Is it a better investment to borrow home equity to invest in the market, or invest in a rental property?

My husband wants to borrow $50,000 through a home equity loan to invest in some stock that he hopes will earn a 4% return. We have a 15-year mortgage that we are 5 years away from paying off. I know that there are no guarantees with any investment, but the only investment that I'd be willing to borrow against our home for is real estate. We live in a suburb of Seattle where the real estate market is booming. I would like to buy a second home or a duplex to use as rental property. My husband feels like home ownership is a liability, and would prefer to sell our house and rent, rather than own. Is it a good idea to borrow against our home to invest in stock, or should we invest in real estate?

Debt, Estate Planning, Investing, Real Estate, Stocks
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May 2018

I would advise caution when using debt to purchase an investment.  Given your stated rate of 4% for the return it would most likely be severely impacted by the interest you would pay on a home equity loan.  It is extremely risky to take out debt to make a stock investment as it's always possible to lose your entire investment.  I do wonder why your husband feels home ownership is a liability though.  Renting versus buying is one of the ongoing financial questions.  You have tradeoffs for both it just depends on which side gives you more of what you want at the best cost both financial and otherwise.  Getting into the real estate market, especially a booming one, can also be a risky move.  Should the market stagnate or take an unexpected dip you could place yourself at a disadvantage.  Also, consider the time and financial investment of having to maintain a second property.  These are big decisions that you should consider very carefully before making a move.  Make sure that whatever choice you make that you both are on the same page and have the same set of expectations and level of risk you're willing to take on.  It might be useful to have a real estate professional get involved to select a property if you decide to invest in real estate and likewise have an investment professional evaluate the stock and weigh that against the cost of the home equity loan.  No matter what, keep talking about it with each other.  Keep the lines of communication open so that this decision doesn't do any damage to your financial life or otherwise.  I hope this helps.

Sincerely,

Antowoine Winters, CFP

Next Steps Financial Planning, LLC

May 2018
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