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farmland, representing the investment value of physical, tangible assets

An Investor’s Guide to Productive Assets, Physical Assets and other Tangible Asset Types

Why Buy Farmland if You’re Not a Farmer? Tangible Assets Explained

Individuals invest in tangible assets (called physical assets, hard assets, fixed assets and more, depending on the asset itself) 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?

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, which can be physical assets or not, include:

  • Current assets, which can be converted to cash within a very short time (typically a year or less), such as accounts receivable, inventory, 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.

Tangible Assets for Accredited Investors

As an individual investor, you can buy into all kinds of tangible assets:

  • As an outright purchaser of 100% ownership.
  • As an investor in a fund that invests money in a variety of assets.
  • As a general or limited partner in a partnership where you intend to invest in an asset for the benefit of the partners.
  • 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 (e.g., farms, factories, real estate, aircraft, equipment). These leases can be set 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% 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.

Physical assets, such as 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.

Products Assets and Non-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

 

Whether you want to invest in a physical asset, such as a real estate property, or you would rather passively invest in a gold ETF, tangible assets are an excellent way to diversify your portfolio and add extra stability.

[Editor’s Note: To learn more about this and related topics, you may want to attend the following webinars: Investing in Commercial Real Estate and Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds 2019. This is an updated version of an article originally published on February 3, 2013.]

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About Alan G. Orlowsky

Alan G. Orlowsky, C.P.A., J.D., is the president of Orlowsky & Wilson, Ltd. Since 1980 he has helped individuals and small business owners plan for their future, build and preserve wealth, and minimize tax liability. His clients have ranged from young couples starting their families, to retired individual taxpayers and Fortune 500 corporate executives.

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