By Kenneth Coleman
Investment Tracker
There have been several erroneous investment assumptions developed over the years that have been passed on to average investors. However, all these assumptions are incorrect. They include the assumption one cannot lose money in real estate, gold is a losing investment and one cannot lose money in the stock market if they buy and hold. There is one exception to these rules and it all has to do with timing.
During disinflation and periods of relative economic stability, gold is usually a losing investment. However, gold is valuable investment when the potential for inflation and dollar weakness escalates. This does not negate the fact that governments, including the U.S., do what it takes to drive down the price of gold. This leaves two profitable alternative investment strategies: buy and hold gold or buy it on dips and sell it on all rallies of about $20 or more.
Real estate prices, during time of disinflation, will decline or remain stagnant. During times of inflation, real estate prices increase. You cannot lose as long as you put down a relatively sufficient down payment, obtain a fixed rate mortgage at no more than 6.8 percent and buy within the first two years of a business cycle. And do not forget the three rules when it comes to real estate investing: Location, location, location!
One thing to keep in mind is that it took approximately 30 years before investors gained their money back after 1929 crash. Investors who lost 50-60 percent of their investment because they invested in the Dow when it topped at about 14,000 points in early 2007 may be forced to wait a long period before they ever see their money again. As stated, it is a matter of timing; if you invest too late, you lose; if you invest too early, you can still lose.
One final investment that gets a bad rap is the infamous reverse mortgage. It is true, reverse mortgages are saddled with extremely high costs. But there is reverse mortgage strategy worth looking at. One that often operates below the radar of popular opinion is the adjustable reverse mortgage. Right now you must be saying to yourself, "adjustable! Is he crazy!?! Adjustable=variable=bad news." Give me a chance to explain.
Since the collapse of the real estate market in 2008, most people are deathly afraid of mortgages with variable interest rates. Nevertheless, the best reverse mortgage plan is one with an adjustable rate. Again, it is all a matter of timing.
If you take out an adjustable reverse mortgage at approximately age 65, you and your spouse have about 18-23 years of life expectancy on average. I expect interest rates to remain relatively low for another 4-5 years. I also expect Britain's Libor, the rate with which the adjustable rate turns, will average 4-4.5 percent over the next 7-8 years. Libor has a history of moving at a lower rate of change than most of the U.S. indices that govern our adjustable rate mortgages.
To help compensate for the high cost of initiating the loan, you can keep the money from the loan in an account that draws 4.2 percent interest. Moreover, this interest rate is tax free whereas the fixed rate reverse mortgage does not provide an interest, let alone a tax free interest rate. Depending on your tax bracket, this could mean earnings of about 7 percent annually.
Therefore, if you are eligible for a $300,000 reverse mortgage payout based on the value for your home and you fall into a high tax bracket, your could be earnings the equivalent of about $21,000 yearly on your $300,000 loan, making the high expenses more palatable. In fact, you can save these expenses during the first year. If you fall into a lower tax bracket, it would take up to 1.5 years to recoup the initial expense.
This leaves, however, the problem of growing inflation. Keep in mind the value of a house four to five years from now will again be pressured upward by consumer price increases and dollar devaluation. A combination of an increase in the value of your house and the 4.2 percent tax free interest rate in your reverse mortgage account should keep any differential caused by a rising interest rate in close proximity. It is all a matter of timing. The price of the average home is as low as it has been in about a decade, providing only room for growth in a home's equity.
Since interest rates on savings are as low as they have been in decades, a 4.2 percent tax free earnings rate is very attractive. You can live just on the interest of this loan by itself. You need to touch the principle. Another benefit to such a loan is the fact that you do not have to pay it back as long as either you or your spouse is living. Your heirs will have approximately one year to pay off the loan after both you and your spouse are deceased.
The timing for an adjustable reverse mortgage has never been better. In a nation on the verge of socialism you can guarantee one thing: slow growth, thus slower inflation. You must meet only two requirements in order to qualify for this particular loan: You can your spouse at least age 62 and have considerable equity in your home.
I have a contact for two major mortgage companies that provide these types of loans: Wells Fargo and MetLife. If you choose this option, I suggest you stick with the major players. This way there is less chance of being caught up in a company with liquidity problems.
Since your money is in an account insured by the federal government, any financial problems the insurance company may incur will only be a minor inconvenience for you. The big plus with a major company is the service is generally better.
If you are interested in finding out more, please visit my web site at www.theinvestmenttracker.com/contact_us.asp and I will provide you the contact information with a Wells Fargo or MetLife broker. Both brokers provided me the information concerning a reverse mortgage.
It is important that you know I have no financial interest in providing you this information.
Editor's Note: Kenneth Coleman Is editor of Investment Tracker, 4805 Courageous Ln., Carlsbad, CA 92008, 1 year, 12 issues, $139. www.investmenttracker.com.
