Author Topic: Equity shaming  (Read 10778 times)

Neo

  • Stubble
  • **
  • Posts: 135
Equity shaming
« on: July 30, 2018, 03:11:14 PM »
What do folks think of this Forbes article?
https://www.forbes.com/sites/forbesrealestatecouncil/2018/07/30/why-your-return-from-home-equity-is-always-zero/#650124894b4b

Seems like I see this logic a lot now. Basically if you cultivate equity in your home you are an idiot. You should be doing a cash out refi every so often to get your money out and put it to work. I agree that in a perfect world the math might work but this isn't a perfect world. What say ye, mustachians?

Syonyk

  • Magnum Stache
  • ******
  • Posts: 3419
    • Syonyk's Project Blog
Re: Equity shaming
« Reply #1 on: July 30, 2018, 03:39:09 PM »
Quote
Most people who desire to be debt-free think money is scarce. Many live below their means and work tirelessly into old age. In this one precious life of yours, why scrimp, save and make sacrifices? Instead of living below your means, think about expanding your means toward being financially free. This means you have enough passive income to do what you want to do when you want to do it.

Hm... A quick glance at history would indicate that being massively leveraged works very well right up until it stops working all at once and you're left with nothing, to include no house to live in. These resets happen multiple times per average lifespan.

Hard pass on that kind of logic.

And a paid for home requires a tiny fraction the annual cash as this proposed plan does. Presumably if markets have gone south, so have property values and taxes.

tralfamadorian

  • Pencil Stache
  • ****
  • Posts: 891
Re: Equity shaming
« Reply #2 on: July 30, 2018, 05:11:15 PM »
Personally, I think this rational is appropriate for investments but I do not consider the home I live in to be an investment.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #3 on: July 30, 2018, 06:08:50 PM »
Probably correct most of the time, but it is much higher risk and may make less sense when interest rates rise it also depends on if you are using taxable accounts or not.

Psrsonnaly if you want to roll the rice on beating a tisk free tax free 4-5% more power to you to squeeze that extra 1-2% out  I will take an approach in the middle with far less risk and a more predictable and thus smaller fire Stache




Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6678
Re: Equity shaming
« Reply #4 on: July 30, 2018, 06:24:44 PM »
Seems like I see this logic a lot now. Basically if you cultivate equity in your home you are an idiot. You should be doing a cash out refi every so often to get your money out and put it to work. I agree that in a perfect world the math might work but this isn't a perfect world. What say ye, mustachians?

I'm not hauling every dollar of equity out of my home, but I plan to maintain a mortgage for a long time and periodically pull out equity and invest it.  We are talking about buying a new house close to FIRE I'll put in the minimum downpayment I can to avoid mortgage insurance and start building equity again in the new house again.

I'd rather have more productive liquid assets than fewer. A paid off home is no magical safety net in my mind.

Mezzie

  • Pencil Stache
  • ****
  • Posts: 825
    • Mezzie Learns
Re: Equity shaming
« Reply #5 on: July 30, 2018, 06:36:28 PM »
Personally, I think this rational is appropriate for investments but I do not consider the home I live in to be an investment.
Same here. My home is a purchase.

Sibley

  • Magnum Stache
  • ******
  • Posts: 3165
  • Age: 33
  • Location: Chicago, IL
Re: Equity shaming
« Reply #6 on: July 30, 2018, 07:34:47 PM »
Personally, I think this rational is appropriate for investments but I do not consider the home I live in to be an investment.
Same here. My home is a purchase.

Thirded. It's an investment in the sense that I will do things (within reason) to improve and maintain it. But it's first and foremost my home.

Raymond Reddington

  • Stubble
  • **
  • Posts: 174
  • Age: 2014
  • Location: NYC
  • "The Concierge of Cash"
Re: Equity shaming
« Reply #7 on: July 30, 2018, 10:39:37 PM »
The goal of homeownership is the lowered cost of living when you no longer have a mortgage payment. That's what the "investment" is. And any equity that can be liquidated to pursue another home with that same end goal in mind.

A person who rents will never reach that.

The only other goal of homeownership is income, in the case of rental properties.

Dicey

  • Walrus Stache
  • *******
  • Posts: 8421
  • Age: 60
  • Location: NorCal
Re: Equity shaming
« Reply #8 on: July 31, 2018, 06:54:27 AM »
This discussion reminds me of my Craps-playing days in my youth...

When I was paying my own way through college, long before the turn of the millennium, my posse would snow (Tahoe) or water (Vegas) ski during the day, then hit the casinos at night. I figured if I was going to play, I might as well make my hard-earned money entertain me as long as possible. My research showed that the game of Craps had about the best odds of all the Vegas-style games. The table looks far more complicated than the essence of the game. Very simply, a point is made by the player rolling the dice, a.k.a. the "Shooter". Bets are placed that number will come up again before the Shooter throws a roll-ending number, called "Craps". Most of the players believe the number will come up again before the Shooter "Craps out".

The odds are best if you understand the number is less likely come up before the Shooter craps out, and bet accordingly.

The most difficult aspect of playing th8s way (besides remembering all the odds) is that you are usually  betting against everyone else at the table. Everyone wants the believe that the point will happen, not that it won't.

That's why this article and most of the comments above remind me of my long-ago Craps playing days. If I was going to do what everyone else doing, I made it my business to learn the most cost-effective way of doing so. Therefore it didn't phase me to literally oppose the rest of the table.

By studying the odds and options I was able to stretch my entertainment dollars, and consistently did better than the rest of my group.

Mortgages are kind of the same way. A lot of people on this thread are saying words like "Well, I believe this, so therefore the Forbes article is crap." I say, learn how the game is played, then work the angle that has the best odds.

Why not improve your success rate by really understanding how mortgages can work for you? It costs you nothing to learn how to use leverage to tilt the odds in your favor. It's okay if you don't; it's just going to take you longer and cost you more to hit FIRE. Just like all those sheeple playing the Pass Line at the Craps Table.

.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #9 on: July 31, 2018, 07:47:57 AM »
This discussion reminds me of my Craps-playing days in my youth...

When I was paying my own way through college, long before the turn of the millennium, my posse would snow (Tahoe) or water (Vegas) ski during the day, then hit the casinos at night. I figured if I was going to play, I might as well make my hard-earned money entertain me as long as possible. My research showed that the game of Craps had about the best odds of all the Vegas-style games. The table looks far more complicated than the essence of the game. Very simply, a point is made by the player rolling the dice, a.k.a. the "Shooter". Bets are placed that number will come up again before the Shooter throws a roll-ending number, called "Craps". Most of the players believe the number will come up again before the Shooter "Craps out".

The odds are best if you understand the number is less likely come up before the Shooter craps out, and bet accordingly.

The most difficult aspect of playing th8s way (besides remembering all the odds) is that you are usually  betting against everyone else at the table. Everyone wants the believe that the point will happen, not that it won't.

That's why this article and most of the comments above remind me of my long-ago Craps playing days. If I was going to do what everyone else doing, I made it my business to learn the most cost-effective way of doing so. Therefore it didn't phase me to literally oppose the rest of the table.

By studying the odds and options I was able to stretch my entertainment dollars, and consistently did better than the rest of my group.

Mortgages are kind of the same way. A lot of people on this thread are saying words like "Well, I believe this, so therefore the Forbes article is crap." I say, learn how the game is played, then work the angle that has the best odds.

Why not improve your success rate by really understanding how mortgages can work for you? It costs you nothing to learn how to use leverage to tilt the odds in your favor. It's okay if you don't; it's just going to take you longer and cost you more to hit FIRE. Just like all those sheeple playing the Pass Line at the Craps Table.

.

That's fine - only I'm not just stretching entertainment dollars, playing the odds by definition should work in your favour but what about the times that it doesn't and you lose a few hundred thousand. The risk of ruin with my entertainment dollars doesn't phase me - so I go bust and run out of money for the casino that day, if I play the odds and they go south on something major my life could be permanently changed.

 Everyone has a different risk tolerance and on a scale of 1-10 using leverage to go all in on equities is an 11.

I may at some point take chunks of equity out, and I would never use all of my investments to pay off the mortgage right away, I invest in 90% equities that is enough risk for me probably about an 8 or 9.

I have enough stress in my life and needing my investments to achieve an extra 3-4% after tax to break even because I am leveraged is not something I want to rely on.

In today's environment of low rates and an endless bull market it seems like a great bet sure.

Black Jack with a bit of know how has the lowest house edge btw - 0.4% with good rules before any counting.
« Last Edit: July 31, 2018, 07:51:12 AM by FIRE47 »

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6678
Re: Equity shaming
« Reply #10 on: July 31, 2018, 08:41:07 AM »
I have enough stress in my life and needing my investments to achieve an extra 3-4% after tax to break even because I am leveraged is not something I want to rely on.

Once you factor in inflation that's eating away at the money you have to pay back on your mortgage it's a lower threshold than that ^^ and you are only taxed on dividends unless you sell. Given that one of the two significant risks for FIRE failure is high inflation your mortgage + equity invested in stocks is a great way to mitigate that risk.

Neo

  • Stubble
  • **
  • Posts: 135
Re: Equity shaming
« Reply #11 on: July 31, 2018, 08:48:43 AM »
I didnt totally follow that retire-canada. Can you elaborate?
« Last Edit: July 31, 2018, 08:53:07 AM by Neo »

Papa bear

  • Pencil Stache
  • ****
  • Posts: 755
  • Location: Ohio
Re: Equity shaming
« Reply #12 on: July 31, 2018, 08:53:17 AM »
Article makes good points.  I have a hard time refinancing my 30yr fixed rate at 3.3% though. Rates rise and I like being locked into something so low long term.

Even some of my rentals are below 4%.  If rates dip below 4% again 10-20 years in the future, I'll be hard pressed to not pull out the equity then!


Sent from my iPhone using Tapatalk

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6678
Re: Equity shaming
« Reply #13 on: July 31, 2018, 09:06:19 AM »
I didnt totally follow that retire-canada. Can you elaborate?

There are two main risks for someone on a FIRE plan:

1. Poor early sequence of returns risk
2. High inflation

If you have a 30yr mortgage at say 4% your actual cost of borrowing is 4% - annual inflation. So if inflation is 2% your borrowing cost is 4% - 2% = 2%. If we get high inflation say 6% your borrowing cost is 4% - 6% = -2% and your coming out ahead by holding that mortgage. Then add in the fact those stocks you bought with the equity you pulled out of your home are another great inflation hedge and you realise this is a way to address one of your most significant FIRE risks.

In the post I commented on above by FIRE47 I just wanted to point out that:

1. the comparison between mortgage costs vs. investment returns needs to consider inflation effects
2. holding a mortgage and investing the equity in stocks actually helps mitigates one of your biggest FIRE risks

Spitfire

  • Stubble
  • **
  • Posts: 231
  • Location: Weston, FL
Re: Equity shaming
« Reply #14 on: July 31, 2018, 09:08:24 AM »
For people who plan to FIRE on a lower income and take advantage of ACA subsidies, a paid off home can really help lower spending and keep you in a target income range.

I do agree that you have a better chance of making more money with leverage at the (still) cheap rates.

I also think that any equity you have sitting there until the home is actually paid off doesn't do you any good.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #15 on: July 31, 2018, 09:15:47 AM »
Quote
Most people who desire to be debt-free think money is scarce. Many live below their means and work tirelessly into old age. In this one precious life of yours, why scrimp, save and make sacrifices? Instead of living below your means, think about expanding your means toward being financially free. This means you have enough passive income to do what you want to do when you want to do it.

Hm... A quick glance at history would indicate that being massively leveraged works very well right up until it stops working all at once and you're left with nothing, to include no house to live in. These resets happen multiple times per average lifespan.

Hard pass on that kind of logic.

And a paid for home requires a tiny fraction the annual cash as this proposed plan does. Presumably if markets have gone south, so have property values and taxes.

Actually if you look at history. For example c firesim. I've run a few scenarios through here with perpetual 5% refinance every ten years and even 7% and both of these are better than not doing so. So history would tell you to refinance and pull money out and invest it

undercover

  • Pencil Stache
  • ****
  • Posts: 786
Re: Equity shaming
« Reply #16 on: July 31, 2018, 09:27:28 AM »
Rate of return always zero? Okay...guess he's getting his money from some some charitable billionaire who loans money out of the goodness of his heart or something.

Dumb article title/premise with semi-good info. The rate of return is not ZERO. You have to pay the loan off no matter what, regardless of if the value of the home goes up or down; and if it goes up enough, then your rate of return on the home itself is definitely not zero (should you decide to sell). Of course it's less than what you'd get if you were willing to take more risk, but the return on the loan by paying it down is never zero.
« Last Edit: July 31, 2018, 09:38:12 AM by undercover »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #17 on: July 31, 2018, 09:33:05 AM »
This discussion reminds me of my Craps-playing days in my youth...

When I was paying my own way through college, long before the turn of the millennium, my posse would snow (Tahoe) or water (Vegas) ski during the day, then hit the casinos at night. I figured if I was going to play, I might as well make my hard-earned money entertain me as long as possible. My research showed that the game of Craps had about the best odds of all the Vegas-style games. The table looks far more complicated than the essence of the game. Very simply, a point is made by the player rolling the dice, a.k.a. the "Shooter". Bets are placed that number will come up again before the Shooter throws a roll-ending number, called "Craps". Most of the players believe the number will come up again before the Shooter "Craps out".

The odds are best if you understand the number is less likely come up before the Shooter craps out, and bet accordingly.

The most difficult aspect of playing th8s way (besides remembering all the odds) is that you are usually  betting against everyone else at the table. Everyone wants the believe that the point will happen, not that it won't.

That's why this article and most of the comments above remind me of my long-ago Craps playing days. If I was going to do what everyone else doing, I made it my business to learn the most cost-effective way of doing so. Therefore it didn't phase me to literally oppose the rest of the table.

By studying the odds and options I was able to stretch my entertainment dollars, and consistently did better than the rest of my group.

Mortgages are kind of the same way. A lot of people on this thread are saying words like "Well, I believe this, so therefore the Forbes article is crap." I say, learn how the game is played, then work the angle that has the best odds.

Why not improve your success rate by really understanding how mortgages can work for you? It costs you nothing to learn how to use leverage to tilt the odds in your favor. It's okay if you don't; it's just going to take you longer and cost you more to hit FIRE. Just like all those sheeple playing the Pass Line at the Craps Table.

.

That's fine - only I'm not just stretching entertainment dollars, playing the odds by definition should work in your favour but what about the times that it doesn't and you lose a few hundred thousand. The risk of ruin with my entertainment dollars doesn't phase me - so I go bust and run out of money for the casino that day, if I play the odds and they go south on something major my life could be permanently changed.

 Everyone has a different risk tolerance and on a scale of 1-10 using leverage to go all in on equities is an 11.

I may at some point take chunks of equity out, and I would never use all of my investments to pay off the mortgage right away, I invest in 90% equities that is enough risk for me probably about an 8 or 9.

I have enough stress in my life and needing my investments to achieve an extra 3-4% after tax to break even because I am leveraged is not something I want to rely on.

In today's environment of low rates and an endless bull market it seems like a great bet sure.

Black Jack with a bit of know how has the lowest house edge btw - 0.4% with good rules before any counting.

This is incorrect using mortgage leverage and perpetual mortgages actually decreases risk so on your scale it would be much closer to 0 than 11. Human emotion makes it seem like an 11 but in reality it's less risk than the opposite path. It can actually get you to a 100% success rate over 30 years if you can perpetually get sub 5% loans and pull out equity and invest annually.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #18 on: July 31, 2018, 09:49:43 AM »
This discussion reminds me of my Craps-playing days in my youth...

When I was paying my own way through college, long before the turn of the millennium, my posse would snow (Tahoe) or water (Vegas) ski during the day, then hit the casinos at night. I figured if I was going to play, I might as well make my hard-earned money entertain me as long as possible. My research showed that the game of Craps had about the best odds of all the Vegas-style games. The table looks far more complicated than the essence of the game. Very simply, a point is made by the player rolling the dice, a.k.a. the "Shooter". Bets are placed that number will come up again before the Shooter throws a roll-ending number, called "Craps". Most of the players believe the number will come up again before the Shooter "Craps out".

The odds are best if you understand the number is less likely come up before the Shooter craps out, and bet accordingly.

The most difficult aspect of playing th8s way (besides remembering all the odds) is that you are usually  betting against everyone else at the table. Everyone wants the believe that the point will happen, not that it won't.

That's why this article and most of the comments above remind me of my long-ago Craps playing days. If I was going to do what everyone else doing, I made it my business to learn the most cost-effective way of doing so. Therefore it didn't phase me to literally oppose the rest of the table.

By studying the odds and options I was able to stretch my entertainment dollars, and consistently did better than the rest of my group.

Mortgages are kind of the same way. A lot of people on this thread are saying words like "Well, I believe this, so therefore the Forbes article is crap." I say, learn how the game is played, then work the angle that has the best odds.

Why not improve your success rate by really understanding how mortgages can work for you? It costs you nothing to learn how to use leverage to tilt the odds in your favor. It's okay if you don't; it's just going to take you longer and cost you more to hit FIRE. Just like all those sheeple playing the Pass Line at the Craps Table.

.

That's fine - only I'm not just stretching entertainment dollars, playing the odds by definition should work in your favour but what about the times that it doesn't and you lose a few hundred thousand. The risk of ruin with my entertainment dollars doesn't phase me - so I go bust and run out of money for the casino that day, if I play the odds and they go south on something major my life could be permanently changed.

 Everyone has a different risk tolerance and on a scale of 1-10 using leverage to go all in on equities is an 11.

I may at some point take chunks of equity out, and I would never use all of my investments to pay off the mortgage right away, I invest in 90% equities that is enough risk for me probably about an 8 or 9.

I have enough stress in my life and needing my investments to achieve an extra 3-4% after tax to break even because I am leveraged is not something I want to rely on.

In today's environment of low rates and an endless bull market it seems like a great bet sure.

Black Jack with a bit of know how has the lowest house edge btw - 0.4% with good rules before any counting.

This is incorrect using mortgage leverage and perpetual mortgages actually decreases risk so on your scale it would be much closer to 0 than 11. Human emotion makes it seem like an 11 but in reality it's less risk than the opposite path. It can actually get you to a 100% success rate over 30 years if you can perpetually get sub 5% loans and pull out equity and invest annually.

Please explain how it lowers risk I would love to change my mind.

"Risk" when it comes to investing does not just refer to the odds of outlasting a 30 year retirement period it also refers to an investors comfort with short and medium term volatility.

In some scenarios though some people are going to end up 30-50% under water on their portfolio paying 4% on money they no longer have - people sell in a crash what will happen psychologically in this scenario?
« Last Edit: July 31, 2018, 09:57:13 AM by FIRE47 »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #19 on: July 31, 2018, 09:57:59 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #20 on: July 31, 2018, 10:02:18 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

It does sound look reasonable on the face of it - in some scenarios though there is going to be very significant "pain" for few years that I would rather not invite on myself. I don't and never have disagreed that the math should work.

I would rather work another year or two then have to rely on juicing my returns with leverage but that's just me. To some people this a a no brainer I'm sure to avoid working another year or two.


Much Fishing to Do

  • Bristles
  • ***
  • Posts: 351
Re: Equity shaming
« Reply #21 on: July 31, 2018, 10:24:18 AM »
I do see part of the point that you are reducing risk.  If someone mortgaged a house to the hilt and the market drops 30% and you walk away and the loan is forgiven or reduced somehow (a lot of assumptions I know but it seems like that was happening for some), you didn't take that loss like you would have if you have some amount of equity in the home.  If you view it that your risk is the same (i.e. that you have to pay the loan back in full), then you are on the hook for the same amount of money no matter what equity you have in the home, but in practice it doesn't seem clear that is the case.  Kinda the same for student loans, there are loan forgiveness options but no payment forgiveness ones (if I spent $80k to go to college that money is gone, if I borrowed it I may be able to get out for less than $80k, though given the interest rates on student loans I dont think i'd give that one a shot....)

CoffeeAndDonuts

  • 5 O'Clock Shadow
  • *
  • Posts: 70
  • Location: Minnesota
Re: Equity shaming
« Reply #22 on: July 31, 2018, 10:32:54 AM »
Great conversation and very timely for me.

We moved recently. The home we sold and the one we bought are, strangely, exactly the same price. In doing so, we went from a loan at 3.125% with 9 years remaining and ~60% equity to a 3.625% fixed loan with 30 years remaining and 20% equity.

We could muster paying off the new home with some admittedly dumb moves right now or pay it off within 12-36 mos.

Instead, I'm going the leverage route. A good friend with a different risk tolerance than us pushed back. After some back and forth, I ran our scenario through cfiresim using:
75%/25% equity/bonds fix.
.04% expense ratio, .25% return on cash.
Rebalance annually, keep allocation constant.
Withdrawal rate equal to our Principal + Interest portion of our mortgage payment.
Not inflation adjusted b/c mortgage is a fixed amount.

Our findings were a 97.4% success rate with a median ending portfolio of $476k. Reducing for 3% inflation of 30 years makes this a median outcome of $196k.

As with all things of this nature, we will likely know within a pretty short time if sequence of returns risk came true.

Since we're both still working and will likely drop to just 1 of us working, then maybe out entirely a few years later, we can still adjust working timelines while we see of SoRR becomes an issue.

So, yeah, despite being well into a strong market run, we're going to use the leverage.

Of course, i'm 3.5 weeks from closing on our sale of the prior home so I've not actually pulled the trigger on dropping all that equity into the market. Admittedly it's been an academic topic for us so far. In the past, when we've brought significant (but not this significant) money into the market, we've done so over months so my behavior indicates a little skittishness at least.



boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #23 on: July 31, 2018, 10:43:01 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

It does sound look reasonable on the face of it - in some scenarios though there is going to be very significant "pain" for few years that I would rather not invite on myself. I don't and never have disagreed that the math should work.

I would rather work another year or two then have to rely on juicing my returns with leverage but that's just me. To some people this a a no brainer I'm sure to avoid working another year or two.

you're not relying on your returns juiced from leverage.  basically if the juiced leveraged returns fail your extra couple years will fail too.  its not like its magic.  the funds are being invested in the same place.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #24 on: July 31, 2018, 11:21:50 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

It does sound look reasonable on the face of it - in some scenarios though there is going to be very significant "pain" for few years that I would rather not invite on myself. I don't and never have disagreed that the math should work.

I would rather work another year or two then have to rely on juicing my returns with leverage but that's just me. To some people this a a no brainer I'm sure to avoid working another year or two.

you're not relying on your returns juiced from leverage.  basically if the juiced leveraged returns fail your extra couple years will fail too.  its not like its magic.  the funds are being invested in the same place.

You're misunderstanding what I am saying. The overall % investment return on the assets themselves will be the same but you will have a larger pool of investments ideally making more money than the interest you are paying  - therefore you are making a greater overall return than if you never used leverage, why else would you use leverage if there was no benefit, you just told me that there is lesser risk by doing so. If I just work 1-2 more years or whatever that number may be I can recreate the same level of risk reduction to my FIRE plan that you are implying in your calculations and thus avoid this increased short term risk altogether. Mostly I was talking about shortening the accumulation phase by using leverage, thus I will have to work 1-2 more years to make up for it.

I think we are talking past each other at this point, at a certain level I will essentially have lowered my risk all that is required - pulling more levers such as using leverage will not be needed. If my stache is sufficiently large or monthly expenses sufficiently lowered or retirement horizon sufficiently shortened why would I need to use leverage? I guess you can always have more money?


« Last Edit: July 31, 2018, 11:42:17 AM by FIRE47 »

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #25 on: July 31, 2018, 11:41:54 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

It does sound look reasonable on the face of it - in some scenarios though there is going to be very significant "pain" for few years that I would rather not invite on myself. I don't and never have disagreed that the math should work.

I would rather work another year or two then have to rely on juicing my returns with leverage but that's just me. To some people this a a no brainer I'm sure to avoid working another year or two.

you're not relying on your returns juiced from leverage.  basically if the juiced leveraged returns fail your extra couple years will fail too.  its not like its magic.  the funds are being invested in the same place.

You're misunderstanding what I am saying. The overall % investment return on the assets themselves will be the same but you will have a larger pool of investments ideally making more money than the interest you are paying  - therefore you are making a greater overall return than if you never used leverage, why else would you use leverage if there was no benefit, you just told me that there is lesser risk by doing so. If I just work 1-2 more years or whatever that number may be I can recreate the same level of risk reduction to my FIRE plan that you are implying in your calculations and thus avoid this increased short term risk altogether.

I think we are talking past each other at this point, at a certain level I will essentially have lowered my risk all that is required - pulling more levers such as using leverage will not be needed. If my stache is sufficiently large or monthly expenses sufficiently lowered or retirement horizon sufficiently shortened why would I need to use leverage? I guess you can always have more money?

It's not a need and you would be safer with the perpetual mortgage even with less money. You're effectively ignoring the historical math your basing your reduction in "risk" on but you're accepting higher risk regardless of how much extra you save by not leveraging. 

You are howver locking in a guaranteed working longer with your strategy. Which is an actual increase in risk you're overlooking.

But the math is the math there is lower risk with a perpetual mortgage historically regardless if you save more money and work longer.

FIRE47

  • Bristles
  • ***
  • Posts: 313
Re: Equity shaming
« Reply #26 on: July 31, 2018, 11:56:15 AM »
Go run the calcs in cfiresim
To do this you'd have to pull up an amortization chart and see what your mortgage balance will be in ten years and assume some house appreciation (inflation). Then you take that difference as an income event. And you end the first mortgage and start a new mortgage at whatever interest rate you're testing with. Repeat 2-3x in the same scenario  and you'll see it decreases risk of failure in fire. Make sure you don't index your mortgage to inflation. You can run 1mm at 40k withdrawal for 40 years vs 1.2mm with a perpetual 200k mortgage basically cashed out.

It does sound look reasonable on the face of it - in some scenarios though there is going to be very significant "pain" for few years that I would rather not invite on myself. I don't and never have disagreed that the math should work.

I would rather work another year or two then have to rely on juicing my returns with leverage but that's just me. To some people this a a no brainer I'm sure to avoid working another year or two.

you're not relying on your returns juiced from leverage.  basically if the juiced leveraged returns fail your extra couple years will fail too.  its not like its magic.  the funds are being invested in the same place.

You're misunderstanding what I am saying. The overall % investment return on the assets themselves will be the same but you will have a larger pool of investments ideally making more money than the interest you are paying  - therefore you are making a greater overall return than if you never used leverage, why else would you use leverage if there was no benefit, you just told me that there is lesser risk by doing so. If I just work 1-2 more years or whatever that number may be I can recreate the same level of risk reduction to my FIRE plan that you are implying in your calculations and thus avoid this increased short term risk altogether.

I think we are talking past each other at this point, at a certain level I will essentially have lowered my risk all that is required - pulling more levers such as using leverage will not be needed. If my stache is sufficiently large or monthly expenses sufficiently lowered or retirement horizon sufficiently shortened why would I need to use leverage? I guess you can always have more money?

It's not a need and you would be safer with the perpetual mortgage even with less money. You're effectively ignoring the historical math your basing your reduction in "risk" on but you're accepting higher risk regardless of how much extra you save by not leveraging. 

You are howver locking in a guaranteed working longer with your strategy. Which is an actual increase in risk you're overlooking.

But the math is the math there is lower risk with a perpetual mortgage historically regardless if you save more money and work longer.

What I am trying to tell you is I don't want to be 250k underwater on a 500k loan at the same time that I've just lost a million in equity in other places all while having perpetual fixed expenses that are 50% higher than they otherwise would have been, That is not a scenario that I want to ever find myself in and that is a scenario that will happen to a good portion of people who use this strategy long enough.

What I am trying to explain to you is that I can reduce my risk from 90-95% (for arguments sake) by increasing my stache by some set amount, and you've told me that I can also decrease it by using some amount of leverage no matter how much large my stach is, well of course - that much is obvious that by doing both I will achieve even more risk reduction than having done just one or the other. I have said that I accept your calculations and that overall the risk is reduced by using leverage.

I am accepting higher risk the same as someone is accepting higher risk by not working forever or having a stach of 100 million, not using a high enough percentage of equities etc or any other decision as we can never reduce risk by 100%






mozar

  • Magnum Stache
  • ******
  • Posts: 2759
Re: Equity shaming
« Reply #27 on: July 31, 2018, 11:58:44 AM »
Huh. I have 60k in equity right now. So if I took that out with a loan at 4.5% (what I see advertised online). So that is 2,700 a year and 27,000 for ten years. If I were to take that 60k and put in the stock market I would have 118000 in ten years and my return would be 31k (118k-60k-27k). Am I understanding this correctly?

Syonyk

  • Magnum Stache
  • ******
  • Posts: 3419
    • Syonyk's Project Blog
Re: Equity shaming
« Reply #28 on: July 31, 2018, 12:04:39 PM »
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.

robartsd

  • Handlebar Stache
  • *****
  • Posts: 1752
  • Location: Northern California
Re: Equity shaming
« Reply #29 on: July 31, 2018, 12:08:32 PM »
There are two main risks for someone on a FIRE plan:

1. Poor early sequence of returns risk
2. High inflation

If you have a 30yr mortgage at say 4% your actual cost of borrowing is 4% - annual inflation. So if inflation is 2% your borrowing cost is 4% - 2% = 2%. If we get high inflation say 6% your borrowing cost is 4% - 6% = -2% and your coming out ahead by holding that mortgage. Then add in the fact those stocks you bought with the equity you pulled out of your home are another great inflation hedge and you realise this is a way to address one of your most significant FIRE risks.

In the post I commented on above by FIRE47 I just wanted to point out that:

1. the comparison between mortgage costs vs. investment returns needs to consider inflation effects
2. holding a mortgage and investing the equity in stocks actually helps mitigates one of your biggest FIRE risks
Yes, by leveraging home equity to increase investments you reduce inflation risk, but you also increase your exposure to sequence of returns risk.

mozar

  • Magnum Stache
  • ******
  • Posts: 2759
Re: Equity shaming
« Reply #30 on: July 31, 2018, 12:12:41 PM »
Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6678
Re: Equity shaming
« Reply #31 on: July 31, 2018, 12:18:03 PM »
Yes, by leveraging home equity to increase investments you reduce inflation risk, but you also increase your exposure to sequence of returns risk.

You don't. We've been through this is in detail. Your invest the mortgage risk will be less than a "normal" 4%WR FIRE plan risk and can be zero by retaining say 20% of the equity in inflation mitigated investments as a hedge against SORR. Note risk results are based on historical data via cFIREsim.
« Last Edit: July 31, 2018, 12:22:02 PM by Retire-Canada »

Neo

  • Stubble
  • **
  • Posts: 135
Re: Equity shaming
« Reply #32 on: July 31, 2018, 12:18:46 PM »
For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.

Syonyk

  • Magnum Stache
  • ******
  • Posts: 3419
    • Syonyk's Project Blog
Re: Equity shaming
« Reply #33 on: July 31, 2018, 12:36:45 PM »
Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

It's a common assumption, yes, but reality has a way of not matching expectations.

For those debating risk, the argument I see a lot from the no equity camp is this: let's say you pay your mortgage ahead or have a 15 year loan and build up a lot of equity. And then you lose your job. You cant tap that equity in your home bc nobody will refi or do a heloc for someone without a job. So you could lose your home despite all the equity you've built up. So you're better off investing the money and then if you lose your job you can tap stocks to pay your house payment until you have a job again. This rationale actually makes a ton of sense to me.

Presumably by the time one is at the "optimizing paying off mortgage/investing equity" point, one has some useful savings, credit ("springy debt"), investments, etc.  I certainly wouldn't suggest putting all one's money into the mortgage at first, but if you've got 6+ months of investments you can pull and credit you can live on for a while, I don't think it makes that big a difference.

And the reality is that some people prefer not having debt to optimizing every last cent.  I consider the mental tax of having debt to be worth a percent or two of returns (I'm obviously one who doesn't like debt), and my wife is the same.  She would, IMO rightly, view taking equity out of a house we own free and clear to be a form of lunacy.

Retire-Canada

  • Walrus Stache
  • *******
  • Posts: 6678
Re: Equity shaming
« Reply #34 on: July 31, 2018, 12:40:55 PM »
Really? I thought 7% was a reasonable assumption around here.

Comparing a 30yr mortgage term to investing in the stockmarket for 30yrs it is a reasonable assumption. You can also use cFIREsim for a historical data analysis of these options.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #35 on: July 31, 2018, 12:51:36 PM »
Yes, by leveraging home equity to increase investments you reduce inflation risk, but you also increase your exposure to sequence of returns risk.

You don't. We've been through this is in detail. Your invest the mortgage risk will be less than a "normal" 4%WR FIRE plan risk and can be zero by retaining say 20% of the equity in inflation mitigated investments as a hedge against SORR. Note risk results are based on historical data via cFIREsim.

correct the risk crowd around here likes to over look this more recent analysis it would be incredibly beneficial for everyone to go back and re evaluate what you think your risk is.  a perpetual mortgage sub 5% all but eliminates both risks - is it probable to get this no - but it also decreases SORR as high as 7% historically. 

mathlete

  • Pencil Stache
  • ****
  • Posts: 779
Re: Equity shaming
« Reply #36 on: July 31, 2018, 12:54:06 PM »
Amazing.

Alan Greenspan was a cheerleader (at least, as much as a Fed Chair can be) for tapping home equity. Or as he termed it, "previously unrecognized borrowing capacities". And the banks listened. I remember opening my first bank account when I was 15 or 16. Pre-crisis. Everywhere in the branch, I saw, "HELOC!" Commercials lit up the airwaves, encouraging you to borrow against your home equity.

Needless to say, Greenspan's behavior on this has aged very poorly.

Leveraging your home equity is just that; leveraging. It's a calculated risk. It can certainly work out, as it has for my brother. As it has for members of this forum, I'm sure. But to act as if we've discovered some sort of arbitrage opportunity here, when the downside risk should be so fresh in our minds...



If I can stump for a minute, Forbes is a garbage publication. It may have at one time, been respected. Maybe back in the 1980s, but that's before my time. They're now in the business of harvesting clicks. If you don't believe me, go to the website and look at how far down the option to pay a subscription fee is. They know that what they're selling is of little value to the end reader. The chief value they create is attracting eyeballs to advertisements.

It's why they let on so many guest contributors with hot takes. It's why they put Kylie Jenner on the cover recently and called her a self-made billionaire, despite the fact that they did little in the way of verifying her company's revenue. They're trolling people into a reaction. "How dare they call Kylie Jenner "self made"?". That's their product. That reaction. And they sell that reaction to advertisers.

Compare this to The Economist. Go to their website, and you'll see a subscription banner right at the top, and paywalls galore. That's because they know there's value in what they're writing.

But enough ax grinding :)

Neo

  • Stubble
  • **
  • Posts: 135
Re: Equity shaming
« Reply #37 on: July 31, 2018, 01:00:02 PM »
I agree but you can find this thinking all over the place not just at Forbes. I just happened to select a Forbes article.

mathlete

  • Pencil Stache
  • ****
  • Posts: 779
Re: Equity shaming
« Reply #38 on: July 31, 2018, 01:08:49 PM »
I agree but you can find this thinking all over the place not just at Forbes. I just happened to select a Forbes article.

Sorry. That wasn't meant to be an indictment on you or the thread in general.

I agree, this line of thinking is once again becoming more pervasive and it makes for a really good topic of conversation.

mathlete

  • Pencil Stache
  • ****
  • Posts: 779
Re: Equity shaming
« Reply #39 on: July 31, 2018, 01:20:24 PM »
Huh. I have 60k in equity right now. So if I took that out with a loan at 4.5% (what I see advertised online). So that is 2,700 a year and 27,000 for ten years. If I were to take that 60k and put in the stock market I would have 118000 in ten years and my return would be 31k (118k-60k-27k). Am I understanding this correctly?

Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

Regarding this specific scenario (10 year HELOC at 4.5% with the loan invested in the market), I decided to back-test this strategy.

I used S&P Data back to 1950 and I looked at all 14,756 periods of 2,500 consecutive trading days. (appox. 250 trading days per year, times ten years).

Then, I computed the CAGR of the market for each period and compared it against the 4.5% rate. If the CAGR was greater than 4.5%, then tapping your equity to invest in the market wins.*

On average, our hypothetical HELOC seeker earned a 2.4% spread. She lost 29% of the time though. "Losing" here means that that market CAGR did not beat 4.5% over the ten year period.

It's a fun illustrative example of what I hammer on all the time in these discussions. Borrowing against your home equity exchanging low volatility for higher average returns.

*This assumes 0 transaction costs, which is an unrealistic assumption, but you get the picture.

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 11830
  • Age: 37
  • Location: Toronto, Ontario, Canada
Re: Equity shaming
« Reply #40 on: July 31, 2018, 01:29:58 PM »
Huh. I have 60k in equity right now. So if I took that out with a loan at 4.5% (what I see advertised online). So that is 2,700 a year and 27,000 for ten years. If I were to take that 60k and put in the stock market I would have 118000 in ten years and my return would be 31k (118k-60k-27k). Am I understanding this correctly?

Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

Regarding this specific scenario (10 year HELOC at 4.5% with the loan invested in the market), I decided to back-test this strategy.

I used S&P Data back to 1950 and I looked at all 14,756 periods of 2,500 consecutive trading days. (appox. 250 trading days per year, times ten years).

Then, I computed the CAGR of the market for each period and compared it against the 4.5% rate. If the CAGR was greater than 4.5%, then tapping your equity to invest in the market wins.*

On average, our hypothetical HELOC seeker earned a 2.4% spread. She lost 29% of the time though. "Losing" here means that that market CAGR did not beat 4.5% over the ten year period.

It's a fun illustrative example of what I hammer on all the time in these discussions. Borrowing against your home equity exchanging low volatility for higher average returns.

*This assumes 0 transaction costs, which is an unrealistic assumption, but you get the picture.

So, about 1 in 3 times you lose money doing this?

CheapScholar

  • Bristles
  • ***
  • Posts: 405
  • Location: The Midwest
Re: Equity shaming
« Reply #41 on: July 31, 2018, 01:36:28 PM »
Just what this forum needed - another thread debating paying off mortgages!

The author was even more pompous and arragont than the folks in the DONíT pay off your mortgage thread.  Iím paying mine off.  I need to own the castle.

mathlete

  • Pencil Stache
  • ****
  • Posts: 779
Re: Equity shaming
« Reply #42 on: July 31, 2018, 01:38:51 PM »
Huh. I have 60k in equity right now. So if I took that out with a loan at 4.5% (what I see advertised online). So that is 2,700 a year and 27,000 for ten years. If I were to take that 60k and put in the stock market I would have 118000 in ten years and my return would be 31k (118k-60k-27k). Am I understanding this correctly?

Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

Regarding this specific scenario (10 year HELOC at 4.5% with the loan invested in the market), I decided to back-test this strategy.

I used S&P Data back to 1950 and I looked at all 14,756 periods of 2,500 consecutive trading days. (appox. 250 trading days per year, times ten years).

Then, I computed the CAGR of the market for each period and compared it against the 4.5% rate. If the CAGR was greater than 4.5%, then tapping your equity to invest in the market wins.*

On average, our hypothetical HELOC seeker earned a 2.4% spread. She lost 29% of the time though. "Losing" here means that that market CAGR did not beat 4.5% over the ten year period.

It's a fun illustrative example of what I hammer on all the time in these discussions. Borrowing against your home equity exchanging low volatility for higher average returns.

*This assumes 0 transaction costs, which is an unrealistic assumption, but you get the picture.

So, about 1 in 3 times you lose money doing this?

Using 4.5% as the interest rate on the loan, yeah. If I wanted to be more accurate, I would look up home equity loan rates for each period in which I made the computation, but I'm not sure how easy it is to find that information.

If I were to spitball though, I would say that this would lower our borrower's success rate. That's because I don't think interest rates have been too much lower than they are today. So if I were to go back and use apples to apples loan rates, most of the time, borrowing costs would go up.

boarder42

  • Walrus Stache
  • *******
  • Posts: 7859
Re: Equity shaming
« Reply #43 on: July 31, 2018, 01:57:20 PM »
Huh. I have 60k in equity right now. So if I took that out with a loan at 4.5% (what I see advertised online). So that is 2,700 a year and 27,000 for ten years. If I were to take that 60k and put in the stock market I would have 118000 in ten years and my return would be 31k (118k-60k-27k). Am I understanding this correctly?

Quote
Yes, though the "60k to 118k in 10 years" bit is the area up for debate.
Really? I thought 7% was a reasonable assumption around here.

Regarding this specific scenario (10 year HELOC at 4.5% with the loan invested in the market), I decided to back-test this strategy.

I used S&P Data back to 1950 and I looked at all 14,756 periods of 2,500 consecutive trading days. (appox. 250 trading days per year, times ten years).

Then, I computed the CAGR of the market for each period and compared it against the 4.5% rate. If the CAGR was greater than 4.5%, then tapping your equity to invest in the market wins.*

On average, our hypothetical HELOC seeker earned a 2.4% spread. She lost 29% of the time though. "Losing" here means that that market CAGR did not beat 4.5% over the ten year period.

It's a fun illustrative example of what I hammer on all the time in these discussions. Borrowing against your home equity exchanging low volatility for higher average returns.

*This assumes 0 transaction costs, which is an unrealistic assumption, but you get the picture.

So, about 1 in 3 times you lose money doing this?

yes over 10 year periods but again - perpetual mortgages not 10 year mortgages and maybe this article discussed HELOCs but the way to do it is to fix the rate with an HEL to tap equity or remortgage the house to tap the equity.

when you apply a 10 year cash out refinance to a home in FIRE and repeat it 1x even at a 7% interest rate on the loan your chances for success increase vs no loan and a 4% SWR or keeping a mortgage to term for 30 years. if we drop that rate to 5% you lose all the risk of failure. and you didnt have to work longer.  And you're going to have more money

effigy98

  • Stubble
  • **
  • Posts: 247
Re: Equity shaming
« Reply #44 on: July 31, 2018, 02:05:33 PM »
For people who plan to FIRE on a lower income and take advantage of ACA subsidies, a paid off home can really help lower spending and keep you in a target income range.

This... There are so many handouts available for low income... Free or lower cost college, food, electricity, property taxes, rent, etc. I rather have lower risk and be in the I can make it with minimum wage category.

RangerOne

  • Pencil Stache
  • ****
  • Posts: 685
Re: Equity shaming
« Reply #45 on: July 31, 2018, 02:16:11 PM »
The goal of homeownership is the lowered cost of living when you no longer have a mortgage payment. That's what the "investment" is. And any equity that can be liquidated to pursue another home with that same end goal in mind.

A person who rents will never reach that.

The only other goal of homeownership is income, in the case of rental properties.

That is not necessarily 100% true. You have to consider what is lost in full ownership. For instance having $500k tied up in fully owned home is potential interest lost. Because you could have the full value of the home invested in an interest bearing account.

Also owning a home has to factor in the continuing costs of taxes, repair probably an HOA. Those plus any opportunity cost have to weighed against renting.

I would generally agree with you more on the point that buying is more of a guarantee of cost stability since you are protected from rapid changes in rent with future inflation. But this is not by any means guaranteed to come out in favor of owning every time.

RangerOne

  • Pencil Stache
  • ****
  • Posts: 685
Re: Equity shaming
« Reply #46 on: July 31, 2018, 02:32:21 PM »
I only skimmed the article but his points seem valid. However he doesn't seem to mention the counter point risk of carrying too little equity may result in you going underwater.

However they don't give too many hard numbers so I imagine he would still keep 20-25% equity to keep the best mortgage rates. This would greatly mitigate the risk of being underwater. Though obviously in a big crash you would be for awhile.

This advice seems like it would come with a lot of caveats though. Like you need to do something dynamic with that cashed out money. Not just shove in it in the bank. Its clear his strategy is far more involved than"equity is bad".

Also it is clear that it introduce new types of risk that cant be adequately explained in one short article. For instance clearly cashing out equity which you may then use to invest in rental property is very complex and risky. Especially if you are a newb.

Overall interesting view point. Clearly there is a lot of risk in owning a home that should always be considered. Natural disasters and the like can get very messy when insurance and the government get stingy. As with Texas floods or the current California wild fires.

Syonyk

  • Magnum Stache
  • ******
  • Posts: 3419
    • Syonyk's Project Blog
Re: Equity shaming
« Reply #47 on: July 31, 2018, 02:45:43 PM »
This... There are so many handouts available for low income... Free or lower cost college, food, electricity, property taxes, rent, etc. I rather have lower risk and be in the I can make it with minimum wage category.

That's been my general goal.  Productive property improvements to reduce ongoing costs (solar, gardens, etc) so I can live on very little money if needed.  Regardless of what happens with markets.  Now, I certainly have investments, but if I can zero out my "food/energy/property" expenses (or nearly so), that opens up a lot of options long term.  Then again, I'm a paid pessimist, so that certainly biases my opinions on things like the long term (say, 60 years) viability of markets continuing to rise against all sorts of great headwinds...

Telecaster

  • Handlebar Stache
  • *****
  • Posts: 1308
  • Location: Seattle, WA
Re: Equity shaming
« Reply #48 on: July 31, 2018, 02:48:44 PM »
This advice seems like it would come with a lot of caveats though. Like you need to do something dynamic with that cashed out money. Not just shove in it in the bank. Its clear his strategy is far more involved than"equity is bad".


Just to be clear, the original article (which IMO was a little over the top) recommend using home equity to invest in more real estate.  In that case, you're not really losing equity.  You are just moving equity from one property to the other.    You do have the interest rate cost of doing so, of course.  This is quite common in commercial real estate investing. 

@mathlete  would it be too much to ask if you could re-reun the same analysis with 20 and 30 year periods? 

mathlete

  • Pencil Stache
  • ****
  • Posts: 779
Re: Equity shaming
« Reply #49 on: July 31, 2018, 03:36:28 PM »
Just to be clear, the original article (which IMO was a little over the top) recommend using home equity to invest in more real estate.  In that case, you're not really losing equity.  You are just moving equity from one property to the other.    You do have the interest rate cost of doing so, of course.  This is quite common in commercial real estate investing. 

@mathlete  would it be too much to ask if you could re-reun the same analysis with 20 and 30 year periods?

Absolutely! If I can figure out how to anonymize a google spreadsheet, I'll make it public.

WRT to your other comment, you're not losing equity in absolutes, but you are raising your debt to equity ratio.

Also, to be pedantic, you probably are losing equity by way of closing costs on your refi and closing costs on your new purchase.