A Michigan reader named Pete asked me a question that I thought I had answered before, but clearly I need to go down this street again.
He asked: “What do you think of re-mortgaging my home in order to buy lake property as an investment? The property appears to be appreciating at about 6 percent to 8 percent a year. I also plan on renting the cottage year-round, which would generate enough income to pay about a third to half of the increased cost of my new mortgage. Any input would be most welcome.”
Well, Pete, can I be frank? Don’t do it.
When it comes to investing in anything – stocks, bonds or real estate – you should only put your money in what you can comfortably afford to lose.
But don’t just take my word for it. I put Pete’s question to a number of financial experts, and here’s what they had to say:
* Dee Lee, a Cambridge, Mass.-based certified financial planner and author of “Women &Money: Your Personal Finance Guide,” said: “I am not a big fan of using the equity in your home to invest in property. You put your asset at risk.”
* James Cotto, managing director of investments for Cotto &Padovani Financial Strategies Group in Mount Kisco, N.Y., warns his clients against making a long-term investment with a home equity line of credit. In general, Cotto advises people to put no more than 33 percent of their net worth in real estate. If you still want to pursue this investment strategy, Cotto said, you should ask these questions: Do I have enough income to service the new debt? How long do I want to hold the property? “Be prepared for unforeseen costs,” he said. “Realize that your plans can have glitches.”
* Sheryl Garrett, a certified financial planner and founder of the Garrett Planning Network, a nationwide network of fee-only financial advisers, said: “Most people would not be served well by leveraging their home further than it already is so that they can get into another very illiquid, geographically nondiverse single property.”
Garrett said if you want to invest in real estate and “you don’t have the money other than to borrow out of your own residence, then that may be a good sign that you’re not diversified enough. You likely need to be investing in other assets such as stocks, bonds and mutual funds, rather than locking your money into other illiquid avenues. It’s a big headache.”
Still not persuaded?
* Ric Edelman, author of several best-selling books about personal finance, including “Ordinary People, Extraordinary Wealth,” is blunt about using your home as your investment piggy bank.
“The only time it makes sense to tap into your home equity for real estate purposes is to pay for home improvements … or to generate greater liquidity,” said Edelman, chairman of Edelman Financial Services Inc. based in Fairfax, Va.
If you’re going to use a home equity line of credit, understand that many of these loans have adjustable rates and the interest rate will likely increase, cautioned Geordie Crossan, a certified financial planner and president of the California-based NBS Financial Services Inc.
Most important, limit the equity line of credit to the down payment only, and then use conventional financing for the balance on the second home or property, Crossan said.
Finally, Garrett said make sure you fully understand what it takes to be a landlord.
Remember Pete’s question? He said the rent he expects to receive wouldn’t fully cover the increased cost of the new mortgage. That’s not good, the experts say.
When you use your primary residence to buy investment real estate, just keep in mind you’re not investing, you’re gambling with the place you call home.
Washington Post Writers Group
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