“I find that as I hit milestones, and surpassed them, they meant not as much to me as I thought they would. The issue with Net Worth is that it is kind of like looking at a toy chest. There are some toys you can play with, there are some that are your favorites, and there are some that you don’t play with because of various reasons. Net worth is like that. You have assets which are cool for net worth but you cannot play with them (liquidity).
An example of this is real estate and life insurance (which are considered assets for net worth). So let me see, yes I have a house, which I can use for home equity lines of credit, but that puts me more in the red than in the black. Life insurance is like a toy you have, but cannot do anything with until you die.
In my example, I have a $400k life insurance policy, and have $300k in equity in homes (I have rental properties, plus my own home). So at the end of the day, Yes, I am a millionaire… but [I can’t] live stupidly as much of my million dollars is “non-liquid” and not able to be turned into “cash” if needed. Granted I am not hurting, but still this makes the issue a “what does a millionaire mean now days?” conversation.”
I think this is exceptional insight and it mirrors a lot of what we are doing. We now have 3 rental properties, plus our own home. Two of them were never intended to be rental properties, the first condos my wife and I bought to live in separately. As such, they aren’t your typical investment property… and actually run at a loss. The loss is small enough, and possibly even a positive if you include the equity we are building that it is better than taking the big hit with selling.
Each month, we are forced to put our money towards these appreciating assets. The bank wants their mortgage payment. If it was a voluntary deposit into a brokerage account, we could decide to skip this month. Even with a retirement account we could probably do the same. Or worse, we could pull that money out of the brokerage and use it to buy a great McMansion. Many people do that and maybe it’s the right choice for them, but I like my financial freedom and McMansions can be a recipe for being “house rich and cash poor.”
The great thing about real estate investing is that the bank gives us no such flexibility… and I love it.
Big-D hit the nail on the head. The investment is so illiquid that it would be a bear to the get money out. (I plug my ears and close my eyes like a child whenever Mr. HELOC mentioned.)
Now you might say, “If you are mostly breaking even, you have rental income coming in and that’s covering those mortgage payments.” That’s true to some degree, but we had to put 20% down, which is a significant check to write at the beginning. If we want to buy another, we are going to save up another 20%. Plus there’s the emergency fund that has to be bigger than usual due to these obligations (what if there are tenants?) There’s money that goes into maintaining it as well.
Overall, between saving up money to buy the places, maintaining them, the emergency fund necessary for them, and still maxing out retirement accounts, we mostly steer clear of lifestyle inflation.
However, like many things in life there is a balance. It’s okay to enjoy life. You don’t want to be living like you are on your last penny because you’ve forced yourself with too many obligations.
Finally, if you are thinking about investing in real estate, here’s a little tool you can use to find the latest mortgage rates in your area: