This is the latest in a series of video interviews in which Pat McKeough will give his advice on a variety of topics. Some will deal with his overall investment philosophy, others on specific investment strategies, and still others will be comments on events that are affecting the markets and the economy. This time, the subject is real estate investing, as Pat replies to questions that followed his earlier video on the home as an investment. (View the post here: Do You Think of Your House as an Investment?) Several readers insisted that they saw their houses as a good source of building net worth, whether through its intrinsic value or as a source of collateral for buying stocks. Pat has a few words of caution on both of those points.
Real Estate Investing: Your House as a Source of Building Wealth
Q: Pat, several people who saw your video suggesting that a house is not necessarily a great investment said to us that they see house ownership as a source of credit that can really build your net worth. What do you think of that idea?
Pat McKeough: I’d say that anything can be a source of growing net worth if you buy it when the price is going up, and house prices have been going way up for the past 20 to 30 years. And people were able to buy houses—especially in Canada—on very advantageous terms. So of course anybody who did buy 20 years ago is way ahead today.
The thing is, there will come a time when houses get so expensive in relation to income that it won’t be a good idea to buy until you really need the house. I think you need to be aware that what worked in the 1990s won’t necessarily work in the 2010s.
It’s very true that as some people said in the comments, they were able to borrow early on and buy stocks with borrowed money because they had the house as collateral. But that introduces leverage, and leverage is not always a good thing.
So I would have to say that these are two separate things: you can borrow money to invest without owning a house, or you can borrow money to invest using the house as collateral. Either way, the interest you pay is tax deductible. And the bank will be more inclined to lend you money if you have the house as collateral and if the house is worth a lot more than what you currently owe on it.
But it may be better for you to go directly to your need for financing to buy a portfolio. You don’t need to buy a house to do that. Instead of thinking of buying a house as a way to borrow money more easily, think of it as a major consumer item. Decide whether you want to spend the money as a consumer.
Buying a house will probably make money for you over a period of years or decades. But it will also tie you down to living in a particular area, even if schools or career prospects are better elsewhere. It probably will gain value for you. But it may not be a good choice for you if you’re only interested in borrowing more money. You may be better off just starting out buying stocks and borrowing money on a line of credit or a margin loan.
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COMMENTS PLEASE—Share your investment knowledge and opinions with fellow TSINetwork.ca members
Do you agree with the idea that a house can be a sort of ‘bank account’ from which you can draw equity as you might need it? Have you ever borrowed on your home equity to make investments? Or do you prefer the more conservative approach of paying off your home as quickly as possible? Let us know what you think in the comments section below. Click here.
Comments
Sean
I posted earlier about borrowing against the equity in your home to invest. I did purchase my home at the bottom of the 08,09 drop and in doing so gained alot of equity in a few short years. I also have the advantage of living in Fort McMurray where our housing market favors a seller over a buyer. While I agree that borrowing to invest may not be for everybody, I disagree with paying your mortgage off as quickly as you can given today’s intrest rates. Let’s say you have a 3.5% mortgage rate as many of the people I know do. If you turned around a purchased a dividend paying company such as Telus (I love Telus) you are already 1% ahead on dividend alone not factoring in any capital gains you may make. As intrest rates rise I would then turn to a pay your mortgage down approach.
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I posted earlier about borrowing against the equity in your home to invest. I did purchase my home at the bottom of the 08,09 drop and in doing so gained alot of equity in a few short years. I also have the advantage of living in Fort McMurray where our housing market favors a seller over a buyer. While I agree that borrowing to invest may not be for everybody, I disagree with paying your mortgage off as quickly as you can given today’s intrest rates. Let’s say you have a 3.5% mortgage rate as many of the people I know do. If you turned around a purchased a dividend paying company such as Telus (I love Telus) you are already 1% ahead on dividend alone not factoring in any capital gains you may make. As intrest rates rise I would then turn to a pay your mortgage down approach.