Even though the Federal Reserve just raised rates, the interest rates for home mortgages are still near all-time lows. Add to this the fact that the stock market is red hot and most housing markets have rebounded and one questions comes to mind. Is using the equity in your home the right way to invest?
In some ways, it has never been easier to get a home loan. In addition, the growing popularity of reverse mortgages have helped millions of seniors tap into the equity they have built up in their homes without the debt service costs of traditional loans.
One popular way it set up a reverse mortgage to use as a revolving credit line. There are some advantages to this approach as the principal available can grow over time. However, is this the best way to get the funds needed for building an investment portfolio?
The reality is that the answer is not cut and dry. The first thing to know is that investing always involves some element of risk. As such, any successful investor will try to reduce the risk in their portfolio by making sure that some of their money is relatively safe. This can include investment in real estate, treasury bonds, gold, or even municipal bonds.
Overall, this helps to balance out riskier investments. However, it doesn’t really answer the question at the top of this article, at least in full. To go deeper we need to look at some of the work on investment by people such as Dave Ramsey and Robert Kiyosaki. The one challenge is that their basic advice (Ramsey on being debt free, Kiyosaki on using debt) contradict each other.
What it might come down to is where your personal profile stands today. If you are just starting out and lack the resources, or if you have the resources but don’t have the risk tolerance than Ramsey’s advice is probably the one you should listen to.
However, if you have the resources and can stomach the risk, then using debt to give you the leverage to accelerate your investments makes sense. The only thing to remember with this sort of leverage is that it is not free money. Regardless if you are using a reverse mortgage or more traditional form of credit, you will need to repay the bank. Don’t worry, they won’t forget.
That being said, taking (managed) risks is a way people hit it out of the park on investments. Think of the pirates of yore. They took a massive risk every time they set sail as they could be killed, marooned, or arrested but the upside was big enough that many people were willing to take the leap. I am convinced much of the ‘old money’ in England and the U. S. was made from smuggling and profiteering – a polite way to say piracy.
Fast forward to today and while piracyhas largely gone away, opportunities for investors to take risks include angel investing, venture capital, crowdsourcing, or even the stock market. Heck, with the way the market is performing these days it is hard to argue that one shouldn’t get into the market.
Just remember that the last one in is always the first one to get burned. As such, you might be better served by remaining on the sidelines for now while you look for the next big thing.
So, what is the answer to the question? For me, I would argue that using the equity in your home for investment capital is probably a bad idea unless you can service the debt regardless of how the investment performs.
This comes down to the idea of how much loss is too much. The answer is simple. If you can continue cover the losses you are ok. Unfortunately, most investors don’t have a good idea of where the line is. As such, investing becomes emotional and there is a better way to accomplish your goals.
My advice. Keep the equity in your house and use this nest egg as part of your plan for your future. If you really want to invest then start small by redirecting some of your disposable income to investments which will pay off with literally betting the house.
