Monetizing a non-liquid asset

[SteveDallas]

Let's say (hypothetically speaking of course ) you've got this house. You live in it. You've owned it for about 10 years. Its market value is somewhere between 2.5 and 3 times the current balance of your mortgage.

If you don't feel like selling the house and moving, what are some techniques for taking advantage of your equity?

[barefoot serpent]

take a 2nd and buy stuff.

[Undertoad]

ditech.com -- since GM can't sell cars it sells money.

lendingtree.com -- if you want 5 different major banks to check your credit history all at the same time, possibly causing notes on it to happen, such as "too many banks are checking this credit history at the same time". You are effectively filing a loan application with all of them, before you get a "quote".


You can probably get the same quotes as lendingtree by merely going to all the major bank websites and asking for a quote. A 30-year re-fi with $30,000 equity cashout (or whatever) is probably the most common thing they see.

[SteveDallas]

Hmmm hadn't really considered the cash-out mortgage concept. I'm leery of the straight home equity loan... you have to pay it back and I'm not sure in our situation we really come out ahead that. (We're sitting on a lot of equity in the house, but we're not sitting on a lot of unused take-home pay.)

[barefoot serpent]

buy some income property -- that is, if you don't mind being a landlord.

[glatt]

If you were older, you could do a reverse mortgage.

[Undertoad]

Oh, you want that equity for investment purposes?

You have something in mind that can grow your worth faster than 3 times in 10 years?

Is there something that makes you think your house is going to decrease in value in the next 10 years, or do you believe that your additional wealth here is from the national or local bubble?

(Do you want to invest in one of my money-losing projects? I currently have three ideas; one is very good, one is average, and one is poor)

[SteveDallas]

Those are all good questions, UT.

[Undertoad]

You need a personal financial advisor like lookout123 to answer those kinds of questions. Generally, if you have a house and it is not decreasing in value, that's your basic nest egg kind of investment because it's not going anywhere.

(If you get a divorce, the money in that nest egg is often most of the money that you will fight over, because one of you generally has to leave.)

If you have all other considerations taken care of, and you have some savings beyond the value in the house, the question then becomes (I suppose) whether you can use a cashout to make more money than the price of the mortgage. Say, for example, on one of my projects. (I didn't mention the lotto one that could make a real mint, because it's not my project, it's my friend's)

Mortgage money is a very cheap loan, the cheapest you will ever get; it is tempting to try to make more money with that money. And mortgage money, over the long term, is cheaper than car loans, credit cards, etc.

Home improvement is another matter, if you can use a loan and actually improve the value of your house, in some cases it could be like free money.

[lookout123]

You have something in mind that can grow your worth faster than 3 times in 10 years?

that question is common, but dangerous. that is like asking "do you know of a better way of making money than IPO's"? -- in 2000.

the only real way to tap your equity and put it to good use is to redo the mortgage. i don't like the online mortgage companies (except USAA) and the bank is your enemy. they look cheaper, but... ask for word of mouth referrals for a good mortgage professional. (if they are willing to quote rates over the phone i wouldn't use 'em - they're just a salesman) they should be able to work with a LARGE number of finance companies, not just 2 or 3. a mortgage prof should interview you and find out your goals for seeking a refi or new loan. then and only then should they be able to make recommendations or begin looking at product pricing.

before you even bother, you need to evaluate yourself. 1) Can you make increased monthly payments? sometimes income from the invested capital is used to cover small shortages 2) Do you have the stomach to watch market fluctuations without jumping ship? [i][i]risk tolerance, 3) How long do you plan on living in this house? 4) Are you disciplined enough to not spend the money withdrawn from the house?

just some thoughts. over the long haul real estate only appreciates on average <7%. the general market has @12%, on average. money trapped in equity does you no good, so if you can answer appropriately some of the questions above, you might want to consider restructuring.

[SteveDallas]

Thanks, I appreciate the info.

Originally Posted by lookout123

just some thoughts. over the long haul real estate only appreciates on average <7%. the general market has @12%, on average. money trapped in equity does you no good, so if you can answer appropriately some of the questions above, you might want to consider restructuring.

Yeah, we're thinking of trying to sock something away for the kids' college, and I have a feeling (though I'm not an expert) that the house is at, or close, to its peak value at least for this cycle.

(btw remember I said the house is worth about 2.5-3x the current mortgage balance.... not 3x what we paid for it!)

[lookout123]

funding college for the kids is a noble and worthwhile enterprise.


yes, there is a BUT.

1) if you don't have your retirement funds FULLY in line to achieve your goals you shouldn't even think about college. no one will approach you on retirement day and say, "you've worked hard here's a grant, scholarship, loan..."

2) money needs time to work. make sure you have enough time to allow $$ to do it's job.

3) although i do work with college funds i advise parents funding the entire education because i believe there is value in making the kids work for it. even for my wealthiest clients i advise that they make their kids figure out how to pay for college on their own, and then if they are so inclined step in after graduation to pay the bills off if they want. that is just me, though. i don't believe a college education is a right just because mom and dad know how to save.

if you don't have a trusted advisor already, and don't want to be tw, i suggest you find someone to sit with before you make any decisions. if you want i can give you some hints on where to start and how to pick a good one.

[Griff]

Originally Posted by lookout123

3) although i do work with college funds i advise parents funding the entire education because i believe there is value in making the kids work for it. even for my wealthiest clients i advise that they make their kids figure out how to pay for college on their own, and then if they are so inclined step in after graduation to pay the bills off if they want. that is just me, though. i don't believe a college education is a right just because mom and dad know how to save.

There is a lot of wisdom there. We all know folks who were in college for no other reason than postponing adulthood. There is a balance to make though if the kid is taking challeging enough coursework that work is right out outside of summer vacation.

[footfootfoot]

In Robert Kiyosaki's book Rich Dad, Poor Dad he says that a house isn't an asset unless it is paying you every month. Otherwise it is a liability. A rental property would be an example of an asset.

What are your thoughts on this, and or his book, if you've read it?

I'm gearing up for a big thread on a related topic, but I'm curious about this.

His definition of assest makes sense, but there may be something I am missing.

[lookout123]

nothing you have is an asset unless it can be turned into useable cash on demand. your primary home doesn't count towards your net worth, so RDPD is right on that count. i'm not a big fan of his as i believe him to be the Dr Phil of his arena, but as with all those types there are plenty of truisms in their writing.

on a strictly dollars and cents view, having in excess of 15-20% equity in your home doesn't make sense. you actually don't want to pay your home off - you want to be able topay your home off at will.

the value of your home will go up or down based on the market which is defined by what houses in your neighbborhood are selling for - REGARDLESS of the size of mortgage. so there is no return on that equity - the equity isn't earning you anything. i've heard people argue that they get a 5-7% return on their equity because they aren't paying interest on it. true enough, until you work in after tax cost of borrowed money. at a 25% tax bracket a 7% mortgage is only costing 5.25% in real dollars. you can find tax-free bonds that nearly return that while leaving your money more liquid. a well balanced portfolio of conservative, quality companies should return in excess of 10% average over a 15-20 year period. so if we're still in the 25% tax bracket that is a 7.5% after tax return COMPOUNDING year over year. just in raw terms that is a net benefit of 2.2% annually. On only $100K over 20 years that is a $54531 benefit brought about by maintaining debt. (that is not the total return. that is only the 2.2% net benefit return compounded. total return would be more extreme) And, you should be able to find better than a 7% mortgage. Keeping in mind that at any point in time IF you choose to pay off your mortgage you still have that $100K + any earnings.

that is just an example of what the raw numbers show. my job is actually to evaluate the individual. Discipline, risk tolerance, time horizon, and earning expectations are also serious pieces of puzzle when deciding whether this is the right plan for everyone. THIS IS NOT A RECOMMENDATION THAT ANYONE RUN OUT AND BORROW AGAINST THEIR HOME TO INVEST!

anyway- there is a thumbnail sketch of what i look at in regards to debt as part of a financial package.