Home are Designed to House Families, Not Store Cash

The Power of Leverage Let’s be clear, buying a home can be a great investment. However, the wealthy buy the
home with as little of their own money as
possible, leaving the majority of their cash
in other investments where it’s liquid, safe,
and earning a rate of return. One of the
biggest misconceptions homeowners have
is that their home is the best investment
they ever made. If you purchased a home
in 1990 for $250,000 and sold it in June of
2003 for $600,000, that represents a gain
of 140%. During the same period, the
Dow Jones grew from 2590 to 9188, a gain
of 255%. The reality here is that financing
your home was the best investment
decision that you ever made. When you
purchased the $250,000 house in 1990,
you only put $50,000 down. The $50,000
cash investment produced a profit of
$350,000. That is a total return of 600%,
far outpacing the measly 255% earned by
the stock market.
The Cost of Not Borrowing
(Employment Cost vs.
Opportunity Cost)
When homeowners separate equity to
reposition it in a liquid, safe, side account,
a mortgage payment is created. The mortgage
payment is considered the Employment
Cost. What many people don’t
understand is when we leave equity
trapped in our home, we incur the same
cost, but we call it a lost Opportunity
Homes are Designed to House
Homebuyers Families, Not Store Cash
Financial
Cost. The money that’s parked in your
home doing nothing could be put to work
earning you something.
Let’s say you had $100,000 of equity in
your home that could be separated.
Current mortgage interest is 6.5%, so the
cost of that money would be $6,500 per
year(100% tax deductible). Rather than
bury the $100,000 in the backyard, we are
going to put it to work, or “employ” it. If I
were an employer, why would I be willing
to hire an assistant for $35,000 per year?
The expectation is I am going to be able to
grow my business and earn a profit on it.
As a business owner, I believe that by
investing in an assistant I will earn a return
that’s greater than the cost of employing
that assistant. If we choose to leave the
$100,000 of equity in our home, we incur
almost the same cost. The only difference
is, instead of referring to that cost as
employment cost, it is referred to as an
opportunity cost. By leaving the equity in
the home, we give up the “opportunity” to
earn a 7 percent return on the money.
By separating the equity we give it new life.
We give ourselves the opportunity to put it
to work and earn something on it. Assuming
a 34 percent tax bracket, the net
employment cost is not 6.5%, but 4.29%,
or $4,290 per year after taxes (mortgage
interest is 100% tax deductible). It’s not
too difficult to find tax free or tax deferred
investments earning more than 4.29%.
Using the tax benefits of a mortgage, you
can create your own arbitrage by borrowing
at one rate and earning investment
returns at a slightly higher rate. It’s what
the banks and credit unions do all the
time. They borrow our money at 2% and
then loan it back to us at 7%. It’s what
makes millionaires, millionaires! Learn to
be your own banker. By using the
principles that banks and credit unions
use, you can amass a fortune. A bank’s
greatest assets are its liabilities. You can
substantially enhance your net worth by
optimizing the assets that you already
have. By being your own banker you can
make an extra $1 Million for retirement.