[vc_row][vc_column][vc_column_text]During the real estate boom ten years ago, much was made of all the seemingly new millionaires being made every day.  Then when it all came crashing down in 2008, these millionaires were wiped out overnight.  What happened?  Being a millionaire should ensure financial security right?  Wrong.  It depends on the type of millionaire you are.  There’s the net-worth millionaire and the cash-flow millionaire.  The technical definition of “millionaire” is a person with a net worth that’s greater than $1 million U.S. dollars.  Net worth represents a person’s assets, minus their liabilities. The problem is what to include in assets and liabilities for determining net worth.  Before the financial crisis, the problem was that many net worth millionaires were counting their liabilities, such as their home and their car, as assets.

When the real estate and stock markets crashed, many net-worth millionaires were wiped out as the value of their liabilities crashed.  Real estate and cars were not productive assets that could sustain a person through a financial crisis.[/vc_column_text][gem_quote style=”4″ no_paddings=”1″]Many cash-flow millionaires, millionaires who receive their income from real assets, assets that produce income, got richer.  They got richer buying the liabilities of the net-worth millionaires at bargain basement prices.[/gem_quote][vc_column_text]The cash-flow millionaires didn’t “lose their shirts” when the markets crashed because their investments were in assets that produced income that wasn’t tied to the broader markets.  The net-worth millionaires holding onto real estate hoping for continued appreciation lost nearly all the value of their wealth.

Jason Hull, in an article for the Money Section of Newsweek.com, put forth the following argument for not including non-productive real estate such as your home in your calculation of net-worth.

“I often hear people describing their net worth in a conversation like this: ‘I have a $200,000 house and $800,000 in investments, so I have a net worth of a million dollars.’ The problem with this description is that your house cannot independently generate income … Basically, owning a home free and clear eliminates the need for you to have a housing expense—save, of course, for property taxes, insurance, and home maintenance costs. If you were to sell your house, then you’d need to use the money that you generated to create a stream of income to pay for your subsequent living arrangements, whether that’s buying another house, renting one, or moving into assisted living.” Hull, Jason, “Should You Include Your Home in Your Net Worth?,” Sept. 5, 2012, money.usnews.com

The takeaway from all this is what the true measure of wealth really is.  It’s not technically fitting into the “millionaire” box that makes a person wealthy, it’s the source of a person’s income that determines wealth.  The person whose income is resistant to recession and economic downturns and whose income isn’t reliant on the broader markets is the person who is truly wealthy.

Which category of millionaire do you want fall under?

The net-worth millionaire or the cash-flow millionaire?

Here at Four Peaks, we religiously advocate cash flow.  That’s why we invest in mobile home parks.  With the shortage of affordable housing, mobile home parks provide recession resistant cash flows of the type that generate real wealth.[/vc_column_text][/vc_column][/vc_row]