Equity

“Buy land, they’re not making it anymore.” — Mark Twain.

Unlocking Equity. From www.SeniorLiving.Org
Figure out if you should unlock that equity for investments.

Or more specifically, how to tap into your source of capital to fund your retirement.

Part One in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Nest Egg

Leaving aside rental and commercial property or other indirect forms of investing in real estate, such as REITs, a more common scenario involves typical homeowners.

Those who bought years ago, paid off their mortgage or will have shortly and despite the negative impact of The Great Recession managed to build a decent amount of equity.

Point one.  

Don’t take what follows as financial advice.

If you haven’t consulted professionals, well, what are you waiting for?

Do so at once!

Back in February of 2007 I read a FidelityReport published by Fidelity Research Institute that compared unlocking equity for investments to risks and relative returns of stocks, bonds and cash.

Point two. 

Fidelity emphasized how much a home, and therefore it’s equity, is subject to market cycles.

History lesson.

Previous generations of Americans treated home equity as an illiquid asset being built up almost invisibly as mortgages were paid down. 

History Lesson

They considered this growing equity either as an “asset of last resort” or as a source of bequests to heirs.

And, of course, back then those homes cost what a luxury car today goes for today.

So, it’s no surprise that future generations are on track to carry much larger mortgages.

And, they will continue to do so into their late middle age and even deep into their retirement years

… perhaps on the assumption that these larger debts will be compensated for by a continued rise in home values.

By 2007, more than 80% of all Americans over age 65 owned homes.

The median price of new homes in the United States has averaged an annual appreciation rate of 5.9% since 1963.

Point three.

Fidelity cautioned, even before the more recent Great Recession

Market Cycles

… historical experience suggests that real estate investments can suffer serious and sometimes prolonged downturns. 

Sometimes it can be across the board.

But, baring a prolonged deflationary slump teetering on an economic depression, it is certainly true for local regions struck by extended economic decline.

Local real estate prices and your return on investment rise and fall with economic factors

… such as interest rates, per capita income, building costs and unemployment rates. 

Shifts in your mortgage loan market can reduce your monthly payments.

Those innovations make housing more accessible.

Like variable rate and interest only loans.

But, they don’t come without their own set of risks.

Beyond the loan market, don’t forget to monitor important variables expanding or constricting the local supply of real estate properties.

  • General availability of land.
  • Land use restrictions.
  • Tough zoning rules.
  • Building regulations.
  • Slow administrative procedures.

And, of course shifts in demographic trends

  • Population growth.
  • Migration patterns.
  • Immigration rates.
  • Average household size.
  • Household formation age (individuals in their thirties).

Fidelity said American real estate values endured three sharp “corrections” during ten-year intervals.

  • From the early 1970’s to the early 1980’s.
  • During the early 1990’s.
  • And, during The Great Recession at the end of the 2000’s to mid 2010’s

With the severity and duration of the downturn that occurred in 2006 still uncertain (published in 2007).

Fidelity tracked investment performance back to before you were born.

How did they say real estate investments held up?

Returns on a dollar invested in residential real estate in 1963 have been only lightly better than returns on low-risk Treasury Bills.

What about compared to stocks, then?

Over this more than forty-year time period, real compound returns to stocks outpaced realty, averaging 5.95% versus returns of just 1.35% to real estate after adjusting for inflation. 

Downturns and Rebounts

So, if you took a dollar and invested it in the 1963 stock market it would have “compounded to $12.36 by 2006.”

But, the same dollar invested in real estate would have grown to just $1.79. 

What about those higher appreciation regions on the coast?

Golden Gate Bridge
On the West Coast. Golden Gate Bridge. Courtesy of http://www.burningwell.org/gallery2/v/Objects/100_5478.JPG.html

Even the highest appreciating regions of the country, the Northeast and West Coast, only realized real returns of 2.35% and 2.49%, respectfully, and underperformed the returns on bonds at 2.74%.

Don’t they say past performance isn’t a guarantee of future performance?

Still data are data.

Home values have underperformed stocks and bonds in terms of average annual returns over every five- and ten-year period from 1963 to 2005, but have only been slightly above the returns on treasury bills.

Why bother, then?

Part Two: Five Options for Unlocking Equity

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.

Anticipation

“Give yourself and your loved ones more choices and options.”

Anticipating What’s to Come

Why anticipation acts like an advanced warning device:  gain more control and thrive.

When it comes to suddenly losing your job without any advanced warning your world turns upside down and your confidence sinks like a rock.

You experience a process of loss.

That’s one of two possible responses.

The second is a process of anticipation.

The first drains all of your energy.

The second feels more like an adventure.

The first forces you to take drastic measures just to survive.

If only they gave you enough advanced warning to avoid the trauma.

Keep an Eye on The Future

If you received advanced warnings and acted on the potential threat, you could have activated a plan months before the event and gained more control over your fate.

But, in the real world it’s very rare to get any kind of warning, so you have to anticipate and adapt on your own.

You need to become your own strategic planning department to see the writing on the wall before it is too late.

Why Not Live in Paradise?

Following Mark’s lead, you need to anticipate the threats and opportunities that present themselves before you move to a Caribbean Island.

“It is common knowledge that if you follow your passions in your business or career, success normally hinges on the demand for it in the local community within a reasonable driving radius.” 

If you plan to move for higher quality-of-life reasons to a new neighborhood in a different state, you have to answer a whole host of questions.

Free to Live a Better Life

Can you still earn a living if the local economy doesn’t support your venture?

What if the town’s people reject you as an outsider?

Is there a way you can win them over?

Will you be forced to give up and move back?

Or is it possible to enjoy a new lifestyle and make money while you sleep?

Start with your passions.

From my 2009 chapter, Why Careers are like Real Estate Markets …

“While we may be in for a long downturn beginning in 2010 or 2011, new real estate opportunities will open up for savvy investors on the outskirts of premier resort communities. 

A new phenomenon is emerging thanks to ‘Web 2.0’ technologies. 

You can make money while you sleep by packaging your knowledge and using the Internet to your advantage.”

So my advice?

Assess your personality.

Focus on what you love doing.

But don’t stop there.

Become a strategic career investor.

“Give yourself and your loved ones more choices and options. In the process, avoid a prolonged downturn while prospering with a better quality of life anywhere in the world you want.”

Steps:

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

An excerpt from Book Two in “The Knowledge Path Series” dedicated to helping you make more money from a lifestyle businesses you’re truly passionate about.

Grabbing an Option While Falling Through Space

Falling Through Space

Disruptions.

From the same chapter, “Why Careers Are like Real Estate Markets”:

“Those of us who have been in transition (between jobs) can tell you that when you are blind-sided it’s not fun.” 

Major disruptions in our lives force us to change our normal habits.

A widespread and prolonged economic disruption across industries dictates …

  • where and how you retire,
  • the value of your house,
  • where you live,
  • your children’s education and
  • career choices,
  • your hobbies,
  • whether your are starting,
  • buying, or
  • selling a business,
  • your estate and
  • tax planning, and
  • even your charitable giving.

We know from change experts that we respond to a job loss in one of two ways.

The first is a version of walking the plank.

We’re pushed off a cliff into the valley of despair — the death-and-dying model — of

  • shock,
  • bargaining,
  • denial,
  • anger,
  • depression, and
  • finally acceptance.

Because we naturally practice selective filtering to focus on business as usual, we miss the clues that suggest just how close we’ve come to the edge of the cliff or plank.

Then we’re falling through space.

The Rules Have Changed.

And, they keep on changing!

A previous version originally appeared in the How We Got Here section of Adapt! How to Survive and Thrive in the Changing World of Work, in 2009, Co-Authored by Steve Howard .

It ‘s no longer enough to simply dream – it’s now more about making the best decisions possible in uncertain, confusing times — whether as individuals, teams or as organizational leaders.

When we come to a crossroads in our lives the path you’ve been on may feel like a dead-end.

But, you have many more options available to you than you initially realize.

You can choose any one of 11 options:

  1. Change positions in same organization;
  2. Change organizations in same field;
  3. Change careers;
  4. Work in the same job while moonlighting;
  5. Start a business from scratch;
  6. Buy a business with its own customers;
  7. Buy a franchise with a proven business model;
  8. Launch a consulting practice;
  9. Turn a hobby or artistic talent into a lifestyle business;
  10. Move to a lower-cost-of-living community and live on your investments and volunteer; or
  11. Retire, yet freelance or consult to supplement your income.