on May 1, 2008
I shelled $[...]+ bucks on this book and now I regret. This book basically talks about 2 things:
1. Buy a house early, and separate the equity from the house by taking a big mortgage or refinancing often. Now invest the equity in some "side fund" which earns a bigger return than mortgage interest.
The priciple works, but it largely depends on the appreciation rate of the house. In boom time earlier this century, it was very feasible. That's probably why Doug's 2 sons (co-authors of this book) made a million. This advice is not universally applicable because real estate appreciation is very much location and time sensitive.
2. One investment vehicle exceeds all the others because contribution/accumulation/districution are all tax-free. Sounds attractive? Definitely! The first 7 chapters talk so much about this myterious "side fund" which is low risk and high return. I held my curiosity and discovered in the end that it's MFTA (max-funded, tax-advantaged) life insurance contract. "If it's properly structured", the authors say, you can be tax-free in all 3 phases mentioned above. I've found the description of this cash value universal life insurance (indexed or fixed) very confusing. Looks like it's not very straighforward to implement, and, we never know how future legislation will affect this strategy. For a common investor like me, I wouldn't try this strategy without a complete understanding of it.
Also, the book is not very well structured. Lots of repetition of the same stuff (guess there are 3 authors writing it). Sometimes it over simplifies financial matters by summarizing everything into 3 rules.
One plus is, you can access on-line resources for free: [...]. However, lots of links are still unavailable.
All in all, it doesn't contain solid financial advice that I was expecting and it largely hinges on past performance (e.g. real estate appreciation rate shoots through the roof) rather than focusing on future possibilities.
on October 11, 2008
First off let me start by making a statement about the author. When I was searching for a website for his "financial services" firm, other than the "missed fortune" website that was set up specifically for his books, what I came across was the website "Bay Area Family Wealth Institute" which I assume is the business site for Mr. Andrews' firm. I wasn't able to find anything concrete on it that really said what services he actually offers, nor was I able to find anything that indicated what his credentials in personal financial advice are (save for a cryptic statement that he has "experience in business management, economics, accounting, financial and estate planning, and advanced business and tax planning"). The site says he's the president of "Paramount Financial Services" but the only Paramount Financial Services website I found, which is out of Arizona, claims to specialize in "a wide range of commercial equipment financing & leasing programs to meet the changing needs of our valued clients. Our competitive programs help established and start-up companies to acquire new and used equipment for their operations". If this is Mr. Andrews' company, which I doubt, it seems to be in a business that is of little relevance to the individual personal investor.
VERDICT: Unable to verify Mr. Andrews' actual credentials or experience, or in fact what services he actually provides or how he makes a living other than through the sale of his books. While this in and of itself doesn't necessarily mean that the advice in his books is wrong, it should be the first red flag that one should use extreme caution when considering his strategies.
Now for the actual content. Essentially Andrews' says that people should buy a house, and then when the house gains in value in just a couple of years they should then refinance the equity and the appreciation out of it and hold absolutely none of their equity in their home. Essentially using their home as an ATM. What should you do with that money you pull out? Andrews' keeps advocating investing it in a cryptic "side account" that is no risk high returns and tax free (I won't try to keep you in suspense like he tried, it's Universal Life insurance he wants you to buy). More on that in a moment. First I want to analyze the first part of this strategy.
If you've been following this strategy for the past few years, I guess you must owe a heck of a lot more on your house now than it's worth. In fact, you may be one of the individuals who cut their losses and walked away from their, let's face it, sub-prime mortgage. If not, you may find that you owe not only 10% or 20% more on your house than it's worth, have no equity in the house, and still are paying 6% or so on the mortgage rate. Whether or not your "side fund" is paying a "higher rate of return" or despite the fact that your mortgage interest is tax deductible (and I'll point out here it's just the interest that is tax deductible), you're at a point now where your property is a completely insolvent asset and that Universal life policy "side fund" probably carries a hefty surrender charge still so it will be hard and expensive to draw your funds out if needed. The money train has come to a complete halt.
And even if home prices weren't dropping, Andrews' conveniently forgets to mention anything about a little thing all home buyers know about called closing costs. When you refinance a mortgage, you pay a fee which can equal around 2% or so of the total amount refinanced. Therefore, if you have a $100,000 that you refinance every 2 years using this strategy, you're adding the equivalent of 1% annually in fees onto your mortgage expenses. Therefore, if after the tax deduction of your actual mortgage interest rate is 4.5%, with a refinance every couple of years it's actually an effective rate of 5.5%, or a savings of half a percent with your deduction. That tax deduction doesn't seem so significant now, does it?
But wait, Andrews' tells us that the Universal life policy will net us around 9% annually. Yes, but even if that were true that's a realized gain of 3.5%, which is close to what I can get in a high yield savings account from a number of reputable online banks. True the bank gains are taxed, however I'll argue that the average return from the Universal Life policy is probably NOT a guaranteed 9%. From what I've read of Univeral Life policies, you pay a hefty up-front commission to set up the policy (your insurance agent might pocket an immediate 6% of your money, so that's a 6% loss to you right out of the gate) and the administration charge on the policy might equal around 2% annually of the value of the policy. Plus, you have to regularly pay your premium so that it won't lapse. So essentially even at a 9% gain, it would take a few years before the insurance agent's commissions were paid for and you would break even, and once you actually started gaining it would likely be around 1 to 1 1/2 % annually. So now, you're paying your mortgage that's worth more than the house, you're paying the premium to maintain your "side fund", and you've just paid your insurance agent a fat commission. Wow, you're well on your way to becoming a millionaire. If I'm just putting my extra money into a high yield bank savings account I'm getting the same financial benefits without all the hassle of this scheme or the very real danger of jeopardizing the whole scheme because finances are tight one month and I might not be able to pay the insurance premium.
Next, I'll just say ignore any information that Andrews' gives in this book about IRAs, 401(k)s or 403(b)s. I didn't catch him actually lying, but I did several times catch him only half explaining some of the rules and intricacies of these types of accounts. For example, he explains a traditional IRA pretty accurately, that you get a tax deduction on contributions but when you withdraw funds at retirement you pay taxes on those contributions plus the earnings. Then he "explains" a Roth IRA stating correctly that you pay taxes on contributions to a Roth. What he fails to make clear is that when you reach retirement age and withdraw funds, your withdraws of both principle and gains are tax free. Because of a wonderful little phenomena that anyone with a little financial saavy knows about and loves called compounding, over a 30 year investment horizon the largest portion of a tax deferred or tax free account will be the gains with the principal equaling a small part (ie. you may over the period of your working life contribute $100,000 to an IRA, but your account is worth $1 million). This is a significant advantage to the Roth, and a significant tax savings for a retirement investor, and to pretty much not explain this fact is what I'd call a lie of omission. Through his poor explanation of the Roth he gives the impression to the reader that Roths are taxed on both ends, contributions and distributions. That's simply false.
Finally, one other point I want to address is his fuzzy accounting logic. In one point of the book he explains how if you own a $100,000 home free and clear, you have a $100,000 asset. However, if you mortgage that home for the full amount, you have now $200,000 in assets. This is absolutely correct from an accounting standpoint, but it's extremely misleading to a layman and here's why. Asset value is determined by an equation called the accounting equation. It's simplified version is:
assets = Liabilities + Equity
In our example we begin with:
$100,000 home (asset) = $0 mortgage (liability) + $100,000 (home equity)
If we mortgage the home, our equation becomes:
$200,000 home & mortgage funds (assets) = $100,000 mortgage (liability) + $100,000 mortgage money (equity)
So you see, while it's true as Andrews' says that borrowing your home's equity will double your ASSETS, ASSETS are just the things of value under your command that are either owned by you or borrowed by you. It is your EQUITY that measures your actual wealth, the worth of what you own. Let's look at the accounting equation again and restate it:
IF assets = liabilities + equity, THEN assets - liabilities = equity AND assets - equity = liabilities
So my final recommendation is, don't follow the advice of this book. It's just bad advice, it's a Ponzi scheme that relies on you getting paid from the money that other insurance company customers are paying for their insurance policies. For someone to have to "earn" all that money so "easily", someone else has to be suckered out of it. One of the first rules of wise investing is "if it sounds too good to be true, it is". Don't believe anyone who tells you that they can get you tax free high returns without any risk (unless they also admit that it would be from breaking the law).
Just a couple other quick words for fellow reviewers: If you gave this book a high rating and start your review with "I don't know anything about investing, but..." then I recommend you do some research on traditional finance so you understand just how unsound this advice is based on actual knowledge of the financial products that Andrews' talks about, despite how good he makes it sound. May I suggest "The Road to Wealth" by Suze Orman. Whether or not you agree with Suze's advice, this particular text goes into pretty good detail explaining various aspects of finance and how certain financial products and accounts work. Now, for those of you reviewers that gave this book 5 stars and defend it vehemently, but you only have one review attached to your user name...well gee, when I write a book I think I'll make up a bunch of false accounts on Amazon and defend my own book against criticism too. Taking out all of the ratings so far here on Amazon for this book that come from 1 review users (both the good scores and the bad scores, for fairness' sake) I calculated this book to have really gotten about 2 stars. It's just really, really, really, bad advice.