RightWingConspirator said:

---

My financial advisor, whom I trust, said as a general rule never keep equity in your home.

---

Really? Is this sound advice? Not saying it isn't, I just don't know.

I would agree.

RightWingConspirator said:

---

Not necessarily. We pulled all the equity out of our home a few years back not because we had no liquidity, but because the market should be able to do better than the appreciation of our home. My financial advisor, whom I trust, said as a general rule never keep equity in your home.

I locked in thirty year money at 2.75 percent and poured that equity into the market. No swimming pools, or remodels, cars, etc. it all went into the market.

We are millionaires more than a few times over as well.

---

My comment was about pulling it out in an emergency. In other words, because you are having a liquidity crisis. What you did was a planned investment. Given the rate you did it at, I would agree. I don't agree with your advisor about having no equity in your home. It depends on interest rates and investment alternatives. You must have a young advisor that doesn't remember 8% plus mortgage rates.

My house is worth probably $1.45 mill and I owe $430k on it. I'm on a 15 at 2.125%. So I assume that's stupid?

At that rate, it is better to invest in match terms bonds than to pay off the house.

I bleed maroon said:

---

• Mark everything to market: Basically, use liquidation value for all assets and liabilities. For instance, 401(k) balances could be reduced for penalties and tax-effected. Home equity should be haircut for selling expenses such as commission and fees. Vehicles and other property should be valued at true net cash proceeds, so remove selling expenses and adjust to true market value (no, your expensive bed and mattress aren't still worth the $10,000 you paid for them).

---

First off, home equity is an asset and should be included in net worth. As someone else mentioned, there are really two components of net worth, one being total net worth and the other being liquid net worth. I have two business interests that are included in my net worth, but I would not include them in my liquid net worth because of the time frame I think it would take to convert them to cash at the value I include them in my net worth. On the other hand, I have some acreage that I would include in my liquid net worth because I think I could convert it into cash, at its FMV, in a month or two if I wanted to sell it and I get inquiries about the acreage 3 or 4 times a year.

As to your comment above, you are spot on. When I was practicing and did personal financial statements, I always included (as is required) a provision for the estimated taxes for the difference in FMV of assets and their cost basis. It is estimated of course, because you do not know the years the gains will be realized, nor the tax law/tax rates in the years of realization. But there will be taxes due on stocks, retirement plan distributions, rent properties, and business interests when they are disposed of. Many home sales will not be subject to taxes, but more and more some are. If the personal financial statements do not include a provision for taxes, then the preparer did not know what he or she was doing. Back years ago, a lot of people prepared their own and of course they did not consider this nor did more than a few loan officers, lol. I suspect times have changed on that.

I am surprised that my bankers still don't ask for my deferred tax liabilities or even an estimate of them. Like you, I have them estimated for my credit personal assessment because without it, you are overstating your net worth especially with tax deferred accounts where you have no basis and will be paying ordinary income taxes when you withdraw from them. I also like to have a handle on future tax liabilities because it helps with tax planning.

So how are you estimating the tax burden on real estate that has a combination of depreciation and appreciation? For me, that is a disproportional share of my net worth.

Kansas Kid said:

---

So how are you estimating the tax burden on real estate that has a combination of depreciation and appreciation? For me, that is a disproportional share of my net worth.

---

We always assumed current tax law and current tax rates and thus some of it taxed at capital gains rates, some of it taxed as 1250 gain and some of it (most likely) subject to the 3.8% NIT. And all of that disclosed in the notes to the financial statements with the disclosure that it is estimated and that the actual tax would likely differ. The bankers would just run with it, they weren't about to do their own calculation.

one safe place said:

---

Kansas Kid said:

---

So how are you estimating the tax burden on real estate that has a combination of depreciation and appreciation? For me, that is a disproportional share of my net worth.

---

We always assumed current tax law and current tax rates and thus some of it taxed at capital gains rates, some of it taxed as 1250 gain and some of it (most likely) subject to the 3.8% NIT. And all of that disclosed in the notes to the financial statements with the disclosure that it is estimated and that the actual tax would likely differ. The bankers would just run with it, they weren't about to do their own calculation.

---

That is great but in my personal disclosure I don't provide any of the basis in the property or how long I have owned it so you could estimate depreciation. I am not giving them GAAP financials (or any notes) which would have the info you mention.

The same situation with my stock/bond portfolio where I have some stocks that have been in my portfolio for over 15 years with very sizable gains as you might expect for something held that long in a bull market.

Kansas Kid said:

---

So how are you estimating the tax burden on real estate that has a combination of depreciation and appreciation? For me, that is a disproportional share of my net worth.

---

I could care less about your RE assets. Unless you're planning on selling them, it means nothing to me. But for the sake of discussion , I'd look at the value (and ask how it was determined) then subtract any mortgage owed. Then I'd give it a "net value" between 50% and 65%. If it was an office building (or other less desirable asset), I'd drop the value even further because a quick sale will greatly reduce the price.

When I lend money for a business purpose or commercial RE, 95% my concern is the ability for the purpose of the loan to repay the debt. If a RE investment, does it have sufficient cash flow? If a business loan, does the business have cash flow to repay? If the answer is yes, but barely…then I'll look more at a personal financial and tax returns. The emphasis will be on liquidity (cash and marketable securities - non IRA) and on income. I'll build a cash flow statement using your credit bureau which will help me know how much you spend. From there, it's a judgement call regarding your character.

In my experience, many entrepreneurs and RE developers are "broke" from a liquidity standpoint. You'd be shocked at how many "rich" people have loans to pay their taxes, massive credit card bills, etc. They have everything tied up in assets or businesses and would have to sell something in an emergency.

Quote:

---

You'd be shocked at how many "rich" people have loans to pay their taxes, massive credit card bills, etc. They have everything tied up in assets or businesses and would have to sell something in an emergency.

---

Facts.

Just went to a presentation on this topic. Whereas a typical "rich" person has a portfolio that's 80% stocks and bonds, most successful entrepreneurs have a portfolio that's 80% a business.

It's a shame but most people don't think about this until they get close to wanting to retire and then they learn about all the stuff they should've done starting five years ago to get ready.

I am not shocked people are asset rich and cash poor. I know a decent number of them.

RightWingConspirator said:

---

Not necessarily. We pulled all the equity out of our home a few years back not because we had no liquidity, but because the market should be able to do better than the appreciation of our home. My financial advisor, whom I trust, said as a general rule never keep equity in your home.

I locked in thirty year money at 2.75 percent and poured that equity into the market. No swimming pools, or remodels, cars, etc. it all went into the market.

We are millionaires more than a few times over as well.

---

Would this be the RE version of retiring and taking a line of credit on your portfolio to live off of while being able to let the investments ride

Most real estate developers…

And a lot of small business owners.

I would say I have close to 8 figures in Business/RE assets and avg about 100K liquid cash in the bank. Although 100K seems light and I wish I had more, I have paid off RE that I can sell to an investor if everything goes to hell in less than 2 wks. I can also sell off part of my business really quickly and can access 500K in about 2 wks also.

I agree with Ramsey on alot of stuff but not cash paying for RE. You can do much more with $$$ than having a paid off home. I get Ramsey takes the ultra conservative route but its not the best way to use money. If rates ever go below 4%, I am refinancing most of my 5+% RE holding and taking cash out to do accredited investing.

I have a paid off duplex valued at prob 450K that cash flowed 30K last year which is good Cap rate but even then, I would have no concerns refinancing into a 4% loan and doing something with the 300K cash.

I'm close now. I own a house worth 300 K plus outright/ paid off...Have close to 500 K in my 401K after maxing out contributions for 10 years now, since my wife started earning really decent money as a mammo tech when she got out of school...Also have 41 acres in northeast Arizona almost paid off that is not worth much now, maybe 60,000 dollars, but it is in a growing area near Showlow, AZ with good water underground for a well. The value of it is going up every year so far..

I agree with all the advice here. Both husband and wife working and making decent income gives you a leg up. Don't waste all your money on expensive cars, vacations, slot machines, latest and greatest phones, technology, etc....Invest on your own outside of your 401K...There are a few good people on youtube that can help you understand how to invest in crypto and stocks and bonds...A lot are no good though, so don't fall for their scams...

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

EvenPar said:

---

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

---

bezos, musk, gates, zuckerberg, Brin/page??

cgh1999 said:

---

Kansas Kid said:

---

So how are you estimating the tax burden on real estate that has a combination of depreciation and appreciation? For me, that is a disproportional share of my net worth.

---

I could care less about your RE assets. Unless you're planning on selling them, it means nothing to me. But for the sake of discussion , I'd look at the value (and ask how it was determined) then subtract any mortgage owed. Then I'd give it a "net value" between 50% and 65%. If it was an office building (or other less desirable asset), I'd drop the value even further because a quick sale will greatly reduce the price.

When I lend money for a business purpose or commercial RE, 95% my concern is the ability for the purpose of the loan to repay the debt. If a RE investment, does it have sufficient cash flow? If a business loan, does the business have cash flow to repay? If the answer is yes, but barely…then I'll look more at a personal financial and tax returns. The emphasis will be on liquidity (cash and marketable securities - non IRA) and on income. I'll build a cash flow statement using your credit bureau which will help me know how much you spend. From there, it's a judgement call regarding your character.

In my experience, many entrepreneurs and RE developers are "broke" from a liquidity standpoint. You'd be shocked at how many "rich" people have loans to pay their taxes, massive credit card bills, etc. They have everything tied up in assets or businesses and would have to sell something in an emergency.

---

Real estate is not my main gig but it is where my wealth is tied up. I have an 8 figure net worth in RE and only 10% of my wealth in liquid assets.

I am in my 40s still so I do plan to flip that equation as I get older but I still am working full time so cash flow is not an issue

Red Pear Realty said:

---

62strat said:

---

EvenPar said:

---

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

---

bezos, musk, gates, zuckerberg, Brin/page??

---

Everyone mentioned became wealthy by starting a business, not investing in a 401k. I recognize that wealthy has a relative meaning, also. Most of the world makes $2 a day, so even someone making $10 an hour in the USA could be considered wealthy by many. 401k's weren't designed to make you "wealthy". Starting businesses creates wealth.

---

Bingo! Should have added that implication to my original comment.

Red Pear Realty said:

---

62strat said:

---

EvenPar said:

---

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

---

bezos, musk, gates, zuckerberg, Brin/page??

---

Everyone mentioned became wealthy by starting a business, not investing in a 401k. I recognize that wealthy has a relative meaning, also. Most of the world makes $2 a day, so even someone making $10 an hour in the USA could be considered wealthy by many. 401k's weren't designed to make you "wealthy". Starting businesses creates wealth.

---

those people's wealth is in public equities nonetheless. There are surely countless examples of people that we don't know that have a ton of wealth in stock. All those investing early and held on in internet 20-25 years ago.

62strat said:

---

Red Pear Realty said:

---

62strat said:

---

EvenPar said:

---

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

---

bezos, musk, gates, zuckerberg, Brin/page??

---

Everyone mentioned became wealthy by starting a business, not investing in a 401k. I recognize that wealthy has a relative meaning, also. Most of the world makes $2 a day, so even someone making $10 an hour in the USA could be considered wealthy by many. 401k's weren't designed to make you "wealthy". Starting businesses creates wealth.

---

those people's wealth is in public equities nonetheless. There are surely countless examples of people that we don't know that have a ton of wealth in stock. All those investing early and held on in internet 20-25 years ago.

---

There are numerous ways to become very wealthy (>$10mm). Starting a business, corporate work, stock investment, real estate, winning the lottery (I don't recommend this as a strategy), etc. Becoming a millionaire has been shown to be achievable even by being a janitor, teacher, construction worker, etc just by regularly saving money and putting it into mutual funds or other similar investments.

I think the only limitation is if you want to become a billionaire or close to it in which case you either need to be a business founder or inherit it. There are a few exceptions but not many. Even the athletes and entertainers that have achieved it have built businesses around their name and brands.

Red Pear Realty said:

---

62strat said:

---

EvenPar said:

---

The wealthy only have roughly 20-25% of their net worth in public equities. The market can make you some money but it's not going to make you wealthy.

---

bezos, musk, gates, zuckerberg, Brin/page??

---

Everyone mentioned became wealthy by starting a business, not investing in a 401k. I recognize that wealthy has a relative meaning, also. Most of the world makes $2 a day, so even someone making $10 an hour in the USA could be considered wealthy by many. 401k's weren't designed to make you "wealthy". Starting businesses creates wealth.

---

Here is an example of someone becoming wealthy in their retirement account via investing. Rare case but shows it can be done.
https://markets.businessinsider.com/news/stocks/warren-buffett-ted-weschler-berkshire-hathaway-ira-retirement-losses-saving-2021-9