$1M in Assets or $1M in savings?

Question

I was just asked why $1M in assets is better than $1M in savings.

I believe $1M in assets is truly worth more, but I honestly don’t know why. Can someone please explain?

Account Closed · Answer

Owning 20% of a $1M property is still only 200K in assets. 200K in the bank is also $200K in assets. Saying you own $1M assets with 20% equity is like saying I own 1T in assets cause I own a few shares of AMZN!

Randall Alan · Answer

If they are income producing assets, you are right.  Real estate, invested well, will generate returns in the high teens to low twenty percent range on leveraged transactions in my experience.  (Cash on cash would be less... but maximizing your money through leveraging will yield a great return.)  This gives you the ability to control / acquire upwards of $4 million dollars in real estate.

You can likely net $200,000 after paying for your  principal, interest, taxes and insurance (before all your other property expenses).  You also get to depreciate 3% of that 4MM a year... so that’s the first $120,000 in taxable earnings that you make tax free, beyond all the other write offs... cars, insurance, health insurance, phones, internet, business meals... oh... and actual property expenses too!Then there is market appreciation.. let’s say that’s 3-5% a year... on 4,000,000 that’s $120,000 to $200,000 a year in appreciation.  So in 5 years that could be $1MM in appreciation.

Finally, your renters are nice enough to pay down your mortgages by a few thousand dollars per property per year... that’s probably at least another $50,000 a year in equity.

I think that’s enough to probably justify assets over savings

Randy

Joe Villeneuve · Answer

Then it isn't even close.  If you have $1M in assets in RE, with a 20/80 ratio, then you only spent $200k.

If you have $1M in assets just counting the cash (the DP's) you put in, then in reality your $1M in cash bought you $5M in property value, and 5 times the cash flow.

Joe Splitrock · Answer

Trick question, cash is an asset.

In the example you gave with 80% leverage, your equity in that investment is actually $200K.

I would much rather have $1M cash assets in the bank versus $200K equity in a $1M worth of investments.

Edward Liu · Answer

With $1M, you should diversify, some in Real Estate (leveraged), some in stocks, some in the bank.  Definitely not all in the bank.   The mixture of assets depend on your age, risk tolerance, your net worth, etc.   There is no perfect mixture.

Also, $1M in asset does not mean person has $1M.   Many people live in million dollar homes, but with big mortgage, bank actually owns the asset.

Curtis Mears · Answer

@Dustin Sanders

1 million in savings will be 1 million in savings in 5 years.

1 million in income producings assets, like real estate, will be worth much more.

Tim Houzenga · Answer

@Dustin Sanders.

$1M in savings.  Then I can at least leverage that into $5M worth of income producing real estate.

Dennis Cosgrave · Answer

I am assuming you have $1 million in NET assets, versus $1 million cash in the bank. Which one is better? There is no black and white answer. It depends on the economic environment. In a deflationary environment, the $1 million cash in the bank might be better as the purchasing power of that cash increases. In an inflationary, zero interest rate environment, the $1 million is better off in income-producing assets.

Mary M. · Answer

not quite  - the levered money gets you a little more cash flow - but not 5x

$1M in Assets or $1M in savings?

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