Leverage low refi-rate?

[Uccmal]

Another option - put the money in something short term, lose a small amount, and if/when rates rise dramatically, buy long term.  Maybe you lose a small amount for five years and make money for twenty five.

 

That would be handy.  Mind you, it may take 20 years.

[shalab]

This is a personal comfort call. The variables at play are:

 

Interest rate

Inflation

Property value growth

Return on capital if you invested it yourself

 

The only certain thing when you do this is the interest rate you are paying at the moment.

 

 

[benchmark]

Another option - put the money in something short term, lose a small amount, and if/when rates rise dramatically, buy long term.  Maybe you lose a small amount for five years and make money for twenty five.

 

Can you elaborate?

[ERICOPOLY]

Another option - put the money in something short term, lose a small amount, and if/when rates rise dramatically, buy long term.  Maybe you lose a small amount for five years and make money for twenty five.

 

Can you elaborate?

 

I believe what he's saying is cash-at refinance at 30 year interest rate, invest the proceeds in short term bonds (losing money on the negative spread for a while) and then buy long term treasuries when the long term interest rate has moved significantly higher than your mortgage interest rate.

[Guest rimm_never_sleeps]

rent and take your house equity and invest it in the stock markets. Buffett never liked the idea of buying a house at a young age.

[Mephistopheles]

rent and take your house equity and invest it in the stock markets. Buffett never liked the idea of buying a house at a young age.

 

True. Conversely, he said in the last annual letter that it is the best investment he ever made.

[benchmark]

Another option - put the money in something short term, lose a small amount, and if/when rates rise dramatically, buy long term.  Maybe you lose a small amount for five years and make money for twenty five.

 

Can you elaborate?

 

I believe what he's saying is cash-at refinance at 30 year interest rate, invest the proceeds in short term bonds (losing money on the negative spread for a while) and then buy long term treasuries when the long term interest rate has moved significantly higher than your mortgage interest rate.

 

Ah, that makes sense. I would not invest in bonds -- I have never invested in bonds, and for this to even worth the risk, I'd like to get something higher return than bond rate.

[Hielko]

I'm a bit surprised that most here are advising against taking money out of the house equity.

 

Would you advice that a new home owner with a ~$250K portfolio should liquidate his whole portfolio and put his whole net worth in his house?

 

I think the right answer is: it depends. What's your net worth, how much equity do you have in the house? how much is already in other investments etc

[Aberhound]

Since we expect to have negative real interest rates for an extended period the idea is good. My goal would be to match the risk profile of the investment. Accordingly most equities are too risky. Many believe the market is overvalued so such an investment could result in a permanent loss of capital. Fairfax borrows at 6-7%. One day Prem might think it is too hard to find investments earning more than this hurdle and choose to repurchase the debt. Perhaps holding Fairfax bonds has a sufficiently low risk profile? You should also lower the risk further by diversifying to hold other bonds as well. You might also include a few dividend paying stocks which are effectively as safe as bonds because of a strong moat. The key is to earn income from the investment to ensure there will always be sufficient income to pay the mortgage. Excess income should be used to pay down the mortgage. While you hold this debt you should lower your risk profile by not holding any other debt until the mortgage is paid off.

[ERICOPOLY]

I just did a cash out deal.  I sold my house in Washington and now I'm renting in California.

[benchmark]

Since we expect to have negative real interest rates for an extended period the idea is good. My goal would be to match the risk profile of the investment. Accordingly most equities are too risky. Many believe the market is overvalued so such an investment could result in a permanent loss of capital. Fairfax borrows at 6-7%. One day Prem might think it is too hard to find investments earning more than this hurdle and choose to repurchase the debt. Perhaps holding Fairfax bonds has a sufficiently low risk profile? You should also lower the risk further by diversifying to hold other bonds as well. You might also include a few dividend paying stocks which are effectively as safe as bonds because of a strong moat. The key is to earn income from the investment to ensure there will always be sufficient income to pay the mortgage. Excess income should be used to pay down the mortgage. While you hold this debt you should lower your risk profile by not holding any other debt until the mortgage is paid off.

 

Thanks for the idea. How do you look for FFH bonds, and evaluate them?

 

The issue that I'm debating is that bonds' income are taxable, hence your total return are not as good as if you were to invest in blue-chip stock that pays a high dividend. But as you said, the risk is also very limited.

[benchmark]

I just did a cash out deal.  I sold my house in Washington and now I'm renting in California.

 

Are you renting because you think that RE is in bubble territory?

[Uccmal]

Since we expect to have negative real interest rates for an extended period the idea is good. My goal would be to match the risk profile of the investment. Accordingly most equities are too risky. Many believe the market is overvalued so such an investment could result in a permanent loss of capital. Fairfax borrows at 6-7%. One day Prem might think it is too hard to find investments earning more than this hurdle and choose to repurchase the debt. Perhaps holding Fairfax bonds has a sufficiently low risk profile? You should also lower the risk further by diversifying to hold other bonds as well. You might also include a few dividend paying stocks which are effectively as safe as bonds because of a strong moat. The key is to earn income from the investment to ensure there will always be sufficient income to pay the mortgage. Excess income should be used to pay down the mortgage. While you hold this debt you should lower your risk profile by not holding any other debt until the mortgage is paid off.

 

There is an excellent idea.  FFH bonds.  And what companies sustained their dividend through the financial crisis: JPM, WFC, KO.  I am sure there are many others not on my immediate radar.

[ERICOPOLY]

I just did a cash out deal.  I sold my house in Washington and now I'm renting in California.

 

Are you renting because you think that RE is in bubble territory?

 

My opinion is that homes in this neighborhood are still falling in price and that my investment portfolio has a lot of remaining upside.

 

I hope I can continue to rent this house for several more years before buying.

 

Look, if mortgage rates go materially higher it will be good news for BAC stock.  So I'm thinking that BAC would be benefitting at the very time that housing inventory would get tough to sell (interest rate shock).  So that's ideally the time for me to buy.