The Queen of Versailles

On the train this weekend, I watched a documentary called The Queen of Versailles. Released in 2012, it follows billionaires David Siegel and his engineer turned beauty queen wife Jackie as they embark to build the largest single family home in America starting in 2008. Siegel is the founder of Westgate Resorts, a large timeshare business. David's plans for his home and his business are rocked by the financial crisis, putting the putting the Versailles project on hold, and the sale of PH Westgate in Las Vegas.

Two financial lessons jumped out at me while watching.

1. The dangers of cheap credit.
During the movie, Westgate's business is highly dependant on credit, both for themselves, and for the people buying time-shares in their company. They sell time-shares to people, at low monthly payments, for long mortgages. Instead of setting up a sustainable business, they leverage the mortages into new projects. When the credit drys up, the business cannot make the payments, resulting in the company having to sell their flagship property in Las Vegas. Near the end of the movie, he says that he should have only had 15 properties, instead of 30.

2. The dangers of being too invested in your own company.
Although the Siegel's paid cash for their current home, they took out a mortgage on the property to invest back into Westgate. When the company runs into difficulty, the creditors demand that David take a pay cut, putting their current home at risk. At my company, I have the option to buy shares every year at a small discount. Many of my colleagues buy these and remain invested. So their employment, their pension, and their investments are all tied into one company. I buy the shares to gain the advantage of the discount, but then sell and invest in other companies.

The movie paints an unsympathetic picture of a slightly out of touch billionaire wife trying to cut back and economize (While still eating caviar for Christmas breakfast). There are also some interesting side threads as the movie explores the mind set of people who buy timeshares, and the impact of the financial crisis on ordinary people. I would recommend a watch if you have a chance to find this movie.

Is Your Home An Asset?

For many people, their home is their largest source of debt (mortgage), and their largest asset. It can be the largest determinate of networth. But is the wealth derived from this kind of net worth real? In my opinion, no, because the home is a highly illiquid asset and one always needs a place to live. You can sell a stock or a bond at your advantage, but could you do the same with your home? Many people are buoyed by a rising house price, but it's difficult to derive a real benefit from this. If your home increased in a value by 10%, chances are your neighbour's did as well. And so even if you move, within the same housing market, you don't end up with any extra cash in your pocket.

Issues like these lead to the phrase house rich and cash poor. So how can you get real value from your home?

1. Move out of town. If you move from a higher value housing market to a lower value housing market, you can realize the difference. For example, a house in the city might be $500,000, but the same size place in a smaller community out of town might be $400,000 due to lower land costs and lower demand.

2. Downsize. Reducing your square footage, moving into a condo, will let you pocket the difference.

3. Renovate (then move). If you put some sweat equity, then you can make your house increase in value more than your neigbour's. You won't realize this gain, until you move.

4. Reverse Mortgage. By obtaining a reverse mortgage you can access the equity in your home. This is neutral on your net worth, as your liabilities also increase, but you change your illiquid asset of home equity into liquid cash.

Paying off your mortgage is a clear benefit. It reduces your interest and frees up cash for building your other assets. It has to be counted with your debt. But what about your equity. Should you count it in your net worth. In my case I do, particularly since the asset offsets the liability of the mortgage. (You can pay off the mortgage if you sell) However, I also track my assets excluding the home, to make sure that I am building up more liquid assets as well. I have two main financial goals, reduce my mortgage and build my liquid assets. My home equity is increasing, but I really don't get too excited, as I know that when I sell, I'll be paying that higher price to someone else when I buy a new place.

How much of your networth does your home represent?

This post was linked in: The Yakezie Carnival, Aspiring Blogger, Fine Tune Finances