How to decide where to invest home equity?

Question

Let's say I bought my home several years ago and now have (for example) $100k equity available if I refinance.

Now I can take that $100k* and invest it in the stock market. Or I could take the 100k and use it as a deposit to buy a rental property.

(Let's assume I already own some stock and another rental property, so I know what I am getting into with each)

Investing everything in just stock or property is not a good idea. As you want diverse portfolio. I have an investment time frame of 5-10+ 20-30 years.

So how do I decide how much to invest into each sector?

*Yeah I probably wouldn't invest all of the 100k, perhaps keeping 20k in reserve.

Answer 1

Your home equity is already invested in..... your home. It's quite different from having $100K in currency in a briefcase and thinking about how to invest that. This isn't too different from saying that you have 100 shares of Apple and want 'invest that equity' in an additional stock. Easily done via a margin account, but not recommended.

This is probably an extended comment, because the question itself it probably too broad, as well as soliciting investment advice.

In effect, the true question is "For someone comfortable with risk, what can I invest in, using my X% equity line as the source of funds?" And keep in mind, those commenting are trying to understand all they can about the scenario you offer. I'd be very cautious about such observations as "property prices are going up X%/yr" as any X much above inflation literally cannot continue indefinitely.

Answer 2

Let's say I bought my home several years ago and now have (for example) $100k equity available if I refinance.

Keep in mind diversification

You have already invested into the housing market by choosing to own a home instead of renting. Now it's your time to invest into other sectors, for example stocks (although with your 5-10+ year time frame stocks might not be such a good idea).

If house value can go up, it can go down as well

Houses generally depreciate instead of appreciating. The reason why it appears to be otherwise are three-fold:

• The rate of depreciation is usually lower than inflation, and houses are real assets, so their value can go up in nominal terms while at the same time going down in real terms.
• People owning houses often maintain them, thus investing more money into them. This money causes a rise in the value of a house.
• There have been massive housing bubbles recently all around the world

Don't over-borrow

You should be comfortable for any number of these happening at the same time:

• You lose your job for a year
• However, a year later you find a new job with 30% lower salary than now
• Interest rates (if using a variable-rate loan) rise to 6% + whatever margin you have on the loan
• House prices start a gradual continuous decline that will end only after 20% of their value is left

The last point needs some explanation. See the Herengracht Index 1628-1973. The largest crash has been from 317.9 (in 1778/9) to 68.1 (in 1814/5), meaning the real price went 79% or approximately 80% down. This has happened, and can happen again.

If you are not comfortable with your loan if a combination of the listed events occurs at the same time, you have over-borrowed. Don't borrow more; instead, focus on paying back your current loans.

Before doing anything, I would divide the rise of the value of your house into normal and speculative parts:

Normal part is caused by you maintaining the house (thus investing money into it), and by inflation. Speculative part is caused by a rise of the housing market index exceeding inflation.

For example, if inflation between buying the house and the current time is 10%, and housing market index is up 50%, the speculative part is 40%. Don't take a loan on the speculative part!

Typically, the normal part is at most percent or two per year in low-inflation countries.

I have an investment time frame of 5-10+ years.

Then stocks are not for you. Stocks are for those wanting to build up their wealth with a time frame of 20+ years.

I would not recommend investing to bonds either. Bonds are fixed-income assets, and the opposite of a loan. If you borrow money with a loan, and invest into bonds, you have both positive and negative positions in the fixed-income market, canceling partially each other out.

I'm sorry to say that with your time frame of 5-10+ years, the best approach is simply to do nothing. Pay back your loan with the schedule you have. If your income allows it, pay it back quicker. Simply said, there are no other assets than bonds which are suitable for a time frame of 5-10+ years. Investing into bonds is equivalent to paying back a loan.