Is your first home a good investment?

This is a loaded question, obviously, because I just revisited the subject of buying your first home (of which I am now an avid fan) a week or so ago; Rick suggested:

Since equities also have a good long term investment record, why not scale back on the primary residence somewhat and invest in both real estate and equities?

At the time, I responded by saying: “The effect of the 20% Equity Rule and 25% Income Rule is to ensure that you are always investing AT LEAST 75% of your networth elsewhere (could be business, RE, equities, etc., etc.).”

Of course, that doesn’t address the question, as I have also said that these rules are up for grabs – meaning, you can just ignore them – when considering buying your first home.

Now, I am clearly a fan of buying your first home – you just need to go back to one of my very first posts to see that – but, it wasn’t always that way …

… I started by believing that there were other investments out there that performed better than your first home.

And, that still holds true; after all, as my Grandfather once told my Grannie when they had the same decision to make soon after immigrating to Australia:

You can’t always buy a business from your home … but, you can always buy a home from [the profits produced by] your business.

This still holds true … as does the 20% Equity Rule. In other words, if you are absolutely committed to using the funds to start a business, or are ABSOLUTELY committed to ALWAYS investing at least 75% of your Net Worth, then by all means keep renting.

It’s just that 99% of people will – sooner or later – fall off the investing wagon. It’s human nature.

Then they’ll end up with no investments, little net worth, and no home. Buying your first home, and using that as a springboard into other investments, is a great way to go; just remember what I said, way back in the beginning of 2008:

 If you are ready, willing and able to buy your first house, or you are thinking of trading up (or, down) …. here’s my advice:

Put aside the emotional decisions and just consider the financial impact, and that is: your house is the ONLY way that most people will ever get off the launching pad to financial success …

Why? Because, you are building up equity over time (even a flat or falling real estate market eventually climbs back up again) …

… but – and here is the key - ONLY if you are prepared to put the equity in your house to work for you … that means, borrowing against the equity in your house to INVEST.

So, you want to invest in commercial real-estate …

… but, you don’t know where to begin?

At least, that’s the case for IJ who e-mailed me:

I’ve always wanted to find some sort of mentor.  It would be great that everyone had a mentor that can help with advice and bouncing ideas off of … [people who've] owned their own businesses, residential and commercial RE.  I want to get more involved in commercial RE and do not know of anyone who I could turn to on how to get started.

I’m a great fan of mentors; but, when you can’t find one then you have to make do with getting info. from a variety of sources: friends, accountants, attorney’s, investor’s clubs, and – of course – Realtors.

This takes time and energy, so in the meantime, you can refer to the resources on this site and others …

For example, you can start by checking out these posts;

If you are interested in property development:
 
http://7million7years.com/2009/09/09/ive-been-out-shopping/
 
http://7million7years.com/2009/09/16/can-your-real-estate-development-project-make-money/
 
http://7million7years.com/2009/09/23/how-much-money-can-you-make-developing-real-estate/
 
And, these posts if you are interested in how to analyze a commercial property deal (offices):
 
http://7million7years.com/2008/12/22/anatomy-of-a-commercial-re-investment-part-1/
 
http://7million7years.com/2008/12/23/anatomy-of-a-commercial-re-investment-part-2/
 
http://7million7years.com/2009/01/05/anatomy-of-a-commercial-re-investment-part-3/
 
And, you should follow up these resources if you are interested in multi-family-type ‘commercial’:
 
Dave Lindahl: (I bought and USED his ‘multi-family millions’ course to help me analyze 100’s of potential deal (but, in the interests of full-dsclosure, I didn’t end up buying any, although I already own millions of dollars of residential RE, but my largest is only a quadraplex)
 
Dolf de Roos: I have bought a number of his products, including his Commercial RE audio course and some s/w … more basic than Dave Lindahl’s course, but helpful nonetheless, especially for noob’s.
 
To be fair, a few others consider these guys to be ’scammers’, but I don’t make any money from either – have bought their material at full price and found it useful, so what more can I say?
 
Oh, and here is a guy who is definitely NOT a scammer and has some useful stuff, too: John T Reed.

Of course, you could also try and do what IJ did:

E-mail me with your questions … I don’t mind, if you don’t mind if I [perhaps] choose your question for a future post

Free money at last!

Once my honeymooner guests agreed that purchasing a home would be a good investing goal, the question became how much equity to maintain?

I explained that if you have an empty glass, worth $100 (let’s say it’s a collectors’ item) representing your house then it makes no difference how much fine wine (also a collector’s item at $100 a glass) you have poured into it as to the future value of the glass …

… the glass can be full or empty, but if collectors’ glasses double in value every decade, it will still be worth $200 in 10 year’s time.

Of course, after consuming a few glasses of that fine wine, another question arises:

What happens if I put less money into the house (or other real-estate)?

Simple, you have to borrow the rest: less deposit, more borrowings/mortgage … more deposit, less borrowings/mortgage.

Then, in deciding exactly how much wine to pour into your glass, you think of the next logical question:

What’s the ideal amount (or %) to borrow against the property i.e. how much deposit should I put in?

Given the current ‘crisis’ in domestic RE values, it’s popular to imagine a high number: 20%? 50%? 100%?

But, it’s not so long ago (and, I wager it won’t be more than a decade before it comes around again) that it was popular to imagine a low number: 10%? 0%? Even negative 10% (as people borrowed 100% of the property PLUS closing costs)?

But, what’s the right number?!

Surprisingly, at least to me, there’s no magic ‘right’ number …

… once you realize that it matters not what equity you have in the house as to how your future wealth increases - based on the appreciation of such fine real-estate.

So, another question forms instead:

What does it cost/save me if I put in more/less money into the RE purchase?

Well, we know it does not cost you future capital appreciation, but it does cost/save you exactly what the bank would charge in you in mortgage interest and ancillary charges … circa 4% – 5% these days.

So, let me ask you two closing questions:

1. Do you think that you can do better than getting ‘free money’ by owning real-estate that appreciates, perhaps even doubling every 7 to 18 years (depending upon whom you believe), leaving you with virtually ALL the excess over the original purchase price?

2. Do you think that you can invest money that would otherwise cost/earn you only 4% – 5% for more than that [Hint: how about some more of that yummy real-estate? Failing that: stocks; business; P2P lending; etc; etc; etc? But, we covered this question last week ]?

… at least those are the questions that I put to our house guests

What do you think?

What should you invest in first?

My wife just got back (well, just before our Noosa trip) from a trip overseas to attend her nephew’s wedding; and, the young happily married couple decided to spend part of their honeymoon in Australia … so, they are staying with us right now!

This was an opportunity for me to interfere in their financial lives … naturally, I couldn’t resist

It’s also an opportunity for me to share my financial plan for our younger readers, whether single or married.

The plan is simple:

Step 1: Start working!

Step 2: Use your pre-work spending and living standards as a guide to ensure that you save at least 10% of your gross salary; preferably more.

Step 3: No matter what your Step 2 Income and Expenditure, save at least 50% of any future salary increase

Step 4: That includes any ‘found money’ such as: change found on the street; tax refund checks; small handouts/inheritences from friends/family (naturally, you will ‘up this’ to saving 95% of any LARGE handout/inheritence); etc.

It won’t take too long to actually have some money (perhaps for the first time in your life) to think about actually INVESTING.

So, what to invest in? Stocks; car parks; italian art; … ?

It’s simple: your own home!

It will probably be a small house or condo to start with … possibly with some ‘fixer upper’ potential …

But, what about the 20% Equity Rule and the 25% Income Rule, which will ensure that you can only afford to buy a shoe-box (literally) at this early stage of your financial life?

You forget them for your first home …

… and, replace them with these guidelines:

- Put as much equity into your house (by way of making a deposit) as you have savings (you’ll want to keep a little buffer against immediate expenses)

- Borrow as much as the mortgage payment that you can afford, which will be the amount per month that you are currently saving (of course, you’ll want to keep a little buffer against extra expenses).

When you (eventually) get tempted to ‘trade up’ to a bigger house, that’s when you apply the 20% Rule and the 25% Income Rule!

But, shouldn’t you invest in something else first? Perhaps you’re not even married yet and can happily rent for a while?

This is true: but, buy the condo anyway … then you can evaluate if your rent is so cheap that you should rent out the condo for a while before moving into it. Same applies if you move to another location: rent out the house/condo and rent for yourself elsewhere until you are ready to trade up (or across).

Why?

Let’s decide whether, over the course of your life, real-estate will go up in price or down in price? The answer for all of history has been UP (over a sufficiently long period).

Decide whether you will ever want to own your own residence? Again, the answer is YES for the overwhelming portion of humanity (and, even if you think not, I guarantee that your eventual spouse will have a very hard go at convincing you otherwise).

So, unless you have an overwhelming reason to believe that RE won’t go up in price for the next X month/years, then you are compounding your money at RE’s typical growth rate (6% … depending upon who you believe and where you live) TIMES the leverage that the bank is giving you LESS (your mortgage payment/costs – rent you would have otherwise paid).

Run the numbers; it’s a VERY good/safe rate of return

Be the bank!

My son asked why I don’t just plonk by money into a safety deposit box to tap into those wonderful gross margins that banks earn buy ‘buying’ your money at 3% and ’selling’ it back to you (or to other people/businesses) at 7%.

That lead to a great discussion on P2P lending, which partially addressed the problem of risk for me: P2P offers filters to allow you to sort loans; ratings to allow you to evaluate loans; and FICO-based ’risk rated’ interest rates (circa 10%) to go along with all of this.

But, that doesn’t satisfy me …

And, it’s not because the banks have MUCH better systems to evaluate and manage loans and it’s their core business, it’s because I can do much better with my limited capital than P2P levels of interest.

Here’s two things to think about:

- Does P2P provide the annual compound growth rate that YOU need to reach your Number?

- Do you have the bank’s virtually UNLIMITED access to capital or is the amount that you can apply to P2P as a % of your Net Worth limited?

These points are critical: you have a limited amount of investment resource available to you and (probably!) a very large Number / soon Date to achieve using what you currently have as a springboard.

Now, let’s flip to the other side:

Banks dig into their ability to borrow (which IS the basis for their entire business, investment banking / asset management services aside) and lend to us for what?

Either to SPEND (on consumer items, if we are dumb) or to INVEST (in our homes, businesses, etc.) if we are smart.

So, let’s put those things together to create our own ‘bank’:

1. We have limited cash to ‘lend’ at our disposal, so we need to find a way to tap into vast amounts of borrowing power just like the banks.

2. Well, we don’t have the Regulations, Reputations, and Resources (e.g. access to the capital markets) that allow the banks to borrow (then lend) so much, but we do have something that allows us to achieve effectively the same huge jump in personal borrowing capacity: the spare equity in our houses.

[AJC: You knew there was a catch! If you don't have a house, have GFC'ed your equity out the window, or otherwise don't have enough equity built up yet, bookmark this post and take the rest of the day off ...]

3. If you DO have spare equity in your house, and can refi. to a fixed rate loan that locks in your borrowings circa 4% or so then you are probably now sitting on a relatively large sum of cash to lend, just like a bank (relatively speaking!).

4. So, you can either:

- Do, what the banks do and lend to somebody who needs the cash at a higher rate; e.g. P2P where you may get 10% for each 4% ‘unit’ that you supply … a VERY healthy 150% gross margin (plus, you have NO staff or overheads), OR

- Do, what I would recommend: cut out the middle-man and lend the money to yourself!

What would you do with that money that you have borrowed?

What any sensible investor would do with money that they borrow from the bank – depending upon their Number and their appetite for risk:

- Buy some investment real-estate,

- Buy stock [AJC: a friendly 'bank manager', no margin calls .... sweet],

- Start a business … it could even be a P2P lending business

That last one isn’t such a joke; I would be more tempted to invest IN a P2P business than I would be to lend VIA a P2P. Why?

It’s simple … the former gives me ho hum 10% returns (with some credit risk attached), whilst the latter gives me access to potentially, unlimited returns!

Are you worried about the risk of business failure?

Well, if the P2P site goes under, isn’t my risk of capital loss the same as if my cash was sitting in their investment accounts [AJC: which is one of the reasons why the SEC is VERY interested in regulating P2P, all of a sudden ... but, until they do ... ;) ]?

Call me … make it happen!

OK, so he wants you to buy five houses this year … and, he gives you the quick ‘hard sell’ at the end … but, the basic philosophy – to me – is sound:

- Houses are depressed in the USA, but so are interest rates,

- Unless the USA ‘double dips’ prices will begin to go up (when?)

- You can fix an incredibly low interest rate on your primary residence (can the bank rewrite the mortgage if you move?)

- You MAY be able to receive enough rent to cover most/all of the mortgage

- Who says you need to buy five houses (except for this Realtor!?) … just think about one for now

Do the numbers for your area/s of interest (price of house, monthly cost of mortgage, likely rental income, other expenses such as 6% – 9% property management etc.) … if you can even come close to breaking even, could you find a better return on your deposit plus the cumulative cost of any monthly shortfall (or gain of any monthly excess)?

Now, run the numbers again assuming that the US market stays flat for another 5 years before some sort of rebound … maybe it still makes sense?

Have you run the numbers? If so, what do you think?

A Vacation Question – Part II

But, what about the other financial question that my son asked while we were on vacation?

Well, we were walking along the beach and Bill, the shaved ice vendor, drove past with his little all terrain vehicle pulling his ’shop’ behind only to stop a few yards up the beach to tempt my son – and, the many other children running along the sand and swimming in the warm surf.

Naturally, I  quickly became $3.50 poorer and my son had his paper cone filled with shaved ice with various color sweeteners poured over it (he chose ‘rainbow’ flavoring), which got us talking:

You see, it’s popular folk-lore that Bill, who has been selling his flavored shaved ice along the beach for 20 to 40 years, owns many of the apartments in the vacation rental buildings all around [AJC: check out the aerial shot in yesterday's post] … if true, then Bill is the poster-child for the Wealth Alchemist i.e. turning temporary cashflow into long-term assets.

It’s not hard to see that Bill turns over thousands of dollars a day, most of it costing him nothing (little staff, few overheads, little-to-no-cost-of-goods-sold), after all, how much can ice cost to make?!

Instead of spending all of that money, it’s not a great leap to assume that Bill saves up enough for a deposit to buy a property every now and then; we figure $1 million worth of property each year (with 20% initial equity).

Here is my son’s question:

“Would he pay cash for the properties, or would he just save up enough for a deposit and borrow the rest?”

Now, this is a seemingly simple – yet terribly interesting – question; one that we could labor over for many posts … instead, we’ll look at this another way, by asking:

“Does Bill need the property for income now or for its future value (hence, future income)?”

The answer is clear: Bill has plenty of income now, but what does he do if his income stops?

Presuming that he can’t rely on being able to sell his business (for example, the council could decide that they no longer want people peddling ice on their beaches), then Bill will probably want his properties to generate a replacement income “one day”.

So, which would do that better? When Bill moves into MM301, it’s likely that owning the properties outright and living off the rental treams that they throw off will be best …

… until then, Bill has to (in my opinion) work on the strategy that will produce the most properties by the time he wants to retire.

So, I had to explain the concept of leverage to my son:

SCENARIO A: If you purchase a property for $100k CASH and it doubles in 10 years, then you have $200k of property. Well done!

SCENARIO B: But, if you purchase TWO $100k properties, putting $50k deposit into each and borrowing $50k for each from the bank, then in 10 years (assuming they both double), you now have $400k of properties, of which you owe the bank $100k (assuming that you haven’t paid down any of the loan in the meantime), leaving you with $300k of property … a $100k improvement over Scenario A.

At least, that’s what the property spruikers would have you believe …

… because, they have conveniently forgotten that in Scenario A, you also have some rental income (after, say 25% costs) coming in, whereas in Scenario B that income would be largely offset by interest owed to the bank.

The question is, is that differential in income ‘worth’ $100k over 10 years?

Let’s assume that we can get a 5% return from our Scenario A property (after costs), giving us $5k a year initially (when the property is worth $100k), increasing over time to $10k a year (when the property increases to $200k in value). It doesn’t take a genius to figure that this comes to less than the extra $100k that Scenario B gives us (if you assume an average $7,500 per year rent for the 10 years, we are comparing $75k in rent for Scenario A to $100k in additional capital gain for Scenario B).

Now, add the benefits of:

- 80% gearing (i.e. only making a $20k down payment in our example), which should buy you 5 properties instead of Scenario B’s 2 properties (cost = $500k; worth in 10 years $1 mill., less $80k loan on each = $600k v $300k for Scenario B and $200k for Scenario A. Get it?),

- Increasing rents offsetting fixed interest rates (possibly producing some positive cashflow from each of our 5 properties as time passes),

- Tax deductibility of any excess of interest over income in the early years (a.k.a. negative gearing),

- And, any additional tax and depreciation benefits of 5 properties v only 2

… and, it’s just possibly a ‘no brainer’, even if that does make some of those scummy spruikers right

But, how does Bill pay his bills?

Well, that depends on how much excess of income the properties produce by the time Bill is ready (or has) to retire …

… if  insufficient to pay Bill’s bills, he can sell enough properties to pay off the bulk (or all) of the bank loans, thus forcing a positive cashflow situation (assuming the properties aren’t total dogs, which is highly unlikely in this well sought after tourist area, which boasts near 100% year-round occupancy) and that (after a reserve to cover costs of vacancy, property management, and repairs and maintenance) is his infltation-protected income for the rest of his life.

Then Bill can spend the rest of his days lazing on the beach … buying shaved ice from the next shmuck who chucked in his chance at earning a college degree for the life of a beach bum :)

Make the move ….

Guys, as the economy improves (if it improves) interest rates will surely rise, as they already are in other countries.

If you haven’t already done so, seriously think about buying some fire-sale real-estate and locking in the the interest rate for 30 years; one strategy – especially if the banks won’t let you take out a 30 year fixed rate mortgage on an investment – is to buy your NEXT home now (it need not be any bigger/better than your current), taking the 30 year fixed on that one, and keeping your current as a rental.

I’m not sure if that’s exactly what Lee was thinking when he asked:

Although the market in our area has held up fairly well through this housing crisis, it’s definitely a buyers market.  I don’t think I’d get top value for my home.  So, I’ve seriously been considering renting it out after we move.  If I did rent it, then I could go a couple different routes:

1. Refinance current home to 30 year (to help cash flow) and take enough cash out to put 20% down on our new home.

2. Refinance current home to a 30 year but take no cash out to get the payment down to a very low amount to have a very good positive cash flow.  Then put 20% down out of pocket on the new home.

3. Take out a home equity loan on the current home just to cover the 20% down payment on the new home loan (30 year).

4. Just go ahead and sell our current home so I can take advantage of the tax free capital gains … I could then use part of it to put 20% down on our next home … and use the remaining as a down payment on one or two rental properties.

5. I have to throw in one scenario just because of that little guy I call Mr. Conservative that sits on one of my shoulders, lol!  I could just pay my current home off within the next 2 years or so, then rent it out with a large cash flow, and use that cash flow to pay the mortgage of the new home we buy.

6. Maybe something I’m not even thinking of?

I think I see a case of paralysis by analysis coming on, so we had better head this off at the pass …

… while I can’t give direct personal advice (as I told Lee), I can point out that in cases like this it’s always good to ask yourself a couple of key questions before Mr. Conservative starts to get very vocal (in your subconscious) and you end up taking no action at all, so I suggested that Lee run some numbers:

a) What would be the situation on your current home, if you just took out a new (or refi) FIXED rate 30 yr mortgage, and put tenants in … what would be your new monthly mortgage payment and what monthly rent could you conservatively [it's good to have Mr Conservative on your shoulders] expect?

b) After pocketing the excess of 75% of rents over mortgage from a) above – or, making up the deficit on the excess of mortgage over 75% of the rent – how much per month do you think you could save from your other sources of income assuming for the moment that you have FREE accommodation for yourself somewhere?

[AJC: the 75% of rents is to allow a buffer for vacancies and other costs of renting ... just a very rough approx. for now]

Once you answer these two questions, my feeling is that the best scenario for you will become obvious … I hope

In Lee’s case, here are his current numbers:

3 bed / 2 bath 1450 sq ft. home in a great location.
Cost Basis: $158,000
Current value: $210,000
$96,000 (9 years 6 months) remaining on a 15 yr mortgage @ 4.625%
Current P&I repayment: $1,042 per month

And, if he refinanced the $96k remaining balance his bank has given him two options for a 30-year fixed loan:

$508/month @ 4.875% Closing costs: $2,000
$493/month @ 4.625% Closing costs: $2,700

For rent, Lee thinks “being ultra conservative” $900/month to $1100/month, which means:

Using 75% of excess over mortgage ($300) and assume living in FREE accommodations, I could easily save $3,000/month because that’s what I save currently even with my $1042 mortgage.  Throw in not paying our current mortgage and having $300 in additional cash flow and $4,000+/month would not be unreasonable.

For now those are the numbers, although I have to say the 75% of excess over mortgage number is probably high considering taxes and insurance on this place are about $200/month.  But as you said, these are rough numbers for now.

So, Lee is getting closer to being able to make a meaningful decision; here are the steps that I suggested:

STEP 1: OK, it seems to me that if you decided to keep your current home as a rental, you would lose money if you stuck to your your current $1k pm mortgage, and produce a positive cashflow of $100 to $200 p.m. if you refinanced.

STEP 2: It seems to me that your $3k pm savings rate will be enough to cover the expected $200k mortgage on your new home. Right? BTW: You WILL fix for 30 years, too (because this will become an ideal 2nd rental, eventually)?

STEP 3: Next, all you need to think about is how to raise the deposit; well, if you don’t have it now, go back to Step 1 and revisit these numbers, assuming that you refi, say, $150k instead of $96k. I’m guessing that you’ll be close to B/E – or, a slight monthly loss – on the rental?

STEP 4: You keep 25% of the rent (plus another $200, say) to cover taxes, ins, and contingencies PLUS you have plenty of excess monthly savings to cover you, until this ‘provisioning fund’ builds up.

Now, what do YOU think Lee should do?! Here’s what he thinks:

I think the smartest thing would be to refi without taking any equity out so that I have a nice cushion of cash flow.  I would then need to come out of pocket with the down payment for the new home which I should be able to do, and even if I need a little help, I could always get a small home equity loan on the rental temporarily.  But I feel pretty confident I could raise enough cash to cover the down payment without having to do that.

My next step…develop my plan of action.

Take Lee’s advice: model these questions to develop a plan of action that works for you … and, take it!

Rent or buy? Rent to buy!

Please take a moment to answer this poll [AJC: which is in response to my No Ads On This Site Policy] by clicking on this link: http://www.misterpoll.com/polls/456056

It’s just one, short question; thanks!!

…. now, back to today’s post:
___________

Jim wants to know if he can turn his current rental into a Rent To Buy:

I have moved from a (rented) flat costing me ~33% of my (net) monthly income to a small house costing 25% (net). (Of course, being a First Time Buyer, I’ll be breaking the 20% net worth rule to put down a deposit, especially given the level of deposit required to get a decent rate here in the UK).

The current owner seems enthusiastic about the option of selling it to me at some point, but I’d like to ask advice on what sort of ‘offer’ to make. i.e. what sort of contributions my rent payments would be / discount off the market value.

I’m thinking if we both have a valuation done, I offer 15% off the average of the two?

I’m not sure that the Rent-2-Buy works in Jim’s case, because he’s already in the house and paying the rent!

But, let’s assume that Jim is willing to sign a longer lease, it will then depend upon whether he is able to bypass the agent or not.

You see, for a rent-to-buy to work, basically you are trying to say to the owner:

Rent to me for longer, then I will:

1. Save you the agent’s fees and commissions, because I will be staying in the house and will keep it as my own (“so, you don’t need an agent to manage me”)

2. Save the 2 to 4 week’s typical vacancy each year as the typical shorter-term tenants move on (you will need to find out what’s common in your area AND what the owner’s experience has been).

Then wouldn’t it be reasonable to split those ’savings’ with the current owner (by way of a ‘credit’ towards a future purchase of the house)?

BTW: Jim, it’s OK to break the 20% equity rule on your first home, because it helps to get you into a house:

http://7million7years.com/2008/01/28/should-you-rent-or-buy/

AJC.

Safe as houses?

Well, I did ask for it, and the first cab off the rank for the ‘diss Adrian party’ is Dan who thinks that one of my favorite posts – Contrary to Popular Opinion, Paying Off Your Mortgage Is The Dumbest Move You Can Make – is ‘ridiculous’. Seriously, thanks for opening up an important new discussion with this comment, Dan:

This is ridiculous. The author apparently believes he is untouchable and will never lose his job, get sick, or die.

You can do all the complex math you want, but the simple fact of the matter is that Risk is the biggest variable, and I don’t see it show up in your equation once.

Don’t be stupid America, and dont prescribe to a system that encourages you to continue owing people money long after you need to.

Pay off your house, free up some income, then pay off your credit cards, pay off your car, and be a happier, less stressed individual.

Hmmm …. paying off your mortgage as a ‘risk management tool’?

Before we even consider why anybody in their right mind would pay off a (say) 8% mortgage before paying off a (say) 19% credit card or car loan, let’s review the substance of my “don’t pay down your mortgage early” argument:

Look at everything that you own as a business: if it’s your own home, separate the ownership of the property in your mind from it’s use …

… for example, even if it’s your own home, treat yourself as your own tenant and figure the rent that you would otherwise had to pay when doing the sums.

Then evaluate the investment against any other investment or ‘business’ …

… but, if you’re still trying to get rich(er) quick(er)?

If you own a home, don’t pay it off … use the upside to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

If you have other sources of income (businesses, investments) don’t spend it or reinvest all of it … use some of the spare cash to help you buy more and more of these wonderful, one-of-a-kind, almost-too-good-to-be-true ’businesses’ …

That’s my advice to you, but only take it if you want to be rich!

But, Dan says that the ‘math’ matters not, you should consider what happens if you “lose [your] job, get sick, or die”. Well, what happens?

If you have paid out your mortgage, your money is locked in the safest bank vault imaginable … all you have to do it sell the home to access the cash. Just pray that the market is an up market and not a down market, when these events outside of your control force you to sell. Or, would YOU prefer to choose the timing? Hmmm …

Of course, you could just borrow some money against the house; but then, aren’t you now putting yourself in EXACTLY the financial situation that Dan wants you to avoid: i.e. “owing people money long after you need to”?

And, even if you still do want to use your Zero Mortgage Bank, what are the chances of the bank actually lending you (or your survivors) any money when you are jobless, sick, or dead?

Oh, and let’s say that you do happen to be unfortunate enough to “lose [your] job, get sick, or die” while you are still in the 10-15 year period when you are well ahead of the 30-year payment curve, but haven’t paid off the mortgage in full, yet? How easy will it be to refinance, or even convince your bank to hold payments for you? Even if you THINK they will, you had better be certain

What do you reckon? Dan’s on the right track? C’mon, be honest … would you feel safer paying off your mortgage early, or letting it ride?