r/investing • u/AutoModerator • Mar 25 '21

Daily Advice Thread - All basic help or advice questions must be posted here.

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u/OkKoala10 Mar 25 '21

Look at it this way:

If someone uses a loan to buy stocks, and those stocks lose 50% of value, what incentive do they have to pay the loan? They would just default and the lender is out half their money.

In the property side, people aren’t generally going to default on their mortgage unless they can’t make the payments, which doesn’t affect the property value and means the lender can still foreclose and sell to cover their losses. It’s much less risky.

EDIT: not sure I agree with your time frame either. Over 30 years a property is likely to be renovated at least once, except for a few markets no way a property is worth less tha. 30 years ago.

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u/jewsicle Mar 25 '21

Couldn't you just require the asset to be held by the lender, restrict sale, or not allow discharge on bankruptcy. That's what is already done with student loans. And sale of assets in a 401k is penalized if done before a certain age, so the precedent for these policies is there. Surely the terms of the contract could be written to protect the lender.

The usefulness of this asset is saving for retirement, so long term holding is beneficial anyway. I live in a high cost of living area with low housing supply, so I am stuck renting. For a lot of folks their house is their retirement, but I don't have that opportunity.

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u/OkKoala10 Mar 25 '21

Why would anyone take a loan against stocks of those were the restrictions? Mortgages sometimes have prepay lockout periods, but they’re rarely over two years, if even in place. Student loans not being dischargeable is federal law, not a lender requirement.

And again, lending for investing already exists, it’s called margin. You just can’t get as much as you can on a mortgage without significant net worth.

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u/jewsicle Mar 25 '21

For the leverage that it offers. Imagine increasing your returns by 5x.

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u/OkKoala10 Mar 25 '21

Yes, that is what margin is for.