The key to successful tax planning is learning how to select the best tax-saving strategies to accomplish your specific goals. My job is easy — pick the right strategies. Your job is tougher — pick your goals. But it’s a fact that your goals will change because of various events over a normal lifetime. Think about it. You get married, have kids, start a business, kids get married (some come into the business, some do not, some get divorced) kids run (and ultimately own) the business. You get the idea. The list could go on and on.
One event that comes into the life of almost every successful person is buying a home (or homes). Almost every reader of this column who calls me for tax advice, when I ask for his goals, includes, “Pay off the mortgage on my home(s).” Some have paid off their mortgages. A few paid cash for their homes.
Okay, here’s the question — is it smart to pay off your home mortgage? Or to put it another way, would it be smart to borrow as much as you can (via a mortgage or home equity loan) using your home as collateral?
Wait! Don’t answer until you read the rest of this article.
Let’s start with a few quotes from an article written by Steven Marshall and Mike Lowe entitled, “How the Affluent Manage Home Equity.”
“Thousands of financially successful people, who have more than enough money to pay off their mortgage, refuse to do so,” they say. The article goes on to say, “They go against many of the beliefs of traditional thinking. They put very little money down, they keep their mortgage balance as high as possible … and most importantly they integrate their mortgage into their overall financial plan to continually increase their wealth. This is how the rich get richer … While paying off the mortgage saves us interest, it denies us the opportunity to earn interest with that money.”
The most thorough, simple and easy- to-under s tand explanat ion of this keep-your-mortgage-highand- invest-the-extra-funds is in Ric Edelman’s book, “The New Rules of Money.” A great read. Ric tells the story of two brothers. Both earn the same amount and buy $200,000 homes. Brother A puts down $40,000 (all of his savings) and gets a 15-year mortgage at 6.38%. Also, Brother A pays an additional $100 extra, each month to his lender to eliminate his mortgage sooner.
Now, Brother B. He only puts down 5% ($10,000) on his $200,000 home and invests the $30,000 balance (of his $40,000 savings). He secures a 30-year, interest-only mortgage at 7.42%. As a result, his monthly mortgage payment is $428 less than Brother A. So he invests $528 every month (the $428 plus the same extra $100 his brother is paying to his lender). Brother B’s investment account earns 8%.
Next, Ric does all the math, including tax savings. After 30 years, Brother A has $613,858 in savings and investments. Brother B has $1,115,425.
Wow! ... for Brother B. Of course, both brothers now own their homes mortgage free. So Ric points out that Brother B can once again mortgage his home and, “Starts fresh to enjoy the same benefits once again.”
Now, the real reason I was motivated to write this article: a series of articles in The Ruff Times, a delightful, easyto- read and always worthwhile investment newsletter written, of course, by Howard Ruff. Pay attention to these quotes:
“I will teach you in the next few issues why it is a good idea to borrow as much of your costly, nonproducing equity [in your home] as you possibly can and put it to work in safe, income-producing investments. Your mortgage-loan interest payments are tax-deductible … It is also simple interest. Your can put the money to work, even at a lower stated rate, as long as it is a safe, secure place … because that will be compound interest.
“For example, in most cases you shouldn’t have an interest-only loan,” Ruff continues, “but in this case maybe you should, because if you are merely paying interest, your monthly cash outlay will be lower, the tax benefits will stay the same … The principle is ‘arbitrage.’ Just make sure you are earning more than you are paying out.
“So borrowing against the property and putting it to work is a sound strategy. Spending the money on ‘things’ is a bad strategy. I am now borrowing against my Northern Utah home … I am now researching to see where I can get the biggest safe return as I put that mortgage money to work, producing income in excess of the cost of the mortgage.”
Let’s summarize the simple arbitrage strategy explained by the above quotes: 1) borrow against your home; 2) invest the mortgage proceeds in a safe investment that earns more than the cost of the mortgage and 3) enjoy the tax benefits of a mortgage interest deduction.
Can you see the arbitrage strategy in your future?... Then here’s a safe investment you should consider: life settlements (LS). A small public company that sells on the NASDAQ makes life settlements available to little-guy investors. During the company’s 16- year history, their LS have enjoyed an average annual rate of return of 15.83%. LS are not subject to market risk, wars, interest rates or other outside influences.
Normally, LS were made only by deep-pocket institutional investors, like AIG or Warren Buffett’s Berkshire Hathaway. Now, because of the NASDAQ company, you can invest with the big guys.
Want to learn more about how you can join the LS profit-making fun? Fax me at 847/674-5299: your name, address and phone numbers (business/ home/cell). You must be an accredited investor. Minimum investment is $50,000.
Irving Blackman is a retired founding partner in Blackman Kallick Bartelstein, 10 S. Riverside Pl., Suite 900, Chicago, Ill. 60606; tel. 312/207-1040, or via email at [email protected]m.