Pseudo-bridge financing

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TOM1964
Posts: 79
Joined: Sun Jan 10, 2010 7:22 pm
Location: SE USA

Pseudo-bridge financing

Post by TOM1964 » Tue Sep 12, 2017 1:12 pm

Hello,

I am going to relocate from the Mid-Atlantic to New England next spring. I will be selling my current house, placing it on the market March 1. Prior to that, I need to build a small guest house and garage/workshop up north, where we plan to retire eventually. I am concerned about how to handle my portfolio as I raise the cash to build two structures before selling our current house. I am hoping to do everything with no bank loans.

We are both 53, and will both be retired by age 60. We own our current home outright, and we own our existing cottage and land up north outright. The land is a neighboring lot in a fairly LCOL village.

I have been rigidly 65% equities and 35% bonds for many years, and I'm comfortable at that level of risk (rode out 2001-2002 and 2007-2008 without selling.) About 25% of our assets are tax-advantaged, and cannot be touched without penalty.

I have huge unrealized capital gains in my equities (mostly TSM,) and I'm in a high tax bracket. The portfolio is substantial; enough to retire today at 53 if we had to, and we could live comfortably but not lavishly (nor would we want to live lavishly if we had more.)

My plan is to sell most of my 35% in bonds that is not in a tax-advantaged account. This will raise enough cash to pay for construction up north, and will trigger minimal capital gains. When I eventually sell my house, I will replace those funds, mostly short and intermediate term muni funds. The sale of my house SHOULD eventually raise substantially more than my construction costs in New England.

My problem is that for at least 8 months, I will be at 90% equities or more, with relatively little room to rebalance if our frothy markets should take this opportunity to collapse. I get a knot in my stomach thinking about being overweight equities and simultaneously trying to sell an expensive home during a financial crisis. O-V-E-R-E-X-T-E-N-D-E-D is not where I want to find myself.

What are your thoughts? Take the tax hit and sell equities in proportion, maintaining my balance? Take a short-term construction loan and leave the portfolio intact? Moving (and selling) first and building later is a difficult option; I need the workshop/garage to store things that I am reluctant to place in a storage unit. Also, our existing cottage up north would be very cramped without the garage and guest house.

Please let me know your thoughts.

Thanks, Tom

Dr. Bogstyle
Posts: 1
Joined: Mon Sep 11, 2017 3:10 pm

Re: Pseudo-bridge financing

Post by Dr. Bogstyle » Tue Sep 12, 2017 1:22 pm

In this situation it sounds like a short term construction loan will help you sleep better at night by making it's cost known upfront. There's also the possibility that your home sells quickly and proceeds pay the loan down before expected. . .

ved
Posts: 620
Joined: Sat Jan 18, 2014 6:56 pm

Re: Pseudo-bridge financing

Post by ved » Tue Sep 12, 2017 1:23 pm

Money is fungible.

In the short-term, why not sell equities in your tax-advantaged account and buy bonds to get back to your AA - it will not be a taxable event.

Then, when you sell your house, you can reverse this transaction in the tax-advantaged account, and buy bonds & stocks in your taxable account (with the money from your proceeds)

That way you will always (or pretty close) be at your AA at all times

delamer
Posts: 2720
Joined: Tue Feb 08, 2011 6:13 pm

Re: Pseudo-bridge financing

Post by delamer » Tue Sep 12, 2017 1:29 pm

HELOC, which will be paid off when you sell the house.

aristotelian
Posts: 2581
Joined: Wed Jan 11, 2017 8:05 pm

Re: Pseudo-bridge financing

Post by aristotelian » Tue Sep 12, 2017 1:35 pm

I would sell at least some of the stocks. In all likelihood you will have to pay taxes on those gains at some point or another. If you sell and the market goes down, then you will have some losses to harvest. [OT comment removed by admin LadyGeek]

Alternatively, why don't you want to take out a low interest loan?

TOM1964
Posts: 79
Joined: Sun Jan 10, 2010 7:22 pm
Location: SE USA

Re: Pseudo-bridge financing

Post by TOM1964 » Tue Sep 12, 2017 8:16 pm

Thanks for all the good replies.

The reason I don't want to do a HELOC, construction loan, or "low interest loan" is that I'd be trading the fear of a loss for the certainty of one. HELOC's run at 4.25% and up right now, and my muni bond funds are paying half that. Why not sell the bond fund and save 2%? The stock portion will still take the same loss either way. Plus, a HELOC on my cottage wouldn't be enough to cover the construction costs, and a HELOC on my house would complicate my sale of that house.

The comment about selling the equities in the tax-deferred accounts is good advice. They are mostly International equity index funds and ETFs (mostly VXUS) but I suppose it's better to mess up my "20% of equities in international" rule than mess up my "65% in equities."

Thanks for your thoughts.

Tom

engineerartist
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Re: Pseudo-bridge financing

Post by engineerartist » Wed Sep 13, 2017 2:32 pm

We moved cross-country last year and I decided to buy in the new location before selling in the old location - primarily to be able to have a "clean" offer, but also so we could move our furniture, clean and paint before placing the old house on the market.

I was able to secure a Securities-Backed Line of Credit (SBLOC) sufficient for the purchase. The advantages were no closing cost, no monthly payment required (cap and roll), a lower interest rate than a HELOC would have been, and no need to sell anything - avoiding potential capital gains.

No restrictions on trading in my portfolio or withdrawing dividends or interest, just ensuring that the total market value maintained the required level.

Our old house closed 90 days after the new one, so this only cost me 3 months of interest.

https://www.sec.gov/oiea/investor-alert ... sbloc.html
Retired - dividend growth investor

ThrustVectoring
Posts: 162
Joined: Wed Jul 12, 2017 2:51 pm

Re: Pseudo-bridge financing

Post by ThrustVectoring » Wed Sep 13, 2017 3:16 pm

TOM1964 wrote:
Tue Sep 12, 2017 1:12 pm
My problem is that for at least 8 months, I will be at 90% equities or more, with relatively little room to rebalance if our frothy markets should take this opportunity to collapse.
IMO, what you should do, assuming that the real estate stuff is definitely going to net you cash ~8 months out:

1. Sell the muni bonds in lieu of taking out a bridge loan
2. For asset allocation purposes, treat "I'll get back into the muni bonds when the housing stuff finishes" like you still had that amount in bonds.
3. Get your taxable account transferred in-kind to whatever brokerage offers you the best margin financing terms on the assets you hold. IIRC Interactive Brokers is good for this purpose.
4. If your 65/35 asset allocation requires you to hold less in bonds than you have in your account, buy stock on margin.

You wind up with the same equity risk exposure, you effectively pay an interest rate equivalent to your muni bonds on the loan, and you can rebalance as if you didn't sell your muni bonds. You are taking on some extra risk, but it's all in the real estate portion - just as if you had taken out a bridge loan to finance this or a HELOC.

OTOH, if you expect the real estate stuff to have risk involved, rather than just short-term cash flow issues, you'll probably want to de-risk your investment accounts to compensate.

goingup
Posts: 2630
Joined: Tue Jan 26, 2010 1:02 pm

Re: Pseudo-bridge financing

Post by goingup » Wed Sep 13, 2017 3:28 pm

It was mentioned above but I'll say it again. I'd swap equity in your tax-advantaged for bonds. Sell all the bonds in your taxable account to raise the needed cash. When your house sells, revert to your original allocation.

We sold all our muni bond funds, along with some equity funds in 2007 to fund a downpayment. This meant we were essentially 100% stocks going into the Great Recession. It was our bad luck to have a vulnerable exposed rear flank and truly got bit in...that area. :annoyed It felt really uncomfortable to have purchased a home at the peak and own a portfolio which temporarily took nearly a 50% haircut. All is good today, but it felt bad for a few years so I'll never be 100% stocks again.

TOM1964
Posts: 79
Joined: Sun Jan 10, 2010 7:22 pm
Location: SE USA

Re: Pseudo-bridge financing

Post by TOM1964 » Wed Sep 13, 2017 7:11 pm

Wow, more replies, thanks! I didn't know if anyone would be interested in this topic.

I have never heard of a SBLOC. I will check that out. I have sufficient collateral at both Vanguard and USAA. If the rate is about what my bonds are paying, it seems like it would be the better choice.

I can understand the concept of just "pretending" that I'm still in bonds, but the problem comes when I need to actually rebalance. It's theory now, with a glass of Chardonnay next to the keyboard as I write this. At 0930 EST during a market plunge it gets real. Margin won't help: I have a 16-year-old IPS that includes the provision "no margin/no leveraged funds."

Thanks, goingup, for relating your story. It summarizes my fears much better than my own original post did.

I think I'll sell all my International Equity in my tax-advantaged funds and convert it to bonds, then raise my cash by selling munis with minimal tax consequences. My portfolio will go from 65/35 to maybe 80/20 or 85/15 for 8 months or so (I'm not really sure) and my weighting in Int'l will be lower than I want, but I won't be paying someone else 4-5% interest to use their liquidity. Or maybe I'll do a SBLOC if it's cheap.

Thanks for all the ideas Boglebrethren.

Cheers, T

MotoTrojan
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Joined: Wed Feb 01, 2017 8:39 pm

Re: Pseudo-bridge financing

Post by MotoTrojan » Wed Sep 13, 2017 7:48 pm

Good reasons to keep a good balance in tax-advantaged space.

Also, if the market does tank and you rebalance, I'd do the calculation as if you had the bonds still (potentially pushing you to sell all remaining bonds), but that is just me :).

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