What To Do With House Equity?

[e86s54]

We are in our late 40s, semi retired with one kid in college and another in high school. Our home is paid off and we have a Line Of Credit on it of over $500,000 with zero borrowed. This house accounts for about 30% of our net worth. The community we are in is very stable but without much appreciation (Real Estate board has us at below 1.5% /per year).

With interest rates at historic lows (LOC is currently at 3.5%) and no projected rise for a couple of years, we can't help feel that we should be investing in something AS SAFE but with better growth opportunities. As opposed to losing money keeping it tied into a house that doesn't grow above inflation.

In the last week that we have considered doing something, we have only considered a rental property (condo) that could also be used by the kids during college (or just rented). But from what I've seen so far, it would be cash-flow-neutral, but good appreciation potential (this city has only had 8 negative years in the last 60 and those dips were all small). Anyway, seems not likely worth the hassle.

I'm sure some of you have had the same dilemma...what have you done?

 

[Richard4444]

we can't help feel that we should be investing in something AS SAFE but with better growth opportunities. As opposed to losing money keeping it tied into a house that doesn't grow above inflation.

Up until a few years ago even boring CDs were paying about 2 points over inflation. With the tank of the real estate market in general, home values have been far below inflation for most of the country. You capitalize AS SAFE and want to have your assets yield a return higher than inflation. IMHO, to get returns higher than inflation, you would have to take some risk, and that is not as safe.

 

[JOHNNIE36]

Any particular reason you mention condo? If you want to try the real estate market, I woulld suggest a house over condo. Maybe the market has changed somewhat over the years but a house is always easier to sell than a condo. Probably easier to rent also. Condo's might be good in a vacation area, like the beach, but other than that I would always choose house. Just my take.

 

[e86s54]

Thanks Richard,

We are in Canada and not in the semi-bubble Toronto and Vancouver real estate markets.

For example, the area we were looking at for an investment condo is actually safer than the market my house is in. How much return in appreciation is the question. Looking at government stats on that market, its averaged over 6% in the last 25 years. So in the end, less than 2% profit. So to add to that I would need to find some value in a property...so more research/education needed on that idea.

 

[e86s54]

Any particular reason you mention condo?

Its a downtown, very urban market. Owning a condo can be less hassle. Houses are about twice the price too...but yes we have been looking at house also.

 

[pb4uski]

I think it depends on whether you consider your house and investment or just a place that you own and live in. Even if you consider your house just a place to live in you aren't necessarily "losing money" on your house equity because your investment in your house allows you to avoid paying rent, so the "return" on your house equity is the annual increase in value plus the rent you avoid paying less your carrying costs that a landlord would pay (property taxes and whatever).

While I view my house as simply where I live, I do borrow money on it and invest the proceeds in my investment portfolio of 60% equities and 40% bonds, but I do that only because I expect that the return on my investments (which I expect will be ~5.5% in the long run) will exceed the cost of financing (3.375%). However, in doing so I explicitly recognize that I am taking a risk that my investment returns may be less than my cost of financing and I am willing to accept that risk.

 

[JOHNNIE36]

Its a downtown, very urban market. Owning a condo can be less hassle. Houses are about twice the price too...but yes we have been looking at house also.

Understand. The market in downtown Toronto would be a different story than the one I visualized. And, Canadian real estate market can be different. As much as I enjoy real estate, I'll have to say I know very little about large, urban real estate markets. Sorry, I'll leave this thread to those in large cities.

 

[Animorph]

I used my 2.5% HELOC to increase my all equities portfolio near the bottom of the market in 2009. I paid it off when my portfolio recovered completely and exceeded my projections in 2011. It is now available as a last step to buy equities (after reinvesting cash) in what I expect will be another big market dip any month now...

Real estate is tempting, but will it recover faster than equities? DW's friend bought foreclosure houses in 2009 and their value has stabalized but there has been no recovery yet. But, they are rented out, with I think a positive cash flow, so it may turn out to be a decent long-term investment.

I'd hang on to your equity and start investing it if the market goes down another 20% or so.

 

[kombat]

2012 in Canada is NOT the time/place I would be funneling even MORE of my money into real estate. You already have 30% of your net worth tied up in real estate. Diversify. Put the money into dividend-paying preferred shares in banks and solid blue-chip companies.

 

[e86s54]

2012 in Canada is NOT the time/place I would be funneling even MORE of my money into real estate. You already have 30% of your net worth tied up in real estate. Diversify. Put the money into dividend-paying preferred shares in banks and solid blue-chip companies.

Kombat,

Thanks...I think that's good advice. But as Animorph mentioned, the market as some short term downside risk, so I will wait for a plunge to enter. In the meantime, I will do research on the Banks and other ideas.

 

[Nords]

Our home is paid off and we have a Line Of Credit on it of over $500,000 with zero borrowed. This house accounts for about 30% of our net worth. The community we are in is very stable but without much appreciation (Real Estate board has us at below 1.5% /per year).
With interest rates at historic lows (LOC is currently at 3.5%) and no projected rise for a couple of years, we can't help feel that we should be investing in something AS SAFE but with better growth opportunities. As opposed to losing money keeping it tied into a house that doesn't grow above inflation.
I'm sure some of you have had the same dilemma...what have you done?

You probably know that I'm firmly in the camp of "keep the mortgage and invest the money", so these next few paragraphs might come as a surprise.

You are experiencing "dead equity". For some reason, at some point in your past you found it worthwhile to pay off the mortgage. Maybe it was a period of high interest rates, maybe it improved domestic harmony, maybe it helped you sleep better at night.

Now you're contemplating "chasing yield". Why? For what purpose? Are the reasons that you paid off your mortgage no longer valid? Do you need more money? Are you getting too much sleep? Are you not working hard enough? Are you looking for more exciting landlord-tenant social relationships? Are you convinced that you're being left behind by the stock market? Is a relative bragging at the family gatherings and making you feel that you're missing out?

You seem to think that some asset classes will grow at least at the rate of inflation with no more risk than real estate. I can only think of two: TIPS and I bonds. Perhaps Canada has other equivalents.

If you're trying to beat inflation with the same level of risk, I'm not sure that asset class exists. If you're trying to beat inflation with more risk, then you could invest in a dividend fund like the iShares Dow Dividend ETF (DVY) or a Vanguard/Fidelity fund. Maybe a commercial REIT.

I don't know the terms of your HELOC, but if I was going to invest mortgage money in equities then I'd try for at least a 25-30-year loan. I wouldn't try to do this with a HELOC that only has a 10-year draw.

If you must invest in these other asset classes, then here are two of the best references that I've found:
Ten Commandments for Real Estate Investors: Commandment #1 | Real Estate Investment Blog by RealData
Dividend Growth Investor

BTW one of the reasons that spouse and I are comfortable with our mortgages is because so much of our income is annuitized (federal pensions). We're "comfortable" holding our rental real estate because it's in a great location (military tenants) and because spouse wants to wait 20 years or so to see if our daughter wants it. I also invest in startup companies and sell options now because I want to gain the "been there done that" experience now and get it over with. I don't want to be seduced by "chasing yield" when I'm approaching my 70s.

Perhaps you should examine your own overall asset allocation and figure out if leveraging mortgage debt is necessary. (I doubt it's necessary.) If you decide that you want to do it anyway, you should be ready to assume the burden of the extra selection research, the due diligence, the periodic monitoring, more due diligence, and the "sleep at night" risk.

If you want to gain more money then you're probably going to have to end up working for it.

Otherwise you could just try to be content with the knowledge that you can tap your line of credit anytime you want to buy something for a cash discount. That discount is worth far more than anything you'll get by chasing yield.

 

[e86s54]

Nords,

First, thank you for your post...it has many ideas I now need to investigate.

We never had a mortgage...I guess we were lucky that way.

We used the HELOC to help fund a business we have. It now supports itself and with rates the way they are, the mortgage was cheaper than the HELOC.

I have never looked at the house as an investment. It was custom built for our needs and the long term, so I don't see us selling it even when the kids are gone. However, it is dead equity as the growth is less than inflation, yet the prices have been stable for years and likely to continue that way.

With anything else, I constantly try to look at things in different ways. I've come up with my best ideas that way. What got me thinking about investing in real estate is the need for housing for our kids in college...roughly $75k over the next 7 years. Many people I know in the same predicament have purchased condos for their kids to live in. I simply expanded that idea.

We do not need to leverage the house and in the end we may do nothing. At the very least, the process will educate us (as your posting has).

 

[Animorph]

There is asomething to be said for using the HELOC, with the right terms and low probability of cancellation, as your market buffer. Simply draw from it for living expenses (assuming your semi-retirement is cash-flow negative) during down markets and pay it back during new market highs. Still essentially investing the money, just timing it a bit differently and perhaps investing a bit less. The sleep at night factor should be pretty good though.

 

[LakeTravis]

Interesting that you are considering investing in RE - I'm pulling myself out of it as we speak. Even though I can still pick up HUD properties 15 minutes outside of Austin for $50K and rent them for $900 a month, after I factor in taxes/insurance/rehab after vacancies/renting costs/loss of sleep/hassles/etc....it's the fact that at some point somebody is going to realize they can BUY the same property for half the price of rent and then that bubble is burst and the pendulum swings the other way.

I'm out, and at this point I'll trade an annual average 7-8% return of a managed fund with none of the headaches.

 

[Nords]

What got me thinking about investing in real estate is the need for housing for our kids in college...roughly $75k over the next 7 years. Many people I know in the same predicament have purchased condos for their kids to live in. I simply expanded that idea.

There are lots of stories about college landlords. Seven years is probably about the shortest period of time you'd want to spend on that type of project to give the market time to go through a cycle. But some college towns might see constant growth in property values. For example my father-in-law had four rentals in Georgetown in the 1970s and was making money hand over fist.

Our daughter (a rising junior) just moved off-campus with three other girls into a 2BR/2BA "party pad". It's a great campus apartment, but you can tell that it's seen heavy heavy use. She's relatively smart about home maintenance, but she hasn't yet developed the early-warning antennae that will help her avoid a clogged disposal or a flooding toilet. She's working on it but she needs more experience.

Gotta know your kids, but I can hardly think of worse tenants than college students. It's their lack of experience and, frankly, time/interest. But if one of your kids turns out to be a budding property manager/handyman then you could do pretty good. Once your kids have left the properties, however, you'd end up as a landlord to a bunch of newbie tenants who can barely figure out how to pay the rent, let alone maintain the toilets and the flooring.

 

[e86s54]

The nice thing about were I'm looking to buy is that it also has a huge civil service population so I would not need or likely want to rent to college students. It would be more upscale, so professionals.

I do trust my kids...both are not the party type. They would see and use it like their own place (in a sense it would be). We would also not be far away to visit on a regular basis.

 

[kumquat]

As a fellow Canuck I'll make a few comments:

We are in our late 40s, semi retired with one kid in college and another in high school. Our home is paid off and we have a Line Of Credit on it of over $500,000 with zero borrowed. This house accounts for about 30% of our net worth. ......

With interest rates at historic lows (LOC is currently at 3.5%)

3.5% is fairly high, I think, you can crtainly get a mortgage for less..

and no projected rise for a couple of years,

Whose projections?

We are in Canada and not in the semi-bubble Toronto and Vancouver real estate markets.

For example, the area we were looking at for an investment condo is actually safer than the market my house is in.

And you know this how?

2012 in Canada is NOT the time/place I would be funneling even MORE of my money into real estate. You already have 30% of your net worth tied up in real estate. Diversify. Put the money into dividend-paying preferred shares in banks and solid blue-chip companies.

Free advice and therefore worth its cost, not that I disagree. Ours is worth a similar amount amount ( no LOC) and I wouldn't consider getting one. That's my(our) choice, not advice.

It is your money and your decision, but as others have suggested, your (paid for) house allows you to have X dollars per month that you don't spend on rent. That (at least to me) is worth something.

Have you looked a taxation models and the LOC, If you buy an investment property a mortgage on that property will always be deductable (and possibly cheaper) the LOC may vary.

I'm no RE expert, but there are some out there, and in your own province. I'd consult an accountant/lawyer/someone (other than an RE agent) before jumping in. As an aside, 14 years ago, when our first kid decided to go to school in Calgary, we ended up buying a condo there. The cash flow was less than rent. It did appreciate. The future may not resemble the past.

 

[e86s54]

As a fellow Canuck I'll make a few comments:


3.5% is fairly high, I think, you can crtainly get a mortgage for less..
Have you looked a taxation models and the LOC, If you buy an investment property a mortgage on that property will always be deductable (and possibly cheaper) the LOC may vary.

Yes but the HELOC gives us more flexibility.

Whose projections?

A couple of the major banks chief economists have mentioned this in the last few weeks citing low inflation and sluggish growth in the US/China and the Euro mess.

And you know this how?

Sixty year history from CMHC on both Markets

Free advice and therefore worth its cost, not that I disagree. Ours is worth a similar amount amount ( no LOC) and I wouldn't consider getting one. That's my(our) choice, not advice.

It is your money and your decision, but as others have suggested, your (paid for) house allows you to have X dollars per month that you don't spend on rent. That (at least to me) is worth something.

Have you looked a taxation models and the LOC, If you buy an investment property a mortgage on that property will always be deductable (and possibly cheaper) the LOC may vary.

I'm no RE expert, but there are some out there, and in your own province. I'd consult an accountant/lawyer/someone (other than an RE agent) before jumping in. As an aside, 14 years ago, when our first kid decided to go to school in Calgary, we ended up buying a condo there. The cash flow was less than rent. It did appreciate. The future may not resemble the past.

Actually I have had the condo discussion with my accountant as we are in the same boat and looking at the same areas for the same reasons. He did buy one.

We are looking at the pros and cons of our business buying it since we are already set up for that with a parent holding company. I guess we are still at the point of deciding what to do...if anything.