When I first heard about an opportunity to make wealth from real assets, I wondered what it meant. To be honest, I wasn’t too sure what real assets are, and I was too shy to ask. In my little bubble of financial illiteracy everything I earned and invested was very real to me; so I questioned the very need for such a misleading term.
However, as I climbed the learning curve of investing, I learned that in financial parlance, a real asset is something that is tangible. So for instance, if I use my money to buy shares of a certain company, that is not a real asset (it is instead a financial one), but if I use the same money to buy a property, then that is a real asset.
My next obvious doubt was when and why should one make that choice? It is one thing to buy a house to live in but when is it prudent to invest in a real asset over a financial one? I eventually realised that it isn’t a simple choice and should ideally be left to your financial adviser to recommend. Primarily because they don’t flip a coin or go with their gut feel, but assess your financial situation, measure your risk taking capacity and then arrive at a plan for your money.
Prashanth Prabhu, Founder and Principal Adviser at 29k Asset Management is in the business of acquiring real assets for his clients across the UK. His view on preferring real assets over financial ones is measured but positive – “Real assets do come with their share of disadvantages, but if built the right way, the advantages can outweigh the disadvantages over the long term.” he says.
One way or another, it is clear that as an investor, it is important for you to know your options in as much detail as possible, and real assets such as property or any inventory that appreciates in value comes with its set of advantages and disadvantages.
Liquidity: Real assets are not as liquid as financial assets. Simply put it is easier and a lot quicker to convert financial assets to cash than it is to convert real assets. Going back to my example from the beginning of this article – I can readily sell the shares I buy and convert my investment into cash. I can do the same with my property, but I can’t do it as easily or as quickly. The process will require me to find a buyer, sort paperwork and then finally conclude the transaction. In effect, real assets are not very helpful when you are facing a financial emergency.
Lack of tenants can affect returns: An investment property left vacant is not ideal for investors who bought it as a source of passive income. This aspect is often overlooked while estimating future return on a real estate investment.
Ongoing spends: All of us know how hard it can be to maintain a house; be it our own or rental property. The effort increases on buying a property for investment because you can’t always be physically present to ensure the place is well maintained. You mostly have to rely on contractors and the spends can be ongoing. Additionally certain bills can continue to add up whether or not you find a tenant for your property.
Generate lifelong income: Financial assets only appreciate in value, so if they were worth x today; in 5 years they might be worth 5x. But real assets appreciate in value and generate income. Take for example a house or property you own; you can rent out a real asset and earn an income from it for the rest of your life. What’s more? The income also increases over time in keeping with your costs and inflation.
Real asset acquisition is now easier: With the rise of property syndicates around the world, acquiring a real asset has become that much easier. In simple terms, a property syndicate is a group of people who come together to buy a property. This gives people with limited available money the opportunity to invest in a real asset. Additionally, property syndicates are well-oiled property buying and maintenance machines that come equipped with all the financial and legal support you will need to acquire and set up a property for rental. This makes it possible to buy a property without your constant involvement by appointing a Syndicate Manager.
Ability to use leverage to multiply returns: Banks are generally more comfortable in lending against real assets rather than financial assets. This comfort is strengthened if the asset also produces income. This allows you to take loans against your property or performing real asset and use it to invest elsewhere. This makes a lot of sense if the return earned from the new investment is higher than the cost of the loan or mortgage payments.
Leaving a legacy behind: One of the most obvious advantages of investing in a real asset is the legacy value it carries. We all work hard so that we can provide the best for our families and loved ones, even after we are gone. And what better legacy to leave behind for them than the opportunity for a lifetime of passive income.