Article: How to Invest When You Have Mortgage Debt

[Honest Abe]

Interesting article from a company that obviously caters to high net worth folks.

http://www.rossasset.com/how-to-invest-when-you-have-mortgage-debt/

It's essentially about using the equity in your house to use as leverage for invest in higher-return assets. Been thinking alot about the dangers  of leverage, particularly after seeing this movie I posted on here: https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/movie-the-queen-of-versailles/

Just putting it out there for comment/reflection

[smedleyb]

Not quite the same thing, but in the same ballpark, I used my AMEX credit card to fund a Lending Club account to the tune of $5000, which is the maximum amount they allow you to invest using a credit card (and it's valid only for initial funding purposes).  I then took advantage of a 1% transfer fee, 0% interest for 12 months offer from Chase and moved the 5K balance over there.  Borrow at 1%, lend it out at 20%.   We'll see how it works out (and I doubt my returns at LC stay at 20% over the long haul). 

[kudy]

I've been considering a bit of Lending Club/Credit Card arbitrage myself, I wrote a hypothetical situation on my blog.  I'm not sure, weighing the possible downsides, whether I am going to do it yet; leverage is exciting to take advantage of, but I'd hate to be caught in a situation where I over-leveraged and everything fell apart.

[tmac]

Interesting article from a company that obviously caters to high net worth folks.

http://www.rossasset.com/how-to-invest-when-you-have-mortgage-debt/

It's essentially about using the equity in your house to use as leverage for invest in higher-return assets. Been thinking alot about the dangers  of leverage, particularly after seeing this movie I posted on here: https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/movie-the-queen-of-versailles/

Just putting it out there for comment/reflection

Interesting article from a company that obviously caters to high net worth folks.

http://www.rossasset.com/how-to-invest-when-you-have-mortgage-debt/

It's essentially about using the equity in your house to use as leverage for invest in higher-return assets. Been thinking alot about the dangers  of leverage, particularly after seeing this movie I posted on here: https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/movie-the-queen-of-versailles/

Just putting it out there for comment/reflection

Interesting article from a company that obviously caters to high net worth folks.

http://www.rossasset.com/how-to-invest-when-you-have-mortgage-debt/

It's essentially about using the equity in your house to use as leverage for invest in higher-return assets. Been thinking alot about the dangers  of leverage, particularly after seeing this movie I posted on here: https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/movie-the-queen-of-versailles/

Just putting it out there for comment/reflection

Nightmare scenario: My uncle took out a large home equity loan on his paid-off house to invest, at the suggestion of his financial advisor. The market then tanked, taking the investment income and his previous retirement income. He had retired at age 55, but had to go back to work at 67 to cover living expenses and the loan. Because the economy tanked, he couldn't find anything at his previous level in his previous field. They're now almost 70, he's working at the home improvement store, and his wife can't retire from her office job. True, they were never mustachian and had a lot of overhead to cover, but it still seems very risky to me.

[Nords]

Interesting article from a company that obviously caters to high net worth folks.
http://www.rossasset.com/how-to-invest-when-you-have-mortgage-debt/
It's essentially about using the equity in your house to use as leverage for invest in higher-return assets. Been thinking alot about the dangers  of leverage, particularly after seeing this movie I posted on here: https://forum.mrmoneymustache.com/antimustachian-wall-of-shame-and-comedy/movie-the-queen-of-versailles/
Just putting it out there for comment/reflection

I am a strong proponent of high yield fixed income, especially private debt, because the safest way to make money is to borrow it cheaply using your house as collateral, and then lend it at higher rates to people who lack your ability to borrow, but who still have the ability and willingness to repay their debts.

Screw the "ability and willingness" of $800K private debt-- I'd rather have collateral.

In 2001, when interest rates were falling almost as fast as the stock market, we took out a mortgage on our rental property.  We also had a mortgage on our home (90% LTV).  We were dual-income military at the time but we were both getting ready to retire, and we suspected that it'd be really hard to ever get another mortgage.  In 2002 it made a lot of sense to buy Berkshire Hathaway stock with the money from the rental mortgage, and we still hold that stock.  BRK has risen from our $43/share split-adjusted cost basis to about $90.  The rental property throws off some cash and has appreciated at about the rate of inflation.  Our home was a sweat-equity project and has shot up in value, although we don't see ourselves selling it.  No worries.

Since then we've refinanced those 30-year fixed loans several times each, and today they're at 4.625% (rental) and 3.625% (home).  We'll pay them off in 2040, when I'll be 80 years old.  After the 2004 refi on our home to 30 years at 5.5%, I started a thread on Early-Retirement.org (http://www.early-retirement.org/forums/f28/covering-a-mortgage-without-losing-your-ass-ets-15237-2.html#post1236693) to track the performance of a small-cap value ETF (IJS) against the interest rate on our mortgage.  Accounting for IJS's reinvested dividends and taxes, even with the Great Recession its eight-year after-tax APY of 5.9% beats the 2004 mortgage rate of 5.5% (before deductions).  And of course it's stomping all over today's 3.625% mortgage rate.

It's an exercise in asset allocation.  My military pension covers most of today's expenses.  We've been drawing down our investments at 3-5%/year, but when spouse starts her pension in nine more years then our withdrawal rate will drop even lower.  In our case (reliable pensions with a COLA, cheap healthcare insurance) we can afford to take on a high-equity portfolio and mortgage debt.  People with bond-like human capital (civil-service employees, university professors, reliable pensions) can probably also take more risk with their mortgages and their investments.

I hope the hypothetical owners of the $800K mortgage with a bunch of P2P loans understand what their financial advisor is getting them into.  But I doubt that they do.

[Guitarguy]

I think this article is getting at something that most people don't really think about: If you have a mortgage and investments, you are essentially leverage investing in the market with whatever debt that you owe the bank. It's a pretty interesting idea but it really only makes sense if you consider it in the perspective of a balance sheet 'snapshot'. Otherwise, I think it fails to take into account that the bank isn't going to knock on your door tomorrow and ask for the full amount of your mortgage.

[smedleyb]

I think this article is getting at something that most people don't really think about: If you have a mortgage and investments, you are essentially leverage investing in the market with whatever debt that you owe the bank. It's a pretty interesting idea but it really only makes sense if you consider it in the perspective of a balance sheet 'snapshot'. Otherwise, I think it fails to take into account that the bank isn't going to knock on your door tomorrow and ask for the full amount of your mortgage.

This is a great point.  We commonly hear the refrain "never borrow money to buy stocks," but as you point out, anyone with a stock portfolio and a mortgage is doing just that.  Of course, nobody really thinks of it that way, but we really should.