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I was talking to a friend “Cindy” the other day, and she was lamenting about money troubles. She said that she and her husband were paper millionaires but live paycheck to paycheck, even though they have completely paid off their home. She referred to themselves as the brokest millionaires she knew.
Unfamiliar with term “paper millionaire”, I asked her to explain further. Cindy said she had over a million dollars in assets, but most were illiquid assets that weren’t readily available. Her definition of a true millionaire was someone that had at least $1 million in investable assets.
According to Phoenix Marketing International, there are 6.8 million households in the US with investable assets of $1 million or more in investable assets, with the ratio of millionaires to the general population remaining flat.
When most people think of paper millionaires, they think of Silicon Valley employees who are waiting for their companies to finally IPO. At that point, these employees can strike it rich with all the stock options that they have selected, instead of compensation.
I’ve had multiple friends that have worked for companies that have IPO’d. Sadly, they watched their stock options become virtually worthless when the stock cratered shortly after they joined. Some compensation that was.
However, since Cindy doesn’t live in Silicon Valley, I was curious to hear how she was a paper millionaire. I would have never thought that this friend, in my wildest dreams, would be a millionaire.
Too Many Expenses?
That’s because her and her husband always complain about money and how expensive everything is around here. They make over $200,000 combined in income. They even moved farther out west so that they could live in a more affordable home.
I wasn’t sure what type of expenses were taking up such a large amount of their income if they didn’t have a mortgage anymore. Her job had taken her overseas in years past, and her housing was completely covered out there. Because of that, Cindy and her husband had allowed lifestyle inflation to creep in.
So when they returned, they bought new cars and ate out regularly. That still didn’t seem that outrageous to me.
Then, she brought up issues she was facing with their rental properties. While they were overseas, since they had accumulated a lot of money, they purchased three different rental properties back home.
I felt like the turntable record screeched to a halt. She owned three rental properties and three mortgages. Cindy and her husband had thought that they were buying at a low point since the market had fallen after the housing market bubble.
All three properties were in the same neighborhood. They hadn’t seen the properties in person as they were overseas, but since they knew the neighborhood well, they felt confident.
I asked if they employed the 1% rule. She looked at me like I had three heads. It was clear that they hadn’t employed the rule, or much less heard of it. Clearly, she hasn’t been reading the blog as closely as she claims. 🙂
Since the 1% Rule is not in effect for their rental properties, Cindy and her husband have to cover part of the mortgage and expenses for each property.
On top of that, they haven’t been able to keep the units rented consistently. When they bought the properties, they thought they knew the neighborhoods well. It turns out that while they were away, that one of the neighborhoods got redistricted into a less-desirable high school. In turn, families quickly sold their homes to move back into the better high school district. As a result, the neighborhood lost some of the cache that it once had.
So in turn, their rental properties instantly became less desirable. For every month that went by without renters, their financial situation became more and more strained.
Since they were desperate, they took on a renter who they were not thrilled about at one of their properties. They just couldn’t continue to carry the mortgage on their own. Having your back up against the wall when making a financial decision is never a good thing.
The tenant has been terrible, in her words. While he always pays the rent on time thanks to an automated payment, they continually receive complaints about trash in the yard and lack of property maintenance. To be honest, Cindy is afraid of what the inside of the house may look like at this point.
She has mentally prepared to fix the issues once the lease ends and then convince her husband to cut their losses and sell the house as quickly as possible.
While building wealth through real estate may be an excellent method for many people, Cindy says it has become a burden for them. In hindsight, she wishes she had done things differently. While she loves being considered a paper millionaire, she says it’s not all that it’s cracked up to be.