As home values are rising, so are the number of Americans taking out second mortgages. When (and if) done right, it is a very savvy move in personal finance.
Here are three reasons those owning real estate in the United States should unleash the equity to buy stocks.
The first is that it diversifies the core value of the largest asset of most Americans.
Buying stocks with the proceeds from a home equity loan diversifies the portfolio.
In addition, "There are tons of new loan types in existence today that mortgage loan seekers can take out, so many to choose from that it has become a smorgasbord of choices," according to American Home Mortgage Solutions.
From that, property owners should be able to responsibly take out a mortgage to buy stocks for the long term. That adds protection to the investment portfolio of an individual.
There are many stocks that have dividend yields higher than mortgage rates.
As a result, investors can practice a form of interest arbitrage. Rates will be lowest on short-term loans, notes American Home Mortgage Solutions.
Stocks with high dividend yields can help to pay off the low-rate mortgage. Ironically, many real estate investment trusts (REITs) have very generous dividends. Hotel REITs such as Chesapeake Lodging Trust (NYSE: CHSP) and Hersha Hospitality Trust (NYSE: HT) have yields over four percent.
Based on the performance of companies in the hotel industry that are publicly traded such as Wyndham Worldwide and others like cheaphotels.com, that sector has a bullish future.
Stocks are much more liquid than real estate.
At the "Invest for Kids" conference in Chicago last October, real estate investing legend Sam Zell said that a healthy asset market had liquidity. That means that assets can sell quickly. Stocks are much more liquid than real estate. It is a wise financial move to convert illiquid assets into ones that can be sold when needed.
Taking out a mortgage should be done with a great deal of responsibility.
That is what buying stocks is all about. Using the proceeds from a mortgage to buy equities can monetize a holding, increase the investment income and raise the level of liquidity for a portfolio. For long-term investing, there is nothing better.
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- real estate investment trusts