The run-up in housing prices has slowed down, at least for now. However, many of us are still sitting on tons of home equity.
Is it a good idea to let your house value determine your net worth? What if the housing market drops again, like in 2008?
I don’t believe housing prices will drop any time soon, but it may be a good idea to diversify your home equity anyways.
Why Is Talking About Money Bad?
What is diversification? When you diversify, you take gains from one area or market and spread them into others markets.
Each market (housing, bonds, stocks, cryptocurrencies, business, commodities) has its own unique boom and bust cycles.
By diversifying, you can prevent getting caught “all in” when one goes bust. You can also have assets in place when another goes boom.
Why is home equity vital to diversification? Home equity is a gift to most homeowners. You basically get paid to wait while you cover your housing expenses.
Inflation vs. Crypto
I owned a home in 2008 and lost all of my equity. In fact, my home equity went negative for about five years. Those were not fun times.
However, we can use home equity lines of credit or cash-out refinance to help fund our adventures into other income streams.
Currently, interest rates are not in our favor, but it can still be an excellent time to draw from your home equity—it all comes down to math (yes, math).
The power of percentages. You have a winning strategy if you can borrow against your home equity at 7% and invest it at 12%.
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Beware that it is difficult to get a safe 12% return, but a lot of what we do is future-facing. Today’s tame (slow) investment can turn into FIRE (fast) later. You must have an eye for investing.
Robert Kiyosaki (“Rich Dad’s Guide to Investing”) is all about using leverage to juice your return. Dave Ramsey (“Baby Step Millionaires”) is the exact opposite. He believes in carrying no debt.
The answer lies in between, with a lean toward Robert Kiyosaki. For the few people who don’t mind doing the math, investing in a beautiful mechanism to get ahead.
My home equity story. My wife and I took a conventional home loan in 2008, putting down $60,000. When we finished the purchase, the home was worth $340,000, and our loan was $270,00.
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In 2009, our home was worth $240,000. We “lost” $60,000 in “real” cash, but we kept the house. We still own the home today.
In 2021, some 12 years later, the value increased enough to leverage our home equity. After building my confidence by reading Robert Kiyosaki’s books, I performed a cash-out refinance.
We took out $80,000, using $30,000 to become completely debt-free, and the rest we invested into the stock market. We bought a combination of index funds, dividend growth stocks, and income products.
The Passive Income Grind 2: Relax
Our house payments increased from $1,500 to $1,700, which was scary. However, we had to trust the system.
Today, we rent the home for $2,200, and our tenant is paying off our new mortgage. Plus, we earned $1,850 in dividends last month. We have two distinct income streams.
The different asset classes. There are many asset classes to diversify into, especially if you add collectibles into the mix. However, you will want to focus on income-producing assets.
What Type of Home Business Should You Start 2: Outside
Here are a few ways to use your home equity to create new cash flow streams.
- Follow a creative pursuit such as podcasting, YouTubing, and music.
- Start an automated business like vending machines or rental cars.
- Buy an Airbnb property in a smaller city.
- Invest in dividends and bonds
- Build an accessory dwelling unit or add a self-storage.
- Invest with a real estate syndicate.
- Buy royalties or a website for passive income
- Buy land to start a farm or a mobile home park.
The list goes on and on. There is no limit to what your imagination can develop. If you have trouble thinking of unique ways, you can always go with the tried-and-true (rents, dividends, royalties).
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What about the new loan or mortgage payment? You will need to create a plan to cover the increased mortgage payment or loan.
The fastest way is to add a roommate (either family or friends) to your household—easily covering your new expenses.
Hopefully, your new investment will take off in a couple of years, adding more cash flow to your bottom line. But you don’t want to follow the “hope strategy.”
You will need a solid plan to ensure you don’t jeopardize yourself or your family. This is where I begin to side with Dave Ramsey.
Fundrise vs. REIT Stocks
As much as I love leverage, you must use it with moderation. This means letting an entire investment cycle play out before trying it again.
The investment cycle. I own three homes; I only performed a cash-out refinance on one. I have two more ripe for the picking.
However, I am going to wait to leverage up. There is no rush to become a “leveraged millionaire.”
I can wait on interest rates, inflation, and housing prices to go in my favor. I can start a business and use leverage to expand if it is a successful idea.
How Would You Spend $5,000?
I love Robert Kiyosaki’s ideas with Dave Ramsey’s patience. I think using both mentors will serve the middle-class well.
Conclusion. Being an investor is not about trying to get rich. It is about protecting yourself moving into the future.
Looking backward or staying still does nothing for your future outlook. You have to remain one step ahead of the game.
You should continuously evaluate how you can use your home equity. You don’t have to spend every dime, but keep some ideas fresh.
Can You Achieve an Infinite Return?
For example, I always think about using some home equity to buy an electric vehicle to rent on Turo.
Don’t use home equity to buy liabilities such as boats and ATVs. This can prove costly in the long run because you have a higher mortgage plus something draining more resources—a true lose-lose scenario.
Focus on income-producing assets, and you can survive the middle class. Even better, you can thrive and work your way up into the elite. Good Luck!
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