Is it good to use the equity in your home to invest in property and build wealth?

Question

What are the risks is there a lot of work involved what are the pitfalls?

Answer 1

Yes and no. Yes if you can greceive cash flow above all expenses. You really have to buy right, one makes money on the buy not sell.
Pitfall: educate yourself on landlording, not as esay as it seems.Must have cash reserves for emergencies, and strong business skills. No risk no reward.

Answer 2

The idea of using the "equity in your home" is to get a loan from a financial institution based on the current value of your home which is presumed to be greater than the current loan. The only way this is advisable is if you can find a place to invest the money from the loan which will return a higher rate of return than the interest you pay on the loan. If you have the ability to pay the new, higher mortgage on your home then you can invest in something that will not give you an immediate return. Investing in property does not necessarily mean you will be building wealth. The wording in your question leads me to believe this is a question on a test. The answer I would give would be...
"It depends on your current financial situation and ability to survive financially if you loose amount you invested."

Answer 3

In the long run, home price increases can not outpace median household income. It is for this reason that variations of two valuation methods have traditionally been used by economists. One method compares home prices to household income, and the other method compares home prices to rent. I tend to favor income although I believe both are good indicators.

My opinion about the housing market is similar to that of 4XTrader. I have not studied the situation since mid 2005; but I do remember Richard DeKaser of National Bank did excellent analysis. DeKaser had reached the conclusion that many housing markets are in fact overvalued in a historical context and he had even calculated the risks of decline in some markets based on historical patterns in regard to valuations. I think DeKaser's page is a good place to start since 1) it has a more academic tone than various blogs and opinions you may discover on-line, 2) because he considers each local market separately, and 3) his analysis seems to be updated about once a year: http://www.nationalcity.com/corporate/EconomicInsight/HousingValuation/default.asp?WT.mc_id=100206

My overall advice: 'Be careful'.

Answer 4

If you dont know anything about investing, use the money towards the equity in your house.

Answer 5

Before you go pulling money out of your home to invest in property, you should be paying attention to what's happening in the real estate market. Sit down at a computer for a few hours and read what the U.S. real estate market is going through right now - this is not a time for inexperienced people to get into real estate investments. The U.S. housing market is coming apart and flippers/investors have been exiting the market. You're are may not be affected, but you can't assume it won't be as the current real estate downturn is a new phenmenon. Generally, real estate is relegated to local markets, but this downturn is, for all intensive purposes, national.

For example, in January, Massachusetts experienced a record-breaking foreclosure rate - 2,207 in January alone, or to put it another 110 foreclosures every business day in January. The hottest markets of the past 5 years are experiening the most rapid downturns. Even Colorado, which was near the bottom of the list of market growth over the past few years is now experiencing the highest default/foreclosure rate in the country.

Add to that that since late 2006 to now, 27 mortgage lenders have gone belly put. Because of escalating defaults in the sub-prime market specifically, and the entire real estate market in general, lenders are tightening up their lending standards.

Another bit of news that most people aren't aware of is the ABX.HE index. It is the index that measures Credit Default Swaps (CDS). CDS's are insurance derivatives against defaults in the mortgage industry. The ABX.HE index tracks the CDS market. In the last few days, the ABX.HE index look like it fell of a cliff. In the last 3 weeks, the cost to purchase default insurance jumped by ---- GET THIS, PAY CLOSE ATTENTION TO WHAT I'M ABOUT TO SAY ---- 1150 basis points!!!! Three weeks ago, you could buy default insurance for 2.5%. Now, it's 14%. Do you realize the significance of such a jump? Imagine for a second if the fed over a 3 week period raised the overnight rate from 5.25% to 16.75%, that would send up all kinds of red flags.

What this means is at least two things: 1) Writers of default insurance and seeing the writing on the wall and are ramping up costs to protect themselves and 2) there are fewer writers of default insurance which is going to have a major impact on lenders; since lenders won't be able to get default insurance, they'll be less likely to issue mortgages.

Remember what I said earlier that in the past few months 27 mortgage lenders went out of business due to bad loans and the slowdown in the r.e. market? HSBC, one of the biggest banks in the world, as set aside $10.5 Billion to cover bad loans in the U.S. This year, 2007, $1 Trillion in ARMS are due to reset higher. What you need to realize is this, most of the ARMS issued in the past few years are in the sub-prime market. The ARM rates for the subprime market are not based on U.S. interest rates, but on LIBOR (London InterBank Offered Rate), with a margin of around 5%. What this means is that if someone got a loan in 2003 when LIBOR was 1.32%, their rate was LIBOR + 5% or 6.32%. The LIBOR rate is now 5.32%, which means, when those loans reset, the Subprime market is going to get hit with rate revisions of 10% or more. That's going to add a minimum of $400 - $500 more per month to their mortgage payments. And a great number in the sub-prime market can barely keep up with their payments now as it is. And with inflation a major concern worldwide the BoE (Bank of England) has been raising their rates, so LIBOR could be higher when these ARMS reset.

Over 75% of the states in the U.S. are experiencing falling sales, the majority of the major metropolitan areas in the U.S. are experiencing price declines.

I'm not telling you this so burst your bubble, but if you are going to get into real estate investing, you better pay attention to what's happening in the U.S. real estate market. I had the privilege of talking with a gentleman that's been investing in real estate since the 1960's. He's been through many different real estate cycles. This gentleman owned 150 properties across 5 states. He sold ALL of them. His comment - "I can weather a downtown in the market, but what's about to happen is going to be a downright meltdown." He told me to put my money aside and wait, that we'd be able to buy houses for 10 cents of the dollar.

Do your research, spend some time at your computer and read about what's happening to the real estate market. You'll hear many say that we're seeing a bottom. Really? Over the past 5 years, certain areas have experienced a increase in property values of 100% or more. Nationally, housing prices have decreased on average about 5% (give or take). At current levels, most people are priced out of housing. So, back 2000, a house that sold for $250,000 and just recently sold for $550,000 - a 5% decline in value to $522,500, how is that going to make the house affordable? Remember, interest rates were substantially lower and over the past few years, lending standards were virtually non-existent, how with the current situation can anyone with half a brain say "we're at a bottom".

Remember, the Fed is still very concerned about an inflation, so the possibility of future rate hikes has not been dismissed.

As a novice to the real estate market, I would greatly caution you to do your due diligence at minimum, or just stay out of it until the market truly bottoms.