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Living on Obama's Fault Line

The opinions expressed by columnists are their own and do not necessarily represent the views of

After a surprise earthquake in D.C. caused havoc and fear among the nation's leaders, Washington insiders are considering naming the secretively destructive fault-line "Bush's fault." But some politicians disagree and claim the earthquake was simply a result of the country shifting back to the right. 

In all seriousness, earthquakes are a reality and can hit at any moment. Are you prepared? And have you even bothered to check if you live near a fault line?

Having been born and raised in San Francisco, I am accustomed to the ground’s sudden movements. I grew up with random earthquake drills during school hours hiding under desks.

We are taught how to save our bodies from destruction, but few know how to save their homes or their finances.

An elderly couple came into my office a few years back to talk about their dwindling retirement funds. They wanted to get some ideas of how they could stretch out their money so they wouldn’t outlive it.

The couple had already blown through their IRAs and savings and were living on social security. It paid for basic essentials, but was not enough to cover potential emergencies or medical bills.

Fortunately, the couple did have one asset left:  their home, which they owned free & clear. It was located in Berkeley, CA, a highly desirable community next to San Francisco and the University of California. Even after the global financial crisis of 2007, the home was still worth a million dollars.

The couple had been wise enough to avoid using their home as an ATM machine over the years, and instead paid down their 30 year mortgage. Simply living and raising their children there had made them millionaires. However, they had very little spending money.

The first question I asked is, “You have earthquake insurance, right?”

“No, it’s too expensive. We can’t afford it, they said.”

Their entire nest egg was in one basket, and that basket could shake violently any day. The location of their home was right on the San Andreas fault. How could this couple safely protect and grow their wealth, while being able to tap into it?

My first suggestion was to sell the home and move to a more affordable area. A married couple can sell their primary residence and enjoy a $500,000 exemption on the capital gain. If they moved to a $300,000 home outside the San Francisco Bay Area (and away from the San Andreas), they would have had more than $500,000 to live on.

Rather than eat away at that $500,000, I suggested they invest it.  A 6% return would yield an additional $30,000 in annual spending money, without tapping into their capital.

Unfortunately, this was not a choice they wanted to make. They preferred to stay in Berkeley near their children.

In that case, I suggested they still sell the home and rent their primary residence. Since they wouldn’t be buying a new home, they would have over $800,000 cash. Invested at 6% return, they would receive an extra $48,000 income per year. Rent would be approximately $2000 per month, so they would increase their annual income by the remaining $24,000.

With this scenario, their money would be diversified into several solid investments, and an earthquake wouldn’t affect their entire nest egg. Plus, the tax advantages from owning rental properties would also help to increase their monthly income.

They listened and found it interesting, but decided they didn’t want to rent a home either.

“OK,” I said. “If you want to stay in this home, even though it is more expensive than you can afford, there’s one more option for you.”

I told them that with today’s rates, they could take out a loan on their home at a 5% interest rate. If they invested that money into cash-flowing rental properties yielding a 10% return, they would be earning 5% passively on the borrowed money.

Plus rather than having their entire nest egg tied up in one property, they could own several properties in various locations for diversification.

If they took out a loan at 50% LTV, that would be $500,000 to invest in other properties. The cash flow would be approximately $1500 per month after all expenses and debt service was paid. This would help them afford earthquake insurance on their primary, plus extra spending money.

Additionally, they would enjoy asset protection by mortgaging their property. Attorney’s looking for lawsuits would no longer find their home as desirable.  Unfortunately, they did not earn enough income to qualify for a $500,000 loan.

Their last option was a reverse mortgage, which was more expensive but would give them some monthly income. This is what they chose to do. It was not a decision that would help them increase their overall wealth, but a least it would give them access to some of their nest egg to pay for daily expenses.

Kathy Fettke is the CEO of, a real estate investment group dedicated to educating its members on wealth building options.

John Ransom | Create Your Badge

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