Liquidity — or at least an exit — is what separates lasting wealth from a literal house of cards. With $75 million sunk in “investment” property it’s hard for any hard-working UHNW client to get ahead, much less keep up with recurring costs. Can his new advisors engineer an Ashton Kutcher outcome out of a Nic Cage disaster?
The last time we checked in on Johnny Depp, he was suing his old management team for letting his spending race too far ahead of even the biggest Hollywood paychecks.
New details indicate that even $2 million a month wouldn’t have been a dealbreaker if only the star had built up a base of income-producing investments before grabbing every mansion in sight.
It boils down to two essential truths that even the best-compensated people on the planet ignore at their peril: A nest egg you can’t crack won’t feed you and a house you won’t flip isn’t an investment.
Going the way of Nic Cage
Depp apparently grossed $650 million over the last 13 years, which should be plenty of cash for just about any other person on the planet.
Even subtracting taxes and management’s 10% cut, the star could have blown $66,000 every day across that peak earnings period and still ended up with close to $100 million in the bank.
Instead, he owes the IRS money and is going to need to make tough career choices if he wants to keep the houses he’s already bought, much less buy more.
Those houses essentially chewed up every dollar of investable capital left behind after paying the bills. That’s okay. On paper, Depp is still worth at least $50-60 million.
But to convert that paper equity into current income, you need to either find a buyer or borrow on the assets. In the first scenario, your investment is worth whatever someone will pay. In the latter, you can at best spend the equity back down to zero.
Either way, it’s a very different scenario from the marketable securities that buttress most investors’ financial independence. If you need cash, can’t find a buyer and don’t have the equity, the houses had might as well be rocks tied around your neck.
That’s what Nic Cage learned about 10 years ago after a similar hot streak left him upside down on about $100 million in ultra-high-end real estate and no cash to make the payments.
One or two castles and private islands are okay as multi-million-dollar toys. It’s a hallmark of the celebrity lifestyle.
But once you collect more properties than you could ever realistically enjoy in a single year, it’s all too easy to pass off non-performing assets as “investments.”
Cage claimed he was “investing” his Hollywood paychecks in mansions. Unfortunately, the timing — going into the global credit crash — was terrible and the lack of diversification practically makes it a mockery to call his holdings a “portfolio.”
He put his entire net worth into a single asset class, leveraged up, and then lost it all when the market froze and he couldn’t find an exit at any price.
Now he’s living in a Las Vegas condo taking every role he’s offered in order to rebuild his fortune. Those movies are at best hit or miss, but when you’re working for volume instead of quality, your professional reputation takes a dive.
Fans rate the roles Cage has done after the crash as 35% worse than the ones that initially made him a star to watch. Johnny Depp has got to shudder when he contemplates that trajectory.
Meanwhile he’ll need to sell a few of the houses at any price just to raise cash. The yacht is already gone. Every day the overhead clock keeps ticking.
Figure $60 million in real estate scattered around the world’s hot spots requires another $6-7 million a year for maintenance and taxes. Suddenly that’s 25% of Depp’s personal budget on a single line item.
Add interest on the mortgages, and he’s got to work harder than ever just to keep his head above water. That’s not an investment portfolio at all. It’s a series of huge liabilities that need active management.
Run it like a business
The difference between accumulating houses and building a real estate investment portfolio really boils down to realistic emotional distance.
If you can’t wait for the market to appreciate to the point where you can flip the property at a huge profit, you’re an investor looking for the payoff.
But if you’re planning to simply hold on as long as the houses amuse you, you’re just buying houses. That’s an expense and not a wealth-building exercise.
Expenses rarely turn into profits. Clients who think otherwise are fooling themselves.
And the advisors can protect themselves by framing the conversation accordingly. Consider structuring any potential purchase that the client wants to classify as an “investment” within a formal business entity — something that highlights the fact that you want profits passing through and back to your client’s bottom line.
The ubiquitous revocable trust that shields celebrity ownership from the prying public isn’t good enough. If you’re investing, you want to start a high-end hospitality business that can make pragmatic buy-and-sell decisions based on the numbers.
In the meantime, investment property can still serve as a personal vacation getaway for 14-30 days, so in theory Johnny Depp could simply rotate around the mansions month by month and rent them out the rest of the year.
As you build up equity and cash elsewhere, rents become less crucial as a way to defray operating overhead. Your clients can still build the real estate empire now and enjoy it later.
They’ll probably fall in love and out of love with properties over time. That’s okay. Once the operating company has a footprint of its own, it can sell residences back to your client and pick up the houses that have fallen from favor.
Johnny Depp probably would have balked at this. That’s okay too. You know where you stand then: you’re not investing, you’re buying houses for personal use. In that scenario, it’s good to carve out space in the cash flow to build a real investment portfolio on the side.
Look at Ashton Kutcher. While he’s flipped the occasional house, the bulk of his money went into early-stage technology start-up companies. As each of those holdings achieves its liquidity event — acquisition, IPO — he’ll be able to cash out.
The money keeps rolling. And unlike Cage or Depp, his net worth has been steadily rising. His investments are his investments. His house is his house.
He’s a relatively happy client. That’s the kind you want.