This repeating newspaper ad finally caught my attention: “Are You House Rich and Cash Poor?” The investment program, offered at a seminar, seemed clear enough. The homeowner incurs a mortgage loan through the featured mortgage consultant and then permits the pre-designated wealth strategist to invest that money.
As the ad explained, a justification for borrowing on your personal residence is that “You’re earning nothing on that equity. You have all that money locked up and you get nothing for it. It’s just sitting there, virtually unemployed.”
Let me offer a second opinion. Home equity is not unproductive. My residence, delightfully free and clear of mortgage, has a potential monthly rental value of, perhaps, $10,000. I’d need to generate a pile of pre-tax income if I had to rent my own house. Who sez I’m getting nothing by having it paid-off?
But economics aside, it’s the concept I reject. It’s unwise to incur a loan on your home, which must be paid, to invest in something that may or may not produce the cash flow to make the payments. Admittedly, it can be argued that if the investment is a surefire winner that you personally direct, with a return well in excess of the borrowing cost, it might warrant the risk. In this particular offering, however, you’ll not be in control. Rather, your fate will be in the hands of a mortgage consultant and a wealth strategist who will explain things as you enjoy a full complementary meal at their “free educational investment seminar.”
As implausible as it may seem, many persons select their investments no more judiciously than by response to mass solicitation advertising. This is not a winning formula. Rather, the route to financial independence requires that you scrupulously avoid questionable enterprises, that you know exactly what you’re doing, and that you at least oversee, if not directly control, the substance of your investments.
Al Jacobs, a 50-year professional investor, lives in Dana Point. He distributes a monthly newsletter at www.onthemoneytrail.net.