Home as an investment?

[THP]

I have a question regarding the current market correction in the housing industry.

Currently I have the majority of my networth in my house. I have about 70% equity in my house and some other savings. We put that much money in the house because I knew I wouldn't be working for 4 years as a med student and we wanted to keep the mortgage payment low for lifestyle and stress reasons. However, having that much money invested in the house and not getting any return (or maybe even losing money ), I wonder if it would be smart to refinance my house and take some of the money out and invest it in mutual funds or something. That way the money would be available in an emergency. What do you think?

Although I will be matching in March so maybe wait to decide then. But there is a good chance I will stay here and not move.

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[mshheaddoc]

1) Wait until match before you decide anything - you never know what will happen

2) There's no guarantee that your house will be worth $X when you sell.

3) If you choose to take money out and refinance remember there is a cost to that. So you'll have the cost of that refinance as well as the new interest rate to consider which most likely the interest rate will be higher than your current rate. Unless you have a guaranteed rate alot higher than your new interest rate it might not be worth it for you to use that money in another investment vehicle.

Just a few thoughts you have to consider. If it were me, long term, your house is a safer investment than taking out the money to a speculative stock market. In MOST areas housing is stable. The bubble has popping and will continue leaking in some areas that had HIGH inflation the past few years such as Cali, NYC and other high end markets. I'm assuming your house isn't in such markets.

Don't make things more complicated than they are. If you are serious about investing, find a financial planner to consult.

 

[The White Coat Investor]

If you choose to take money out and refinance remember there is a cost to that. So you'll have the cost of that refinance as well as the new interest rate to consider which most likely the interest rate will be higher than your current rate.

Keep this in mind, it is very important. Keeping costs low is very important in maximizing investment returns.

It appears to me that you are confusing a real estate investment and a mortgage. Real estate, such as buying a home, is an equity investment. A mortgage, or taking out a loan, is a negative bond investment. By putting a lot of money down, you minimize how much of a negative bond investment you picked up. Assuming your mortgage is say 6%, that 70% equity is earning precisely a guaranteed, after-tax, after-expense, 6%. That's pretty darn good.

So where does the house come into all this? Your house value may go up or down over the next few years, but the % of it which is mortgaged has nothing to do with your house as an investment. The bank does not own 30% of your house. You own the whole damned thing. If its value goes up $100,000, the bank doesn't get $30K does it? Likewise, if it goes down $100,000, the bank isn't out $30K. So in effect, how much equity you have in your house has nothing to do with its characteristics as an investment. Don't compare the return on your house to the return available to you in the more liquid financial markets. Compare your mortgage to what is available in the financial markets. If you think you can do better than 6% (or whatever yours is) after-tax, after-expense without taking any risk, OR, if you want to take on more risk in hopes of earning even more, then you might think about taking out that equity and investing it. But bear in mind this is the equivalent of investing on margin. I think your reasoning for putting 70% down was sound and I'd stick with it, knowing that money is paying a fair return, no matter what happens with real estate.

Regarding your emergency needs, I would definitely save an emergency fund of ~3 months expenses. If it doesn't look like you can do this, you can look into a home equity line of credit. Hopefully you'll never need it.

 

[THP]

Keep this in mind, it is very important. Keeping costs low is very important in maximizing investment returns.

It appears to me that you are confusing a real estate investment and a mortgage. Real estate, such as buying a home, is an equity investment. A mortgage, or taking out a loan, is a negative bond investment. By putting a lot of money down, you minimize how much of a negative bond investment you picked up. Assuming your mortgage is say 6%, that 70% equity is earning precisely a guaranteed, after-tax, after-expense, 6%. That's pretty darn good.

So where does the house come into all this? Your house value may go up or down over the next few years, but the % of it which is mortgaged has nothing to do with your house as an investment. The bank does not own 30% of your house. You own the whole damned thing. If its value goes up $100,000, the bank doesn't get $30K does it? Likewise, if it goes down $100,000, the bank isn't out $30K. So in effect, how much equity you have in your house has nothing to do with its characteristics as an investment. Don't compare the return on your house to the return available to you in the more liquid financial markets. Compare your mortgage to what is available in the financial markets. If you think you can do better than 6% (or whatever yours is) after-tax, after-expense without taking any risk, OR, if you want to take on more risk in hopes of earning even more, then you might think about taking out that equity and investing it. But bear in mind this is the equivalent of investing on margin. I think your reasoning for putting 70% down was sound and I'd stick with it, knowing that money is paying a fair return, no matter what happens with real estate.

Regarding your emergency needs, I would definitely save an emergency fund of ~3 months expenses. If it doesn't look like you can do this, you can look into a home equity line of credit. Hopefully you'll never need it.

This makes a lot of sense and no one has ever explained mortgages like this before. I never thought of the mortgage as a negative bond investment that I am trying to minimize, but it definitely makes me feel better. Seen in a different light I felt I might be losing money.

I definitely don't live in one of the "housing bubble" areas.

I could pretty easily live 6-10 months with what I have saved, I am probably overly conservative.


I have a second question which my wife and I have been throwing around. If we were able to stay in a low cost of living area, how often do people keep their home and rent it out? I would have to use some of the equity for a down payment on a new home, but with my monthy payment so low I think I could rent it for enough to pay expenses and help with the new loan. Who knows? Maybe too much to juggle as a resident.

 

[Sol Rosenberg]

I rent out single-family homes. There are people who will tell you flat-out that there is no money to be made renting out single-family homes, and they are either right or close to right IMHO, but in a good market, the appreciation of the home's value, coupled with the tax breaks you may be able to realize, has made it a good deal for me.

As far as spending the time: Consider hiring a property manager if you decide to rent out your home. It's usually more than worth the $$$. Also, one other owrd of advice: If you decide to rent, make sure you can afford NOT to have the steady rental income. You say that you have some sizeable savings, so that is good. Even the best-looking tenants on paper can (and some of mine have) turn out to be flaky and break their lease, or be late on rent, etc, etc.

 

[The White Coat Investor]

Stock market investing can be very simple and straightforward using a reasonable collection of index funds.

Real estate investing is almost always like a second job. Do you need a second job as a resident? Hiring someone else "to do the work" will lessen your workload, but also cost you a big chunk of your profit. The going rate is about 10% of the rent.

Sell your home and take your equity with you. If you decide to rent as a resident, put the money into a 3-4 year CD so you'll get a fair, safe return on it until the time comes to buy your next house.