Posts Tagged ‘Finance’
Are you rich yet?
What a terrible thing to ask, and yet Kiplinger’s tells us that the top 1% of Americans (about 1.3 million households) have a minimum household net worth of about $6 million. Those households control about 23% of all wealth in America. Another block of about 1.3 million households — those between the top 2% and the top 1% — have a minimum household wealth of about $2.5 million, more or less. Of course, these numbers are highly inexact, because… well… I’ll get to that.
By some estimates, real estate makes up as much as 50% of the total net worth for the top 2% of Americans. Again, this is hard to estimate, since typical households don’t have their real estate re-appraised on a daily basis. However, some real estate sectors have done very well, particularly residences, real estate supporting private businesses, and some industrial properties. Before the pandemic, I generally used the VERY heuristic rule of thumb that the super-wealthy (lets say, half a billion net worth and above) had about 25% of their net worth in real estate of some kind or another.
If you’re Jeff Bezos or Warren Buffett or such, you have people who look at this stuff regularly. However, of you’re in one of those 1.3 million households who have a net worth between, say, $2.5 million and $6 million, you probably don’t give it much thought. But maybe you should. I wrote about this in my most recent book, Valuation and Strategy. Here are just a few points, in no particular order:
- Have you considered intergenerational transfers? How exactly will your estate be divided? Is there a way to structure it in an advantageous fashion, considering the often onerous costs of selling property out of an estate?
- Do you own real estate supporting a family business? Is it coupled with the business itself, or is it a separate entity? Do your children or other family members want to continue the business, and do all of them want to participate? Perhaps there are ways to separate the business from the real estate in order to equitably prepare your family members for the inevitable.
- Is any of your real estate financed? What does that look like now? As I write this, interest rates are trending downward after a couple of years at uncomfortable levels. Does this change anything?
- How has your investment real estate changed in value relative to your non-realty investments? Are your asset allocations where you want them to be? Are you comfortable with the risks moving forward?
I would note that the average registered investment advisor is pretty good at not losing you money in the stock market, but ill-prepared to advise on the nuances of real estate investing. That said, most real estate brokers are ill-equipped to advise on wealth management issues. There are people out there who can help you, and with the economy in some flux, now would be a good time to take a long hard look at your real estate holdings.
As always, if you have any questions about this, please don’t hesitate to reach out!
John A. Kilpatrick, Ph.D., MAI
Share this:
4/27/09 — The Death of Efficiency?
I was trying to explain to a lawyer why AIG was “too big to fail”.
While I let that sink in, I’ll tell you a little story. Back when I was an academic, every summer our Finance department would have a little private, in-house, self-edification symposium we jokingly called “Finance Camp”. Usually running 4 to 6 weeks, it would consist mainly of a weekly, afternoon session of 1 – 2 hours, in which each of us would take turns making a presentation on some aspect of that summer’s theme. One summer it was bond portfolio duration. Etc. You get the picture?
Anyway, one summer, we decided that the theme would be “bankruptcy”. While planning for the sessions, we realized that the Law School also taught “bankruptcy”, so we should invite the 3 or 4 law professors who taught that subject. We planned for a big “round robin” intro meeting, followed by alternating weeks of presentations from finance and law. Good idea, right?
Sigh… as it happened, not only were we talking about two different SUBJECTS, we were frankly talking about two different LANGUAGES. Case in point — from a finance perspective, if bankruptcy is properly priced ex ante, then the event of bankruptcy is irrelevant. From a legal perspective, the very concept of such irrelevance is inconceivable.
So, back to AIG. Everyone, I guess, seems to bemoan the fact that we have (or had) companies in America that were “too big to fail”. Because what they do is so clouded in mystery, it’s hard for the person on the street to grasp how badly the economic machinery would suffer if AIG failed. Imagine, instead, if Boeing and Airbus were one company, and they suddently went out of business, taking with them all the expertise not only to build new planes but also all the expertise to repair, maintain, and service all the existing airplanes. In short, air-transport in the world would grind to a halt by 8am t. Yeah… THAT big.
So, why are Boeing and Airbus so big? After all, these companies are fairly new to the game — Boeing didn’t even get into commercial aviation until the jetliner days, and Airbus is a fairly recent amalgamation. What ever happened to venerable names, like Douglas, de Havilland, and Lockheed?
In short, they were victims of efficiency. Monopoly theory suggests that as firms become more-and-more efficient, the “also-rans” drop out. One big mistake and a firm ceases to exist. Think about automobiles — the U.S. alone used to have dozens of auto manufacturers. Today, we’re down to three domestic producers (not counting off-shore headquartered labels which are actually made here). Indeed, world-wide, the number of profitable auto makers may be just a hand-full after this recession is over.
It might surprise the lay person to read that financial services is actually a fairly low-profit business, compared to making automobiles or airplanes. Car makers can easily knock a few thousand dollars off the list price and still make money. Boeing is currently making millions of dollars in concessions on airplanes. On the other hand, margins on financial instruments are extraordinarly thin. If so, then how are the AIGs and Merrill Lynchs of the world able to pay seven- and eight-figure salaries? Simple — a one percent margin on a billion dollars worth of business is still $10 million.
In a world like that, where financial houses constantly trade with other financial houses, we end up with razor-thin margins, which leads inexorably to monopolies. Add to it the fact that these financial houses are massively intertwined, and we end up with houses of cards that could completely collapse if a major, key-stone player falls down.
How do we fix it? The first question is should we fix it? Is the cost of having to pick up all of Humpty-Dumpty’s pieces every few years greater than the cost of inefficiency? Of course, this question probably doesn’t matter, since the regulators in the U.S. and most everywhere else seem inexorably headed toward new rules which will add significant inefficiency to the process. Is that a bad thing? Probably not — it would be nice to go back to the day when there were 10,000 mortgage lenders in the U.S. rather than just a hand full, when there were dozens of major stock brokerage firms rather than just a few, and when AIG didn’t completely own the insurance business (and a few other businesses that may surprise you, like airplane leasing). The price of this — and let’s call it an insurance premium — will be significant inefficiencies in the financial marketplace.
From a small northwestern observatory... 