Using home equity to top up share portfolio vs investing another rental property?

Question

Hi, I wonder is it still worth it to take out home equity to top up my current share portfolio vs using the equity to invest in a rental property in today high interest environment? Any input is greatly appreciated.

Answer

Deciding whether to use home equity to top up your share portfolio or invest in a rental property depends on several factors, including your financial goals, risk tolerance, and the current economic environment.

Investing in Shares:

Pros: Historically, the stock market has offered substantial returns over the long term. Shares are also more liquid than real estate, meaning you can sell them more quickly if you need access to cash.

Cons: Shares can be volatile, and there’s a risk of losing capital, especially in the short term. As noted, in a high-risk scenario, historical figures suggest you could lose a significant portion of your capital if the market declines.

Investing in Rental Property:

Pros: Real estate can provide steady income through rent and potential tax advantages. Property values can also appreciate over time, offering a good return on investment.

Cons: Real estate requires more management and maintenance. It’s also less liquid than shares, and the initial costs can be high. In a high-interest environment, the cost of borrowing increases, which could eat into your profits.

Current High-Interest Environment:
– In today’s high-interest environment, borrowing costs are higher, which could affect the profitability of both investing in shares and purchasing rental property. Higher interest rates can lead to lower net returns because of increased borrowing costs.

Risk and Time Horizon:
– If you have a shorter investment horizon or need to ensure capital preservation, the volatility of the stock market might pose a higher risk compared to the more stable, albeit slower, return of rental property. However, if you are comfortable with potential short-term losses and have a longer time horizon, investing in shares might offer higher returns.

Diversification:
– Diversifying your investments between shares and real estate can also be a strategy to consider. This can help spread risk and provide more balanced growth and income potential.

In relation to Pearler, the platform can be a valuable tool in managing whichever investment strategy you choose. Pearler focuses on long-term investing and offers features that can help you track and manage your investments effectively, whether you decide to increase your share portfolio or diversify into other investment types like real estate. Pearler’s approach to investing, emphasizing long-term growth and financial independence, aligns well with the strategic use of equity for investment purposes, ensuring that your decisions are aligned with your overall financial goals.

You can find out more about this topic here: How I Apply Modern Portfolio Theory To My Fi Strategy

Disclaimer

I am an AI-powered chatbot and not a financial advisor. The information provided is for educational and informational purposes only and should not be considered as financial advice. Investing involves risks, and past performance is not indicative of future results. It is important to conduct thorough research and consider your own financial situation and risk tolerance before making any investment decisions. It is always recommended to consult with a qualified financial advisor or professional before making any investment decisions.

Answer

Hi Anthony.

There are really two questions here.

The first question is about whether it makes sense to use debt to invest at current interest rates.  I personally think that property and shares will both provide higher returns than 6% so I do think it’s still worth using debt to invest.

The other options are paying down debt and debt recycling – I wrote about all three in the current environment here: https://strongmoneyaustralia.com/mortgage-vs-...

The second question is basically property vs shares.  That’s going to be a personal choice based on which asset you’re more attracted to, what returns you expect from each, your specific goals and timeframe are, and then also your risk appetite, which nobody can know but you.

Both are appealing.  Shares are typically better if someone is trying to create passive income in the next 10 years, whereas property can be better if the goal is simply long term net worth growth and one is happy to keep funding the properties.

All the best.
Dave

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Dave Gow - Strong Money Australia

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