Financial Poise
Share this...
Tangible Assets - Gold Coins

Introduction to Investing in Tangible Assets

Why buy farmland if you’re not a farmer?

Individuals invest in tangible assets (also called hard assets) because they are generally considered more stable in value than most commonly traded sovereign currencies and securities. When the world economy falters, many investors move into tangible assets, such as gold, because they are perceived as safe havens during difficult economic times.

To be sure, tangibles are still subject to value fluctuations based on supply and demand, depreciation and appreciation, and (in the case of equipment) obsolescence or displacement by new technologies. But when managed well, tangible assets can generate (a) income for investors over a period of years, or (b) capital appreciation. Certain kinds of tangibles, such as farmland and commercial real estate, can generate both income and capital gain.

What is a Tangible Asset?

What is a Tangible Asset?For accounting purposes, an asset is anything (tangible or intangible) that can be owned or controlled to produce economic value, or be converted into money or another asset when sold or transferred.

In the words of the International Accounting Standards Board, the reason for acquiring or investing in an asset is that you expect a “future economic benefit” to “flow” from it.

Assets can be tangible or intangible. Tangible assets include:

  • Current assets, which can be converted to cash within a very short time (typically a year or less), such as accounts receivable, most inventories, marketable securities, short-term loans, currencies, some precious metals, and cash itself
  • Fixed assets, such as real estate, machinery, equipment, tools, electronic hardware, trucks, airplanes, and in-ground resources like oil and minerals

Intangible assets include intellectual property such as patents, trademarks, copyrights, software, and licenses; and financial assets such as securities, funds, and derivatives.

Tangible assets tend to be easier to value than intangible assets, because they are more readily bought and sold at a current “fair market value.” Valuation of an intangible asset often requires preparation of an appraisal.

Tangibles for Accredited Investors

As an individual investor, you can buy into all kinds of tangible assets, either (a) as an outright purchaser of 100 percent ownership; (b) as an investor in a fund that invests money in a variety of assets; (c) as a general or limited partner in a partnership where you intend to invest in an asset for the benefit of the partners; or (d) as a managing or non-managing member of a limited liability company (LLC).

In the case of a limited partnership, the general partner offers shares to passive investors (limited partners) via a private placement. Beyond a small number of privileged limited partners, only accredited investors may purchase those shares as passive investors.

Partnerships and LLCs that invest in productive tangibles (those which can be used to produce a product or service and thereby generate income) may either (a) control and manage the assets themselves, or (b) lease the assets to businesses that operate or use the assets (including farms, factories, real estate, aircraft, and equipment, for example), for a limited term (five to seven years in many cases) and derive an annual income stream for the investors (commonly a 5 to 10 percent yield). At the end of the term, the partnership may choose to renew the lease, find a new lessee, or sell the asset and distribute the remaining capital (sometimes for a capital gain) to the investors.

Investors in non-productive tangible assets typically purchase such assets outright or through a publicly traded security, such as an exchange-traded fund (ETF) or trust. For instance, an ETF will actually purchase gold bullion and hold it in a secure location for the benefit of its investors.

Fine art and antiques are most often purchased outright, although investment vehicles exist that will purchase such assets for the benefit of investor groups. Commodity futures are commonly purchased and sold through publicly traded funds or partnerships. Real estate is often purchased (a) through large, publicly traded real estate investment trusts (REITs) or funds of REITs; (b) through large, publicly traded limited partnerships, or even (c) outright by owner/manager investors.

The Hardest Productive Assets

Investors looking for stable value, reliable yield, and appreciation usually prefer the hardest of the hard, productive assets: farmland, commercial real estate, power generation plants, oil and gas production.

Likely Appreciate in Value

Likely Depreciate in Value

Productive Tangible Assets

Farmland, commercial real estate

Machinery, equipment

Relatively Liquid

Relatively Illiquid

Non-productive Tangible Assets

Precious metals

Fine art, antiques, collectibles

 

Leave a Comment:

Share
Hide