I just paid off my house, now what?

Question

I just paid off my residence. No mortgage! Should I get a new loan and invest?

Asked by: DE – Maryland
Answer

An investment strategy is personalized based on so many factors: your age, income, and objectives, just for starters. 

If you just paid off a mortgage on your residence, this places you in the enviable position of having options lots and lots of options.  Please remember that one option is to do nothing, not invest, not get a new loan.  

However, if you have decided to keep your home free and clear of mortgage debt, talk with a real estate attorney about ways to protect the asset.  About 30% of all real estate in the U.S. is free and clear.  Just know that bad actors can make a free and clear real estate asset their target for fraud, so protecting yourself and your assets from this potential is essential. 

One method for protecting your debt-free real estate asset is to create a family trust that places a mortgage on the asset. You, the homeowner, are the beneficiary of the trust. This mortgage encumbers the property making it less attractive TO people looking to commit open fraud. Talk to a real estate attorney to determine the best way to protect a free and clear property. 

Home title lock is a company that addresses this issue also. Their website is Http://www.hometitlelock.com.

Placing a new mortgage on your free-and-clear home for purposes of re-investment is a significant financial decision.  It raises your risk profile because any asset with debt is a considerable risk of loss. I can see people scrunching their brows. Simple truth: borrowers are a slave to lenders. Most any debt carries with it an obligation of repayment. And wrapped within that obligation is the potential loss of assets securing said debt.  

A very wealthy man was getting up in age.  He liquidated all of his business and real estate holdings over several years and placed the money with various investment houses and mutual fund managers. Why? His answer:  

"I am acutely aware that I have made a lot of money in my lifetime owning and operating various businesses and real estate. I didn't want to place the burden of managing my complex holdings on my wife and children.  They don't have my expertise.  It would be a struggle.  Worse, they could try and run my business and fail, losing everything. So I liquidated everything and placed my wealth with professional money managers – several of them.  Now my family will have the job of managing the money managers and not my business.  This I think they can do."

Imagine the love and planning that went into that decision!  Using this example, consider thinking long-term and provide yourself with an opportunity to take a little play money. So many people take every-single-last-dollar from one investment and place it into the next only to lose it all (I'm not referring to blowing up a well-thought-out 1031 exchange – follow the rules~!). I'm not suggesting this will happen, but given that thought, consider taking 2% to 5% of the gain on sale just for you and your family to enjoy on current needs or wants.  That still leaves the bulk of the money for serious investment decisions. Recognize that piece of money that you take, maybe taxable income.  

Now, back to the more serious question of what to do with a free and clear property. The first order of business is to assess the intended term or length of ownership of the asset in question. The path forward will be completely different if you have already decided to sell the property in a month or a year versus having a 10-year time horizon versus looking at the asset as part of generational wealth (with a 100-year hold time).  

Hold time determines available options.  Personal circumstances affect choices.  People with no current needs, desires, or trigger points around money have the most options because they can do nothing.  They can let the asset sit there, free and clear, earning no money.  All they have to do is pay for taxes and insurance out of pocket.  They can treat the asset like a vacation home, just another holding with some small carry cost. Most of us do not have that option. We have "needs" no matter if they are real or imagined. 

The best option for using proceeds from a re-finance with cash out is to use the funds to pay down or pay off other debt, particularly debt with high interest rates.  But not to the point of zeroing out cash-on-hand.  Transferring debt from one place to another is just that, a transfer. To make positive progress on debt reduction, there has to be a positive event – like eliminating high borrowing costs or retiring age-old debt and having a lower monthly payment amount (at a lower interest rate).   

If there is little or no other debt to address, then a re-finance with cash out represents a Y-in-the-road in terms of what to do with proceeds.  Do you take cash and invest it into stocks and bonds or other real estate?  Consider this: first, create and maintain a cash reserve equal to 10% to 20% of the cash-out amount.  

Creating a cash reserve is a positive step towards financial security because you have a source of funds for life's emergencies (you don't have to sell something to pay for an unexpected $3,000 expense).  The "yes but" is that this takes cash out of circulation for attaining a greater yield!  Sure. But who's to say your invested dollars don't go down in flames.  Investment risk should be balanced with cash or cash equivalent holdings. 

After cash reserves, the amount invested (in your investments of choice), hopefully, produces a return-on-investment equal to or greater than your costs of borrowing.

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