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Home Equity, Does it Earn a Rate of Return? Is it a Prudent Investment?

“My house is earning a great rate of return, I am so glad I have my equity there.” Many homeowners mistakenly believe this statement is true. They send extra payments to their mortgage company thinking this will enhance their homes appreciation. They ‘invest’ extra mortgage payments in their homes equity. Alternatively, they buy a new home ‘reinvesting’ all their previous home’s equity. In both cases thinking they are earning a great rate of return and making a prudent investment. Unfortunately, they don’t know what they don’t know.

That is, home equity has no rate of return and it is not a prudent investment.

First, let us illustrate why equity has no rate of return with two examples. For simplicities sake we will assume a $100,000 home and a five percent real estate appreciation rate in all the examples.

1. A $100,000 home with 100 percent equity appreciates at 5% over one year to $105,000.
2. A $100,000 home with zero percent equity appreciates at 5% over one year to $105,000.

In both examples, the house appreciated five percent regardless of the amount of equity in the house and was worth $105,000. The amount of equity in the house had no impact on the appreciation of the house. Therefore, keeping your money locked-up in equity in your house is not increasing your rate of appreciation. If the amount of equity does not improve your rate of appreciation, then it has not earned a rate of return. In addition to not earning a rate of return, equity is not a prudent investment because; equity in a house is not safe or liquid. It is not safe because housing prices can drop and your equity does with it. It is not liquid, because the only ways to access your equity is by selling your house or borrowing the equity from the bank. Let us explore these two topics.

Home equity is not safe.

Rate of return aside, let us look at equity from a safe investment standpoint. The point of investing is to make money. To make money on an investment there needs to be a positive rate of return. With a negative rate of return, you lose money, and with no rate of return, your money just sits there. Since equity has no rate of return, which means no interest rate is compounding and making it grow. The only way that equity changes is with the unpredictable fluctuations in the real estate market. In a falling market, equity locked-up in a house can shrink significantly.

Home equity is not liquid.

Liquidity is a big problem with equity and real estate in general. In the worst case, you need the money for an emergency. The only way to access your money is to take out another loan. If you are out of work or disabled, can you qualify for a loan? Fat chance your banker will say yes to a loan. Banks are rarely in the business of lending money to people who really need it. That means the only way to have a chance of getting that money trapped in equity is to sell the house. If you are a buyer and you know the seller is out of work or disabled then are you going to offer them their selling price or will you wait and offer them less? If it sits on the market for too long-the bank, which is fully aware of the amount of equity build-up in your house, swoops in, and repossesses it.

What is the solution for trapped home equity?

The solution is Home Equity Management. This concept is based on four premises:
(1) your home equity should be liberated from the illiquid brick and mortar of your home;
(2) your liberated home equity must be safely and prudently invested;
(3) your liberated home equity must earn a predictable compounding rate of return-better if this is also tax-deferred; and
(4) a positive interest rate arbitrage between the mortgage interest and the investment rate of return.

1. Equity can be liberated–cashed out– either with a home equity loan or refinancing the existing home loan. This is the fist step in protecting your equity from the inherent liquidity problems of brick and mortar real estate.
2. Once liberated it should be prudently invested in liquid financial instruments free from market risk fluctuations. Instruments such as investment grade municipal bonds, tax-deferred annuities, indexed annuities, or investment grade life insurance contracts.
3. All these prudent financial instruments earn a predictable compounded rate of return. These investments also contain guaranteed elements which create predictability in the rate of return. In addition, they all earn either a tax-free or tax deferred rate of return.
4. The compound rate of return on your invested home equity should be equal to or greater than the simple interest on the mortgage to create a positive interest rate arbitrage. If the mortgage’s interest is tax deductible, this enhances the interest rate arbitrage.

Your home equity when properly managed using these four premises becomes a valuable and flexible part of your financial pan. Provided, that is that your cashed-out equity is invested in a safe and predictable vehicle, where there is liquidity and guarantee of principal, compounded interest rates in a tax free environment–such as one option listed-in an investment grade life insurance contracts. Then your equity can grow tax deferred and unaffected by market fluctuations. In this situation, the money is also highly liquid. It can be accessed free from income tax. In many cases, it can be far more valuable than 401(k)’s and IRA’s which are taxable at retirement. Furthermore, when it is all said and done, by investing in a investment grade Universal Life product you leave a sizable death benefit to your heirs, all from money that would otherwise be sitting in some mythical land where it is called equity, earning nothing.

How to Expand Your Network Marketing Business in the New Economy

I would like to take the time to welcome you to the “new” economy.

My recommendation for any network marketer interested in expanding their business in this economy is to first realize that we are in a “new” economy and the old way of doing things is just not good enough.

As this “new” economy starts to reveal itself to the masses, a large majority of the people you will come across will be in panic mode. Almost all of us have never experienced an environment like the one we find ourselves in today.

Do you want to know what to do?

Here is the formula. The bad news is this formula is going to require that you come equipped with a much better work ethic than you had in the past.

Here are some simple strategies for converting your business in such a way so that you will actually expand while others won’t.

  1. Defend your business (customers and down line) with your life. A strategy that is prevalent in the marketplace is to pillage other organizations. Make sure you are prepared for the on slot.
  2. It’s about the relationship you develop with your prospect, not how much it costs to join your opportunity. If you are constantly getting the objection of price, then you better learn how to overcome that objection. The easiest is to learn how to create rapport with the prospect.
  3. All the tasks you put off when times were good, you better be prepared to do them right now. When times are good, we all get lazy. It is time to wake up and take charge or someone will step in and just take.
  4. You need to be constantly reviewing your business habits and not settling for second best. Each and every day we need to review ourselves. If we did well, rehire yourself for the next day. If not, fire yourself and hire that person within you that can get the job done.
  5. Network like you have never networked before, and then network some more. Does this mean you should be talking about your business each and every minute of the day? No. However, we all could do better about being more aware of the people that surround us daily.
  6. Add value to others without the thought of receiving something back in return and become known in the network marketing community. Just like in network marketing where you work, work, work, get paid, the principle is the same give, give, give and eventually it will pay-off.
  7. Remember, most likely everyone else is scrambling to make corrections with their business, make sure it isn’t you. Understand the situation we are all in and decide not to focus on anything else but moving your business forward.
  8. It is all about personal branding and not about your company, product or service. When you decide to market something, market yourself and forget about the company, product and service. People are really buying you anyway.
  9. Ensure that all decision you make about your business and advice you offer your down line will still be good 5 years down the road. Sometimes we make decisions based on income or because of pressure from our up line. This is your business and you will have to live with your decisions.
  10. Focus on what is good about your team, your opportunity and your industry. Leave the whining to others. I look at network marketing like a buffet. I walk down the table and put the things I like or want to try on my plate. I don’t go back to the table and whine about everything on the table that I disliked.
  11. Work on your attitude each and every day. Make sure you read this correctly. This says work on “your” attitude each day, not on someone else’s.
  12. Invest in your business and specifically personal development. Stop looking at it as an expense. The best investment you can make is in yourself. Make sure you don’t leave this out.
  13. Differentiate yourself from others in everything you do. This starts with your communication skills. Look at everything that you need to do in your business and decide to “master” each area.
  14. Work your business to leverage the power of technology, as well as, the fundamentals of traditional practices. Technology is an awesome resource to use to build your business. However, it will never replace the personal contact and relationship building necessary to build a large organization.
  15. Understand that you need rejection in the marketplace. You do not want everyone to join your business. Sometimes when people first start out they don’t care who joins there business, as long as it is a warm body. You need to be more selective in who you work with.
  16. Build your business on an International scale. The best way to leverage your business is to recruit people around the world and then your business will never be closed.
  17. Build your business during business hours and yourself during all other hours. This does not mean 9 to 5. It means that you need to focus building your business when it is appropriate to talk with people and then out work on yourself the rest of the time.
  18. Lead by example carefully. What you do right, your down line will do 50% of the time. What you do wrong in your business your down line will do 100% of that. Don’t expect someone else to do what you are not prepared to do yourself.
  19. Write your goals out. Put them in front of you and review them twice a day until the list is complete. If you have heard this before, my question to you is, “Are you doing it yet?”
  20. If you are building a business for the future, you better be positioning yourself to be there to enjoy it. I hope that you are taking care of your health by eating right and exercising. If not, perhaps you should put your business in someone else’s name and save time.
  21. This is your business, act like it. It is time to stop thinking that your success or failure is the responsibility of the opportunity or your up line.

Some people get in a business, do nothing and wonder why their business does not work. The business works when you work the business.In conclusion, all that is necessary to expand your business is to master these strategies.

  • Remember to take care of your down line and your customers.
  • The shape of your business will be decided on how much you improve yourself.

Summary: Stop whining and get to work. It is a business.

Start-Up Advice – Helping You Remember the Things Needed When Starting a Business

So you are thinking of starting a small business. Let us say you are passionate about something, painting or baking for instance, and decide of basing your line of business on it. You are excited to get started as you get to enjoy and earn profit at the same time. But, for sure, you are aware that you just cannot run a business just then and there. There are crucial things that must be considered and that must not be overlooked.

If you are new to business, you can always seek start up advice from your trusted friends who have enough experience in the business world. You can also ask from professionals whose lines of work are related to business in general. Moreover, the internet is a rich source of information regarding how to start and go about your business. But of course, you have to take those pieces of information with a critical mind.

One thing that you should arm yourself with is a business plan. You just cannot go to the battlefield of business without a well-laid out plan, just like what you want your business to achieve and how you are going to go about it. You need to know how much it would cost to start and run your chosen business, and make the necessary business proposals to possible investors if your funds are not enough. Usually, you have to prepare necessary funds for a building (which you may have to rent or buy), advertisements, employees, and of course the start-up products and equipment.

Then you would have to come up with a business name, something unique but will easily be remembered by your prospective customers. Of course, you will have to register your business. Also, you have to make a separate business account so as to avoid getting your personal finances mixed up with your business finances.

Moreover, if there is one thing that business people must be careful with is keeping clear financial records as early as the business has began. Besides keeping track of the financial status of your business, these records help you make tax deductions for which you are entitled. Speaking of taxes, you would want to be aware of the current tax laws and legislation as your ignorance of these can be detrimental for your business later on. You can hire the services of accountants to help you with this, though, together with the auditing and bookkeeping needed in businesses.

You should also be aware that there are firms that can help you decide on the kind of business format that you should have and can give you advice on business plans as well as budgets. You may have to spend money on this, but it can be considered an investment as it can benefit your business on a long-term basis.

The number of businesses, big or small, running in a particular area is one of the factors that dictate its economic stability. That is why starting and running a business is encouraged. While it is said that not everybody can be good business people, it would not hurt if you consider yourself being one. There is a risk that comes with it, of course. But, this risk can be lowered by making informed decisions. It is your responsibility to make a research, solicit pieces of advice from friends and business professionals, or any way where you get yourself informed what it requires to start and run a business. Although it can take a lot of your time, the rewards can really be fulfilling, not only economically but also emotionally.