• Productive assets are tangible or intangible assets that generate income or appreciate over time.
• Identifying which assets are productive in any given sector or industry is important to diversify an investment portfolio.
• Real estate is a prime example of a productive asset, consistently yielding impressive returns through regular income and value appreciation.
• While productive assets produce income directly through use or operation, financial assets represent a claim to profits or an obligation to pay.
• Digital assets like social media and mobile apps can also be considered productive assets due to their user base, data, and reach.

Productive assets are tangible or intangible items that generate income or appreciate in value over time. Unlike non-productive assets, these have the potential to generate direct financial returns, making them a coveted choice for investors.

For example, an apartment complex earning rental income or patented technology that brings in royalties are considered productive assets. One is tangible and the other intangible, respectively.

Historically, the U.S. has seen various examples of productive assets. In the 19th century, railroads became a significant productive asset, revolutionizing transport and trade[1]. In the 20th century, the rise of technology companies transformed intangible assets, like software and algorithms, into massive income-generating entities. In turn, the development of these assets spurred economic growth and prosperity not only in the U.S. but globally as well.

Studying and identifying productive assets in an investment sector or industry is crucial for many investors, especially when diversifying their portfolios[2].

Diversification involves spreading investments across various asset types to reduce risk. Incorporating productive assets to achieve this provides a potential for growth, risk management, and steady income.

Real estate consistently outperforms many traditional investment avenues and productive asset types. Data shows[3] that commercial real estate has an average annual return of 9.5%, residential real estate 10.6%, and real estate investment trusts (REITs) 11.8%.

RELATED: What’s Your Diversification Strategy?

In general, any investor would do well to diversify their portfolio with productive assets, whether they are real estate or otherwise. Here are some of the benefits of doing so.

• Risk mitigation: Every asset class has its cycle of ups and downs. By diversifying a portfolio with productive assets, an investor can offset potential losses in one sector with gains in another. For instance, while stocks may plunge during economic downturns, rental income from properties may remain relatively stable.
• Steady cash flow: Certain productive assets, particularly real estate, offer a regular income stream. For example, the U.S. Census Bureau noted that the rental vacancy rate in Q2 2023 was about 6.3%[4], indicating strong demand. Such assets can provide consistent returns, irrespective of market fluctuations, strengthening an investor’s cash flow.
• Hedge against inflation: Productive assets, especially tangible ones like land, often act as a safeguard against inflation[5]. This means they can maintain, or even increase, their purchasing power over time.
• Tax benefits: Investing in certain productive assets, like real estate, offers tax incentives. Depreciation, mortgage interest deductions, and certain credits can significantly reduce tax liabilities for investors. For example, a land business set up as a limited liability company (LLC) can enjoy pass-through taxation[6].

Real estate remains one of the most tangible and desired forms of productive assets. Real estate assets can be broadly categorized into:

Commercial Properties

These are properties designed for business activities. Think of the bustling office buildings in Manhattan or the sprawling shopping malls in suburban areas.

Whether rented out to tech startups or high-end boutiques, commercial properties consistently generate substantial rental income for their owners. The returns on commercial spaces, especially in prime locations, can be substantial over time.

Rental Properties

Residential properties, from single-family homes in the suburbs to multi-story apartment complexes in the city, offer a steady stream of income when rented out.

In the U.S., with urbanization and job migration, the demand for rental properties in growing cities remains robust. The rise of distance learning and work-from-home setups during and after the COVID-19 pandemic has facilitated migration to suburbs and states with a lower cost of living[7].

Rental properties provide monthly revenue and often appreciate in value, offering a two-fold advantage to investors.

Agricultural Land

Beyond the steel and concrete, agricultural lands play a massive role in any economy. Whether used for grain cultivation or raising livestock, these lands yield products that, when sold, generate profits.

Agricultural land is so important to the global economy that it accounts for 4% of the global gross domestic product (GDP)[8], sometimes contributing as much as 25% for agriculture-focused developing economies. Additionally, as global food demand rises from 35% to 56% from 2030 to 2050[9], the importance and value of fertile agricultural lands surge in tandem.

In addition, even undeveloped or raw land can offer an attractive venture for many investors looking for a well-rounded investment portfolio.

Land’s inherent flexibility and historically appreciative nature make it a promising and productive investment.

It has several distinct advantages:

• Appreciation: Historically, land tends to appreciate over time. In burgeoning areas, a plot bought today can be worth multiples of its purchase price a decade later. Cities like Austin, Texas, have witnessed significant land value escalation[10] due to tech growth and population influx.
• Versatility: One of the most appealing aspects of land is its adaptability. A piece of land can be used for many purposes: agricultural cultivation today, a residential complex tomorrow, or even a recreational space. Its potential transformations are only limited by zoning laws and the owner’s vision.

• Rental potential: Most associate rent with buildings, but land can also be rented or leased for various purposes. For instance, landowners may lease their ground to an energy company for oil extraction, generating a steady rental income.
• Low maintenance: Unlike properties that can deteriorate over time or require regular upkeep, land remains relatively maintenance-free. This makes it an attractive option for investors who prefer assets with fewer management demands.

Productive assets and financial assets serve different purposes in the investment world.

Productive assets, like a factory or software, generate income through operation or use. For instance, a farm (a productive asset) produces crops that can be sold. In contrast, financial assets like stocks or bonds don’t produce tangible goods or services. Instead, they represent a claim to a portion of a company’s profits or an obligation to pay[11].

Apple is the world’s biggest company in terms of market cap.

An example of a financial asset is a stock. If you own stock in Apple, you don’t directly benefit from the sale of iPhones. Rather, you own a share of the company, and its overall performance may influence the stock’s value and hence, the dividends you receive.

1. Why are productive assets important for an individual investor?

For individual investors, productive assets are the cornerstones for building wealth and ensuring financial stability. Given their inherent ability to generate income or appreciate in value, these assets can offer consistent returns over time. This contrasts with non-productive assets, like a personal car, which might depreciate and don’t provide any direct financial return.

By incorporating productive assets, like real estate or shares in a profit-generating business, into their investment portfolio, individuals can:

• Secure a passive income stream.
• Diversify their investments, reducing reliance on any one source.
• Potentially benefit from tax advantages, especially with assets like real estate.

2. How do interest rates affect the value of productive assets?

Low interest rates make borrowing money cheaper[12]. This can spur businesses to invest in new productive assets, like machinery or real estate, anticipating future growth. Conversely, when interest rates rise, the cost of financing these assets increases, potentially reducing their demand and, subsequently, their value.

For real estate, especially, low interest rates can boost property values as more people can afford mortgages. Conversely, higher rates might dampen real estate prices as borrowing becomes costlier.

Interest rates are set by a country’s central bank[13], such as the United States Federal Reserve. These rates are pivotal in influencing the broader economy and, by extension, the value of productive assets.

3. Can digital assets, like social media platforms, be considered productive assets?

Yes. Thanks to their unique selling proposition, platforms like social media, e-commerce websites, and mobile apps are considered significant productive assets. Their value isn’t based on physical presence but on user base, data, and potential for generating income.

Take Facebook, for instance. While primarily a social media platform, its vast global reach allows businesses to advertise, making it a significant income generator.

Such platforms, while intangible, have the potential to generate enormous revenue, making them highly sought-after productive assets in any sufficiently modern economy.

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3. Taylor, M. (2022, October 14.) 2023 real estate return on investment. Bankrate. Retrieved from https://www.bankrate.com/real-estate/roi-on-real-estate/
4. Quarterly Residential Vacancies And Homeownership, Second Quarter 2023. (2023, August 2.) U.S. Census Bureau. Retrieved from https://www.census.gov/housing/hvs/files/currenthvspress.pdf
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10. Folger, J. (2021, September 10.) Why Silicon Valley Companies Are Moving to Texas. Investopedia. Retrieved from https://www.investopedia.com/why-silicon-valley-companies-are-moving-to-texas-5092782
11. Srivastav, A. (n.d.) What are Financial Assets? WallStreetMojo. Retrieved from https://www.wallstreetmojo.com/financial-assets/
12. What Do Interest Rates Really Mean? (n.d.) Equifax. Retrieved from https://www.equifax.com/personal/education/personal-finance/what-do-interest-rates-mean/
13. Monetary Policy And Central Banking. (n.d.) International Monetary Fund. Retrieved from https://www.imf.org/en/About/Factsheets/Sheets/2023/monetary-policy-and-central-banking
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