Building wealth: every dollar is a worker

BY JAY BRIJPAUL

When investing, put your money to work for you.  Consider a beehive; imagine your money as the worker bees with more workers, the bees can gather more honey. Many homeowners pay off their mortgages. Congratulations! For this example, let’s assume that the home is worth $700,000 and it’s paid for. We languished on the fact that we are now mortgage free. In this case, the $700,000 or 700,000 workers are all locked up in jail and are not working. They are tied up in the property. Let’s release some and put them to work.

Consider the value of the home as a glass of water; pouring some water into another glass does not change the total volume. Similarly, we can “pour” some of the wealth tied up in our home into our “investment glass”. The first thing to do is to arrange a secure line of credit against the property. A secure line of credit is like an overdraft protection on our checking account. The only difference is that it is much larger, and the banks would like some level of protection so they will hold the home as collateral.

Setting up a secure line of credit on a mortgage free home has an additional benefit. It protects the asset against fraud. Identity theft is on the rise and one can assume another person’s identity, apply for a loan against the home and move the proceeds offshore. A secure line of credit is like a mortgage and since the lender is on the title, the lender must be informed if someone wants to use the property to secure a loan. Just like car or home insurance, homeowners should get title insurance for their protection.

Now we have money available to invest. It is important to choose the right type of investment. Take me for example; a banker promised to double my money in just four years. He claimed to be an expert in the stock market and that he had helped many clients like me in the past. Four years later, I cashed out, salvaging only a quarter of what I invested. The mistake I made was choosing the wrong person to assist me. I also did not take the time to educate myself in the field I wanted to invest in.

Investing in real estate is one of the best ways to build wealth. Take our home for example, it provides shelter and helps to protect us from inflation and poverty. We do not need too much technical knowledge to buy a home so, why not use some of the money from the line of credit to invest in a second home? On average, house prices double every seven years.

Preserving and growing wealth requires discipline. It is essential that you research in the field thoroughly before investing. Solicit help from professionals, schedule interviews with them. We learn more through this approach. Test the waters before plunging into an investment. Hindsight is 20/20 and we become more educated the second time around. Good business professionals never make instant decisions. They allow at least 24 hours to pass before committing.

The best way to learn is through our own mistakes but when it comes to wealth preservation, let’s learn from others! John took the equity from his home and went prospecting for gold. A year later he filed for bankruptcy. John never did his research and like a fish, went for the lure. Lending money to acquaintances is not good business acumen. If someone needs to borrow, it means that they do not have. How will they be able to repay you in the future? Another mistake to avoid is to become a guarantor for someone. If that person defaults, then you will land in the furnace!

Robert Kiyosaki, the author of “Rich Dad Poor Dad” talks about the millionaire mindset where two children receive an inheritance of $40,000 each. They both bought a new car with their inheritance. One paid cash for it while the other took dealer’s financing and invested the $40,000 in a rental property that cost $400,000. After five years, they both sold their cars for $10,000. The investment property went up by 10%, giving her an additional $40,000 while her brother remains much poorer. Happy investing!