VDI Insights: Your Home Equity Is a Trap

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-Tim Murphy

Look out your home equity is a trap.

I know, I know, everybody around me is feeling like they're rich right now, because their home value is skyrocketing.

One of the benefits of being a licensed real estate agent and investor is that you get to have your finger on the pulse of the market.

And right now, I'm hearing a lot of people saying, Man, I'm rich, look at all the home equity I have right now. And I believe a lot of people are feeling this way, as they see their biggest asset, their home, skyrocket in value.

I get it. I own many different properties and my wealth, based on my PFS, or my personal financial statement has increased along with everyone else.

I too have gotten excited about feeling rich, you're not alone.

However, when I find myself in situations like this, situations that feel almost too good to be true, I dig for facts and use logic.

For example, when you enter into college and you receive your first credit card, you're like, how much can I buy?

This has a $5,000 limit on it.

Oh my gosh, I'm rich!

That credit card when you're in college makes you feel rich because you feel like that credit card just handed you $5,000 When in reality, with an interest rate of 23%, that credit card, that money, that feeling of being rich, was just smoke and mirrors.

You're not rich, because you had more money you could spend, especially if you spent it on things that lose value and don't produce cash flows.

That is what makes you rich.

Like Ray Dalio, billionaire hedge fund manager writes in his book, if you own a house, and the government creates a lot of money and credit, there might be many eager buyers who would push the price of your house up, but it's still the same house.

Your actual wealth hasn't increased just your calculated wealth.

It's the same with any other investment asset you own that goes up in price when the government creates money, stocks, bonds, etc.

The amount of calculated wealth goes up, but the amount of actual wealth hasn't gone up because you own the exact same thing you did before it was considered to be worth more.

Just like with a credit card, your home equity can be a trap, if you don't use it wisely.

Ray Dalio also goes on to say that using the market value of what one owns to measure one's wealth, gives an illusion of change in wealth that doesn't actually exist.

As far as understanding how the economic machine works, the important thing to understand is that money and credit are stimulative when they're given out and depressing when they are asked to be paid back.

It's in moments like this when Value Driven Investors like us need to open our eyes to reality, the reality that inflation is creating superficial wealth.

It's making you feel rich, but are you really getting richer?

Like the wealth we are feeling because our home equity is increasing, like the wealth, our parents felt in 2006 in 2007, just before the bubble burst. The reality is, you can capture that gain in value by pulling a home equity line of credit or doing a cash-out refinance.

You have every right to do that.

To go a step further, you're almost crazy if you don't.

However, don't fall into the trap of feeling rich and spending your equity on things like cars or boats. Things that lose value.

Because if you do, one day, just like many of our parents did, you might feel the pain of having a payback.

It's because of life lessons that we as Value Driven Investors need to stick together, we need to think and act differently. Learn from the lessons and the paths that we have walked, while creating a brighter future for us and those closest to us.

Because together, we can support each other in finding quality assets that will increase in value and produce cash flow for years to come.

It's the cash flow that makes you really wealthy.

It's the cash flow that allows your wealth to truly increase along with the increased demand for the assets that you are accumulating.

Do this correctly, and when all the smoke settles, you will find yourself sitting on a pile of assets while you thrive.