The Mortgage of Magellan

Did you ever notice how many mutual fund names evoke the era of the Great Navigators? One of the best known of these is Fidelity’s Magellan Fund. It was the first mutual fund to have a billion dollars under management, due in large part to the stock-picking prowess of its manager, Peter Lynch. In the wake of recent shipwrecks of firms such as Global Crossing and Enron, launching your investment plan may seem as risky as sailing off into uncharted waters. What might we learn from Magellan and Lynch about investments in terra firma, i.e. real estate?

In 1519, Ferdinand Magellan commanded an expedition that would be the first to circumnavigate the globe. Magellan hoped to discover at least six new lands on his voyage, which would allow him to claim two of them for himself and his descendents. Unfortunately for him, Magellan was slain by a group of prospective “tenants” in the Philippines, and never realized his dream of becoming a landowner.

Over 480 years later, the value of owning real estate is still widely recognized. Even a devout equities investor like Peter Lynch suggests that your first investment should be in a home of your own. The general upward trend in housing prices, combined with the fact that real estate investments are usually made with borrowed funds, has resulted in very good returns for homeowners over the past several decades.

The tax deductibility of home mortgage interest enhances these returns and recent changes in tax law make it possible for homeowners to harvest their gains on personal residences with unprecedented ease and frequency. Home ownership can be a powerful contributor to a balanced wealth building strategy.

It is also one of the few investment vehicles that provide daily tangible comforts in a way that financial instruments can’t match. No matter how good their performance, stocks and bonds are never cozy.

Finally, as Lynch points out in a recent magazine article, the difficulty and expense of selling a home encourage you to hold onto your real estate investment through temporary market declines. That’s how you accrue the long-term benefits of being a buy and hold investor. Financial instruments can be sold with a phone call to your broker or a few clicks of your mouse, so you are much more likely to panic and sell out at a loss when things get tough.

The functional asset allocation strategy I use stresses the importance of maintaining the proper balance among interest earning, equity and real estate assets. I generally become much more involved in helping clients make real estate decisions than financial planners who derive most of their income from the sale of financial products or fees based on assets under management. I want to be sure that my clients have the right size house, the right size mortgage and the right kind of mortgage, too. Recently, in helping some new clients work through these issues I saved them an amount equal to my first year’s fee just by getting them the right kind of mortgage.

If you have questions about how much house you should buy, or if you would be better off with a 15 or 30 year mortgage, or whether to keep your previous house as a rental property when you buy a more expensive home, these are all questions that I can help you answer as part of creating your complete financial plan. If your current advisor is not integrating your real estate holdings into their recommendations, getting a second opinion could reduce the chances of your being lost at sea.