WealthWeek

I stumbled upon this book last week… The title caught my attention and so I was intrigued enough to read it and write a review for the site.

Overall, I’d say the contents of this book is fair, though the ideas may not be as realistic for some investors. While some of the concepts are sound, others are are somewhat questionable.

THE GENERAL IDEA

Purchase real estate (always a good idea) and then extract as much equity as possible and shuffle it into tax-favored investments, such insurance contracts.

POSITIVE POINTS & STRENGTHS

Purchasing real estate is a vital and necessary part of the wealth-building process and it is important to obtain your first property as soon as possible. Seeing how uncertain the market is in the US at the moment, I can see how some might view real estate as risky. The truth is that at times like this, there are bargains to be had and keep in mind, housing markets have historically shown to bounce back.

The authors discuss a few methods as to how a twenty-something could buy a property with very little down. Since I am somebody who did this myself, I can vouch for the fact that it is possible.

The authors talk about using interest-only mortgages as a way to keep costs down as well as a way to avoid trickling any more funds into equity than is necessary. If you are a true advocate of the idea that equity should be separated for preservation (and, it seems like a sound idea assuming housing prices are stable and not falling), then the idea of interest-only mortgages seems like a good idea.

The message about houses being a great tax-shelter (getting breaks on mortgage interest) is a good one and should be taken advantage of.

Further, they suggest refinancing every two to three years and extracting the ‘lazy equity’ as they call it in order to transfer it into better-performing investment vehicles. The idea is that equity that is stuck in a house provides a ROI of 0, however if it is extracted, it can fetch conservative returns in stables investments (and, they get into various comparisons to insurance contracts according to their criteria).

The concept of utilizing insurance contracts as a tax-deferred investment vehicle is one that I am not familiar with, so this left me quite intrigued and I plan to research it some more.

The authors talk about several wealth-building ideas, which I discuss on wealthweek.com, such as paying yourself first (i.e.: saving at least 10% of your income).

Withdrawing equity through refinancing as well as extracting money from insurance contracts by way of loans is indeed a way to avoid being taxed as such income is not earned, portfolio or passive.

WHAT TO WATCH OUT FOR

It seems that the authors are suggesting that readers should refinance up to 100% loan-to-value (or, at least they didn’t specify a max percentage and so it is ambiguous as to what they’re suggesting). Truthfully, it is not always realistic to achieve 100% financing, especially in today’s US housing market and subsequent credit crunch. What’s more, if a property is financed up to even 90% LTV, it can be hard to make it cash flow, be it with an interest-only mortgage. For instance, condos have maintenance fees which can affect cash flow negatively.

Not all markets are the same - some see more growth than others to the point that it may not always be worth it to refinance every two years if it means that a sizable chunk cannot be taken out. Andrew’s sons clearly enjoyed the recent boom that just past (which is a testament to the power of real estate and the potential of their system). However, you need to understand that the real estate market moves in cycles and so when it is down, you have to be able to weather the changes and hold on as well as use different investing tactics. Some investors, unfortunately, cannot do this.

The authors make reference to withdrawing amounts in the range of $60,000 or thereabouts every two years. Typically, if there as a conservative 3% - 5% increase in housing prices in a stable market, it would be hard to withdraw chunks of equity such as this if your properties are in the $200K range. You would definitely have to wait longer (say, 4 years) and that is still not a bad idea, it would just take you longer and this book is about becoming a millionaire by the age thirty. Also, if you have potentially tied yourself into a mortgage term (say, a 5 years), breaking it in order to refinance and pull out equity would expose you to some potentially high penalties that could eat away at some of the equity. Still, it could be worth the the trouble, depending on the numbers.

GOOD OR BAD?

Overall, the authors’ message is a good one: take your equity out (as much as possible) and route it into clever investments (such as tax-sheltered insurance contracts). Even better, they are encouraging young people to get out there and make a difference in their own financial lives. So, it is definitely a good read on those levels.

Keep in mind, building up the sort of equity they talk in the book is not always as predictable as they make it seem (especially if you have interest-only loans and the market runs into a cool cycle, as it is now). Further, it is not always possible to refinance properties up to such a high percentage of loan-to-value without affecting cash-flow - assuming you even get 100% financing.

There’s no mistaking it: purchasing real estate is very important if you plan to build and sustain wealth. And, it is one of the best ways to shelter your capital gains from taxes, as the authors discuss at length in the book. Also important to wealth preservation is to roll out a well thought-out tax plan, such that your precious capital is able to grow rather than become eroded with excessive exposure. The authors make this point loud and clear, and they are to applauded for that.

There were a few comments on amazon.com about the book (some readers felt that it was a waste of time). I don’t necessarily agree with those comments because the book is mainly talking about ways to grow your capital without tax exposure (and, real estate has always been a vehicle for that). And then, they provide a method to do this, which can work for some people if they can find the sort of investments that will bring about nice chunks of equity. Truthfully, it is the daring few who will take the information and make it work for them (those people who practice the characteristics of millionaires and find ways to make certain plans work). There are real estate investments out there that can yield sizable equity returns, you just have to be willing to look for them.

For these reasons, I would recommend any twenty-something (or, even thirty-something just starting out for that matter) to read this book and have an open mind as it’s being read. It’s a great starting point to get your mind thinking about what it takes to build wealth and how real estate and other tax-planning strategies factor in.

The discussion about insurance contracts seems promising as well and one that I plan to research further. Even if equity is not used to fund such a savings plan, it could be a useful tool nonetheless.