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Equity Redistribution As many home owners and prospective owners realize, your home is often one of your largest assets, however, too many are relying solely on home appreciation to increase their wealth. Equity redistribution is the process of tapping into your home’s equity for the purpose of broadening the range of your investments. There is an old saying, “Don’t put all your eggs in one basket.” Any financial planner worth his business card will tell you the same thing, “Don’t put all your money into one investment.” Why then, do so many homeowners leave all their eggs in the basket known as their home, or more specifically, why do they leave their the largest portion of their wealth solely at the mercy of the real-estate market? Most of us have heard, time-and-time-again, “diversify.” I agree, you should, however, you should go one step beyond diversification. To diversify you would tap into your home equity; buy another property as an investment. This protects you against a loss of value to one property, and normally generates wealth faster than a single property. Once you have enough additional equity built up, you may buy a 3rd property, and so on. You may even choose to buy properties that in and of themselves generate income such as rentals or commercial properties. The problem with diversifying is you are still putting all your eggs into that real-estate market basket. I submit that beyond diversity, you need to broaden your portfolio to include investments from multiple markets. Allocating your assets across a broad spectrum will not only typically cause your investments to outperform any single investment group over time but also have greater stability in times when a particular market crashes. End result, greater, more stable, wealth. When I initially bring up investing to my clients, many are skeptical; they feel they don’t have enough money to invest. I guess this comes from another old saying, “You have to have money to make money;” which, in essence, does have some truth. It takes surprisingly little money, however, to begin broadening your investment portfolio. From 1990 to 2000, appreciation in the Washington DC Metro area averaged 24.3%1. Based upon that figure, a $100,000 home in 1990 would have been worth approximately $124,300 in 2000. This converts to an average annual growth of just 2.199%. As we all know, the last few years, housing values have soared, but, historically, a rate of 2-3% is a very normal result. Roger C. Gibson recently published the results of a study dividing investment equally into four primary categories: US Stocks, Foreign Stocks, Real-Estate, and Commodities. By dividing his investment in this manner, Mr. Gibson achieved an annual return of 13.268%. Obviously, most of us can’t pull out 75% of our equity to stick into other investments, nor would I ever suggest someone do so. But, what if, instead you were to draw $10,000 of your equity. Allocate that money across a broad range of funds. In most cases, your interest rate on the equity loan would be far below the expected rate of return on your new investment. Using the figures above, if you drew $10,000 of equity out of your $125,000 home to invest using Mr. Gibson’s model, your home would continue to appreciate, and in 10 years would be worth approximately $155,000. The $10,000 you invested would be worth $34,000. Assuming you received a 10% interest rate on your equity loan (rather high for a 10 year loan with good credit), you’d have paid less than $6,000 in interest. So your total realized growth would equate to an additional $28,000! Equity Redistribution: another way to make your home work for you. Written By:
Neil R. Davies, Lending Manager, Infinity Mortgage Lending, Inc. Disclaimer: The author strongly recommends seeking the advice of a financial planner to assist in determining where to invest. Investing does involve risk, and people can lose money.
1. Office of Federal Housing Enterprise, www.ofheo.gov
2. Gibson, Roger C. Asset Allocation: Balancing Financial Risk McGraw-Hill 2000
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