How To Make Your Largest Asset Work for You

For most people, their mortgage payment is the largest recurring debt payment they make each month.

But what if, instead of needing to earmark part of your take home pay for that, your house paid for the mortgage itself? Anything left over after the mortgage payment comes to you as a bonus.

Instead of being one of the largest drains on your monthly finances, your house could become a passive source of income. And it doesn’t involve renting out your spare bedroom on AirBnB or anything like that.

My husband and I made this switch last spring, and we’ve been thrilled with the results so far. Instead of worrying about how fast our savings is being depleted by our monthly mortgage, we’re enjoying watching our nest egg growing.

Here’s how you can accomplish the same thing for yourself.

Historic low interest rates for mortgages

This process works because of the historic low interest rates for mortgages. We were able to refinance our house last spring for 3%.

Current rates are as low as 2.25% for a 30-year refinance, and 1.75% for a 10-year refinance. That’s practically free money.

The more home equity you can draw out in a home mortgage for this process, the better. In our case, we were close to paying off our initial 10-year mortgage. In addition, we live in a hot housing market, so the value of our home had risen significantly during those 10 years.

Our friends who had recently moved into their home only had $30,000 in home equity. They were able to do the same process as we did. They are able to offset part of their monthly mortgage payment, but not the entire thing.

How you can take advantage of this

Refinance your home at the lowest rate you can get, for the largest loan size you can get. Minimize the out of pocket fees and points you pay.

Competition among stock brokers

Another recent development that makes this process work is the competition among online stock brokerages. It used to be common for a stock broker to charge as much as $25 to buy stock for you. It has gradually fallen, to $12, then $10, then $7.

Last year saw stock brokers roll out $0 trades.

If you are making smaller investments, fees can wipe out your profits quickly. Being able to buy and sell stocks for no cost helps you keep your profits.

The other thing that stock brokerages compete on is the interest rate of margin accounts. These are accounts in which you borrow against the stock you already own, to buy more stock.

I used to have a 9% margin account. That went down to 7%, then 4%. Now it’s under 2%.

How you can take advantage of this

Take the money from your refinance and place it in a margin account at an online stock brokerage with low trading fees and a low margin rate.

Market volatility

There is an increased level of general uncertainty sparked by the pandemic. The stock market has been seeing huge swings in different sectors as popular sentiment moves, driven by the news. The fundamentals of these unpopular companies are usually still sound. That means there are great bargains to be found.

Another thing that is increasing the number of bargains is the heavy use of ETFs. To see how that happens, let’s use an example from the beginning of 2020.

Someone who wanted to make a play against the oil and gas industries could short an Energy Sector ETF. Using the largest of these ETFs as an example, it holds many major gas companies, such as Exxon Mobil and Chevron. It also holds oil and gas drilling companies, refining companies, and midstream transportation companies.

When the demand for gasoline plummeted, the companies that relied on high prices for oil and steady demand were hit hard. The companies that store fuels, on the other hand, are paid regardless of demand. So their fundamentals were unchanged. But their stock prices dropped because they were in a basket with the other energy companies in the ETFs.

Growth vs. income

Great bargains in the stock market can mean two different things, depending on whether you’re looking at growth or income stocks.

For a growth stock, a great value is one with solid fundamentals whose share price is trading significantly below what the company is worth. For an income stock, a great value is one with solid fundamentals whose dividend yield is artificially high due to a dip in the share price.

When you invest in growth stocks, you get your profits when you sell the stock. At that point, you need to find another great bargain to invest in.

When you invest in income stocks, you get profits whenever they pay dividends, and can continue to hold the stock. If you choose, you can also sell the stock to profit from a rising stock price, the same as for growth stocks.

The key to the process

The key to making your house pay you dividends lies in being able to take advantage of these artificially inflated dividend prices. I’m not talking about companies or industries that need to pay high dividends to attract investors. Stay away from those.

But you can find plenty of companies with solid fundamentals whose dividend rates are currently higher than normal. Do your own research into why the rates are high. Are they going to be able to continue paying dividends? Is the stock price likely to rise in the future?

If the answer to both of those questions is a solid yes, put the company on your list of potential investments.

What you’re looking for are companies that will pay a dividend of at least the rate of your mortgage plus the rate of your margin. In our case, that was 5% (3% + 2%). We were able to select a diverse portfolio in 8 different sectors, with dividend payouts from 5.6% to over 11%.

Those payouts are calculated based on the yearly dividend payment divided by the stock purchase price. So as the stock price rises, and new dividend payouts are announced, the return on our initial investment is much higher than new investors would receive.

How you can take advantage of this

Invest in a diverse portfolio of fundamentally sound companies that pay an average dividend rate higher than the combined rate of your mortgage and margin interest rates. It may take a few months to establish your complete portfolio.

Monitor and maintain

Once the hard work has been done to create your portfolio, you only need to review your holdings periodically. I do it once a month, but you may prefer quarterly or even yearly.

Weekly would expose you to too much volatility, but might be worth doing while you’re still building your portfolio. In that case, just identify new prospects each week.

Review each of the stocks that you are holding.

Are they still fundamentally sound? Do they still pay your target dividend rate?

It’s important not to look at what the dividend rate is for new investors. That may well be below your target. Look at what the dividend rate is compared to your initial investment. For example, one company we hold is paying a dividend rate of 8.1% on our initial investment. New investors would only be getting a 3.9% dividend, because the share price of the stock has risen.

Identify additional stocks that meet your criteria of being fundamentally sound but temporarily undervalued.

Compare that list of new potential stocks to your existing portfolio. If you have not yet fully established your portfolio, you can add the new investments, provided that they are diverse.

In other words, don’t have more than two stocks in any one industry, and try to have at least one stock in six different sectors. My husband, who has an MBA in Finance, is fond of saying that you get almost all the benefits of diversification by owning the right six things.

As an example, we have three stocks in the materials sector. One of those is in the chemicals industry, one is in containers and packaging, and the third is in metals and mining. A non-diverse portfolio would buy stock in three mining companies.

If you already have a complete portfolio, compare your potential stocks to your existing stocks. Are there low-paying dividends that you can replace with high-paying dividends, while maintaining diversity? Are there stocks that have risen high enough in price that you could sell them and invest in twice the amount of new stocks?

You may find that you are exiting out of some sectors entirely. That’s fine, as long as your overall portfolio remains diverse.

How you can take advantage of this

Continue to adjust your holdings periodically to maintain diversification and keep your overall dividend rate above your target rate. Your house will now be able to pay its own mortgage every month.

Conclusion

Rather than being a monthly expense, your house can generate a positive cash flow every month. Even if you don’t have much equity in your home, you can still partially offset the monthly mortgage payment.

The way to do this is with a four-part process:

1. Refinance your home mortgage
2. Deposit the proceeds in a margin account
3. Purchase fundamentally sound stocks with high dividend rates
4. Monitor and maintain your portfolio to ensure diversity and high rates

As long as the dividend rates are higher than the combined mortgage and margin interest rates, you’ll be making money from your house.

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