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
predesignated Wealth Strategist to invest that money.
As
the ad explained, a justification for borrowing on your personal residence is
that “You’re earning a 0% return on that untapped equity. You have all that
money locked up and you’re getting absolutely 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 which
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 professional investor for nearly a half-
century, issues a monthly newsletter in which he
shares his financial knowledge and experience.
You may view it on http://www.roadwaytoprosperity.com
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