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Topic subjectInvesting Strategy, Using equity
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147, Investing Strategy, Using equity
Posted by joseph_675, Mon Apr-16-07 10:09 PM
After many years of pretty good personal money management on the budget side of the issue, I find myself wondering how to take another step forward in investing for retirement. I am behind in that I am now 48 and don't have much in a Roth, second home - property, etc. Where I do have some leverage is in the equity of my personal home. How can I determine whether or not using some of that equity to invest now will put me further ahead in say 10 years than simply continuing to pay down my mortgage at an aggressive pace. What factors do I need to know? How do I calculate the projected outcomes of those two strategies?
148, RE: Investing Strategy, Using equity
Posted by CyberHost, Wed Apr-18-07 05:06 AM
Hi Joseph,

Congrats on your strategic thinking!

This sounds like a question to take to your CPA because taxation will be a big part of the formula to determine your answer. It will also depend on where your ongoing income comes from... like there could be a big difference in whether you are employed or self-employed, and have you maxed-out your pre-tax retirement savings options, etc. etc.

If you don't have a CPA, start a relationship with one close by - you actually want to be able to go to their office and discuss this face to face. Since tax season for accountants is just ending today, give them a little time to breathe. Then call next month to make an appointment to see him or her in May or June.

Cyberhost at Idea CafeThe Fun Place for Serious Business(sm)
149, An added caution RE: Investing Strategy, Using equity
Posted by CyberHost, Wed Apr-18-07 05:11 AM

Let me stress... do not take your question to an "Investment Advisor" (who would likely have an agenda to sell you investment products/services)!

See a CPA (Certified Public Accountant) who can objectively calculate the math of various scenarios AND factor in the various taxation issues.

Cyberhost at Idea CafeThe Fun Place for Serious Business(sm)
150, RE: Investing Strategy, Using equity
Posted by Strategist, Sun Apr-29-07 08:52 PM

I would take a continue education class at your local college. Most have financial planning types of classes. Also look in the calendar in your local paper for companies who do classes for free. Take a few of those, too.

Hey, it's never to late!

167, RE: Investing Strategy, Using equity
Posted by Phanntom, Mon May-14-07 12:04 PM

I don't put much faith in CPA's aside from doing taxes. I find them to be historians and if you get to know any most earn very low returns on their own investments. By their own admission, they aren't much on risk. A good fee based Certified Financial Planner can be a great help. Those that don't charge a fee will only recommend investments they sell.

I've invested for a lot of years successfully. The first advice I'd give is learn the "rule of 72". In short it's a formula that will tell you based on the annual return on an investment, how long it will take for that investment to double. Divide 72 by the rate of return and the result is the amount of time it will take for the investment to double in value. Example: $5,000 invested with a 15% annual return rate will double to $10,000 in 4.8yrs. In my own portfolio I look for a 15% rate, and since 1999 I've averaged 14.99 which is close enough for me.

I'm one who's loath to take equity out of my home for investing purposes. In my own case, my mortgage is 6%, so as long as I can make more than that investing I'm fine. If I had credit card debt that was 18%, I'd pay that off first, only because if I can make 15% on my investments I'm still falling behind at the rate of 3%.

Investing is a big picture game made up of many small pieces that you try to bring together with each contibuting it's own part.
Hope this helps...
196, RE: Investing Strategy, Using equity
Posted by ZeroGCreative, Tue Jun-05-07 12:33 PM
A common misconception is that having a paid off house is good. Well, I guess but then that $300,000 is earning you ZERO return! It is just like having a savings account that pays 0% interest. So why try to pay off your mortgage??

Instead maximize your return on your equity. If you re-fiance and cash out 90% of your ALWAYS want to leave 10% equity in your home to account for price downturns if you ever need to sell. As long as your return on investment is greater than the interest rate on your mortgage, then you are making money! Investing in rental property (not a second home...again no return on the equity in it!) is a great way to make high return on your investment. The cash flow you receive every month is passive don't have to work for it...and it will 9 times out of 10 be a better cash on cash return than any IRA, mutual fund, or savings account.

Remember, real estate is a tangible assest (your home is NOT an makes you no money therefore it is a liability-Robert Kiyosaki). The stock market can crash...and you can loose EVERYTHING!!!!!! People will ALWAYS need a place to live, and there is only so much land. Real estate prices can go up and down, but if you stay in for the long term, you will succeed.

Just like everything else, educate yourself. If you are interested in commercial real estate. Scott Scheel has an amazing 4 day academy where you learn an enormous amount!! Work with a real estate agent who is an investor THEMSELVES! And read the books that are out there!

I speak from experience!!
207, RE: Investing Strategy, Using equity
Posted by Phanntom, Thu Jun-14-07 08:34 AM

I'm afraid I have to take exception with your idea that your home not being an asset. Property values have consistently appreciated over time and in some markets have consistently beaten the returns on most other investments. I paid less than 400k for my home in 2002 and today it would sell in this depressed market at more than 900k. For 5yrs that's better than a 20% annual return, and much higher on a cash on cash return. Most of my stocks I've held the same period or longer and yes, to take the equity I either have to refi or sell just as I do with any investment. I also get the benefit of the interest write-off. Real estate is a very good investment, but it's not the perfect investment.

Everyone isn't cut out to be a landlord and friends of mine that are will tell you it's not nearly as profitable as those selling the idea try to make it out to be.

If you do have a paid off house you have great peace of mind...most people can weather pretty extreme runs of bad luck if they don't have to pay a mortgage or rent...that's the biggest nut most of us have to crack...without that...most of us can handle nearly any downturn.
Take care
208, RE: Investing Strategy, Using equity
Posted by ZeroGCreative, Thu Jun-14-07 04:50 PM
The 22% appreciation rate that this country experienced from 2002-2005 was not typical, not even close. And just hoping your home will appreciate enough to fund your retirment is pure speculation and not wise. If you know your economic history you know that housing tanked in the 80's and average Joe could not sell his home if his life depended on it. With interest rates at 18% and seller financing being the only way to sell your home, I sure hope nobody tried retiring on their homes equity...since they lost a huge chunk of it. The housing market depends on the interest rate as well, and as you know the main reason for the market which made your home appreciate was fueled by record low interest rates...something we will not be seeing again for some time as inflation creeps up. So counting on a paid off home for retirement is risky...b/c if you retire during a down turn in the will not have as muc as you had hoped. The higher the interest rates the lower the home prices.

Thats great that your home went up that much, in the DC area I made $150K in 2 years off an investment townhome in the same time period...but I did not receive any of that money until I sold it. I did have monthly cash flow of $500 off the rental income though. And if I tried selling it now...I would not have made as much. And it would take 6-9 months to sell it! So if you needed your equity now to pay the bills, then you would have to borrow from your house...costing you money in interest. Again another example of your home not making you money, but costing you money. All the big markets are now seeing your home is not worth what is was 2 years ago. The reason why your home is not an asset is because it does not provide you any monthly cash flow. All you do it put money into it. Repairs, improvements, maintanence.

I currently invest in 60 unit plus apartment complexes. With a good property management company...and a solid knowledge is very stress free and I do enjoy the very comfortable monthly cash flow it provides. And I get amazing tax write offs and the line item depreciation which keeps my taxes to a minimum.

Remember a dollar is worth more today than you want cash flow NOW to reinvest which will give you more money LATER! Compounding is important and your home equity does not compound!!!! That is why real estate is a great investment for someone who takes the time to educate themselves to own rental property than wait around for their house to appreciate in order to retire.

It is not the only investment strategy out there, and it can be risky if you don't know what you are doing....but no more risky than putting your money into your company's stock and losing your entire retirement fund and pension because the CEO was inflating profits and the company went under. (Worldcom, Enron). Or investing in the legacy airlines (American, United, Delta) very stable stocks for decades, then they all went backrupt. So everyone needs to decide how to invest and educate themselves. There are winners and losers in every type of invesment out there! :)