Moving money -- It's done all the time

Posted: Oct 13, 2006 2:52 PM

If you have invested in the stock market, you know what moving money can mean to you: going on margin to leverage yourself into another position or selling a part of one position to get another position. Why would you do that or why does anyone do that? It's simple, to maximize your profits. Money is a rare resource, as you know, and therefore must be allocated into the proper channels for it to perform at it's best. So why not use real estate as well? I know some of you have now leaped to your computers to say, "Are you kidding?” Not really.

There are many ways to use real estate to help you grow your money. I will speak of a few and let you mull it around and see what you think. We shall begin with the option arm, which in my opinion is an option for disaster most of the time. It will, however, work for you if you work it, and not vice versa. The one plus of the option arm is that the payment is made at an artificially low rate, which of course can also be its major detriment. This rate, known as the pay rate (not the interest rate), is designed to let you live now and pay later as the difference between the pay rate and the interest from the real interest rate is added to your balance each month. Your balance goes up, not down. If you use the option arm to your advantage, you pay the minimum payment each month, let the unpaid interest accrue until the end of the year, and then pay the unpaid yearly interest in one payment. Net result is using a great deal more of your money all year long (depends on the size of the loan) and still getting the maximum interest deduction for the year.

The option arm exercise takes great discipline because if you don't pay it off, you end up paying interest on interest for a very long time and you lose one of the major tax advantages of real estate. So what else can you do? You can move money between several pieces of real estate to allow you to increase the value in one or more of the properties.

One of my clients has three homes, one primary and two second homes. She likes to buy houses, fix them up and eventually sell them at a nice profit. She has a very low interest rate arm on her primary property, which was rehabilitated and is now done, and several types of arms on her other two properties. One of the second home properties has gone through the fix up and is about finished; the other one is about to undergo the work. The following will demonstrate her money moves to make all of the rehabilitation work:

1. To complete the rehab on the initial second home she added an equity line on her primary residence. She also used part of the line for the down payment on the next second home.

2. Now that the initial second home is complete, she is refinancing that home to pay off, but not cancel, her equity line on her primary residence. This will be a cash out refinance. She will use her equity line again, as needed, to rehab the next second home. When that one is done, she will refinance that house and pay off the equity line. She will also balance out the loans, if appropriate, depending on the interest rate market at that time.

There are many ways to get the job done and this is her idea of maximizing her dollars through the movement of the equity in her houses.

I wrote a column of July 14th which was entitled "Youth is Wasted on the Young". It was a detailed plan to increase your real estate holdings over the years without increasing your payments, but simply moving your money around. It is a plan that will make you significant amounts of money if you develop your plan and stay with it until you have what you want.

At this point I must issue the following warning: LEVERAGE WORKS BOTH WAYS – TO INCREASE YOUR PROFIT OR HASTEN THE LOSS OF YOUR MONEY! You cannot assume that because I have said something, or some one else has, that encourages you to move forward that it will work for you. Please plan your moves carefully and if you are unsure seek help. There are many professionals who can work with you in setting up or perfecting your plan. Remember money is a rare resource and shouldn't be spent haphazardly.

Age is a factor as well. Youth is daring, old age shouldn't be. I, for one, refuse to admit I am old, but I do not take the risks that I did a decade or two ago. Why? I probably don't have the time to make it up if I make a mistake. We are all seeking ways to increase our wealth so that we may enjoy what we perceive to be a better life style. But we are all accustomed to our current life style, so I really caution good planning before you make any financial moves whatever your age may be.

When I was young, the craze in the financial markets was to take term life insurance and invest the difference between the term premium and the whole life premium in mutual funds. I didn't, mainly because I could barely afford term insurance, let alone whole life, and there wasn't any money for the difference. Did this hurt me financially? Probably, but I have had my run as well, even if it came a little later. The message is simple: do what is best for you when you can. It may be an extraordinary opportunity, but do not take unnecessary risks when you can't. There is always tomorrow.