{"id":65,"date":"2011-12-19T16:24:28","date_gmt":"2011-12-19T21:24:28","guid":{"rendered":"http:\/\/www.cashflownavigator.com\/blog\/?p=65"},"modified":"2012-01-18T01:21:14","modified_gmt":"2012-01-18T06:21:14","slug":"how-do-you-distinguish-good-assets-from-bad-assets-hint-it%e2%80%99s-about-the-cash-flow","status":"publish","type":"post","link":"https:\/\/www.cashflownavigator.com\/blog\/2011\/12\/how-do-you-distinguish-good-assets-from-bad-assets-hint-it%e2%80%99s-about-the-cash-flow\/","title":{"rendered":"How Do You Distinguish Good Assets From Bad Assets? (Hint: It\u2019s About the Cash Flow)"},"content":{"rendered":"

\"\"<\/a>At the height of the 1980s real estate bubble I watched a TV news interview with a new homeowner.\u00a0 She said her parents always told her: \u201cBuy the biggest house you can afford.\u201d \u00a0 And that\u2019s exactly what she did.\u00a0 She was beaming. \u00a0It did seem to make sense, at least at the time.\u00a0 After all, homes were appreciating (increasing in value) on average over 5% per year in the 1980s and over 10% per year the previous decade.<\/p>\n

I, too, found the advice compelling so I followed it and bought a house much larger than our \u00a0family needed.<\/p>\n

<\/p>\n

Shortly afterwards my wife and I saw the movie \u201cThe Money Pit.\u201d\u00a0 I can\u2019t say the movie was Oscar-worthy, but its central message did resonate:\u00a0 Sure, a home can be a large and often appreciating asset, but the bigger the home the bigger the mortgage.\u00a0 And the bigger the mortgage, the bigger the monthly expense.\u00a0 Nice that it appreciates, but not nice that it creates a negative cash flow.<\/p>\n

We found that by committing all of our available income to paying the mortgage and other expenses associated with the home \u2013 by creating such a large negative cash flow \u2013 we were losing the opportunity to pay off other debts, or to use some of our income for better investments.\u00a0 In other words, being \u201chouse poor\u201d was keeping us from moving ahead financially.<\/p>\n

After a few years in our McMansion we realized our (my) mistake and downsized.<\/p>\n

The above example illustrates that when evaluating any asset there are two considerations:\u00a0 1) Does it appreciate or depreciate?\u00a0 And 2) Does it generate a positive or a negative cash flow?\u00a0 The problem with the advice to buy a large primary residence is that this type of asset only passes the first test (appreciation).\u00a0 It doesn\u2019t pass the cash flow test.<\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 By evaluating any asset on two dimensions \u2013 appreciation vs.<\/strong><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 depreciation, and positive vs. negative cash flow \u2013 the asset can be<\/strong><\/p>\n

\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 classified as either \u201cBest,\u201d \u201c 2nd<\/sup> Best,\u201d or \u201cWorst.\u201d<\/strong><\/p>\n

So by evaluating an asset based on two dimensions \u2013 not just whether it appreciates or depreciates, but also whether it generates positive or negative cash flow \u2013 the asset can be grouped into one of three categories:<\/p>\n

1)\u00a0\u00a0\u00a0\u00a0 Assets that BOTH appreciate AND generate positive cash flow (Best)<\/p>\n

2)\u00a0\u00a0\u00a0\u00a0 Assets the EITHER appreciate OR generate positive cash flow (2nd<\/sup> Best)<\/p>\n

3)\u00a0\u00a0\u00a0\u00a0 Assets the NEITHER appreciate NOR generate positive cash flow (Worst)<\/p>\n

A primary residence, then, falls into the \u201c2nd<\/sup> Best\u201d asset category.\u00a0\u00a0 If it\u2019s a 1-family<\/em> primary residence, that is.\u00a0 What if, on the other hand, it\u2019s a multi-family<\/em> rental property?\u00a0\u00a0 In that case the asset has the potential to appreciate and also generate a positive cash flow (if the monthly rental income is greater than the monthly mortgage, insurance, property tax and maintenance expenses).\u00a0 So a rental property is an example of a \u201cBest\u201d asset type.<\/p>\n

How about the bad kind \u2013 \u201cWorst\u201d assets? \u00a0\u00a0Examples of these include cars, boats, furniture and household goods.\u00a0 They lose value <\/strong>and<\/em> they don\u2019t generate positive cash flow.<\/p>\n

You can find more information about the three Asset types and strategies to help optimize your asset and cash flow mix in our free e-booklet \u201cWealth Is Good, Cash Flow Is Better\u201d. \u00a0\u00a0In the meantime, we invite you to share your thoughts \u2013 and your own stories and experiences \u2013 on this subject with other readers.<\/p>\n","protected":false},"excerpt":{"rendered":"

At the height of the 1980s real estate bubble I watched a TV news interview with a new homeowner.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10,9,3],"tags":[],"class_list":["post-65","post","type-post","status-publish","format-standard","hentry","category-assets","category-cash-flow","category-financial-planning"],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/65","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/comments?post=65"}],"version-history":[{"count":19,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/65\/revisions"}],"predecessor-version":[{"id":145,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/posts\/65\/revisions\/145"}],"wp:attachment":[{"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/media?parent=65"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/categories?post=65"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.cashflownavigator.com\/blog\/wp-json\/wp\/v2\/tags?post=65"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}