24/7 Insights

• This Redditor is considering taking out a line of equity against their property. 
• They want to take the equity balance and invest in the market. 
• Ultimately, the question is whether this is too much of a risk. 

For many people in Reddit’s r/fatFIRE subreddit, it’s all about getting to a comfortable dollar amount as fast as possible. Everyone in this subreddit is looking at different ways to use any free income to make more income, including this Redditor. 

In this poster’s case, they are considering taking some of the equity value of their home and investing it in the stock market. With around $300,000 in equity, they want to see if they can invest and use any profits to offset the costs of using their equity. 

This post appealed to me because it is known as the Smith Maneuver, at least in Canada. As there is a name for this, it’s clear this is an idea other people have had, but that doesn’t mean it’s always the best idea. 

The Scenario 

Starting with what we know, we have a Redditor with a $400,000 piece of property with only $100,000 left on their mortgage. Their current loan is at a 3% fixed rate, and they only have eight years left. As it stands today, they have approximately $300,000 of equity built up with the property or home. Their goal is to decide if a potential HELOC (home equity line of credit) loan is the right move and or if there is a better decision to be made about paying off the property and using the balance for investing in the market. 

In other words, you have two scenarios under consideration. The first is to take the $300,000 equity and invest it straight into the market. The second is to carve up the money by investing $200,000 into the market and taking the remaining $100,000 to pay off their loan balance. 

We don’t know the age of this poster or any other potential debts they may have outside of this home loan idea. In other words, the biggest question that worries me is that a market crash could coincide with a home value crash, and this Redditor could be left holding a huge bag. However, this Redditor says they are confident their income is stable, and they could carry the loan outside market returns. They also indicate the percentage they are looking to tap into is less than 10% of their current net worth. 

The Recommendation 

The responses in the Reddit thread are rather interesting, and many point back to the Smith Maneuver by name. Considering that I am not providing financial advice, I’ll immediately note that I see this as a high-risk effort that could carry some reward. The biggest concern is that you have to worry about a market crash. While the current odds of this seem low, the same thing was said right before it happened in 2008 and devastated the global economy.  

Recognizing the high risk and reward aspect, if this Redditor takes just a tiny portion of their net worth and wants to make some money, go for it. If the converse was true and they said this was a considerable percentage of their net worth, I’d be less inclined to say yes to this idea. So long as they recognize the risks and go in with eyes wide open, taking out a loan could be a wise idea. 

The biggest consideration here is the percentage of the interest on any loan. If we’re talking 9, 10, or even 11% on a personal loan, it’s not worth it. The Redditor has affirmed their confidence in carrying the loan, so they may not care about the interest rate. Still, the return percentage would need to outperform the interest accrued dramatically. 

The Takeaway

As this is not an uncommon method to make money, which is why it has its name and is known as a HELOC, I think there are positives to this approach. The biggest concern is a market crash, which few people can predict. However, so long as any crash won’t immediately impact the Redditor’s well-being and livelihood, it sometimes pays to be a little risky. 

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