Why borrow money in RE but not Stocks?

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jackbauer_24
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Why borrow money in RE but not Stocks?

Post by jackbauer_24 » Sat Feb 09, 2019 12:35 pm

Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!

Therapist Investor
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Re: Why borrow money in RE but not Stocks?

Post by Therapist Investor » Sat Feb 09, 2019 12:43 pm

jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!
I'm no expert, but the type of debt has something to do with it. Mortgages tend to have lower interest rates than margin rates. When you've been investing while having a mortgage and the stock market goes down, you can take the paper loss and no one will come for your house. When you lose enough investing on margin and have to pay up at a margin call, you can lose everything including your house.
"Get what you can, and what you get hold, 'Tis the stone that will turn all your lead into gold." | -Benjamin Franklin

selters
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Re: Why borrow money in RE but not Stocks?

Post by selters » Sat Feb 09, 2019 12:50 pm

Callable vs non-callable debt.

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alpine_boglehead
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Re: Why borrow money in RE but not Stocks?

Post by alpine_boglehead » Sat Feb 09, 2019 12:58 pm

jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!
See this thread from last year Why is leveraging property good but leveraging stocks bad? which is 200+ posts long. Many good answers were given.

My key takeaway: the bank can't take away your house just because its value went down (as long as you're making your payments). The broker can take away your stocks just because their value went down.

In a quiet hour, read market timer's epic thread where now well-known forum member market timer documented his experience using margin to buy stocks in 2007. The rest is history. It's a very good read, scroll along the S&P 500 price chart while reading to get the best experience.

I'm always slightly astonished when questions like this (borrow to invest in stocks? should we be 100% stocks?) coincide with recent strong market performance. The expected future return just went down sharply (because part of it has just been realized) - thinking about loading up on stocks just then seems counter-intuitive to me.

adamthesmythe
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Re: Why borrow money in RE but not Stocks?

Post by adamthesmythe » Sat Feb 09, 2019 1:02 pm

(answer) Because stocks are an investment, and a house is both a place to live and an investment.

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Sandtrap
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Re: Why borrow money in RE but not Stocks?

Post by Sandtrap » Sat Feb 09, 2019 1:05 pm

jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!
[s]There's a number of things thrown into the soup pot here.
1. Water or Chicken Soup Base = Liquid investeble assets with varying degrees of liquidity. (IE: cash, credit, equity, etc)
. . . okay. . . not going to do that but it was fun to think about taking it to the veggies, etc.


Random thoughts and examples that might help.

1. Investment in R/E is a "business" that generates profits, income stream, investable funds.

2. It can be thought of that one's employment or other business is a "business" in the exchange of goods/services for cash.

3. Taking the proceeds from #1-2 and "investing" those proceeds into the "market" puts the money to work. Perhaps, in a sense, also a "business" but thought differently.

4. You mention "house" therefore home therefore mortgage. Unless a SFH bought specifically as an investment income property, not the same as one's residence.

5. Market investment gone sour, you will not lose more than your principal investment unless you borrowed to do so and also owe interest on that loan. However, on this forum, borrowing to invest does not sync with "Bogle Basics".

6. R/E investment gone sour and you will indeed potentially lose much more than the principal investment, through lawsuit, property value devaluation, lose of rental income, mortgage default, etc, etc, etc. Again, think of this as any other business. Restaurant failure. Retail store failure. Etc.

7. There are aspects of R/E investing for appreciative value and income stream that are often overlapped with "investing" in the market/funds/etc. But, the fact that there are overlaps does not make them the same thing nor make comparisons valid.

8. Simplistically, take the funds generated from any business (R/E include) and/or employment and "invest" them into the market as part of a broader comprehensive financial strategy.

CurlyDave
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Re: Why borrow money in RE but not Stocks?

Post by CurlyDave » Sat Feb 09, 2019 1:34 pm

selters wrote:
Sat Feb 09, 2019 12:50 pm
Callable vs non-callable debt.
+ 1

And, there are other very significant differences.

The mortgage is a declining balance loan with periodic payments. Keep up those payments and the loan can not be touched.

The margin is a loan with a fixed balance, where interest charged can automatically be added to the loan balance. If the asset securing the loan falls in value the loan will be called. If you can repay the loan, on a very stringent timeline, your shares will not be sold. This is unlikely and shares are frequently sold in this situation.

Judicious use of debt can be very beneficial to one's finances. We carry mortgages in retirement (although I sometimes think of it as FI instead of retirement). Both on rental properties and on our primary residence. Over the years we have benefitted greatly from this. The CAGR of stocks is far higher than the mortgage interest rates. Even though we have more than enough in our portfolio to pay off the mortgages, I would rather have the money growing at equity rates. The whole concept of "sleeping soundly" if one has a paid off house is nonsense to me. I sleep soundly knowing that I am benefitting from the arbitrage between mortgage rates and stock returns. Over any long enough period of time this works. We are so far ahead of this game now that there is no danger of losing any property through not being able to make a mortgage payment.

And, our gains are enough that even the worst historic bear market would still leave us with substantial gains.

Judicious use of margin is harder to pull off than judicious use of mortgage debt, but we have a small amount of margin on our taxable account. Maybe 20%, maybe less. There are times when I would like to not have this margin loan outstanding, but then I remind myself of the market gains I would have foregone if we did not have the margin and everything looks better.

* * * * * * * * * * * *

If you want to be 100% safe, being debt free is the way to go.

But, the rewards for taking risks are substantial, and a careful analysis of the risks can go a long way toward mitigating them.

Before we bought any rental property, or took out even $1 of margin I always went through a "bad case analysis". Not worst case, which would paralyze anyone, but a case where one of us suffered a years long job loss and a property stayed vacant for over a year, while there was a 50% market decline. If that was survivable then the risk was worth taking if the reward was substantial.

Beliavsky
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Re: Why borrow money in RE but not Stocks?

Post by Beliavsky » Sat Feb 09, 2019 8:03 pm

CurlyDave wrote:
Sat Feb 09, 2019 1:34 pm
The whole concept of "sleeping soundly" if one has a paid off house is nonsense to me. I sleep soundly knowing that I am benefitting from the arbitrage between mortgage rates and stock returns. Over any long enough period of time this works. We are so far ahead of this game now that there is no danger of losing any property through not being able to make a mortgage payment.
I'm glad it has worked for you, but the fact that expected stock returns are higher than the cost of carrying a mortgage balance does not make doing so an arbitrage. It is a reward for taking risk. Even over an extended period, it is possible that carrying a mortage and investing in equities will do worse than paying off the mortgage ASAP and investing only remaining funds in equities.

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Re: Why borrow money in RE but not Stocks?

Post by bluquark » Sat Feb 09, 2019 8:30 pm

Nobody mentioned yet that you can take a mortgage interest deduction against your income. For high-income taxpayers, this drives the effective rate so low that in some cases it can even be a winner to buy municipal bonds on the leverage, let alone stocks.

My summary would be that America as society has decided it wants everyone to buy a house, and therefore the government has piled up lots of goodies — Freddie/Fannie reinsurance, mortgage interest deductions, and so on — to sweeten the deal. On the other hand there are no particular subsidies for ordinary margin accounts, so it’s a mediocre deal.

MathWizard
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Re: Why borrow money in RE but not Stocks?

Post by MathWizard » Sat Feb 09, 2019 8:40 pm

Other than my home, I do not take a loan for real estate.

Using leverage on either can be problematic.

The biggest problem with leverage in stocks is that people get greedy. I believe Lehman was using 15x on mortgage backed securities, assuming they would never drop. They may have figured they had the downside covered, but you saw how well that went.

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Re: Why borrow money in RE but not Stocks?

Post by rnitz » Sat Feb 09, 2019 9:08 pm

I'm surprised no one has mentioned it, but having a mortgage while you also have stock/bond investments IS borrowing to own stocks (and/or bonds). Unless you're planning on defaulting (and live in a State/situation where they don't have claim on your other assets), debt is debt. Yes, a mortgage is a much better type of debt than margin loans, but it's a claim on all of your assets.

You could sell some of your stock/bond investments and pay down your mortgage, or refinance taking out money to increase your stock investments. How does this matter (other than the aforementioned important callable/non-callable issues and interest rates). Virtually everyone uses leverage in their stock investments (at least starting out) when they have a mortgage. It's a little like the bucket approach in that it's a mostly psychological issue, but be real: if you have debt and investable stocks/bonds you are using borrowed money to invest in stocks/bonds. And that's ok.

pdavi21
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Re: Why borrow money in RE but not Stocks?

Post by pdavi21 » Sat Feb 09, 2019 9:25 pm

1. Don't do either; buy a cheaper house
2. Stocks don't have the same returns as a home. If you do mortgage, you have an insured (except against depreciation) investment with a guaranteed maximum liability, with a near gauranteed annuity type return in reduced rent payments.
3. You need to live somewhere before you can invest somewhere...unless you mooch off parents, employer, etc.

andrew99999
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Re: Why borrow money in RE but not Stocks?

Post by andrew99999 » Sat Feb 09, 2019 9:41 pm

CurlyDave wrote:
Sat Feb 09, 2019 1:34 pm
selters wrote:
Sat Feb 09, 2019 12:50 pm
Callable vs non-callable debt.
+ 1
+2

aristotelian
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Re: Why borrow money in RE but not Stocks?

Post by aristotelian » Sat Feb 09, 2019 10:11 pm

Actually, anyone who has a mortgage while investing in stocks is, in effect, leveraging debt to invest more in the market. However, in that case, the investment in the market is backed by the house, so if the market goes to zero, the investor is not cleaned out.

CurlyDave
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Re: Why borrow money in RE but not Stocks?

Post by CurlyDave » Sat Feb 09, 2019 11:23 pm

Beliavsky wrote:
Sat Feb 09, 2019 8:03 pm
CurlyDave wrote:
Sat Feb 09, 2019 1:34 pm
The whole concept of "sleeping soundly" if one has a paid off house is nonsense to me. I sleep soundly knowing that I am benefitting from the arbitrage between mortgage rates and stock returns. Over any long enough period of time this works. We are so far ahead of this game now that there is no danger of losing any property through not being able to make a mortgage payment.
I'm glad it has worked for you, but the fact that expected stock returns are higher than the cost of carrying a mortgage balance does not make doing so an arbitrage. It is a reward for taking risk. Even over an extended period, it is possible that carrying a mortage and investing in equities will do worse than paying off the mortgage ASAP and investing only remaining funds in equities.
Well, you are right on it not being an arbitrage -- I learned something today.

But, I challenge you to find any 10-year period in the last 50 years when one did worse by investing in equities and holding a mortgage than by paying off the mortgage. Then compare it to the number of similar 10-year periods where one did better in stocks.

The probability of better performance in stocks overwhelms the probability of underperformance.

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Re: Why borrow money in RE but not Stocks?

Post by AlohaJoe » Sat Feb 09, 2019 11:52 pm

bluquark wrote:
Sat Feb 09, 2019 8:30 pm
Nobody mentioned yet that you can take a mortgage interest deduction against your income.
You can also deduct margin interest. There's no difference.

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willthrill81
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Re: Why borrow money in RE but not Stocks?

Post by willthrill81 » Sun Feb 10, 2019 12:02 am

Beliavsky wrote:
Sat Feb 09, 2019 8:03 pm
CurlyDave wrote:
Sat Feb 09, 2019 1:34 pm
The whole concept of "sleeping soundly" if one has a paid off house is nonsense to me. I sleep soundly knowing that I am benefitting from the arbitrage between mortgage rates and stock returns. Over any long enough period of time this works. We are so far ahead of this game now that there is no danger of losing any property through not being able to make a mortgage payment.
I'm glad it has worked for you, but the fact that expected stock returns are higher than the cost of carrying a mortgage balance does not make doing so an arbitrage. It is a reward for taking risk. Even over an extended period, it is possible that carrying a mortage and investing in equities will do worse than paying off the mortgage ASAP and investing only remaining funds in equities.
+1

And the statement that there is always arbitrage between mortgage rates and stock returns over a long enough period is, at best, misleading and, at worst, just plain wrong.

Back in the year 2000, 30 year mortgage rates averaged 8%*. U.S. stock market returns from 2000-2018 had a CAGR of 5.15%. Playing the 'arbitrage game' is far from a sure thing.

Yes, you could have refinanced down the road, but there are costs for doing that and 30 year mortgage rates didn't fall below 5% until 2009, so there wasn't much arbitrage opportunity even then.
Last edited by willthrill81 on Sun Feb 10, 2019 12:04 am, edited 1 time in total.
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sf_tech_saver
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Re: Why borrow money in RE but not Stocks?

Post by sf_tech_saver » Sun Feb 10, 2019 12:04 am

bluquark wrote:
Sat Feb 09, 2019 8:30 pm
Nobody mentioned yet that you can take a mortgage interest deduction against your income. For high-income taxpayers, this drives the effective rate so low that in some cases it can even be a winner to buy municipal bonds on the leverage, let alone stocks.
Yup. As much as I hate the idea of any debt or a payment an effective 1.8% interest loan for the tax deductible mortgage is just too easy to arbitrage against low risk CA Municipal Bonds.

Show me a margin trading investment account with a 1.8% interest rate and I might get interested in it as well!

Park
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Re: Why borrow money in RE but not Stocks?

Post by Park » Sun Feb 10, 2019 12:39 am

An obvious point, but one worth pointing out is that there is embedded leverage in stocks, but not in RE. And as stocks are corporations, a stockowner is not personally liable for the debts of those stocks. There's not many forms of debt where you can say that. Corporations often can get debt at lower rates than investors. Corporate debt is usually tax deductible. And if corporate debt is in the form of bonds, it's not usually callable. I'm not sure about corporate loans, as to their callability.

https://www.yardeni.com/pub/spxratios.pdf

In Nov 2018, the debt to equity ratio of the S&P500 was 0.86. Stockowners have effectively borrowed a lot of money. When a recession occurs, stocks usually go down as a % much more than the economy goes down. One reason that I've seen for the difference is that it's due to the embedded leverage in stocks.

With a debt to equity ratio of 0.86, there is diminishing return to increasing leverage beyond 100% stocks. Once you go past 100%, you are liable for your debt, your debt is usually callable and your interest rate is probably higher than what a corporation pays.

Margin loans are demand loans. At any time for any reason, the brokerage can ask for immediate partial or full repayment of the loan. And that's most likely going to happen when you least want it to. You have to trust your brokerage.

I have had the experience of coming home on a Thursday evening, and seeing an email from my brokerage (IB) stating that the loan value of some of the securities I was using for margin was going to zero as of Monday morning. It wasn't a good experience for me. I have heard of people whose home equity line of credit was cancelled back in 2008-2009.
Last edited by Park on Sun Feb 10, 2019 1:02 am, edited 1 time in total.

xzhou
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Re: Why borrow money in RE but not Stocks?

Post by xzhou » Sun Feb 10, 2019 1:02 am

selters wrote:
Sat Feb 09, 2019 12:50 pm
Callable vs non-callable debt.
+3

CurlyDave
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Re: Why borrow money in RE but not Stocks?

Post by CurlyDave » Sun Feb 10, 2019 1:21 am

willthrill81 wrote:
Sun Feb 10, 2019 12:02 am

...Back in the year 2000, 30 year mortgage rates averaged 8%*. U.S. stock market returns from 2000-2018 had a CAGR of 5.15%. Playing the 'arbitrage game' is far from a sure thing.

Yes, you could have refinanced down the road, but there are costs for doing that and 30 year mortgage rates didn't fall below 5% until 2009, so there wasn't much arbitrage opportunity even then.
My experience has been that refinancing was pretty easy as rates fell. Yes there were costs but they were never out-of-pocket costs. They were wrapped into the loan balance.

Data at this site https://www.milliondollarjourney.com/in ... t-data.htm only goes up to 2013, but 20-year nominal CAGRs are in the 8 to 17% range for any year after 1970. Be sure to compare nominal, not inflation adjusted returns. A mortgage is paid off in nominal future dollars.

YMMV, but my results have been that I have done well using other people's money.

CurlyDave
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Re: Why borrow money in RE but not Stocks?

Post by CurlyDave » Sun Feb 10, 2019 1:24 am

sf_tech_saver wrote:
Sun Feb 10, 2019 12:04 am

...Show me a margin trading investment account with a 1.8% interest rate and I might get interested in it as well!
Probably the best available is at Interactive Brokers. 2.7% on the part of the balance over $3M.

That is a little rich for me -- the $3M part, not the 2.7%

ohai
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Re: Why borrow money in RE but not Stocks?

Post by ohai » Sun Feb 10, 2019 2:45 am

rnitz wrote:
Sat Feb 09, 2019 9:08 pm
I'm surprised no one has mentioned it, but having a mortgage while you also have stock/bond investments IS borrowing to own stocks (and/or bonds). Unless you're planning on defaulting (and live in a State/situation where they don't have claim on your other assets), debt is debt. Yes, a mortgage is a much better type of debt than margin loans, but it's a claim on all of your assets.

You could sell some of your stock/bond investments and pay down your mortgage, or refinance taking out money to increase your stock investments. How does this matter (other than the aforementioned important callable/non-callable issues and interest rates). Virtually everyone uses leverage in their stock investments (at least starting out) when they have a mortgage. It's a little like the bucket approach in that it's a mostly psychological issue, but be real: if you have debt and investable stocks/bonds you are using borrowed money to invest in stocks/bonds. And that's ok.
The difference is that you have to own a lot of real estate to collateralize this loan. So, yes, I agree that the mortgage proceeds can be used for any purpose, including investing in stocks. However, you are forced to accept a house as a significant percentage of your asset allocation as a condition of this loan. So, it's more like you can borrow money for whatever you want, as long as a huge chunk of that is for a house.

To answer the original question - people are subsidized for owning real estate through mortgage interest tax deductions and cost basis transfers. In addition, houses are not marked to market. So, you won't be subject to margin calls and you have (the illusion of) price stability. Most people think stocks are scary, speculative investments, and do not feel comfortable managing stock investments, let alone leveraged ones.

On top of this, there is this ideology in the US that you must own houses or you are a loser. The whole "housing as an investment" thing really accelerated in the past 20-30 years. Nowadays, I really don't see how past decades returns can be attained in some of the more high priced real estate markets. People simply can't afford this rate of price returns.
Last edited by ohai on Sun Feb 10, 2019 2:53 am, edited 2 times in total.

Goal33
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Re: Why borrow money in RE but not Stocks?

Post by Goal33 » Sun Feb 10, 2019 2:51 am

Because the RE might be a primary residence and the cost of financing needs to be weighed against the cost of renting.
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Re: Why borrow money in RE but not Stocks?

Post by FoolMeOnce » Sun Feb 10, 2019 9:00 am

sf_tech_saver wrote:
Sun Feb 10, 2019 12:04 am
bluquark wrote:
Sat Feb 09, 2019 8:30 pm
Nobody mentioned yet that you can take a mortgage interest deduction against your income. For high-income taxpayers, this drives the effective rate so low that in some cases it can even be a winner to buy municipal bonds on the leverage, let alone stocks.
Yup. As much as I hate the idea of any debt or a payment an effective 1.8% interest loan for the tax deductible mortgage is just too easy to arbitrage against low risk CA Municipal Bonds.

Show me a margin trading investment account with a 1.8% interest rate and I might get interested in it as well!
In my previous investing life, my advisor was able to get very low margin rates for his clients. I borrowed for a while at 1.75% and 2%. I think it even dipped to 1.5% for a while.

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willthrill81
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Re: Why borrow money in RE but not Stocks?

Post by willthrill81 » Sun Feb 10, 2019 10:20 am

CurlyDave wrote:
Sun Feb 10, 2019 1:21 am
willthrill81 wrote:
Sun Feb 10, 2019 12:02 am

...Back in the year 2000, 30 year mortgage rates averaged 8%*. U.S. stock market returns from 2000-2018 had a CAGR of 5.15%. Playing the 'arbitrage game' is far from a sure thing.

Yes, you could have refinanced down the road, but there are costs for doing that and 30 year mortgage rates didn't fall below 5% until 2009, so there wasn't much arbitrage opportunity even then.
My experience has been that refinancing was pretty easy as rates fell. Yes there were costs but they were never out-of-pocket costs. They were wrapped into the loan balance.
You still have to pay for the costs of refinancing, even if you didn't have to pay them up front.
CurlyDave wrote:
Sun Feb 10, 2019 1:21 am
Data at this site https://www.milliondollarjourney.com/in ... t-data.htm only goes up to 2013, but 20-year nominal CAGRs are in the 8 to 17% range for any year after 1970. Be sure to compare nominal, not inflation adjusted returns. A mortgage is paid off in nominal future dollars.
False. In the most recent 20 year period, 1999-2018, the nominal annualized returns for U.S. stocks were 6.01%. From 2000-2018, it was 5.15% nominal. Over the totality of the period, there wasn't much arbitrage to be had between mortgage rates and stock returns. Yes, you would have done well since 2009, but you would have lost significantly from 1999-2008 (nominal annualized return of -.66%).

I'm not saying that it's a poor strategy, just that it's very far from guaranteed and entails risks of its own, as the millions who lost their homes after the financial crisis can attest to.

And this strategy makes less sense for those with significant fixed income holdings. IIRC, in most of the historic periods, mortgage rates were higher than fixed income yields (i.e. one could get a better return by paying down their mortgage than owning bonds). That has certainly been the case for most of the last decade. From 2009-2018, TBM had a nominal return of 3.31%.
Last edited by willthrill81 on Sun Feb 10, 2019 10:29 pm, edited 1 time in total.
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Ben Mathew
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Re: Why borrow money in RE but not Stocks?

Post by Ben Mathew » Sun Feb 10, 2019 11:02 am

As others have noted, people who are invested in stocks but also carry a mortgage, are indirectly borrowing money to invest in stocks. It's better to borrow money by way of a mortgage rather than margin loans because margin loans are callable.

From a lifetime AA perspective, you can minimize your lifetime portfolio risk by reducing risk around retirement years and increasing risk early on (and in the later on, but that's harder to do). Ayres and Nalebuff show that young people would ideally be leveraged quite heavily--well beyond 100% stocks. Doing so with margin loans and futures and so on are very hard to do in a disciplined way. But holding a mortgage in the early part of life is a good way to implement early leverage. The flip side of increasing risk early on is reducing risk in the middle years. The mortgage would get paid down and you are mortgage free (or close to it) by the time you hit retirement.

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Blueskies123
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Re: Why borrow money in RE but not Stocks?

Post by Blueskies123 » Sun Feb 10, 2019 11:09 am

alpine_boglehead wrote:
Sat Feb 09, 2019 12:58 pm
jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!
See this thread from last year Why is leveraging property good but leveraging stocks bad? which is 200+ posts long. Many good answers were given.

My key takeaway: the bank can't take away your house just because its value went down (as long as you're making your payments). The broker can take away your stocks just because their value went down.

In a quiet hour, read market timer's epic thread where now well-known forum member market timer documented his experience using margin to buy stocks in 2007. The rest is history. It's a very good read, scroll along the S&P 500 price chart while reading to get the best experience.

I'm always slightly astonished when questions like this (borrow to invest in stocks? should we be 100% stocks?) coincide with recent strong market performance. The expected future return just went down sharply (because part of it has just been realized) - thinking about loading up on stocks just then seems counter-intuitive to me.
EPIC is right, it has been running for 10 years. It would be cool to see a list of all the epic threads, maybe a book idea for someone.

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DanMahowny
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Re: Why borrow money in RE but not Stocks?

Post by DanMahowny » Sun Feb 10, 2019 11:34 am

selters wrote:
Sat Feb 09, 2019 12:50 pm
Callable vs non-callable debt.
nailed it
Funding secured

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Re: Why borrow money in RE but not Stocks?

Post by GT99 » Sun Feb 10, 2019 11:36 am

CurlyDave wrote:
Sat Feb 09, 2019 11:23 pm

But, I challenge you to find any 10-year period in the last 50 years when one did worse by investing in equities and holding a mortgage than by paying off the mortgage. Then compare it to the number of similar 10-year periods where one did better in stocks.

The probability of better performance in stocks overwhelms the probability of underperformance.
In general I agree with you, but you're on the edge in terms of timelines. Obviously, the shorter your investment horizon, the better it is to pay down the mortgage. If your investment horizon is 20+ years, and you have a 4.25% mortgage, odds are very high that you will do better to invest rather than pay down the mortgage. As you come down to a 10 year timeline, the odds come down (there are several 10 year periods with average returns below 4%, most recently 2007 through 2010). Right now, I'm probably ~15 years from retirement, and I'm definitely not paying down my mortgage. When I get within 10 years, I probably will, and will do so more aggressively the closer I get to retirement.

I don't understand the rationale that always seems to come up in these conversations that there is "a chance" that you will do worse in the stock market. Of course there is. No matter what your decision with your money, there is always a chance you could have made a better decision. It's a game of odds. If someone offered me an investment where there was a 1% chance I'd lose my money and 99% chance I'd double it...there's still "a chance" I'll lose my money...but of course I'm going to take that risk. On a 20+ year investment horizon, odds of doing better in the stock market are much greater than 90% (the worst 20 year average returns in the last 50 years are around 6%).

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Re: Why borrow money in RE but not Stocks?

Post by bluquark » Sun Feb 10, 2019 2:18 pm

That is mostly the same argument as for increasing your AA because higher stock AAs have had higher returns. With a mortgage you can get your effective AA to higher than 100% stock, and yes the historical returns would’ve been even higher.

The potential problem with high stock AA is sequence risk. Bernstein has argued that based on historical data, the timeframe where sequence risk doesn’t matter is 30 years or longer, not 10 years or longer. So if you were on your starter home at age 25, this would make sense. At 15 years from retirement like you, it starts to look sketchy to do this.

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Re: Why borrow money in RE but not Stocks?

Post by Admiral » Sun Feb 10, 2019 3:08 pm

One other thought:

The beauty of a mortgage is that the loan rate is fixed, generally for a very long time. Because it is not a callable loan, this has two important side effects:

1) When interest rates are higher than your loan rate, you can invest in fixed income or other "safe" instruments and make money (not to mention the stock market, which of course is always an option)
2) When interest rates are lower than your loan rate, you can refinance and save money (which can then be invested as you choose)

Many people on the board refinanced multiple times as rates fell. Now they are on the rise. Result: my interest rate is lower than bond and money market yields. Win, win.

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Re: Why borrow money in RE but not Stocks?

Post by carol-brennan » Sun Feb 10, 2019 3:18 pm

jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks.
Someone at work asked me that question in 2007. I gave him an answer similar to another person's on this thread: callable vs. non-callable debt. I also told him not to do it.

He did it. Last I heard, he lost everything in the crash of 2008, including his house and his marriage.

Don't do it.

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Re: Why borrow money in RE but not Stocks?

Post by rh00p » Sun Feb 10, 2019 3:43 pm

andrew99999 wrote:
Sat Feb 09, 2019 9:41 pm
CurlyDave wrote:
Sat Feb 09, 2019 1:34 pm
selters wrote:
Sat Feb 09, 2019 12:50 pm
Callable vs non-callable debt.
+ 1
+2
Not always. A home equity loan is callable anytime.
Preparing for the worst. Hoping for the best.

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Re: Why borrow money in RE but not Stocks?

Post by nisiprius » Sun Feb 10, 2019 4:05 pm

Because everybody needs shelter, but nobody needs stocks.

You can ring the changes on that, but, roughly speaking, for most of us, a house to live in is not an investment at all; its main function is shelter. Any "investment" characteristics are afterthoughts, or--frequently--part of misleading sales pitches, made to soften a prospect's resistance to a very costly purchase. A home mortgage, then, is in the nature of a necessary evil, to provide a basic need. (Yes, of course it's not truly a need, there are shades of grey and so forth.)

Stocks have no direct use except to provide a return on investment. (Sure, shades of grey again, who doesn't appreciate a good engraving of lightly clothed muscular young men and graceful young women clutching those lightning bolts and gears, against a background of dark Satanic mills with belching smokestacks?)

But why argue? If you want to buy stocks on borrowed money, and you actually can honestly sign the paper saying you understand all the risks and are cool with losing more money than you have, just do it. If you want to take risk, don't try to kid yourself that it is not risky, just accept the risk and take it. And don't look to strangers on the Internet for validation.

I gotta say, though, that after Market Timer's margin call came in, and things went sour, and he changed his avatar from Don Quixote to Raskolnikov, I got the impression that he was not cool with losing more money than he had, after all.
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Re: Why borrow money in RE but not Stocks?

Post by CurlyDave » Sun Feb 10, 2019 7:38 pm

bluquark wrote:
Sun Feb 10, 2019 2:18 pm
...The potential problem with high stock AA is sequence risk. Bernstein has argued that based on historical data, the timeframe where sequence risk doesn’t matter is 30 years or longer, not 10 years or longer. So if you were on your starter home at age 25, this would make sense. At 15 years from retirement like you, it starts to look sketchy to do this.
Take that 15 years and add in a 30-year retirement. Your time horizon is really 45 years.

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Re: Why borrow money in RE but not Stocks?

Post by GT99 » Sun Feb 10, 2019 9:07 pm

bluquark wrote:
Sun Feb 10, 2019 2:18 pm
That is mostly the same argument as for increasing your AA because higher stock AAs have had higher returns. With a mortgage you can get your effective AA to higher than 100% stock, and yes the historical returns would’ve been even higher.

The potential problem with high stock AA is sequence risk. Bernstein has argued that based on historical data, the timeframe where sequence risk doesn’t matter is 30 years or longer, not 10 years or longer. So if you were on your starter home at age 25, this would make sense. At 15 years from retirement like you, it starts to look sketchy to do this.
Can't say I'm familiar with Bernstein's argument, but simply put, someone 15-20 years from retirement that is 100% in stocks is going to end up with more money at retirement than someone who is 60% in stocks the large majority of the time (obviously not saying they should stay 100% in stocks all the way through retirement). I'm over 90% right now. I'll start reducing that as I get closer to 10 years. My 15 year timeline assumes a below average market already, and that's still an early retirement. If it's a great market, it might be more like 12-13 years. If it's a terrible market, 17-20 years.

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Re: Why borrow money in RE but not Stocks?

Post by TheOscarGuy » Mon Feb 11, 2019 9:14 am

jackbauer_24 wrote:
Sat Feb 09, 2019 12:35 pm
Why is it that people are generally okay to invest in real estate with borrowed money but always advise against borrow money to buy stocks. If either investment go sour, won't there always be someone that forces you to sell the asset. For example with borrowed money from bank or investors for real estate, the bank or investors can take the house away. With margin, the broker will force a sale. So why is one okay and not the other? Please help me understand this. Thank you!
If you pay mortgage, the mortgage company does not call in the debt. As you said, at margin the broker will force a sale.

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Re: Why borrow money in RE but not Stocks?

Post by Yohanson » Tue Feb 12, 2019 2:07 am

You could say that I borrowed money to invest in stocks. In 2015, I replaced all the windows in my house at a cost of about $14,500. I put it all on my main credit card and the following month, I transferred it all to a Chase card that had a rate of 0% for 12 months with no fee for the transfer. I also maxed out my Roth. The next year I transferred the remaining balance to an Alliant card with the same rate and fee. I also maxed out my Roth. In 2017 I spent $4500 to replace my front door. I used my main card for that and the following month, I transferred the remaining balance from the Alliant card as well as the balance from my main card to a BoA Card that had a zero fee transfer and 0% interest for 15 months. I didn't max out my Roth but I did put $2800 in it that year.

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