The Wire and Illiquidity

November 08, 2017

I mentioned before that the painful day in buying the beach house was actually the day before closing. That was the day I got to wire over a hundred thousand dollars into the escrow account for closing.

This was the third house I’ve bought (2nd for Maureen), and each time the amount of money we put down increased. On my first house, before the 2008 bubble, I put a big fat zero down. Amateur. For the second house, in 2012, it was about 40k. This time, it was quite a bit more.

Illiquid but Tangible

There’s a funny perception that happens when you deal with real estate. Because of the amount of money involved, you feel like you’re losing lots of money. And to a certain extent, that’s true. We now have a lot less cash than we did before! But it’s tremendously important to remember that your money is going towards an asset. A very tangible asset. A place you can live. Instead of having cash sitting in the bank, you now own outright 20% of a piece of real estate. That’s something that’s tangible, usable, fun, and (fortunately) changes in value relatively slower.

In other words, it’s way more fun than seeing a bigger number on your computer screen.

For a long time, I wasn’t particularly fond of real estate as an investment. It felt big and slow moving because real estate is inherently illiquid. If I wanted to make a change, or sell a house, it would take months. But lately, I’ve come to appreciate that illiquidity.. especially in the context of a second house. I’ve also restructured my understanding of an investment. And it turns out to be a pretty incredible asset.

Here’s a few things you can do with an illiquid real estate asset:

Live In It

Well duh, it’s a house. But don’t underestimate the quality of life and value proposition that a good house has. This also means you should choose your investment very carefully. A home is a physical container for a lot of the memories a family produces. The quality of the container can change the memories produced therein. Maureen and I committed awhile ago to focusing on buying experiences instead of things for each other and our children. And while a house is definitely a “thing”, it’s really an enabler for many wonderful experiences. The neighborhood we’re in, the town of Bethany Beach and it’s amazing atmosphere, and our proximity to the beach were all things we recognized would help create even stronger, better experiences for our family.

Having a second home is also a decision to live in a particular place. It’s a commitment. We don’t expect to go on that many big family vacations to far away or distant places. We’ve committed to the Delaware shore. I am really excited about this, and hope to write more about it at some point. We took our kids for a hike through a forest and down to a beach on Indian River last weekend, and they discovered so much about how the shore ecosystem changes in the fall. I love that our family will learn more about how the shore changes seasonally, year over year.

Loans and Credit

Another wonderful thing you can do with an illiquid asset is take out loans on it. On our Maryland house, we’ve already used this to great effect. We did a complete (and very awesome) basement remodel on that house using a Home Equity Line of Credit. As you build equity in your asset, this can be an incredible tool for two reasons:

  1. It can provide an exceptional safety net for unexpected circumstances
  2. It can be a great source of leverage for big purchases

We plan on paying off our second home as quickly as possible, hopefully under ten years. Our Maryland home is already on a 20 year mortgage. As our kids grow up and the (potentially very large) expenses of private high school and college hit, having this asset to borrow against will be very important.

I used to worry a lot about things like mortgage payments getting in the way of other future expenses like our kids’ education. I worry much less about it now, and the thing that changed was the realization that paying off the mortgage enables any of the other big expenses.

Get Richer

This is the last of the big reasons. Even though you’re putting out a huge amount of cash when you buy a house, you’re getting richer. Houses are (very slowly) appreciating assets.

I had this realization shortly after closing. I did the calculation comparing our total outlay, including all closing costs, compared to the home valuation that was done as part of our normal mortgage process. A lot of times, the home valuation step seems like a rubber stamp to the purchase price. I won’t go into the why, but based on how it happened and the fact that the valuation was not the same as the purchase price, I’m convinced that the home valuation was actually very accurate. We ended up about $10k “richer” on our closing date than we were the day before. So even though we just dropped a ton of cash, we were actually ahead of the game. We were just migrating from the liquid to the illiquid.

Make a Fuller Life

You might think this sounds suspiciously like my first reason to invest in an illiquid asset like a second home. And you’d be right! But I can’t overstate how valuable this has already been to our family. Our life is already richer and more full. And as we look at the many years ahead, watching our children grow up and enjoying life with friends and family, we can’t help but impress upon others the importance of considering your options. To take a simple, obvious example.. most people put money in their 401k and feel content now because they’ve done their duty to their 60-year-old self. But if you’re in that boat, you haven’t really thought it through yet. So slow down, take a look around and ask yourself: “What do I want? What am I working for? What rhythm do I want for the story of my life?”

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