Bad Real-Estate Advice

I promise this will be the last article with “bad” in the title in a while. There is never a shortage of bad financial advice though, in fact sometimes I feel like the majority of the advice out there is bad advice. Here is an excellent example of bad financial advice, “Tip For Ignoring Bad Advice In Money Magazine.”

The latest edition of Money Magazine profiles a couple, 46 years old, that together make $120k/year, have a $250k ARM mortgage, a $30k home equity loan, and $12k in credit card debt. The couple is very concerned about boosting their slim retirement savings; to this end, they’d like to leverage the equity on their LA home, which is now worth $1 million.

Here comes some — in our opinion — highly irresponsible advice from a CFA who suggests this ‘extreme makeover’ (Money’s phrase): Take out a new $500k ARM mortgage, pay off the debts, then plow the remaining $200k into the U.S. stock market (80%) and bond funds:

The article then gives several reasons why this is a BAD idea. I’ll let you read the article… The blogger who wrote the article above gives a possible alternative,

How about this approach — sell the house. Retire the debts. Take the remaining $700k and put away a big chunk for savings (invested not only in the US stock market). Then buy a more modest home, or rent until the housing market settles down.

I am amazed at how resistant people are to selling their home outright and renting. I’ve even heard people use the excuse “I don’t want to move because it’s a pain.” Even if you made just $100,000 on the sale of your home (many people in Vancouver have made much more in the past few years), combine that with the mortgage payment you will no longer be paying and that’s a lot of rent! Not only that but you should have plenty to spend on a moving company, making it less of a pain. Moving isn’t so bad. The first few times I did it, it was annoying, but you get used to it. Here’s another blog article I saw recently about buying vs. renting, “Buying vs. Renting a House.” Scroll down to the comments, they are more interesting. Here’s one,

I know lots of home owners who pay more money each year in real estate taxes than I pay in rent. And that’s not including landscaping, maintenance and repairs, expensive furniture to fill the expensive house. I don’t buy into the idea that buying a house now, at what may be the peak of a housing bubble, makes any kind of sense.

I got a bit side-tracked here. Nobody should go and sell their house just because the market has gone up, but if you are like the couple described in the Money article, who are “very concerned about boosting their slim retirement savings,” then make sure you get some “good” advice before doing anything drastic.

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