2

I'm wondering as to whether or not the following investing strategy is viable:

Invest in real estate when the stock market is high (i.e. it's been going up for numerous years, no recent large drops)

and when the stock market drops significantly (yes, 'significantly' is hard to define), invest in stocks (likely by increasing the mortgage on the real estate)...

I believe this can be a good, potentially very profitable and not too risky investing strategy...

However, we have to consider the following questions:

How does the price of real estate correlate with the level of the stock market? How do mortgage interest rates correlate with the level of the stock market? How easy is it to profit from recent stock market drops and at what frequency?

Thank you

  • Keep in mind that the success of significant portions of many major industries is tightly tied to real estate. So, a general "stock" strategy should not be blind (or opposite) to the real estate market. – Nicole Aug 18 '11 at 20:24
2

The price of real estate reacts to both demand for property and the rate of inflation and rate of income growth. Mortgage rates generally move as treasury rates move. See this paragraph:

As we mentioned, intermediate term bonds and long-term mortgages (more properly, Mortgage-Backed Securities, or MBS) compete for the same fixed-income investor dollar. Treasury issues are 100% guaranteed to be repaid, but mortgages are not; therefore mortgages carry more risk of default or early repayment, which could potentially disturb the return on the investment. Therefore, mortgage rates must be priced higher to compensate for that risk.

But how much higher are mortgages priced? In a normal market, the average "spread" or markup above the 100% secured Treasury is about 170 basis points, or 1.7%. That markup -- the spread relationship -- widens and contracts with a range of market conditions, investor appetites and supply of available product -- as well as the presence of competing investment opportunities, like corporate bonds or domestic (or foreign) equity markets

Source: What Moves Mortgage Rates?

And when the stock market crashes, investors tend to run to bonds and treasuries, which causes prices to go up and treasury yields to drop. Theoretically, this would also cause mortgage rates to drop, although most mortgage rates have a base price below which they cannot fall.

How easy is it to profit from recent stock market drops and at what frequency?

Incredibly difficult. The issue with your strategy is that you cannot predict the bottom of the market (at least us mortals can't). Just take the month of August for example. Stocks fell something like 15%? After the first 5-10% drop, people felt that the bottom was there, so they rushed in, only to have the market fall even more.

How will you know when to invest? Even if the market falls by 50%, and there's a huge buying opportunity, and you increase the mortgage on your house, odds are your rates will increase because of the equity you take out. What if the market stays low for a very long time? Will you be able to maintain mortgage payments? Japan's stock bubble popped in the early 90's, and they've had two lost decade's now.

Furthermore, there are issues of liquidity. What if you need more capital? Can you just sell a property or can you buy now property to draw equity against? What if the market is moving too fast for you to take advantage of. Don't ignore transaction costs and taxes either.

Overall, there are a lot of ways that your idea can go wrong, and not many ways it can go right.

0

You're "onto" something. Investing in real estate was not a bad idea about 10-15 years ago, when stocks were high, and real estate was not.

On the other hand, by about 2006, BOTH stocks and real estate were high, and should have been avoided. And around 1980, both were LOW, and should have been bought.

I expand this construct to include gold and oil. Around 2005, these were relatively low, and should have been bought over stocks and real estate.

On the other hand, ALL FOUR are high right now, and offer comparable dangers.

0

The right time to buy real estate is easy to spot. It's when it is difficult to get loans or when real estate agents selling homes are tripping over each other. It's the wrong time to buy when houses are sold within hours of the sign going up.

The way to profit from equities over time is to dollar-cost average a diversified portfolio over time, while keeping cash reserves of 5-15% around. When major corrections strike, buy a little extra.

You can make money at trading. But it requires that you exert a consistent effort and stay up to date on your investments and future prospects.

0

If you are thinking about opting out of stocks and then investing in real estate, it is possible. You can sell your stocks at once. You can't do the same if you've invested in real estate and you want to sell and invest in the stocks. As your rental property will take a little while to list, sell and close, at least a few months.

If you have enough resources to invest in both, you can have a diversified investment portfolio. That's the best option.

You must log in to answer this question.

Not the answer you're looking for? Browse other questions tagged .