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.
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If you enjoy this
weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly
Financial Newsletter, as well as my new book, The Road to Prosperity
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