This article above is one that you may be hearing about more often now. I was surprised to see that $1MM+ foreclosures are up 273% and that the percentage of homes in this value range that are in foreclosure is actually higher than the overall US housing foreclosure rate!
I want anyone who is reading this to keep in mind that it has to be a very tough thing to go through this kind of situation. I don’t want to EVER experience it or have a close friend or family member experience it either. However, we can use this situation to see what went wrong.
A few years ago, a wise person once told me: You pay cash for your toys and you finance your investments. At the time, I didn’t really understand what they were saying but after seeing the economic and financial downturn we have had, I see the value in keeping debt low.
This family had a nice career and their decision was to put, what appears to be, the bulk of their money into one asset: their home. Now, that’s fine. They paid cash or put a big downpayment. That’s exactly what they should do! Why worry about a mortgage when you’ve done well and want to slow down? Now…here is where they made their mistake…
They went and borrowed against their home to start two restaurants. Now, restaurants are already a very risky proposition. And I love the enthusiasm and entrepreneurship. That can never be denied. But in my opinion, if you want to take that risk, sell your home and use the proceeds to do your deal. Don’t finance your home so now you may owe a bank and any other creditors to the restaurant that you are starting.
This isn’t the only case. I always hear of people financing their high end sports cars! Why buy a Ferrari if you have to finance it? If you are doing that, you really can’t afford to own it. These items are reserved for the ultra wealthy, if you ask me. If you can’t pay cash for the thing, please don’t do it. You don’t want to be married to a loan payment to something you love. If things start to go poorly in your financial world, you will resent the car or item you purchased and that’s not what you wanted to do when you first bought it.
I know it’s easy to say these things from the outside looking in, but I really do love the “Pay cash for your toys and finance your investments” mantra. It makes sense. Your investments should be financed because you can earn income off of them to help pay the debt. Some might say that your home is an investment, when it really isn’t. Your home is being used to provide shelter and the hope is that over time, it will go up in value because the cost to build that home 20 years from now will be more than what you bought it for. Don’t use it as your retirement fund.