Using investment funds for Home purchase

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sam.thode
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Using investment funds for Home purchase

Post by sam.thode » Tue Sep 12, 2017 7:50 am

I've started considering buying a house, and I'm wondering what best practices / strategies are for financing. I've got my investment accounts (taxable / non-taxable) that I've generally considered to be retirement / once in a life time large purchase expenses.

I'm wondering what's the best way to go about this? Should these funds be used towards a house vs getting a mortgage? Is there a way to withdraw from the taxable accounts towards a house while minimizing the tax hit of withdrawal? I know there are some first time home purchase tax breaks, but I'm just starting to explore the options available, and thought I'd see what the community here knows.

Any recommendations on what to read? / Any kind of recommended financial advisors for this kind of thing?

stan1
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Re: Using investment funds for Home purchase

Post by stan1 » Tue Sep 12, 2017 8:02 am

I've used taxable accounts to pay for cars, home down payment, mortgage payoff, and large home improvement projects. In between I continue to invest in my taxable accounts. Don't let the tail (taxes) wag the dog. Remember you are paying taxes on the earnings not on the original principal.

One of the approaches I've used is to keep muni bond funds in my taxable account which I've used multiple times for large purchases. As an example when I buy a new car I sell from my muni bond fund holdings then allocate future investments back into that same muni bond fund. I view it as giving myself a loan.

If you are a disciplined saver another option is to use a 401K loan for down payment instead of liquidating taxable investments.

Liquidity gives you the freedom to do what you want. It's a great tool when you know you also have the discipline to use it smartly.

dbr
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Re: Using investment funds for Home purchase

Post by dbr » Tue Sep 12, 2017 9:18 am

The tax hit of withdrawing from taxable accounts will depend on the capital gain involved and on your tax situation regarding the cost of capital gains taxes. The first step is to tabulate how much capital gain there is, long term and short term, from the assets you might sell.

Note as taxes go that there is a tax on principal if the holding is real property, not that you don't already pay that indirectly when you rent.

livesoft
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Re: Using investment funds for Home purchase

Post by livesoft » Tue Sep 12, 2017 10:34 am

There is no best way. There are many best ways. I would say though that an "advisor" is not a good way since it will cost you a chunk of change to pay them for little or no benefit.

We saved for a home downpayment by investing in a joint taxable account in Vanguard mutual funds. We actually just used Vanguard Windsor II for the this back in the late 1980s and early 1990s. That's an all-equity large-cap value fund. We had no fear of stock market losses (remember 1987?), but also no set time point that we needed to buy a house. We were casually looking, but not in a hurry. We saw real estate bubbles come and go. Our investments just kind of ticked along for years and years.

When we decided to buy a home, we found that our fund assets could be used to pay cash for the the home we wanted. However, we just made a 20% downpayment and kept the rest invested.

Many folks would say that investing in the stock market is a terrible idea for a home downpayment. If one doesn't have a hard specific time that they need to buy a home, then I don't think that is true.
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livesoft
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Re: Using investment funds for Home purchase

Post by livesoft » Tue Sep 12, 2017 10:40 am

The way to minimize the tax hit from selling assets in your taxable account is pretty simple.

First, be sure to set your Cost Basis Method to Specific Identification which will allow the next two items to be used effectively.

Second, be sure to practice tax-loss harvesting every time you can. There are many threads on this. TLH can give you losses to offset future gains while keeping you completely invested in the markets.

Third, when you sell shares to make a downpayment, specifically identify the shares to sell that will cost you the least in taxes. These could be the shares with the highest cost basis (least gains) and/or the shares with losses and/or the shares that have been held more than one year.
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randomizer
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Re: Using investment funds for Home purchase

Post by randomizer » Tue Sep 12, 2017 10:44 am

If you can pull it off, don't touch the retirement funds. You had those earmarked for retirement, after all.

Being able to tap your taxable investments is potentially a dangerous trap that will lead you to buy a more expensive house than you really need, leading you to be "house poor". I don't think of a non-liquid asset like a house as an investment; it's a roof over my head, and I don't want to have to sell it to fund something else.

On the other hand, if you have to save the down payment up over time, that will make it more likely that you end up buying something that you can afford. And when you pay off the mortgage, you'll enjoy the liberating feeling of knowing that you are debt-free and own the place you live in without having compromised your retirement investments. In the meantime, renting isn't so bad.

Of course, this is all just an opinion. There are a bunch of other factors specific to your circumstances which could lead you to come to other conclusions (your income, employment security, age, savings rate, interest rates etc).

sam.thode
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Re: Using investment funds for Home purchase

Post by sam.thode » Tue Sep 12, 2017 1:27 pm

Some thoughts based on the replies-
If you can pull it off, don't touch the retirement funds. You had those earmarked for retirement, after all.
Looking at the rates on TSP, it looks like you can pull out up to 50% of what's there, and you pay it back at a locked in interest rate of whatever the G Fund is. With the G Fund Interest rate at 2.125%, if that interest rate is lower than whatever I'd get on a mortgage, would it then make more sense to tap the TSP? Or does it make more sense to have the mortgage in order to keep the maximum amount possible in the TSP to maximize the gains? Not sure where to draw the line on the tradeoff there would be.
Being able to tap your taxable investments is potentially a dangerous trap that will lead you to buy a more expensive house than you really need, leading you to be "house poor".
Does that sentiment change if the intent is for it to be a rental property? My thoughts are that having a paid off house means all the rent coming is is completely extra income, and then eventually selling the property some time down the road after its accrued value.
And when you pay off the mortgage, you'll enjoy the liberating feeling of knowing that you are debt-free
But if I pay it off up front, I'd already be debt free. And I'd be able to take home whatever extra once I sell. (I realize there is risk there, if the house doesn't gain value, but for the area, the market is currently rapidly expanding)
"advisor" is not a good way since it will cost you a chunk of change to pay them for little or no benefit.
Agreed. I have a couple resources I can turn to for advice without the fees I'd utilize.
Many folks would say that investing in the stock market is a terrible idea for a home downpayment.
Could you expand? Is that basically on the risk that the market goes down? I generally consider my investment funds to be retirement / big life event purchases (eg, house. Actually, that's probably the only thing besides retirement I'd use it for. Every other major event gets its own savings bucket).

Rob Bertram
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Re: Using investment funds for Home purchase

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

How much money do you have in your taxable account? If it is over $100k, a strong argument could be made to take out a margin loan or to switch to an e-mini S&P500 futures contract in order to benefit from favorable borrowing rates. At least, that would enable you to have a down payment without taking a tax hit when withdrawing funds.

delamer
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Re: Using investment funds for Home purchase

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

TSP loans are capped at $50,000 or 50% of the balance, whichever is less.

sam.thode
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Re: Using investment funds for Home purchase

Post by sam.thode » Tue Sep 12, 2017 1:38 pm

If it is over $100k, a strong argument could be made to take out a margin loan or to switch to an e-mini S&P500 futures contract
Could you explain more? Or have any recommended resources to explain? (I can google it, I just figured I'd ask in case you had a good resource handy)

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grabiner
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Re: Using investment funds for Home purchase

Post by grabiner » Tue Sep 12, 2017 10:04 pm

The most natural comparison is between mortgage rates and low-risk investments. A 15-year mortgage has a duration of about 7 years, so a fair comparison is to something like Vanguard Long-Term Tax-Exempt, which holds low-risk bonds with a 7-year duration. If the after-tax rate on a 15-year mortgage is the same as the after-tax rate on the bond fund, it isn't costing you anything to take out the mortgage

Then, add any costs involved. If you take out a mortgage, you will have to pay mortgage origination fees, appraisals, etc., which add to the cost of the mortgage. If you sell stock, you will have to pay capital-gains tax. Treat any difference in these costs as if you were paying additional points on the mortgage; 0.75 deductible points is about equivalent to 0.125% in the interest rate.

When I bought my home four years ago, I had large capital gains on almost all of my stock, so I sold only enough stock to put 20% down, and took out a 15-year mortgage at a low rate. I didn't pay much in capital-gains tax because I had some stock to sell for a small gain.
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mega317
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Re: Using investment funds for Home purchase

Post by mega317 » Wed Sep 13, 2017 12:03 pm

sam.thode wrote:
Tue Sep 12, 2017 1:27 pm
Agreed. I have a couple resources I can turn to for advice without the fees I'd utilize.
Caution: some of these resources may have conflicts of interest, or may just not know what they are talking about.

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bertilak
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Re: Using investment funds for Home purchase

Post by bertilak » Wed Sep 13, 2017 12:50 pm

I see nothing inherently wrong with using invested assets for home purchase.

Some people specifically invest just to build up equity for this purpose. Some people use invested assets to pay off (or down) a mortgage on a home already owned.

If retired, improved cash flow may be a consideration and a reduction in mortgage payments is a more sure way (and tax efficient way) to do that than to leave money invested in order to generate the income needed to make mortgage payments.
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Rob Bertram
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Re: Using investment funds for Home purchase

Post by Rob Bertram » Wed Sep 13, 2017 5:06 pm

There is a mega thread (that I started) which discusses the benefits of using leverage as a viable way of fine-tuning your risk. I could link it if you'd like, but I won't make you read through the 1800 posts. From a mathematical perspective, owing money to a bank is no different from owing money to a brokerage. So you might as well pick the best rates with the level of risk that you find acceptable.

One common trade-off that people feel compelled to make is to move their money out of the market and into a home. I made the argument that it is not an either/or decision. With a sufficient buffer in a taxable account, one could keep their current market exposure and either switch to stock futures or margin loans and buy a house.

There are a few brokers out there that offer competitive margin loan rates. Interactive Brokers is one. The rate that they charge is often 1- 1.5% lower than the cheapest mortgage rates available, but it varies with the base rate which is a risk. If the margin loan you take is small relative to the rest of your account, you won't need to worry about a margin call which is why I asked how much you had in your taxable account. One nice tax feature of margin loans is that margin interest offsets any realized investment gains -- even short-term capital gains. If there are no gains to offset, margin interest can be carried forward.

Another option I mentioned is stock futures, specifically e-mini S&P500. Futures are a little complicated to explain, but I will try to give a simplified example. When you buy an e-mini contract, you are essentially borrowing someone's collection of stock equivalent to 50x the S&P500 index (Today: 50 x $2,496.48 = $124,824). The price of the contract reflects the current value of the assets minus some implied interest. Every day, the contract is marked to market and any appreciation in asset value is added to your account as cash while any depreciation is removed from your account. The nice thing about a futures contract is that the implied financing rate is very low (about 0.35% above the LIBOR 3-month rate) -- about 1.7% today.

I use the word "buy" a little loosely as you don't pay anything (except for brokerage fees) for the contract. Instead, you take possession and responsibility of that contract as money is either added or removed from your account based on the value of the e-mini contract. The brokerage puts a reserve on about $5000 of the cash in your account. If the value of your account ever drops below that threshold, the brokerage will start selling assets (i.e., margin call).

So depending on how much you have in your taxable account, you could keep your market position and put some money down for a house. I would would be happy to go through specifics if any of these topics sounds workable.

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