Take out a Mortgage to invest?

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roguewarrior0
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Take out a Mortgage to invest?

Post by roguewarrior0 »

I am in a strong position financially and preparing to retire in the next 6 months.
  • I own 3 homes fully paid for (Primary-340k, rental-335k, rental-256k
)
  • Portfolio is ~$8m
  • Retirement Withdrawal Rate will be 3% (240k/yr)
  • I am 48, wife is 46, 2 sons (18/16)
  • all expenses including college are coming from my 3% Retirement Withdrawal
With 30 year interest rates @ ~2.3%, is worthwhile to take out mortgages to reinvest in 3 fund portfolio. I could basically get another $700k via mortgage @ ~2.3%; and invest conservatively in 3 Fund portfolio and likely do much better with historical @ 7% over the 30 year period.

I originally paid off my mortgages to simplify and take the guaranteed return, but with interest rates so low and inflation rising. It seems like a market inefficiency to take advantage of. In 30 years, that 700k would grow to $5.3m


thoughts?
Last edited by roguewarrior0 on Mon Jul 26, 2021 12:59 pm, edited 1 time in total.
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retired@50
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Re: Mortgage or no Mortgage

Post by retired@50 »

roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm thoughts?
The questions that come to my mind are as follows:

What's your asset allocation mix?

Do you hold any bonds?

If you do hold bonds, do they pay more or less than 2.3%?

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
roguewarrior0
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Re: Mortgage or no Mortgage

Post by roguewarrior0 »

Good point. I would do 60/15/25 (Total Stock/ Total Int'l/ Total Bond). Heck the dividend yield on that alone is 2.02% at that AA.
02nz
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Re: Take out a Mortgage to invest?

Post by 02nz »

I see a fair number of threads like this these days. Can't seem to find similar ones from around March 2020. Wonder why that is?

To answer OP's question: 1) it's not a good idea, but 2) it doesn't really matter as it would be 10% of your portfolio, I wouldn't even bother (actually I wouldn't even bother asking or thinking about it). The man for whom this forum is named wrote a book titled Enough. I would recommend reading it.
delamer
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Re: Take out a Mortgage to invest?

Post by delamer »

Given that you are talking about less than 10% of your liquid assets and you are planning on investing in the 3-fund portfolio, it seems like very low-risk for fairly high reward.
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anon_investor
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Re: Mortgage or no Mortgage

Post by anon_investor »

roguewarrior0 wrote: Mon Jul 26, 2021 12:58 pm Good point. I would do 60/15/25 (Total Stock/ Total Int'l/ Total Bond). Heck the dividend yield on that alone is 2.02% at that AA.
One can argue that you have already won the game and do not need to take additional risk.
Shorty
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Re: Take out a Mortgage to invest?

Post by Shorty »

Makes no sense to me. Plan uses post-tax money to pay interest to be used on pre-tax investments. Also, I'd think you could achieve a similar effect with a more aggressive AA or a little bit of leverage (can get margin at a better rate - not to mention transaction costs associated with new mortgages). More importantly, why add complexity and risk when your portfolio already supports your needs/wants?
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JoeRetire
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Re: Take out a Mortgage to invest?

Post by JoeRetire »

roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm Portfolio is ~$8m
Retirement Withdrawal Rate will be 3% (240k/yr)

With 30 year interest rates @ ~2.3%, is worthwhile to take out mortgages to reinvest in 3 fund portfolio. I could basically get another $700k via mortgage @ ~2.3%; and invest conservatively in 3 Fund portfolio and likely do much better with historical @ 7% over the 30 year period.

I originally paid off my mortgages to simplify and take the guaranteed return, but with interest rates so low and inflation rising. It seems like a market inefficiency to take advantage of. In 30 years, that 700k would grow to $5.3m
I agree with your approach concerning the low mortgage rates available.

Since $700k is unlikely to make a material difference in your portfolio/plans, you can choose to leverage a mortgage or not - whichever makes you happier.
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manuvns
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Re: Take out a Mortgage to invest?

Post by manuvns »

you can invest but better to invest on 10-15% drops .
Thanks!
LongRoad
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Re: Take out a Mortgage to invest?

Post by LongRoad »

roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm In 30 years, that 700k would grow to $5.3m
Just be aware this isn't really the full story if you account for the monthly loan repayments against the add'l $700k investment account. There's a good chance you'll still come out ahead, but you're introducing sequence of returns risk.

What is your current AA on the $8m?

If you're currently 90/10 or 100/0 then I suppose your risk tolerance might justify the plan. But if you're, say, 60/40 or 70/30 then simply moving toward a higher stock % will be a more efficient way to increase your risk. In your position, I don't think I'd borrow a single dollar, even at 2.3%, just to turn around and invest it in Total Bond.

Best to you whatever you decide. :sharebeer
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OldTimer
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Re: Take out a Mortgage to invest?

Post by OldTimer »

My DW and I were is a similar situation to you scenario 20 years ago. We decided to sell the rentals, upgrade our home for all cash and live life. No mortgage or loans, never looked back. Travel the world. In our case it was the right decision.
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Re: Take out a Mortgage to invest?

Post by Rob Bertram »

I am a huge proponent of increasing your market investment position by assuming debt strategically. Home mortgages work for that purpose, but margin loans are much more cost-effective and have better tax advantages. If you have a sizeable taxable portfolio, margin interest rates can be below 1% at Interactive Brokers. That is way better than you could get with a home mortgage.
Topic Author
roguewarrior0
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Re: Take out a Mortgage to invest?

Post by roguewarrior0 »

Interesting. I hadn't considered a margin loan, historically margin interest was so exceedingly high but a margin loan would solve several problems including having to sell investments to cover my 3% withdrawal rate.

Does Vanguard do margin loans?
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Re: Take out a Mortgage to invest?

Post by 59Gibson »

JoeRetire wrote: Mon Jul 26, 2021 2:26 pm
roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm Portfolio is ~$8m
Retirement Withdrawal Rate will be 3% (240k/yr)

With 30 year interest rates @ ~2.3%, is worthwhile to take out mortgages to reinvest in 3 fund portfolio. I could basically get another $700k via mortgage @ ~2.3%; and invest conservatively in 3 Fund portfolio and likely do much better with historical @ 7% over the 30 year period.

I originally paid off my mortgages to simplify and take the guaranteed return, but with interest rates so low and inflation rising. It seems like a market inefficiency to take advantage of. In 30 years, that 700k would grow to $5.3m
I agree with your approach concerning the low mortgage rates available.

Since $700k is unlikely to make a material difference in your portfolio/plans, you can choose to leverage a mortgage or not - whichever makes you happier.
I agree with JoeRetire, less than 10% of your NW would make little difference. Why bother w/ it?
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roguewarrior0
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Re: Take out a Mortgage to invest?

Post by roguewarrior0 »

You guys are right, that 700k mortgage wouldn't make a huge dent.

However, this thread has taken me in a new direction. I plan on living off of 240k a year by selling 3%/yr from portfolio during January rebalancing. If instead I never sold and just perpetually took out a loan. The 5% additional growth off of that is pretty astonishing.
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RickBoglehead
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Re: Take out a Mortgage to invest?

Post by RickBoglehead »

roguewarrior0 wrote: Mon Jul 26, 2021 4:21 pm
Does Vanguard do margin loans?
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Re: Take out a Mortgage to invest?

Post by Aged Maduro »

You've won the game. Don't overthink it. There is no need to go and complicate your life at this point. Enjoy the wonderful life that you have already created for yourself.
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Re: Take out a Mortgage to invest?

Post by JoeRetire »

roguewarrior0 wrote: Mon Jul 26, 2021 6:40 pm You guys are right, that 700k mortgage wouldn't make a huge dent.

However, this thread has taken me in a new direction. I plan on living off of 240k a year by selling 3%/yr from portfolio during January rebalancing. If instead I never sold and just perpetually took out a loan. The 5% additional growth off of that is pretty astonishing.
Expecting 5% additional growth is probably a mistake. But it's your mistake to make, should you choose to do so.
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Re: Take out a Mortgage to invest?

Post by steve r »

Shorty wrote: Mon Jul 26, 2021 2:21 pm I'd think you could achieve a similar effect with a more aggressive AA ... More importantly, why add complexity and risk when your portfolio already supports your needs/wants?
+1 You have $2M in bonds which probably pay less than mortgage. You can get more in stocks by lowering bond holding if you want ... but why rock the boat as you have a good thing going.
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Re: Take out a Mortgage to invest?

Post by Wiggums »

Your idea makes sense as one way to take advantage of the low rates. Especially if your goal is to build a bigger nest egg.

Our portfolio is about the same size and we are completely happy without rentals and mortgages. In fact, we purposely keep our finances simple for my DW. We accept the market returns using the three fund portfolio. When we do well, we send extra to our charities.
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Re: Take out a Mortgage to invest?

Post by cchrissyy »

if your plan works out the way you think it should, would it have any noticeable impact on your life?
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grabiner
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Re: Take out a Mortgage to invest?

Post by grabiner »

roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm With 30 year interest rates @ ~2.3%, is worthwhile to take out mortgages to reinvest in 3 fund portfolio.
No, because your intended portfolio includes bonds. If you take out a loan and hold a bond, and the loan interest rate is higher than the bond yield to maturity, you are guaranteed to have less money than if you sell the bond to pay down the loan.

If you want to take more risk, it makes more sense to sell bonds and buy more stock, or to sell stock and buy riskier stock.

If your portfolio is 100% stock, and you want to take still more risk, then borrowing money to buy stock could make sense in theory.

Note that you need to consider after-tax yields. If you are in a high tax bracket and have a mortgage with tax-deductible interest, it might be worth keeping the mortgage and buying municipal bonds. But this won't work for taking out a new loan; you cannot deduct interest on a loan that is used to buy tax-exempt bonds. (And the IRS considers an investment loan to be against your entire portfolio; if you buy stock on margin and also hold tax-exempt bonds, you still lose a proportional share of the interest deduction.)
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Watty
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Re: Take out a Mortgage to invest?

Post by Watty »

roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm I could basically get another $700k via mortgage @ ~2.3%; and invest conservatively in 3 Fund portfolio and likely do much better with historical @ 7% over the 30 year period.
Even though interest rates are low investing and earning a higher rate of return(after taxes!) is harder than it sounds because you have a sequence of returns risk. Here is a very simplistic example of that which I have posted before.
If you do not pay it off then you will have more sequence of returns risk. For example in rough numbers if you just kept a $100K mortgage and also put $100K into a separate investing account which you also pay a $500 a month mortgage out of then;

a) If you get unlucky and get a modest 10% decline in the portfolio the first year then it would be down to $90K
b) You would also need to pay the $500 a month mortgage($6,000) so your portfolio would be down to $84K
c) To pay off the mortgage at the end of the second year you would need about $96.5K so you would need to gain back $12.5K and another $6,000 for the next years mortgage payments which combined is $18.5K. That would take a 22% return on the remaining $84K to get back to the point where you could pay off the mortgage.

In the past portfolios have declined in roughly one of four or five years depending on the asset allocation. (20 to 25 percent of the time)

https://personal.vanguard.com/us/insigh ... llocations

The sequence of returns risk can also go the other way and you could get lucky and have the first couple of years get good returns that would put you on the path for large gains over the years. There will sometimes be very optimistic projections on just how much better not paying off the mortgage could be but one limiting factor that needs to be considered is that few people actually keep a 30 year mortgage for the full 30 years. It is difficult to put a number on it but many people who own a home will sell it in less than 10 years.
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Re: Take out a Mortgage to invest?

Post by Andymoler58 »

I did that exact same thing last year. Had my primary paid off and took out a mortgage at 3.375 during covid so that 180k decision looks brilliant for where i invested it at. Then, I bought a rental late last year originally with cash and swapped it out for a mortgage at 2.75% this year.

As the mortgage guy told me, that money is just sitting there doing nothing for you. So take it out and use it

Margin rates are a good idea too but they are variable so they could increase over time. With a mortgage your locked in. I look at it as diversifying your interest rate with a combo of margin, and mortgage debt
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Re: Take out a Mortgage to invest?

Post by sf_tech_saver »

grabiner wrote: Mon Jul 26, 2021 9:51 pm
roguewarrior0 wrote: Mon Jul 26, 2021 12:23 pm With 30 year interest rates @ ~2.3%, is worthwhile to take out mortgages to reinvest in 3 fund portfolio.
No, because your intended portfolio includes bonds. If you take out a loan and hold a bond, and the loan interest rate is higher than the bond yield to maturity, you are guaranteed to have less money than if you sell the bond to pay down the loan.

If you want to take more risk, it makes more sense to sell bonds and buy more stock, or to sell stock and buy riskier stock.

If your portfolio is 100% stock, and you want to take still more risk, then borrowing money to buy stock could make sense in theory.

Note that you need to consider after-tax yields. If you are in a high tax bracket and have a mortgage with tax-deductible interest, it might be worth keeping the mortgage and buying municipal bonds. But this won't work for taking out a new loan; you cannot deduct interest on a loan that is used to buy tax-exempt bonds. (And the IRS considers an investment loan to be against your entire portfolio; if you buy stock on margin and also hold tax-exempt bonds, you still lose a proportional share of the interest deduction.)
This response is dead on.

Low-interest rate pledged asset line loans are a nice way of accessing cash without having to sell equities -- and perhaps that can allow some people with large enough portfolios to be more aggressive on their AA.

Here is the problem -- low-cost loans are already (and always proportionality) priced into the market.
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Re: Take out a Mortgage to invest?

Post by Rob Bertram »

roguewarrior0 wrote: Mon Jul 26, 2021 4:21 pm Interesting. I hadn't considered a margin loan, historically margin interest was so exceedingly high but a margin loan would solve several problems including having to sell investments to cover my 3% withdrawal rate.

Does Vanguard do margin loans?
Technically, yes. Their rates are very high and not good for long-term loans. Shop around for better margin rates. Interactive Brokers has generally had the best rates in the industry, and many of us use them: https://www.interactivebrokers.com/en/index.php?f=46376
roguewarrior0 wrote: Mon Jul 26, 2021 6:40 pm You guys are right, that 700k mortgage wouldn't make a huge dent.

However, this thread has taken me in a new direction. I plan on living off of 240k a year by selling 3%/yr from portfolio during January rebalancing. If instead I never sold and just perpetually took out a loan. The 5% additional growth off of that is pretty astonishing.
I added emphasis to an important concept. The main reason for keeping bonds is to prevent the "Sequence of Returns" risk. Essentially, we keep bonds as ballast so that we are not selling parts of our portfolio when the market is down. If you are only taking margin loan for your income instead of selling your assets, you no longer have sequence of returns risk. You can go 100% stock (or up to 140% if you want to assume additional risk).

With a meaningful portfolio, it will grow much faster than your margin debt. You should never need to sell assets in order to generate the money you need to live on. This is extremely tax efficient because a loan is not income. And margin interest offsets capital gains. This gives you more headroom for Roth conversions, etc.
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Re: Take out a Mortgage to invest?

Post by grabiner »

Rob Bertram wrote: Tue Jul 27, 2021 12:04 pm
roguewarrior0 wrote: Mon Jul 26, 2021 6:40 pm You guys are right, that 700k mortgage wouldn't make a huge dent.

However, this thread has taken me in a new direction. I plan on living off of 240k a year by selling 3%/yr from portfolio during January rebalancing. If instead I never sold and just perpetually took out a loan. The 5% additional growth off of that is pretty astonishing.
I added emphasis to an important concept. The main reason for keeping bonds is to prevent the "Sequence of Returns" risk. Essentially, we keep bonds as ballast so that we are not selling parts of our portfolio when the market is down. If you are only taking margin loan for your income instead of selling your assets, you no longer have sequence of returns risk. You can go 100% stock (or up to 140% if you want to assume additional risk).
If you go 100% stocks with debt, you have the same sequence-of-returns risk as if you do it without debt. If you have debt equal to your bond holding, and then the stock market drops, you still have 100% of your net worth in stock, and you have lost the same number of dollars as an investor who held only stock with no debt. If the market drops, you can sell bonds to increase your stock allocation to more than 100% of your net worth without selling stock, but an investor without debt could do the same by taking a loan at that time.

And either way, there is the risk of needing to sell stocks because you run into the margin limits (either through a margin call, or because you have run out of bonds and can't borrow any more under the margin rules).

This is why I don't recommend going 100% stock with both bonds and debt, unless the debt interest rate is close to the bond rate, or there is some other benefit such as liquidity. Conversely, it can make sense to go over 100% stock with debt and no bonds, if that is consistent with your risk tolerance.
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Re: Take out a Mortgage to invest?

Post by Freetime76 »

roguewarrior0 wrote: Mon Jul 26, 2021 6:40 pm You guys are right, that 700k mortgage wouldn't make a huge dent.

However, this thread has taken me in a new direction. I plan on living off of 240k a year by selling 3%/yr from portfolio during January rebalancing. If instead I never sold and just perpetually took out a loan. The 5% additional growth off of that is pretty astonishing.
Fair point: we don’t have $8M (yet).

However:
a) I am not dealing with banks that much to make my life more complicated. Simplicity rules in our world, unless something adds value,

b) why not take out margin loans on your investment accounts and invest that money?? The market is doing great, company stocks are selling for exactly what the company valuations are supposed to be, and the real estate market never wanes nor health and life scenarios shift where one desires change and flexibility, so why not leverage as much as they’ll give you?

c) most importantly...you used the word “just” :oops: . My humble experiences have repeatedly demonstrated to me that if I am using the word, “just”, I am oversimplifying and about to step in it. Why not sell the rentals and reinvest it all in the market, and have a nice, relaxing weekend (as with OldTimer’s example). Do not forget to add risk into your calculations (beta, Sharpe ratio...way beyond me).

Again, if you’re looking for these higher returns in the market, why not just do margin loans and invest that money?? A little less spread, but maybe you can get a better rate?

What does your wife think?
Please spell out new acronyms. Thank you.
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