I received some good comments on my post 11/23 "Do You Want to be Debt Free or Wealthy?", so I wanted to continue the conversation. Hope it helps.
Q from Konnie: What do you consider a good return?
A: Good question, Konnie. This is where you'll want to work with your financial planner to determine the amount of risk you are comfortable with and that will answer part of the question (i.e. higher risk equals higher return) And of course, if your post-tax mortgage rate is 5%, you'll want to make sure your post-tax investment rate is at least that high, which isn't hard to do.
You will also want to consider how long you want to invest the money and how long you will keep the home, based on life goals.
The advantage of leveraging as I described in the post is moving assets "sunk" into a home appreciating only on paper and at the whim of the real estate market into assets that can be moved about freely into other investments to take advantage of other opportunities.
Meanwhile, the home is continuing to appreciate according to the real estate market on its own, but if it suddenly depreciated, you've diversified your investments.
This can also be a great strategy for your real estate investor clients who want to invest in different geographic markets as well, to spread out that risk.
Here's a perfect example of why it's good to not have all your money in your home, even if you aren't a sophisticated investor. Think about hurricane Katrina or some of my friends who had homes in the Northridge earthquake. One friend in particular had a modest job and still owed a lot of money on his mortgage. Another friend was doing well and had just paid off his mortgage completely. The earthquake hit and caused tremendous damage to both homes. Who do you think came out on top? The one who didn't have all his assets in a home that was now worth half the value it was the day before. Both were short sold, but the one who had the mortgage paid off had much more to lose.
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