Your home and the equity in it is not a prudent investment. In this episode, we
are going to address the question that I've been asked numerous times in my
career as a financial strategist. "Is a home a good investment?"
So, my name is Doug Andrew. I've educated people for 45 years on how to
optimize their assets, minimize taxes and empower what I call their authentic
wealth. One of the biggest insights people had
when they purchased my very first book titled Missed Fortune was the 11
chapters at the beginning. Because there was a total of 23 chapters. But 11 of
them were dedicated to real estate and in particular your home. Is that a good
investment? Well, I measure investments based upon
3 maybe four criteria. This is what features or what deems a prudent
investment: Liquidity, safety, rate of return. In this order and then if there's
any tax benefits. Now, sometimes people think that a home is a good investment.
Now, based upon that definition, a prudent investment must pass the what I call the
LSSR test it. it's LSRR. Liquidity, Safety, Rate of
return. And then we can have the T, if there's tax benefits that's like icing
on the cake. I learned the hard way that your home equity is not a prudent
investment because it fails all of those tests and liquidity, safety and rate of
return, you do get some tax benefits. And so, I'm going to explain why and how I
learned that lesson. So, the second chapter of my very first
book titled Missed Fortune. I disclosed a defining moment in my life that some
critics said, "Oh, you're a financial advisor? And you admitted in your book
that you lost a home in foreclosure? What kind of an advisor are you?" I go, "What?
That's one of the greatest things that's ever happened to me."
I'm going to share with you how losing that home in foreclosure, (In the moment) I lost
150,000 bucks. But I have made millions since that time
because of what I learned by going through that bad experience. So, when I
share that... "Honey, look what... Look at all the blessings. Look at
the people we've helped to avoid the same mistake we made. And look, they
compensated us. The world loves usefulness and they compensated us for
our wisdom." I've sold over a million books with that story in there. Many
people send me thank-you notes from all over the world for helping them not get
into the same trap that I was in by trying to pay off my house or letting
too much equity accumulate in my house. I say, "Look at how the wonderful emails.
Look at all these notes. Look at all the money that we've been reimbursed. Let's
go lose 20 more houses." My wife goes, "No. Once was enough. Honey, once was enough." So,
if you haven't heard of this, I'll just summarize it. Clear back in 1978, my wife
and I built our third home. And there's a beautiful 6,400 square foot home. And we
built it for 150,000 bucks. And when we moved in, it
was worth 300,000. We didn't put any money in a down payment
out of our pocket. How we did that is explained in my book. In fact, I've never
paid a down payment out of my pocket for any piece of real estate or any home
I've acquired. I've satisfied down payments but not with my own money.
Because I learned some very valuable lessons. The mistake I made wasn't paying
a huge down payment into this house. The house went up in value from
150 that I put into it to build it. And it was worth
305,000 when we moved in. Now, that wasn't money I put in there. That
was the value of the house. And so, I thought I have the world by the tail. I
had a 300,000-dollar house and I only owed 150,000
on it. Most people say, "Hey, wow. You did actually you've got 100%
rate of return." No. I learned that that 150,000 of home
equity meant absolutely nothing but a number on a sheet of paper a balance
sheet if you get into trouble. Because we had three things happened to us about
two and a half years later. We never dreamed what happens simultaneously. And
we found ourselves without an income. So, we couldn't make our mortgage payments.
We went without an income for nine months. I had to liquidate other assets. I
had to sell a duplex. But it wasn't a good time to sell. So, I didn't get the
money out of my duplex that I really want
but it was enough to bring my delinquent mortgage current. I sold a timeshare to
ski resort fortunately for triple what we had paid
for it. But I used up my assets trying to save this house from going into
foreclosure. In retrospect, I probably wouldn't have done that. Because we
finally decided "We've got to sell this house. We can build another one." I owned
another two acres right next door adjacent.
Well, we listed that house for 295,000. Why? Because
we had a bonafide appraisal for 305. But no takers. See, when you have a recession,
this was the recession of 1980, '81, '82 where a lot of people throughout America,
especially in Houston Texas lost their homes in foreclosure during that oil
crisis. Well, it rippled throughout America and it affected us. So, when
there's more supply of homes for sale then there is demand people who want to
buy them. Values have to drop. And we had to lower the price on our real estate
listing from 295,000 down to 285, 275, 265, 225,
195 thousand. We couldn't give it away. And I'll never forget the day we walked into
the county courthouse and we watched that beautiful house get auctioned off
in foreclosure proceedings. Now, we went out within 48 hours and bought another
home with no money down and no credit. I've done that many times.
But the point I'm making right now is I learned some things. I learned that
that 150,000 of equity in my house was just a number on a sheet of
paper. Meant nothing unless I could access it. The only way I could access it
was to sell it which I couldn't do. I had to keep lowering the price so that went
away. So, I realized that it was not liquid. I couldn't get to it.
I couldn't borrow because I didn't have an income to qualify to borrow. And learned that
it's a lot better to have access to your home equity and not need it than to need
it and not be able to get it. It's a lot better to have a not need the need and
not have. And then I learned that home equity does not have safety of principal.
At that 150,000 my house was worth 300 and then
it went down down, down, down, down I couldn't even give it away for
195,000. So, it did not pass the safety of principle test. In other
word, I could lose my original value that I want to hit. So, there's
strike one, strike 2. Liquidity, safety. It's not a prudent
investment. What about rate of return? Real estate
equity especially my home equity, it always has the same rate of return. Zero.
Zip, nada. In other words, your home is going to do whatever I go up in value or
down in value regardless of whether it's mortgaged to the hilt or free and clear.
Has nothing to do with how much equity you have in the property. Does that make
sense? So, let's say that I have 100-dollar bill and I put it in a jar
or a tin can and I bury it in my backyard. Now, is that 100-dollar bill
buried in my tin can in the backyard liquid? Yeah as long as I can remember
where I buried it or my wife doesn't find out. Okay? Is it safe?
Well, yeah. Again as long as somebody doesn't find out where I buried it and
they steal it. So, the 100-dollar bill in the tin can in my backyard, it's safe
as long as somebody else doesn't find out. But is it earning a rate of return?
No. In fact, it's probably doing what? Going down in value. Because of just
inflation. So, what's the difference between $100 in a tin can
buried in my backyard and the hundreds and thousands of dollars that we tie up
in the bricks mortar wood foundation of our houses? I would submit that the
100-dollar bill in the tin can in the backyard is more liquid and safe
than the money we tie up in our homes. But as far as rate of return, you can
understand that money bearing in a tin can is not earning a rate of return
either is that real estate equity. The only way that home equity earns a rate
of return is when you keep it separated. You separate it. So, by keeping the money
separated, the reason why I don't pay any money out of my pocket for a down
payment, I satisfy it using OPM or other people's
money. I keep that money over here in my right hand pocket so to speak earning
compound interest tax-free and what I call my Laser Fund. And I've averaged
9%. So, 9% tax-free, the mortgage, if I borrowed money at
4.5%. And that's not.. My mortgage right now is
only 3.375. 3 and three-eighths.
But at 4.5% tax deductible interest in a 33-
percent bracket, it's only costing me a net of 3. How much more is
9% you're earning in this pocket versus the 3% in simple
interest tax deductible declining balance in this pocket? It's 3 times
as much. This is how you can become your own banker. And I actually will have
enough money over here to pay off a 30-year mortgage in about 12
years. If you do that with a 15-year mortgage, you're sending it to the
mortgage company, it's like saying, "Here Mr. Banker, here's an extra 100 bucks
this month. Put this against my mortgage. Don't pay me any interest on that. If I
borrow it back, if I need it, I'll borrow it back in on your terms and prove
there's a need why should have that." It's not sort of stupid, doesn't it? So, that's
why I don't give them my money. I keep them separated because home equity fails
the liquidity safety and rate of return test. So, this is why I keep my real
estate equity in a position of liquidity, safety earning predictable rates of
return compounding tax-free at usually 100/ 200/ 300
percent greater, okay? 3 times the net cost of the tax deductible mortgage
interest that I'm paying. And this is what makes the world go round. This is
what banks do. They borrow our money and pay us 1%. And they turn around
and increase the safety by 5 notches and earn 5%. They're making
500%. Every 10,000 they pay in interest. On a million bucks
in their bank, they make 50,000. That's 5 times. So, these strategies
have been in all my books. My first one Missed Fortune. But my most recent book
you can understand why I keep all my serious cash, my real estate equity and
what I call the Laser Fund. So, if you click down here, you can get a free copy
of this book and you just pay a nominal shipping and handling fee of $5.95.
It's actually two books in one. This is 200 pages, 14 chapters.
All kinds of charts and graphs of the explanations. This book is about
100 pages. And it's 12 chapters with 62 actual stories. And
there's a chapter in there on real estate and how to manage it better.
If you want to read both, you can use your right brain and left brain. And I
would love for you to get a free copy of that. So, click down here and learn more.