What is Your Price of Happiness?

Inflation, inflation, inflation. Housing is on fire! Used and new car prices are astronomical. Buyers are lining up to pay well over asking price for homes that have skyrocketed in value over just a few years ago and dealers are… buying back the cars they’ve sold just to stock the lot?

No, this isn’t the twilight zone, this is the world we are currently living in. Despite the fact that things are more expensive, there is some good news in all of this: many of us are sitting on appreciated assets that haven’t just risen in value, but are in high demand.

I know many clients, friends, and (dare I say) myself have caught ourselves toying around with the question of selling these appreciated assets in order to take advantage of this market—even if they were not necessarily pieces of property or vehicles that were purchased with immediate resale in mind.

When is it a good idea to sell something of personal value to you for the sole purpose of “making money” off of it?

From a dollars and cents perspective, it would seem like it’s always a good idea if there is enough potential upside. Bought your house for $2 million in 2019, but comparable homes in your neighborhood are going for $3.5 million now? Perhaps you sell it and upgrade, or perhaps you sell it, reinvest the money somewhere else, and wait to buy again when the market cools.

This is happening a lot right now. As many of you know, my wife and I purchased a second home in Naples, Florida. As of late, we have seen lots of people downsizing to pocket profit while some are simply buying and selling left and right. It’s like these people can’t sit still. Some are trading up to live in larger homes while others are simply trying to cash in on this inflated market.

All of this action has me thinking, when does it make sense to cash in and when does it make sense to stay put? What is the cost or the benefit?

As I mentioned above, the dollars and cents line up right now. These people who are selling are making money. I mean, we can see what properties are bought and sold for anytime we want by swiping through a few realtors’ pages.

But what about the guy who purchased a vacation home, but doesn’t necessarily need it. At what dollar value does selling an appreciated asset make sense?

In other words, “What is the price of happiness?”

At what point does the ‘number stood to gain’ outweigh the happiness accrued from the asset? How much would you sell your happiness for? 

And what would you stand to gain in its place?

These are really the questions that have to be answered for anyone considering off-loading an appreciated asset like a vacation home or spare vehicle in this market.

Here’s why.

The transaction will cost you something—and I don’t mean money.

Yes, you have to pay a realtor to list and sell your home, but this is not what I’m talking about at all. The transaction—the sale of the home or boat or vehicle—will result in a loss of some sort. Obviously, this is the loss of the asset. But it’s also the accrued experiences those assets afford you.

What you have to do then is determine what the asset means to you beyond its financial value. In other words, how much money would you have to make on the sale of your vacation home to justify giving up the experience of using it? The experience of waking up and smelling the crisp ocean air six months out of the year? Of having a place your college age kids and their friends could come visit on Spring Break? Of this milestone achievement you reached as a result of your hard work?

For some, the answer might be nothing. There is no dollar amount that is worth giving those things up for (at this point in time, at least). And for others, it could be any profit after expenses over the value you paid for it. It’s completely subjective.

The idea is to question how much your happiness does cost, because at a certain point, you’re willing to make the trade. What number makes you say “uncle”?

There are times when the extra “cost” is completely worth the “price of happiness.” 

Here’s a smaller, less complicated example in action. A couple months ago, a friend of mine ordered a new SUV. He purchased the car for an initial service that was needed for his business, but once he showed up to take delivery of the new vehicle, the sales manager made him an offer. He said, “Hey, I’m not trying to sell you anything, we literally have nothing in our inventory to offer you. But, I will buy this car from you for 20% more than you paid for it on the spot, right now, today.”

Now here is normally where I would say, “long story short,” but this is just truly a short story. The deal made sense. He negotiated a little and sold the car back to the dealer for more than he paid for it. Here’s why: it was a smart deal.

He decided to go with a different vehicle until he could take delivery of another newer vehicle down the road. In other words, he took the extra cash in exchange for waiting a bit longer.

But there was a cost. So, what was the cost of this transaction? Taking an Uber off the lot instead of leaving in a new SUV, and then finding another car to purchase.

But, there are other considerations, of course. Cars are depreciating assets, so the minute he drove it off the lot, the value would have already decreased. Who cares, then, right? Well, if the vehicle had a personal value or indispensable purpose that could not have been replaced with another vehicle (as in the above example), the cost of the transaction would have been too high to make sense, even with the extra money in hand.

In this instance, it proved to be a lucrative opportunity. But if the vehicle was NEEDED to produce revenue immediately or were of sentimental value—say a long promised and awaited gift for a spouse—the decision to make the deal may not have been so cut and dry. Or, if he simply decided that NOT leaving with the vehicle was worth the money, then there is the answer. For this gentlemen, the extra 20% was worth the cost of immediate happiness.

Happiness is relative. 

I know, I know. Thanks for stating the obvious, you’re thinking. But happiness is absolutely relative to a number of factors, especially one’s health, for example. Because if we all knew when our time was up, we wouldn't care about money. We'd just enjoy the last few weeks with our loved ones, and that's that. The cost of happiness then changes a lot based on things like someone's health.

Another factor that affects the cost of happiness is time—time spent waiting for something or time spent in a particular situation. Let’s say you just finished decorating your vacation home and getting it to your liking. At this point in time there is a definite sense of ownership and pride in what you have accomplished to first purchase the vacation home and second make it your own. Up and selling at that moment might feel like more of a loss, at which point the cost of happiness increases.

Now take the example of the car I used above. Let’s imagine that this gentleman had already waited nine months for this new car to be ready, and knew he wouldn’t be able to get the same car again for another 9 months. Time spent waiting, then, would be directly related to his cost of happiness.

This is why there isn’t a cut and dry answer when it comes to deciding your cost of happiness. Numbers can’t tell the whole story.

What do you stand to gain?

If you do find yourself in a position where the potential profit on your asset outweighs your desire to keep it, then you must take the next logical progression in your thinking and identify what it is you stand to gain. Put another way, what will the extra money afford you that you don’t have now?

If you consider selling your vacation home to buy a larger, more expensive home, I think this could be a bad investment. Essentially, you dilute your return with the escalated costs associated with purchasing the larger home. Plus, you’ve also got to consider that there is only so far that home will have to appreciate in this already elevated market. Do you need the extra space? Or is it just a case of wanting to do something with your added equity because you can? Make sure you aren’t buying into a bigger obligation that may not appreciate as much as you hope.

Or, let’s say you take another route and take a loan out against your extra million in equity. You go find five properties, put 20% down on each of them, and now you have a portfolio of real estate investments. You’ve now extended your dollar. You own a portfolio of five million-dollar rental properties. Let’s even say you have them all rented out and boy, oh boy, you make money! This sounds sexy and attractive, but here's the problem: there's closing costs associated with each of these. Not to mention the headache of upkeep, maintenance, and being a landlord—or paying a property manager to do it all for you. Don’t forget insurance and property taxes.

So, is it doable? Yes. You could really expand your real estate portfolio in a climate like this. But, you also take on the risk of whether or not all those properties will be worth a million dollars in five years.

And yet a third option would still be to take out a mortgage against your equity, invest the money elsewhere in hopes of making more than the 4% interest you’ll be paying on the loan, and leverage that equity to invest in equities. The downside of using leverage to invest in equity markets is great, though, and have never recommended doing so.

But another smart possibility is simply to sit still. Stay put. Enjoy that your net worth has gone up. Yes, you’re not using it. But you’re working to pay off the note you hold on it, and later on when you decide to transfer it to something else—maybe a home where there’s space for grandchildren—you’ve got a big chunk of equity to work with. In the meantime, you don’t have the carry costs and you can save and invest money until you get to that point.

Risk your winning hand? Or live to play another day?

Let me close this with a hypothetical question I think will elucidate my point:

Do you toss back a pair of kings in hopes for a pair of aces? Or do you enjoy the victory in hand and live to play again?

Every transaction has a cost. Adding greater leverage to an already winning position can be costly—not just financially, but personally, as well.

What is the price of your happiness?

Determine that cost and weigh it against the potential benefits to determine how best your money works to help you achieve the life you want today while working towards an even better tomorrow.