Investing in stocks and bonds to save for a home renovation

Question

We have a goal of one day doing a large home renovation. This work is not urgent, but it would definitely be nice to do someday. I would prefer to take on as little debt as possible to do this, so I'm happy to save for several years to be able to pay without debt (or with a very small amount of debt).

I've been investing some money in stocks and bonds to eventually pay for this project. The hope is that steady contributions combined with capital appreciation, dividends and interest payments will help me get there faster than a high-yield savings account. Again, the project isn't urgent, so I can afford to wait or endure some market turbulence.

Most of my experience in investing has been saving for retirement, where you have decades to grow your money and you simply continuously save - never withdrawing until you reach retirement age, and then withdrawing only a tiny percentage per year after that. This is a little different, because the money will be used in just a few years. I feel a bit weird just emptying the brokerage account once I reach my goal, and giving up all that future appreciation. It would be nice to let my investments continue to grow.

So one idea I have is this: once I've reached my investment goal, get a home equity loan or HELOC to fund the renovation project. Then, each month, withdraw the amount I need to make that month's payment from my brokerage account and apply it towards the HELOC. I would make both principal and interest payments, even during the interest-only period. I would set a target savings goal so that a 4% annual withdrawal would cover all the loan payments.

This way, my investments keep appreciating and earning money, and once the project is paid off, I'll still have a substantial brokerage account. (NOTE: The amount of money required to make the HELOC payment would not stretch my budget - I wouldn't be depending on the earnings. If I couldn't withdraw from my brokerage for some reason, I would be a little sad that my plan wasn't working but it would not be a budget crisis and I would be able to pay out of my normal income).

One obvious downside is that I'm still paying interest the whole time, even if it's paid out of investment earnings. I'm also exposed to the possibility of rising interest rates making my HELOC more expensive. In general, the historic growth rate from the stock market is going to exceed the interest rate I pay on a HELOC (it certainly has for all my adult life). If something goes drastically wrong and interest rates skyrocket, I could always re-evaluate - maybe I would have to give up on the plan and simply apply the entire brokerage balance as a lump sum to address this situation. I can also reduce my interest rate risk by getting a fixed-rate home equity loan; the downside is I'd have to be very precise about the project budget.

Is this a reasonable plan? Are there downsides I'm missing?

Answer 1

What are you going to do if the stock market takes a major dive after you've taken out the loan? Consider the market crashes in 2008 and 2020. The market eventually came back in both cases, but for the duration of the loan you are committing yourself to selling your investments even if the market is in a panic. If you simply sell your investment to pay for the renovation upfront, you can pick the timing so you aren't trying to sell during a crash.

Answer 2

Many people want to find a way to use the stock market to boost their savings for their emergency fund, house down payment, or other big purchase. Their planning always includes the hope that they won't hist a extended period time of less than average resultants, or a badly timed bear market just when they need the funds.

You take a slightly different approach, you invest with the plan of having enough in the brokerage account that you can use the 4% plan to pay off the HELOC from the ongoing growth, and still have a substantial brokerage account when the renovation is done, and the HELOC paid off.

To do that your brokerage account will have to be much larger than the amount you will borrow for the HELOC.

Back of the envelope calculation:

• Loan amount: 50K
• 10 years to pay it off
• 6% interest
• $555.10 per month

That translates to $6661.20 a year. With the plan being that represents 4% of the brokerage account balance. So the balance would have to be $166,000 or so.

A couple of comments point to the danger:

I feel a bit weird just emptying the brokerage account once I reach my goal, and giving up all that future appreciation. It would be nice to let my investments continue to grow...

...This way, my investments keep appreciating and earning money, and once the project is paid off, I'll still have a substantial brokerage account. (NOTE: The amount of money required to make the HELOC payment would not stretch my budget - I wouldn't be depending on the earnings. If I couldn't withdraw from my brokerage for some reason, I would be a little sad that my plan wasn't working but it would not be a budget crisis and I would be able to pay out of my normal income).

Under this plan you are trying to use the brokerage account to do two things. Pay for a major renovation of your house, serve as a investment platform for some other unspecified purpose. It also points to you already realizing that when the time comes you might not want to dip into those "savings"

I find this mixing of goals within one bucket of money problematic. The money for the renovation should be put into a less risky investment. The money with no defined purpose can be put into a more risky investment. I am assuming that you have other funds for retirement, college fund, emergency, and life happens.

Now it is true that you can within that one brokerage account invest in many different funds that cover the range of risks. You do mention stocks and bonds, capital appreciation, dividends and interest; which implies that you could be open to splitting the money within the brokerage account.

The risk is in your statement "In general, the historic growth rate from the stock market is going to exceed the interest rate I pay on a HELOC ". That sounds like you are counting on historic stock market returns, not lower returns from safer investments.