Plane value vs. Personal Net Worth?

denverpilot said:
I don’t lecture folks who use or want debt, but I do point out the guaranteed risk they’re taking. As long as they get that, they can do as they please... right up until they ask politicians to socialize their lack of personal discipline in risk taking and accepting their own mistakes and own their losses. That last part is simply immoral.
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There's that, where I totally agree with you, but in the case of airplane loans, the bank can repossess the airplane.
 
Ryanb said:
What I’m saying is, unless you have a lender offering free money or you have a way to offset the interest in your loan each month, your net worth will decrease.
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Ok, so you are projecting into the future. Here is a secret, any purchase of a privately owned and used aircraft will reduce your net worth over time as it increases your expenses. That interest on the note is just one part of those expenses going forward. But then, taking money out of income producing investments to pay for the plane will do the same. For the question of net-worth, it makes no difference whether you are paying $300/month extra for interest on a plane or whether you are losing out on $300/month from your brokerage account.

The teeter-totter has to balance. If we could all have no change to our net worth, yet still go out and buy a lot of new toys, we all would, sadly it doesn’t work that way.
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As someone said earlier, in the moment of the transaction, buying a $100,000 plane is no different from buying a $100,000 brick of gold. Makes no difference to your net worth one way or the other. It simply doesn't. Same as buying a silo full of grain or a dump truck. Asset class 'cash' decreases by $100,000, asset class 'inventory' or 'vehicles' goes up.

You are using balance sheet language when what you are thinking about are ongoing expenses.
 
EdFred said:
That's not a guaranteed return though. When you find me a guaranteed return that outdoes interest rates, we can talk.

I'm still down 10+% from 6 months ago in "the market."
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I'm up.

Right after someone can guarantee my engine will make TBO. ;)



Wayne
 
I learned a long time ago, net worth, profitability, and Market Cap, etc are interesting but Cash Flow is what’s important to me. If more comes in every month that goes out, life is good.

Being retired with a COLA Pension, RMD’s from IRA’s and Social Security every month is as close to a guarantee of what comes in as I can get. So I buy a car with free money and the day I drive it off, my met worth goes down because the car depreciated immediately but I still owe the entire amount. Eventually, it goes back up because the debt goes to zero but the car has some residual value, even to a scrap dealer. But I don’t care since cash flow has been positive all the time. Even better for a plane if I took out a loan since the depreciation is close to zero and I can maintain positive cash flow by not buying something that would result in more going out than coming in.

I believe that’s called living within your means. :cool:

Cheers.
 
weilke said:
As someone said earlier, in the moment of the transaction, buying a $100,000 plane is no different from buying a $100,000 brick of gold. Makes no difference to your net worth one way or the other. It simply doesn't.
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Those are the key words.
 
I offer opinions based on what I've learned, seen first hand, and what the math tells me. I'll leave judgments to God - He's a lot smarter than I am...... So please take what I say as advice/thoughts for the best outcomes for people, not pointing fingers if anyone disagrees.

Debt is to be avoided. If you have the money and want to buy toys like an airplane, let me shake your hand for doing a great job building wealth and ask you to tell me how you did that so that I can get smarter.

If you ask advice I'd say don't go into debt because if something bad happens - loose job, have very high expenses (medical, etc.), you don't want the debt to be there. Debt in general causes stress, etc. In addition, it get's in the way of building wealth. Read an old but timeless book "The Millionaire Next Door". The people with high net worth get the high net worth by building wealth over time, no debt, etc.

The original topic - new worth and plane ownership? Hard to say. Just as I would wager a lot of BMW's and Mercedes are owned by people who don't really own them, are in debt, etc, so some plane owners are in debt who have a low net worth. Some (probably older) own it outright and have a high net worth.
 
It's more a question of one's life situation and obligations than net worth. A person who has a mortgage, other loans, kids headed for college, etc., is in a very different situation than someone without those obligations, even if they have the same net worth. I'm 100% debt free and an empty nester. That gives me remarkable freedom, and a costly mistake won't wreck life for my family.

When I decided to start plane shopping (having a helluva tough time, by the way) I moved money into a dedicated airplane account. As far as I'm concerned, that money is already spent, even though I haven't swapped it for a plane yet. I don't count it part of my net worth and it isn't part of my retirement planning.
 
eilke said: ↑
As someone said earlier, in the moment of the transaction, buying a $100,000 plane is no different from buying a $100,000 brick of gold. Makes no difference to your net worth one way or the other. It simply doesn't.

A few other considerations.

If you buy a $100,000 brick of gold, you have 1) the cost of financing that you pay on the loan, which is almost risk less / guaranteed to be there. 2) You have the added risk of what happens to the value of the gold - could go up or down.

Net Present Value of your "asset" with its associated risk and costs can be factored into what you really own / what your real net worth is.

Owing an airplane by financing an airplane will therefore reduce your net worth unless the appreciation overtakes the negative NPV. You might get lucky. Or not.
 
WDD said:
I offer opinions based on what I've learned, seen first hand, and what the math tells me. I'll leave judgments to God - He's a lot smarter than I am...... So please take what I say as advice/thoughts for the best outcomes for people, not pointing fingers if anyone disagrees.

Debt is to be avoided. If you have the money and want to buy toys like an airplane, let me shake your hand for doing a great job building wealth and ask you to tell me how you did that so that I can get smarter.

If you ask advice I'd say don't go into debt because if something bad happens - loose job, have very high expenses (medical, etc.), you don't want the debt to be there. Debt in general causes stress, etc. In addition, it get's in the way of building wealth. Read an old but timeless book "The Millionaire Next Door". The people with high net worth get the high net worth by building wealth over time, no debt, etc.

The original topic - new worth and plane ownership? Hard to say. Just as I would wager a lot of BMW's and Mercedes are owned by people who don't really own them, are in debt, etc, so some plane owners are in debt who have a low net worth. Some (probably older) own it outright and have a high net worth.
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I mostly agree in principle, but I'm not as hardcore about it. I'm debt free today, but earlier in life I carried a mortgage for my home and the occasional car loan. I've never carried credit card or consumer debt. The loans I took were chosen carefully, were well within my means, were covered by life and disability insurance, and were paid off early. I could have lived like a monk and cleared out that debt earlier, but I would have passed up some of life's joys to do so.

Some things are best done while you're young but they cost money. If you want to do some of the things I've done, like raise kids, race sports cars, pursue cave and wreck diving, etc., you have to do them while you're still relatively young and healthy. The expense of those things may mean you need to carry debt for a while.

Debt is like fire - very useful, but has to be controlled carefully so it doesn't burn you.
 
Half Fast said:
It's more a question of one's life situation and obligations than net worth. A person who has a mortgage, other loans, kids headed for college, etc., is in a very different situation than someone without those obligations, even if they have the same net worth. I'm 100% debt free and an empty nester. That gives me remarkable freedom, and a costly mistake won't wreck life for my family.

When I decided to start plane shopping (having a helluva tough time, by the way) I moved money into a dedicated airplane account. As far as I'm concerned, that money is already spent, even though I haven't swapped it for a plane yet. I don't count it part of my net worth and it isn't part of my retirement planning.
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Buy yourself a beer! Well done. I'm sorting out how I can do the same now that our youngest is finishing college.
 
We all make our own choices, my choices might not work for you and yours might not work for me. What everyone should do is just be fully aware of the consequences of those choices and take responsibility for them. Beyond that, I don't really care what other people do and I don't see why it should be so contentious.
 
Half Fast said:
Some things are best done while you're young but they cost money. If you want to do some of the things I've done, like raise kids, race sports cars, pursue cave and wreck diving, etc., you have to do them while you're still relatively young and healthy. The expense of those things may mean you need to carry debt for a while.
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Yeah, if I had to do it all over again I would have been a lot less conservative with my money in my 20s and 30s. I've lived a debt free life (except a house), saving aggressively into both retirement and savings. Some of this is a function of being an airline pilot and cognizant of its cyclical nature, but I wonder how different things might have been had I been willing to assume more risk.
 
kayoh190 said:
Yeah, if I had to do it all over again I would have been a lot less conservative with my money in my 20s and 30s. I've lived a debt free life (except a house), saving aggressively into both retirement and savings. Some of this is a function of being an airline pilot and cognizant of its cyclical nature, but I wonder how different things might have been had I been willing to assume more risk.
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What would life be without some risk?



(Answer: probably longer)
 
MacFly said:
Really? What is my financial situation? What's my net worth, what's my income, what are my expenses? You must know those things in order to label me "fiscally imprudent". Or are you saying that the would be fiscally imprudent for you, given your financial situation? Do I have to live my life by your "outmoded" financial rules that you developed to fit your resources? Or, having worked hard for financial success over many years, can I indulge myself while still feeding and educating my family without being criticized by financial curmudgeons on an airplane website?
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He never said you were any of those things.
 
WDD said:
If you buy a $100,000 brick of gold, you have 1) the cost of financing that you pay on the loan, which is almost risk less / guaranteed to be there. 2) You have the added risk of what happens to the value of the gold - could go up or down.

Net Present Value of your "asset" with its associated risk and costs can be factored into what you really own / what your real net worth is.

Owing an airplane by financing an airplane will therefore reduce your net worth unless the appreciation overtakes the negative NPV. You might get lucky. Or not.
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Net worth is simply what you own, minus what you owe.

When you bought the brick of gold or the airplane, if you can sell it immediately for the same price, your Net Worth remains equal. This leaves out liquidity — maybe you can’t sell it immediately and it’ll take time. Doesn’t matter if it still sells for what you bought it for. Net Worth still remains the same.

Now if you bought a brand new airplane and by switching from new to used it lost half of its resale value the day you flew it home, in your scenario now your Net Worth is 50K lower.

Risk really has nothing to do with Net Worth other than as a forecast maybe. The chances something goes up or down isn’t part of the calculation for Net Worth as it stands right at this moment. You can guess at values of things and get an ESTIMATED Net Worth (probably the word that is missing) but only a real number counts.

Something like an appraisal on an asset gets that estimate as close as possible — and one can determine if it’s “close enough” to make decisions from or if the market for the asset is too variable (risk) but not truly know exactly what Net Worth is.

I know roughly what my house is worth by neighborhood comps and such. I can ask a Realtor to look and get closer. I can hire an inspector and appraiser and get closer. But until it sells I’m just in the ball park on Net Worth. Probably close enough for big picture work.

Same with cars, household belongings, whatever assets one has.

If one “owns” a house truly worth say $500K and has a $400K loan on it, Net Worth is positive $100K from that asset. They also “own” the risk of default with that loan.

If that same house is “owned” with no loan, it’s a positive $500K on Net Worth.

And of course reality applies here also. “Own” is in quotes because until you have the title in hand, you don’t own anything. The bank owns it. Can call it a lien but that’s just semantics. You do however get to sell it if you like if you want to do so to pay them off. They retain approval on selling short however, which prints you’re just their caretaker. You sell short without them changing the deal, you still “own”
a mortgage and no place to live. :)

But Net Worth doesn’t change because you bought something unless you know it can’t be sold for what you paid for it.

Now what would really be nasty is if you bought a house and the loan terms say you pay all interest no matter when you sell. Then you’d be going immensely into the hole the second you signed. As it sits today you go fees and points purchased up front in the hole. So there is a minor Net Worth hit left out of the simple version above. Another area you get constant nibbling at Net Worth is PMI. Especially now that it’s usually not removable at 80% LTV like it once was. A constant drain on capital paying for someone else’s insurance you receive no value from whatsoever.

Anyway. All of the above plus more I’d say is why looking at Net Worth or Estimated Net Worth isn’t a great way to assess any purchase. The balance sheet is more direct and a percentage of income for all aircraft costs from acquisition through maintenance and operating costs, is probably as useful or far more. Low or high Net Worth doesn’t really become the limiting factor.

Second limiting factor is risk. On aircraft the risk that’s the highest is a loss by damage — mitigated perhaps by insurance at additional ongoing cost — or mechanical failure that costs most of the value of the aircraft, or goodness forbid more (totaled by maintenance costs).

Net Worth is waaaaaaay down the list of deciding factors. To me anyway. YMMV.
 
Bill Jennings said:
You don't know that, maybe Mr Zero Percent has just enough liquid capital to cover the note, maybe he has far more. Everyone's situation is different.

As for me, when available I take the 0% loan, because every payment after loan initiation is paid in further devalued currency from that time point forward.
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Very rare. But it was an analogy. Call the surgery “all the money Bezos has” if you like.

Point was the risk is always there for default and life can toss things at you larger than any amount of liquid capital available that will be more important than an airplane.

Like @Everskyward said, the bank can also repo. They also took their risk making the loan.

The risks of other losses also apply but a loan always adds an additional one.

And of course you could always say you like the airplane more than the kid... LOL. Some legal risks there, too. :)
 
WDD said:
If you ask advice I'd say don't go into debt because if something bad happens - loose job, have very high expenses (medical, etc.), you don't want the debt to be there.
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The 'pro debt faction' would argue that the one thing you want in that situation is cash on hand, and having used other peoples money to buy the toy keeps more of that liquid cash in your pocket.

Lets say I have 50,000 I can spend on aviation. If I spend all 50 on the plane and pay for ongoing expenses out of cash-flow, I would have to sell the plane pretty quickly if I had a medical event or job loss. If otoh I spend 25 and borrow 50, I have 25 in the bank to
- pay for an unplanned overhaul
- cover the note, hangar, insurance for a very long time until I 'have' to sell. And at that point, I would still have some equity in the plane.

Over-extending yourself reduces your financial security. Responsibly using debt doesn't.

Debt in general causes stress, etc.
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If it does that for a particular individual, they are probably well advised to avoid debt. The only debt I have is against my primary residence and maybe $2000 left on a 4 year old tractor. Neither of those causes me to lose any sleep. In the coming year, I may buy a plane. If I borrowed 1/2 or 2/3 of the purchase price for something like an older 182, it would add ZERO stress to my life.

In addition, it get's in the way of building wealth. Read an old but timeless book "The Millionaire Next Door". The people with high net worth get the high net worth by building wealth over time, no debt, etc.
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Yes, some people built their wealth that way.

And then there are others who built their wealth by aggressively using leverage by borrowing piles of 'OPM' to build their business.

And then there are those somewhere in between who use some debt to finance things they need or want while conserving cash for other needs.

This is not like trucker-hats where one size fits all.
 
weilke said:
Lets say I have 50,000 I can spend on aviation. If I spend all 50 on the plane and pay for ongoing expenses out of cash-flow, I would have to sell the plane pretty quickly if I had a medical event or job loss. If otoh I spend 25 and borrow 50, I have 25 in the bank to
- pay for an unplanned overhaul
- cover the note, hangar, insurance for a very long time until I 'have' to sell. And at that point, I would still have some equity in the plane.

Over-extending yourself reduces your financial security. Responsibly using debt doesn't.
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In that situation, why go into debt before the need? Borrow the money if and when needed for the emergency and only as much as needed to cover the immediate crisis.

BUT, the trick to making that work is to arrange for it now, well ahead of the need, when you can take your time and negotiate favorable terms. Many years ago, my wife and I set up a home equity line of credit. We have never once tapped it and I have no plans to do so. In fact, when it expires we'll just let it go. It's a variable rate, but it's 0.5% below prime. We set it up strictly in case of emergency. If a disastrous situation like you describe had ever happened, we could have simply written a check for the necessary amount against that credit, and paid it back rather leisurely at a low interest rate.

To cover situations that may not happen, it's sufficient to have the ability to borrow. It's not necessary to borrow ahead of time in order to squirrel away cash.
 
Or save up your 50k, then save up another 50k before buying the plane.

This is why I haven't had kids (OK, other than finding a willing participant) and kid is going to cost like 100k from 0-18. I want that 100k saved up, plus another 100k before the procreation process begins. Another kid, another 100k/100k.
 
Half Fast said:
In that situation, why go into debt before the need? Borrow the money if and when needed for the emergency and only as much as needed to cover the immediate crisis.

BUT, the trick to making that work is to arrange for it now, well ahead of the need, when you can take your time and negotiate favorable terms. Many years ago, my wife and I set up a home equity line of credit. We have never once tapped it and I have no plans to do so. In fact, when it expires we'll just let it go. It's a variable rate, but it's 0.5% below prime. We set it up strictly in case of emergency. If a disastrous situation like you describe had ever happened, we could have simply written a check for the necessary amount against that credit, and paid it back rather leisurely at a low interest rate.

To cover situations that may not happen, it's sufficient to have the ability to borrow. It's not necessary to borrow ahead of time in order to squirrel away cash.
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Using a heloc for contingencies has two downsides:
- banks can freeze or even call helocs for reasons related to either the borrower (e.g. drop in fico), real estate market or the economy at large.
- if you use it, you now created a liability against your primary residence. That's ok if your financial issue is short-term. If it continues longer, you now have created a foreclosure threat against your home. Otoh, if you borrowed against the plane, you hand a set of keys and a bag with logbooks to the nice man from the bank, and you have that issue out of your life.
 
weilke said:
Using a heloc for contingencies has two downsides:
- banks can freeze or even call helocs for reasons related to either the borrower (e.g. drop in fico), real estate market or the economy at large.
- if you use it, you now created a liability against your primary residence. That's ok if your financial issue is short-term. If it continues longer, you now have created a foreclosure threat against your home. Otoh, if you borrowed against the plane, you hand a set of keys and a bag with logbooks to the nice man from the bank, and you have that issue out of your life.
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I'd rather lose the house.
 
weilke said:
Using a heloc for contingencies has two downsides:
- banks can freeze or even call helocs for reasons related to either the borrower (e.g. drop in fico), real estate market or the economy at large.
- if you use it, you now created a liability against your primary residence. That's ok if your financial issue is short-term. If it continues longer, you now have created a foreclosure threat against your home. Otoh, if you borrowed against the plane, you hand a set of keys and a bag with logbooks to the nice man from the bank, and you have that issue out of your life.
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Quite true, and a good caution. The key is to only use it short term for an emergency when you need to right a check right now. Then sell or refi other assets to clear the heloc.

And an emergency doesn’t mean you just found a great buy on a new boat.
 
Boy it sure is taking some people a lot of text to explain how things like collateral and interest work.

Do y'all need some metal interest calculators?
 
weilke said:
The 'pro debt faction' would argue that the one thing you want in that situation is cash on hand, and having used other peoples money to buy the toy keeps more of that liquid cash in your pocket.
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Why not both no debt and cash on hand?

These are not exclusive. :)

Both the debt and no debt crowd may have cash on hand at all times as a completely separate and unrelated goal.
 
Paid all my planes in cash. The tax free, combat pay money in Iraq easily paid for my $38K AA5. The same tax free, combat pay in Afghanistan easily paid for my $65K Velocity. The roughly $15K total operating costs per year is well within what my annual salary allows.

It’s really about priorities and assuming a certain level of risk. Just talked to a coworker yesterday who is really into getting a Velocity but won’t take the leap. He says his wife is spending all his money and can’t afford to buy right now. If you’re timid and don’t get your priorities straight, you’ll spend your life in the sidelines dreaming while the rest of us are out enjoying aircraft ownership. Take the plunge!
 
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MuseChaser said:
The point that others have made about being able to pay cash for depreciable assets mirrors my philosophy. Almost everyone needs to borrow for their home should they wish to own one, but generally that's an appreciable asset. Anything else that's not used in a business setting... have the cash for. Maybe don't use it if finance terms are great....but have it.
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I have financed a vehicle (car, motorcycle, or plane) only once in my adult life. The cheapest loans you can ever make is from yourself. Pay cash, then "pay yourself back" into your investment account. If you do it responsibly, your interest rate will be negative. Every dollar saved in paying interest is another dollar toward flying. :) It does take some discipline to accumulate the first bolus of cash to do this. (And not continually blow it on things you can't sustain.) And it helps to start small (and my first plane, an AA-1A was "butt-of-jokes" small for sure). But after that, if you can save aggressively and invest wisely, you may never need a loan again for a vehicle, including a plane. I figure that this payback and investment strategy has essentially resulted over time in say, a "free" GNS-430 and a "free" set of G5s.
 
denverpilot said:
Very rare. But it was an analogy. Call the surgery “all the money Bezos has” if you like.

Point was the risk is always there for default and life can toss things at you larger than any amount of liquid capital available that will be more important than an airplane.

Like @Everskyward said, the bank can also repo. They also took their risk making the loan.

The risks of other losses also apply but a loan always adds an additional one.

And of course you could always say you like the airplane more than the kid... LOL. Some legal risks there, too. :)
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If the asset you hold can be quickly sold for more than the amount you owe, then there is no risk of default. Markets can and do change, there were plenty of people in the Great Recession thought they had equity and it evaporated quite quickly when the housing market tanked, or perhaps we should say, returned to sanity. That was true of some markets but not most. Where I live, we didn't see a big runup in housing prices before the crash and we didn't see a big drop after it
 
Five years ago, I went looking for a boat. What we were looking for was a nice family runabout that we could use for tow sports. I started off looking for a used boat, but in the comeback from the Great Recession, there wasn't much available, mostly older stuff that wasn't in very good shape, or a few recent models that were close to new boat prices. In the later part of the summer, I gave up on finding a used boat and demoed a couple of new boats, but we decided it was too late in the year and that we would continue to rent. The following January my wife and I went to the boat show and bought a leftover 2015 model. It was about $46000 all in. I put $15,000 down and took them up on their three percent for five years financing. Now, the cognoscentis of cheap would tell me that I did that all wrong, that I should always buy used and never finance anything but a house. Could I have paid the balance in cash? Yes, but that would involve selling investments, and my best guess is that I would come out ahead not doing that. Not only did I think the stock market would beat that 3 percent, since the money was mostly in index funds that I've had for a while, and there would be taxes to pay on the unrealized earnings.

The boat got paid off last month. In the four and a half years we've been paying on the boat, that index fund has gained 11% per year on the average. I did a search on Boat Trader, and the two 21 foot Yamahas that show up nationally s have an asking price of $35,000, and that is for a trim and power level that is a step down from ours.

Do I have any regrets? Just one, that we didn't buy it a couple of years earlier.
 
FormerHangie said:
.... Could I have paid the balance in cash? Yes, ....
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Exactly. That's the entire point. As I and others have written, when financing terms are such that money left invested earns more than interest paid, it makes sense to finance. What I do not believe in personally is buying anything that REQUIRES financing, except for a home.
 
MuseChaser said:
Sailboats and planes are both huge time sucks. Since late March/early April when Covid hit and I've had plenty of time, I tore out and rebuilt the entire transom of our 26' Pearson and rewired a good bit of it, built a new battery box and relocated the battery, AND have done the entire interior of our Cherokee, installed a 4 place intercom, fabricated new fuel lines, installed a PowerFlo exhaust, new wheel bearings all around, new brake pads, new brake lines, fuel tank work, and everything else normal that goes along with an extensive annual. Been working pretty much 40 hour weeks on both..boat is finally in the water and doing great, and we're wrapping up the plane this week (I hope). I'd way rather sail and fly than wrench on either, by a long shot, but I've gotta say it's been very rewarding. No regrets to owning either, at all. The boat is much, MUCH less expensive, including slip, haul out, lumch, and winter storage.
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I agree! This virus has allowed me to “social distance” on the sailboat and the mahogany speedboat. I installed a pump out head on my Hunter 27-2 (originally had a cassette head). Tons of wood work done on both boats. Been getting a lot of complements at the dock! My boat friends often ask about my toys and how much aircraft cost to maintain. I tell them to add a zero to sailboat projects (and that’s with a partner in the plane). Our plane is about $80k, paid for and represents 5-7% of net worth. I’m 38 and have 12yrs till planned retirement. Things are gonna get crazy because my wife and I plan on sailing around the world on a catamaran...
 
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