A pretty good article, except for this part (this guy is dangerously delusional if he thinks 8% after tax returns are gonna be the norm for the next 20 years):
Short of selling, can you put any of your home’s paper gain to good use? Some risk-takers say you should. "There’s no reason to have 50% equity in your house," says Scott Leonard, who is advising many of his clients to strip excess equity and invest it in stocks or more real estate. (He defines "excess" as more than 20% of the home’s value.) Those investing in real estate are "buying houses in areas they feel are going to be more stable, as a diversifier away from the Southern California market," where Leonard works. Those buying stocks or tax-efficient mutual funds are seeking at least an 8% return, most of it in appreciation that won’t be taxed until the investment is sold. With the after-tax cost of borrowing at about 3.25%, Leonard estimates, "8% tax-deferred for 20 years is phenomenal." He pursues this strategy only with clients in their 30s and 40s who have the time to weather any down markets and incomes high enough to easily afford the payments that come with a bigger mortgage.
"It’s unbelievable how cheap it is to borrow money on your home," Leonard says. "But people don’t take advantage of it as they should." A homeowner with $400,000 of equity in a $750,000 home, for instance, could borrow $250,000 and, invested over 20 years at 8%, turn it into about $1.2 million. The extra mortgage payment, at 5%, would be about $1,300 a month. If you were to simply invest that $1,300 every month, you’d end the 20 years with about $770,000, assuming the same 8% return. (In both cases, any income tax paid along the way is ignored.) |
