Almost free cash

B

Bossman

Dryer sheet aficionado
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It is still possible to open an equity line of credit at 2.75% (eg. Citizen's Bank with .5% discount). I am thinking about opening a line of credit for anywhere between 100K and 250K and then investing that money in a basket of some fairly aggressive dividend ETFs (eg. PGX, SPYD, QYLD, et al) that pay monthly.

Assuming, I borrow 250K against my house, the monthly payout on this equity line would be $572.92. The monthly dividend would be approximately $1040. The monthly payments would be automated, so everything would require very little maintenance.

The equity line has a floating interest rate and a fairly high cap, but would plan to pay off the equity line if the interest rate hits 4.5%. Other than the obvious risks on investing the money in dividend ETFs, this seems like a win win situation. What am I missing ?

Thanks for your input.
 
They could call your HELOC at any time. How are you going to pay off say a 50% call ?

Of course they would call when things are really bad, like the market tanks 40% and they make the call the next day.

Other than those bad things, it's an aggressive play. I did it during one of the recessions to smaller amount, sold it all off a few years later for 50% net gain in my money.
 
I was not aware that a HELOC can be "called" as it has a 15 year payback period. But, I will pose the question as that would definitely increase the risk associated with this play.

Thanks!
 
I think it would be safer if you took your home's equity and "invest" in crypto currency...that is where the REAL returns are! :hide:
 
It is basically a common type of investing with leverage, generally with a variable interest rate, the interest rate can almost certainly be expected to go up based on current rates. It requires having an extremely high risk tolerance, and decent timing at least (such as right after a bear rather than a long bull market).

Not something I'd recommend for anyone right now, even with a very high risk tolerance. I most certainly wouldn't characterize it as free, it is just leveraged investing, you can end up like Buffett (uses his companies as leverage), or you can end up like Lehman (which funnily enough used the same type of leverage, just other's mortgages along with a mix of their own, all with bad timing). Of course, you won't go bankrupt due to the much stricter individual lending standards, unlike those on Wall Street, but you can certainly lose an arm and leg.
 
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Do you have somewhere to live if the day comes where you can't pay off the HELOC? Do you have enough liquid assets to pay off the likely deficiency judgment? Have you explained this idea of yours to your spouse, including the risks, and gotten approval to proceed?
 
I don't think I would ever take a HELOC to invest. But I did take the cash from the sale of our last home and invested it in our 60/40 portfolio instead of paying cash for the next house. Got a 30 year 2.75% fixed rate mortgage that I just refi'd to 2.25% 30 year fixed rate @ zero cost. Technically similar. Emotionally different. That move has netted me $102k in paper gains. Yeah me.
 
corn18 said:
I don't think I would ever take a HELOC to invest. But I did take the cash from the sale of our last home and invested it in our 60/40 portfolio instead of paying cash for the next house. Got a 30 year 2.75% fixed rate mortgage that I just refi'd to 2.25% 30 year fixed rate @ zero cost. Technically [-]similar[/-] Identical. Emotionally different. That move has netted me $102k in paper gains. Yeah me.
Click to expand...

FIFY.

There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.

Now, if it was a downsize, sure invest the left overs. If it is bigger house, sure, take a mortgage.

I am making no judgement on what you did, but there is no difference between taking a mortgage on the existing house to invest, and taking a mortgage on the new house so you can invest.
 
CardsFan said:
FIFY.

There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.

Now, if it was a downsize, sure invest the left overs. If it is bigger house, sure, take a mortgage.

I am making no judgement on what you did, but there is no difference between taking a mortgage on the existing house to invest, and taking a mortgage on the new house so you can invest.
Click to expand...

Agreed, except most HELOCs are variable rate. Inflation will kill ya. I'm betting inflation will be at or above 2.25% average over the next 30 years. In fact, the 10 year break even rate is 2.41%, so I am making money as we speak. Deflation is a risk, though. But I can refi again to mitigate that.
 
CardsFan said:
There is no difference what so ever in taking a mortgage on a new house, that could paid with proceeds from the last, and taking a second, or HELOC on the original house.
Click to expand...

Not entirely true. As mentioned, a HELOC can be closed/called at any time and that has happened in recent history. That doesn't really happen with a primary mortgage.
 
ExFlyBoy5 said:
Not entirely true. As mentioned, a HELOC can be closed/called at any time and that has happened in recent history. That doesn't really happen with a primary mortgage.
Click to expand...

Fair enough. I have never had a HELOC so know little about them. So, everything I said applies if I call it a re-mortgage to a new rate with a cash out, right? :D
 
Bossman said:
It is still possible to open an equity line of credit at 2.75% (eg. Citizen's Bank with .5% discount). I am thinking about opening a line of credit for anywhere between 100K and 250K and then investing that money in a basket of some fairly aggressive dividend ETFs (eg. PGX, SPYD, QYLD, et al) that pay monthly.

Assuming, I borrow 250K against my house, the monthly payout on this equity line would be $572.92. The monthly dividend would be approximately $1040. The monthly payments would be automated, so everything would require very little maintenance.

The equity line has a floating interest rate and a fairly high cap, but would plan to pay off the equity line if the interest rate hits 4.5%. Other than the obvious risks on investing the money in dividend ETFs, this seems like a win win situation. What am I missing ?

Thanks for your input.
Click to expand...

You're missing two things.

The first is risk, which others have mentioned.

The second is taxes, which I don't think have been mentioned yet. You'll have federal and possibly state income taxes on the dividends as you go along, and you'll also (hopefully) have capital gains taxes when you go to sell the investments.
 
I have considered doing this before, but did not feel you could invest to beat the cost by a large enough margin to justify the risk. If you invest very conservatively you can't lose much or make much. And rate rise kills you.

I would not find the risk/reward compelling.
 
You don't have any cash available to do this instead of paying interest on a HELOC?
 
William Bernstein on the subject of retirement saving: “Make no mistake about it: The object of this particular game is not to get rich – It’s to not get poor.”
 
Bossman said:
It is still possible to open an equity line of credit at 2.75% (eg. Citizen's Bank with .5% discount). I am thinking about opening a line of credit for anywhere between 100K and 250K and then investing that money in a basket of some fairly aggressive dividend ETFs (eg. PGX, SPYD, QYLD, et al) that pay monthly.



Assuming, I borrow 250K against my house, the monthly payout on this equity line would be $572.92. The monthly dividend would be approximately $1040. The monthly payments would be automated, so everything would require very little maintenance.



The equity line has a floating interest rate and a fairly high cap, but would plan to pay off the equity line if the interest rate hits 4.5%. Other than the obvious risks on investing the money in dividend ETFs, this seems like a win win situation. What am I missing ?



Thanks for your input.
Click to expand...



Trying to figure out what makes this “almost free cash”.
 
So, if HELOCs are callable: problem. If not, the market could go down concurrently with dividends being cut concurrently with the HELOC interest rate climbing: problem.


Otherwise, it's a great idea!
 
I don't see how the monthly payment could come close to $572.92 for $250k home equity line. An interest only HELOC for 10 years is closer to $750. So if you add principle in there you are going to be well over the $1040 you can generate in divvy's.

If it were that easy everyone would do it :)

You'd have in invest in some mreit that is paying double digit % monthly. Now that is risky....
 
tenor.gif
 
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