Philip Brewer makes an interesting observation – a correct one – that land is only worth the income that it can produce.
The argument is that if you live in a house, the equity that it produces (by increases in market value) is imaginary, because you have to live somewhere and all land is equally increased in value.
Yet, I still suggest that you should buy a house!
My reasoning is simply insurance: if all else fails, your 401k and the equity in your house can help to fund your retirement … or, earlier, fund your comeback from a failed venture etc. etc.
Again, my reasoning is simple: you can release equity in your house by down-sizing (moving into a smaller, cheaper home), cross-sizing (moving into a cheaper neighborhood), or simply borrowing against your equity (remember the good old HELOC?).
However, the general principle of ‘asset rich, cash poor’ still applies …
My grandmother was an immigrant after the war: from rich beginnings in Europe, she emigrated to Australia with her husband and teenage daughter, virtually penniless.
Yet, she and my grandfather managed to build up a property portfolio worth many millions of dollars.
The problem is that the properties – whilst in prime, downtown areas – gradually became run-down and weren’t bringing in enough income. She became the classic ‘asset rich, cash poor’ person always struggling to pay her tax bills.
My wife’s mother was the same, although in a different financial class: her only asset was her house, her only income her meager pension, yet she refused to sell or refinance the house and lived a virtual pauper.
Ironically, dividing the house into three when she passed on was not really life-changing for any of her three daughters, so it was a financial sacrifice IMHO not worth making … she should have taken a reverse mortgage; even $10k would have made a dramatic difference in her own life, especially since she was too proud to take handouts.
In both cases, Philip’s “house [or asset] rich, cash poor” certainly holds true.
But, it need not be so …
Philip points to times long passed by, where “land was wealth because it produced income–crops, grazing, timber, game, etc. If the land didn’t produce an income, it wouldn’t be considered especially valuable”.
Nowadays, this is simply called ‘rental real-estate’.
If you buy land/real-estate, you no longer need to till the soil yourself to generate an income, you can be the middle man who ‘introduces’ the land to the person (nowadays, usually a business) who is willing to till the land and pay your fee – called ‘rent’.
You still run risks:
1. Related to the land: repairs and maintenance, depreciation, floods, fire, vandalism, and so on, and
2. Related to the business: If the business goes under, you will be left with an empty building.
But, these risks are one step removed from the ‘feast or famine’ risks of land ownership such as for a farmer, that Philip talks about: “it was possible to ruin the income from your land through poor management or bad luck. That was how you found yourself land rich but cash poor.”
These days, as a landlord, you can manage these risks through good selection and management of tenants, provisions (i.e. put aside money for a rainy day to cover vacancies, repairs and maintenance, depreciation, etc.), and insurance (e.g. agains floods, fire, public liability and malicious damage).
If you buy right, add value, manage your real-estate investments well, and allow some time for your investments to ‘mature’ a little (i.e. your loans to be paid down a little, and rents to go up a little) there’s no reason why you can’t be both asset rich and cash rich.
I’m speaking from personal experience 😉