When Your “Number” Becomes Irrelevant

The number

Last week, after some extended back and forth, my relationship banker finally came back with a decision.

The bank has agreed to refinance the commercial property I bought last year.  In practical terms, that means they will replace the existing mortgage (about $570k left outstanding) with one totaling $820k.

Put another way, that’s about $250k of equity release – which is roughly equivalent to the down payment I made last year.

Now, it feels pretty cool for a variety of reasons.

One is that I essentially got this property for free – that is, if you ignore all the capital I tied up for the past 18 months and all the risk and effort that came with buying and managing the property.

The other one is that the refinancing proceeds are tax-free, which is always a nice touch.

And, of course, it’s the fact that $250k is a massive chunk of money, notwithstanding anything you may hear about banker bonuses.

In other words, it’s a nice case study of how people get rich with real estate – and I will write up a detailed blow-by-blow over the next few weeks.

But in the meantime, the more pragmatic question is – what do I do with the spreadsheet?

Mental Accounting

As a reminder, I bought the property for $855k – which is exactly how it’s recorded in the “Real Estate” section of my net worth file.  And yes, there’s an associated mortgage liability below that number.

When I do my year-end update, I have a couple of options.

I can keep the value of the property at $855k.  Nice and conservative – but problematic at the same time, given there will be a $820k mortgage liability against it.

It’s clear I am sitting on more than $35k of equity – and keeping the number artificially low will also muddle my debt-to-equity ratio.

Alternatively, I can keep the same LTV, which was about 69%.

By that metric, the value should be around $1.2m ($820k divided by 69%), a $345k increase.  Implicitly, that’s what the bank thinks the property is worth.

Yet another option is to revalue the property to the “market” rates.  My estimate is that if I was to sell today (which I never would), I could probably get about $1.4m for it.

Ahh, decisions, decisions – except that it doesn’t really matter.

Sure, some numbers might massage my ego more than others.

Some might even help sell more copies of my latest and greatest real estate course (if I had one, though I do recommend this book).

But whatever number I plug into that spreadsheet, it won’t change the most important metric of the property: the amount of cash it spins off into my bank account every single year, which is about $25k a year after expenses and mortgage repayment.

Beyond Real Estate

The conundrum above doesn’t only apply to aspiring property moguls.

Consider venture capital investments for a second.

You plonk some money in at seed stage.  Things go well, and the value of the business increases massively in subsequent fundraising rounds.  The value of your stake – and your net worth – looks better every day!

And then, one day, the tide turns – and the company goes through the nasty experience of a down round.  Worse, investors might disappear altogether, leading to liquidation and rendering your investment worthless.

Thanks to selection bias, you only read about the spectacular winners and a few highly-publicized losers.  But venture capital is a notoriously hard business and the vast majority of investments are flops.

The same logic applies to crypto ahem, other highly speculative investments.

I’m sure it’s fun to make a few million on the latest crapcoin.

But unless you crystallize that gain – and transfer it into a much-hated fiat currency (much harder than people think given there’s zero liquidity in most of these things), I wouldn’t suggest staking your retirement on it.

At this point, we should also talk about the stock market.

On one hand, you can (and should) take a LOT of comfort from the fact that a diversified index gives you exposure to tens of thousands of companies, spanning hundreds of different industries and many countries.

It’s highly unlikely that the value of these businesses (in each of which you are a fractional owner) will go to zero at the same time.

Yes, it could happen in the event of a full-on nuclear war or another catastrophe, but I doubt you’ll be checking in on your portfolio very often if that happens.

At the same time, squint hard enough and you could make an argument that after a long period of expanding multiples and excess central bank liquidity, there’s a bit of froth in the value of your portfolio.

Perhaps it’s 10%.  Perhaps it’s 25%.  No one knows – but not the worst thing to consider if you happen to be in a pensive mood over the Christmas break.

Now that we are on a roll, let me give you a few other situations that could render your “number” irrelevant.

Value Of Your Primary Residence

Sadly, I haven’t yet come up with a way of liquidating 4% of a property to pay for living expenses every year.

Sure, you can take out a line of credit or a new mortgage against your house – but that will cause your expenses to go up to service the interest.

Alternatively, you can downsize or move out, “monetizing” a part of your investment in the process.

But unless you plan to do any of the above, including the value of your principal residence in your “number” is likely to be misleading.

Tax-Deferred Investments

You don’t have to read this blog for very long to realize I’m a big proponent of investment vehicles like workplace pensions, lifetime ISAs, and 401(k) plans.

I mean, where else will you get 12%+ returns on your money?

Workplace pension returns

The problem, of course, is that unless you are in your late 50s, you can look – but you can’t really touch the money.

Makes for a rather challenging problem if you are planning to retire early.

Taxable Investments

Likewise, it’s great to make a killing on Tesla or Shiba Inu – but unless you managed to do it within your ISA (which is basically impossible for crypto), the taxman is going to take his hefty cut.

Not everyone gets to pull off a Peter Thiel.

Next thing you know, the number in your bank account looks quite different from the one you had in your spreadsheet.

Pot Shots

To be very clear, none of the above is a dig at real estate, pensions, crypto, or Elon Musk.  Far from it.

Rather, the fundamental point here is that there is a massive difference between growing your portfolio – and living off it.

It’s not something you need to worry about early on in your journey.

As a matter of fact, I absolutely love the “number x 4%” formula.  It’s the best gateway drug the financial independence community could ever invent, regardless of your views on the 4% rule (I certainly have mine).

In addition, tracking the “number” is still the best way to evaluate the success of your wealth-building strategy.

But as you progress towards your (hopefully early) retirement, you should pay ever-increasing attention to cash flow.

The following, highly non-exhaustive list of questions may help here:

What is the natural dividend yield from your investments?

How much cash will your property portfolio spin off?  (ignore refinancing proceeds here as banks won’t be nearly as generous when you retire)

What is the plan for monetizing your less liquid investments (business ownership, venture capital, etc)?

How do you bridge the gap between now and the age when you can tap your tax-deferred investments?

Can you count on any state pension income?  Similarly, will you be able to make any income in retirement?

Answering the questions above will give you a better view of your retirement prospects than any “number” ever will.

And it’s best to answer them now, lest you realize that that kissing your cubicle home office goodbye might take longer than you expect.

As always, thank you for reading – and happy investing!


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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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2 thoughts on “When Your “Number” Becomes Irrelevant”

  1. Yes interesting article. The direction of cash flow is interesting. Cash flows in and cash flow out. The balance and time, required for the due diligence for the analysis and strategy.

    1. Always tricky to see the cash flow out (and as you say, the amount of diligence is important)

      But amazing to see the strategy vindicated when the cash comes rolling back in!

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