Dont Be House Rich and Cash Poor

We will soon turn to the newly created mortgage and real estate programs that should have a powerful and positive impact on your finances. But first we want to explain why new investors have had such a hard time taking advantage of these programs before now.

For a long time, anyone with pretensions of becoming a real estate investor had been trapped in the old-school way of thinking: everyone advised him or her to pay off a mortgage as quickly as possible. That meant turning over his or her cash to the banks or financial institutions, leaving the person with little or no usable cash. They were making a higher monthly mortgage payment, and not leveraging their money to make more money.

Without usable cash, it was impossible for the investor to think about purchasing real estate on a continuing basis. Without usable cash, the investor could not exploit the new mortgage and real estate vehicles.

Then came the boom in real estate—and new investors were raring to go. They wanted to capitalize on that boom. To do that, of course, they needed cash.

The explosion in the real estate market in our home state of Florida the past few years has been unprecedented. No one has ever seen such interest in real estate. The state has issued 295,000 real estate licenses. There are thousands of real estate agents in southern Florida. The market is truly at an all-time high. It seems that everyone has developed an interest in real estate.

Low interest rates coupled with an extremely attractive lifestyle have caused the real estate boom in southern Florida. Prices have skyrocketed and the average cost of a home in Palm Beach County has risen to $406,000 (compared to 2001 when the price for a home was ''only'' $250,000).

The soaring prices have exposed an intriguing conundrum for those who bought a house years ago.

Someone purchasing a $150,000 home ten years ago, relying on a $75,000 mortgage to pay off the home, now finds that his or her home is worth $500,000. The equity in that home has appreciated dramatically and the owner may well have already paid off the $75,000 mortgage or a good portion of it.

Meanwhile, the person has accumulated $425,000 of equity that is simply sitting there and doing nothing.

This person is a classic example of what we mean by being house rich and cash poor.

As long as such people cling to the wrong-headed mortgage strategy of putting ''dead money'' into the equity in their homes, they are going to be unable to take advantage ofthe newly created mortgage and real estate instruments that will be explained in great detail later in this book.

Imagine someone carrying a package of $100 bills, taking the package home, emptying it at home, and then stuffing the bills in a hole in the backyard—instead of investing it. Without knowing much about the person, it would be easy to ascribe some serious mental illness to him or her. Why would anyone voluntarily put so much money in a hole in the ground, making it impossible to earn any money on the cash they are socking away?

Well, that's the equivalent of what the old-school folks who are paying off their mortgages as fast as possible are doing. Until now many people kept their ''savings'' in home mortgages that yielded no cash at all.

These folks had been told that they must strive to become debt free. But no one has told them how dire the consequences of pursuing old-school ways are. No one has tried to stop these people from doing the equivalent of stuffing a great deal of money in a hole in the ground. The goal of this book is to stop these people from doing just that.

Recently, we had a retired gentleman and his daughter come to our offices looking for our advice on mortgages. Here is their story:

He had a generous retirement plan from a pharmaceutical firm, and he wanted to buy a condo that he had found. Had the market been better, he could have cashed out his retirement plan (for $750,000), but the market had dropped and it made no sense for him to touch the plan. Instead, his daughter lent him $450,000 to buy the condo, but she later said that she needed the $450,000 back. The father knew that it would make little sense for him to take the cash out of the retirement plan because he would be exercising his shares at a much lower value than if he were to wait until the value rose. He also had a small mortgage above and beyond the $450,000 that he had invested in the condo.

After listening to us on the radio, the man and his daughter visited us in our offices. She wanted to refinance into a 15-year fixed rate mortgage. She could give no good reason for doing that other than to say that, ''We'll pay it off faster.''

We asked her: why would you want to do that? We told her that as long as she can have manageable monthly payments it made no sense to take out a 15-year fixed rate mortgage. We suggested that they turn to other kinds of mortgage instruments, where they would not have to use up their valuable income—and in a much shorter time they would have what they needed to pay off the mortgage.

We suggested that they take a ''New Smart Loan™'' and cash out the stock options when the options rose in value. Even if the stock options did not rise in value, it was better for them to take a minimum-payments mortgage than to take a 15-year fixed mortgage, burying the money in the bank in much the same way that someone might bury money in their backyard. By burying in their backyard, the money cannot be converted to cash any more than it could if it is turned over to the bank in the form of monthly mortgage payments.

Why would anyone voluntarily bury his or her money in the backyard?

The best advice to give these people is: stop ''burying'' your money in a bank. Your money is not earning new cash. Indeed, it is losing value: the greater the inflation, the less buying power you have.

Clinging to the Old School

Who or what is driving these people to that ''hole'' in the backyard? It is the banks and other financial institutions that are the culprits, urging on clients mortgage payment strategies that are the equivalent of socking their cash away without any chance of wealth creation.

The clients socked their cash away in all innocence. It was not as if someone had explained to them their choices and they made a conscious decision to go down one path and not another. But now we're telling you, there's a better way.

STRATEGY #5:

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