Liquidity

1
Liquidity

• Compare the liquidity of typical investments

Cash Same day access via check, debit card, mattress, etc.
Bonds / Stocks Same day access, but with possible market timing losses
House Wealth HELOC 30 to 60 days Refinance 30 to 90 days Sell 60 to 180 days

• Liquidity the use and control of your
  investment.

2
Safety - Foreclosure

• Unlike most investments, you must make timely
  debt service payments to retain access to the
  wealth in your house.
• If you cant make these payments, you can
  potentially lose control of that wealth.
• 1 reason for Foreclosure Disability
• Other factors ranked as most common reasons for
  loss of house in foreclosure Loss of Job,
  Divorce and Death.

3
Return

• Return the rate of growth on your investment?

• The Return on wealth in a house is always 0
  wealth in the house can only increase two ways
• Principal Repayment (your wealth)
• Property Appreciation (market wealth)

4
Return Typical Scenario
80,000 Invested Interest Rate 7 (30 year
fixed) Appreciation 4 (annual)
400,000 purchase price 320,000 mortgage loan
5
Return - No Appreciation
80,000 Invested Interest Rate 7 (30 year
fixed) Appreciation 0 (annual)
400,000 purchase price 320,000 mortgage loan
Without appreciation, there is only
principal repayment.
6
Return No Appreciation or Principal
80,000 Invested Interest Rate 7 (interest
only) Appreciation 0 (annual)
400,000 purchase price 320,000 mortgage loan
Without principal repayment and appreciation,
there is no growth.
7
Return Nothing Invested
0 Invested Interest Rate 7 (30 year
fixed) Appreciation 4 (annual)
400,000 purchase price 400,000 mortgage loan
If you invested no wealth in the purchase of the
house, their total wealth at the end of 30 years
is the same. Return on house isnt Return on
wealth in house
What did we leave out?
8
What Was Missing?
Payment Difference at 7
Loan Amount Payment Principal Interest Tax Reduction Net Cost
320,000 2,129 262 1,867 700 1,167
400,000 2,661 328 2,333 875 1,458
difference difference difference difference difference (292)
80,000
80,000 Difference
Investable Asset Cash Flow Return(EPR) Net Cash Flow
80,000 (292) 4.375 292
based on a 37.5 marginal tax bracket
9
Return The Real Issue

• The real issue with Return is understanding your
  Effective Rate EPR.

• Would increasing the potential Return on wealth
  in the house increase your confidence?

10
The Potential Impact of Liability Management

Savings Found Savings Used For 30 Year Mortgage Payoff Savings Used For 30 Years of Investing
150 mo. 21.5 years 223,554
250 mo. 18.5 years 372,590
350 mo. 16 years 521,626
450 mo. 14.5 years 670,662
550 mo. 13 years 819,698
750 mo. 11 years 1,117,770
1,000 mo. 9 years 1,490,359

• Well work together to determine which of these
  two approaches you believe to be most suitable
  for you.

Standard 30 year fixed at 7 / Assumes an 8
After Tax Rate of Return
11
Why Focus on the Mortgage Liability First?

• The mortgage is the lowest cost liability
  available to most people.
• It is typically tax preferred to other
  liabilities because of interest rate
  deductibility.
• In managing liabilities, we look to utilize the
  mortgage first if borrowing is necessary.
• The mortgage is the largest single liability
  expenses for most people.

You must itemize to benefit from mortgage
interest deductions.
12
Step 2 Payment
Consider the different ways to pay on your
mortgage.
A smart payment approach can impact the Safety,
Liquidity and Return of the investment in the
house.
13
Step 3 - Availability
Consider what portion of the wealth might be
available to you.

liquidity liquidity liquiditylocation
location location
A simple rule of thumb, multiply current gross
income by 4 for an availability estimate.
14
Step 5 - Management
Consider your specific needs today and those in
the future.
All management of wealth in the house is
afunction of Safety, Liquidity and Return (based
on EPR).
15
Step 6 - Protection
Consider that wealth in the house, is only safe
if you have use and control.
lawsuit
divorce
home equity line
foreclosure
disability
job loss
depreciation
A smart protection strategy is to have a 100
HELOC that is updated when equity increases by 5.