Any experience using a HEI (Home Equity Investment) to invest in bonds?

Question

Hello,our house is paid off and recently I came across an HEI (Home Equity Investment) from e.g. https://point.com/In short, a company gives us about $100,000.00 for up to 30 years and uses our house as collateral or safety. So, we don't have to pay any monthly interests or fees etc.The way they make money is that at the start they value our house at, let's say, $400,000 and after 20 or 30 years they value it again at $500,000 and now, apart from us paying back the 'borrowed' 100,000 they get as well one third of the increase in value, so we would have to give them an additional $33,000.With bond yields at or above 5% the idea occurred to me that I could get the money for buying bonds through an HEI and put it into 30 year treasuries.What is there to lose?In two weeks, I will turn 65, and I want to do it for 30 years. So even if we get very high inflation for a long time I should come out as a winner, I thought. But whilst writing this I realize that (theoretically) inflation could get so high for so long that after 30 years the value of the house has increased to e.g. $1400,000.00.In that case I would have to give the bank an additional $333,333.00.Which means in my case I would have to sell the house, but at age 95 it might not matter to me.As you can see or read, I am still in the process of researching and contemplating this idea and so I welcome any constructive input.Many thanks, RM

Don Konipol · Answer

Somewhat similar math to a reverse mortgage. Do you want to leave an estate, or is it more important to increase your current spendable income?

The “math” is extremely complicated, and includes “assumptions” about housing prices in general, and your house in particular. Since nobody takes this added risk for free, we can assume the investor/lender is anticipating a higher than normal return, which means you’re paying a higher than normal price for this $. But it still may work out for what you want.

Chris Seveney · Answer

I would do a reverse mortgage over the hei. I have not done those types of deals but online info notes they typically discount value of home from appraised value and their percentage of the gain is also highe (ie they give you 20% of home value they get more than the equity)

Another option is to just sell it and take money and rent etc.

Richard Meuter · Answer

Hello,

first off, I want to thank everybody who replied, whether in writing or just by contemplating my situation. It all helped!

Secondly, I realized last night what I believe is driving me.

Since we have no children and my wife, because of an illness, will most likely go to heaven before me, I want to have spent and enjoyed most if not all of my money before I die.

So now, I guess a better question is, what do I have to do to be able to spend/enjoy most of our money before I go to heaven without ending up in a situation where I have to move out of our current house because I can't pay HOA fees any longer or pay for a new roof or something similar.

Or from a different angle, how can I access the value that is in our house without jeopardizing the house in the next 30 years?

So, for clarity, I am German and lived in various countries and therefore did not contribute much towards my retirement. My biggest asset is our house.

Many thanks, gM

P.S. Don, I will reply to your post later. I don't quite understand what you are trying to say. Who is the investor in your example. Thanks for your patience.

Don Konipol · Answer

The investor can choose to invest in a fully amortized mortgage, and receive monthly interest plus return of principal. In the scenario you lay out, the investor is betting it all on the value of, and appreciation of a piece of real estate, perhaps in15 or 30 years, with no monthly payments. This is a much higher risk than an amortizing mortgage, and more like an equity investment than a note investment. The required projected yield of an equity investment is greater than a debt investment because it’s a greater risk. So, if I can lend at say 6.5% fully amortized secured by your house, I’m going to require at least a projected yield of say 8.5% annualized to take the additional risk. Further, since no payments are being made or received, it’s all “back ended”.

Housing prices have increased by an average of 4.2% per year over the last 40 years. Your $400k house in 30 years at a 4.2% annual increase would be worth $1,407,000. So they would receive back $535,000 on their $100,000 investment.

Gregory Acs · Answer

Hi Richard,

That's an interesting strategy, and I think you've already identified one of the biggest risks. With an HEI, you're not paying interest, but you're giving up a share of your home's future appreciation. If home values increase more than expected over the next 20 to 30 years, the total cost could end up being much higher than it appears today.

I'd also compare an HEI with more traditional options like a HELOC or cash-out refinance. Even though those involve monthly payments, they may end up being less expensive over the long run depending on interest rates, appreciation, and your investment returns.

Before moving forward, I'd run several scenarios using conservative assumptions for both bond yields and home appreciation. That should give you a clearer picture of which option offers the best long-term outcome.

Richard Meuter · Answer

Thanks for your reply Don,

We have no children and we don't want to leave an estate. My wife is already retired and I am close to retirement.

We want to increase the money we have to spend.

Not sure what you are referring to with 'added risk'. Why has investing in real estate an added risk compared to stocks?

I would think the investor/lender is doing this because over the long-term real estate appreciates more than stocks. I could be wrong here but that is what I think (needs to be checked). Plus, the lender might have already more than enough invested in the stock market and is looking for a way to diversify.

Best regards, gM

Richard Meuter · Answer

Thanks for your reply Vaibhav,

you are correct that individual bonds do not compound, but on the other hand, without an HEI, I would not have that money to invest. I could invest it differently (stocks instead of bonds), but I want to keep the risk as low as possible. If I make 5% per year after tax, then I have an extra $5,000 per year to spend. And when the 30 years are up, I will be 95 years and might have to sell the house to cover the 1/3rd of value increase of the house that I have to give that company, but I don't know what I want to do with my life then. Plus, I just realized, I could invest the $5000 I get every year in the stock market or something that is compounding.

Food for thought, gM

Vaibhav Puranik · Answer

I would say, don't do it unless you need the money. The most important reason is that individual bonds do not compound. For that long term horizon (30 years), you must choose an investment vehicle that's compounding money, otherwise your returns will be significantly low. If you keep it invested in the house, it will compound. If you put it in other stocks it will compound. But putting in treasures, you will get interest every year, but it will not compound. In investing the most critical factor over long time is compounding of the money. Compounding means your earnings start earning earnings!

Any experience using a HEI (Home Equity Investment) to invest in bonds?

Any experience using a HEI (Home Equity Investment) to invest in bonds?

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