It seems to me the reason real estate can be such a good investment is because of the cheap leverage available. Without that, real estate's "1% rule" gives you a 6% annual return after assumed expenses of 50% of your gross rent, and 6% is less than one expects from the stock market on average. (Though I am aware some markets have a 2% rule, which is clearly much better.)
I don't particularly want to be a landlord. I'd rather index with my own leverage if possible. Leveraged ETFs are no good because they don't seem suited for long-term holdings given they aim to amplify daily returns (and can thus take your investment to zero even if the benchmark is going sideways). My minimal research has turned up the availability of secured loans for stocks, but those appear to carry rates of 6% or higher, which would eat up most of the expected returns in any long-term indexing strategy. Brokers' margin interest seems to be similarly high.
I don't understand options very well, but would they be an option (pun intended)? Is there another solution I'm not aware of?
I think it's been mentioned in some fashion already...
The best way for an individual investor to leverage returns is probably through secured debt, because most of us can't leverage investments directly at reasonable rates. Most brokers will charge +/- 6% (today) for margin, which eats away most of your return. Of course, if you are a very, very large investor, that 1% spread between 6% fees and 7% expected return is sufficient, but most retail investors won't get much from that. Plus, those rates also change.
I think borrowing against a house or a car is likely the cheapest way to go. Either you can do it after the fact (once a house/car is paid off and you refinance) or by simply delaying payments as much as possible (pay the absolute minimum). You should consider any type of leverage in your whole life as portfolio leverage. Although the assets aren't directly related, it's a similar concept. It's like a company that issues bonds to build a new factory. Whether it's secured by the home office or by a satellite office, the payment terms and rate are the same at the consolidated level.
Similarly, taking cash out of a hard asset like home/car at 3-5% for a longer term loan (cars go up to 5 yrs and mortgages up to 30) can definitely help to add leverage to your overall net worth.
Today, if you really want to add leverage, I think a 4% 30 yr mortgage is the best way to go. You can tack on a 2-3% car loan for 5 years as well, but the term won't be nearly as long there.
There is obviously a risk component to all this as well, so you do need to consider that. This all assumes you have very low liquidity risk and can support the higher cash outflows comfortably and in perpetuity, as hitting even 1 liquidity event and having to sell assets at unfavorable prices would negate much of the gains.
Interesting thread, thanks for posting!
