Real Estate As a Tool - Article 1.

A House Can Be More Than a Home

There are some who will be reading this article who will think it speaks heretically. There are many Americans whose understanding of pursuit of the American dream tells them that they should be living in a mortgage-free house - that one of the major goals of life in these United States is literally to be able to burn the mortgage.

It is never my intention to attempt to talk such an individual out of his or her comfort zone; however, if you are willing to think at least a little differently, I have some ideas for you to consider.

Let us start with some scene-setting.

If you inherited a decent stake, or inherited a house, or are at or near the end of your income-producing years (and even then I might argue that a mortgage makes sense), there are powerful reasons for owning the house outright.

For the rest of us middle class Americans (or at least those who have any interest at all in what I write), well - we should be buying our home. And we should be using a mortgage - leverage - to buy that house. Why use leverage? Why use the bank's money to buy a house? Because the failure to do so will generally result in higher income taxes (mortgage interest is deductible, after all), and because the mortgage is a hedge against inflation (unless you are on one of those wacky adjustable rate mortgages), and because you are otherwise tying up a disproportionate percentage of your money in one asset, and because real estate values usually appreciate at a greater rate than the interest rate you are paying on that mortgage.

Which leads me to suggest that your house, while it is pretty and functional and all, is still most importantly a cornerstone of your investment portfolio and should be viewed as such. Granted, your house is more than "just" an asset in your portfolio - it is, in fact, the single most important asset you have, PLUS it is the asset you can enjoy the most and physically improve the most.

Still, the better path for us is to view our house with the cold-eyed scrutiny of a seasoned investor. Serious investors do not kid themselves about the value of their holdings. They buy at the best price they can negotiate, make wise additions (and even subtractions) and then sell only at their price. They like to use other people's money to make money. To be sure, they make mistakes, but they are always clear on their motives.

This is what I am suggesting that you do.

Enjoy your house - yes. Improve it - most definitely. But do not worship it - do not fall in love with your house such that you condemn yourself to make unwise decisions about its value or its place in your financial life. We middle class folk must play the money game well in order to achieve financial independence. We cannot afford to make big mistakes and keep making them. We must take advantage of the tax laws and of our opportunities.

One of the best opportunities we have is to buy a house, let the bank assume a lot of the risk, take the tax deductions, improve the house, enjoy the house - and then sell the house at a profit, none of which is likely to be taxed, and then start the process over in a nicer, bigger, more valuable house.

Over time, we can use this asset to help start a business, to send the kids to college and perhaps even to fully fund a nice retirement. We'll be talking about these opportunities over the next few weeks.