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Financial advisory
Assets vs. Equity
How Can Understanding the
Difference Help Me Grow Wealth?
BY CHRISTOPHER MILLER, MBA SPECIALIZED WEALTH MANAGEMENT
My idea from this month’s article came from a recent philosophical conversation with a client. We were discussing the difference between Assets and Equity. Understanding the difference between the two can
help real estate investors immensely.
WHAT IS THE DIFFERENCE BETWEEN TOTAL EQUITY AND TOTAL ASSETS?
I think the best way to explain the difference is to consider your own personal financial statement. In a financial statement, you list everything you own on the left side and list all of your debts (liabilities) on the left. Your assets are the sum of everything in the left column. Your equity is assets – liabilities: the sum of everything in the right column.
Your Financial Statement probably includes some liabilities that are not investment related: auto loans or student loans for yourself, your children or grandchildren, for example. To evaluate these categories from an investment standpoint, we need to individually review our investments and look at the assets vs. equity in each.
DEFINITIONS OF EQUITY AND ASSETS
If you own a 4-unit property worth $1,500,000
and your loan on the property is $1,000,000, then your Equity represents the value of your asset less the loan amount: basically the amount, (ignoring transaction costs), of money you could get your hands on if you sold the property.
Your Assets in the above example would be $1,500,000. After all, you own that property and nobody else does – even if the bank fronted most of the purchase price. What good is a larger Assets number if I can’t get my hands on that cash right away? Let’s discuss how using leverage to turn your equity into more assets can help you.
HOW LEVERAGE CAN HELP YOU – APPRECIATION POTENTIAL
Leverage can help investors by allowing them to multiply their equity to acquire more assets. A great feature of leverage is that a bank will lend us most of the money to buy a property, but we get to keep all of the profits. This will be easiest to understand for real estate investors. If I bought a house here in California in 1986 for $200,000 and sold it this year for $1,200,000, that will represent a 600% return on my initial investment. If – on the other hand – I purchased that house with a 20% down payment of $40,000 and financed the rest, I have turned $40,000 into $1.2 million over 35 years for a 3,000%
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Christopher Miller is a Managing Director with Specialized Wealth Management and specializes in tax-advantaged investments including 1031 replacement properties. Chris’ real estate experience includes work in commercial appraisal, in institutional acquisitions for a national real estate syndicator and as an advisor helping clients through over four hundred 1031 Exchanges. Chris has been featured as an expert in several industry publications and on television and earned an undergraduate business degree and an MBA emphasizing Real Estate Finance from the University of Southern California. Chris began his real estate career in 1998. Call him toll-free at (877) 313 – 1868.
68 SEPTEMBER 2021 - APARTMENT MANAGEMENT MAGAZINE AMM1/6