Is personal residence a store of value?

[oldcrowcall]

I am thinking of taking a substantial sum out of my taxable retirement account and putting it into a much better house. That should leave enough in the retirement fund for a SWDR to age 83--unless we have hyper inflation of course. Around 83 I could sell or do a reverse mortgage. Right now I am 65/35 equity to fixed income. I am afraid of a lotta things- higher oil, higher interest rates, terror attacks, inflation, etc. Good strategy? Better to wait until higher rates drive values down then do it?

 

[BigMoneyJim]

I think you really have two or three questions there, each deserving its own special consideration:

• Should I get a bigger house?
• Should I pay off my mortgage? (Or in your case buy cash)
• Should I consider my house a spendable asset?

If you try to decide them together you may fudge one answer to justify another.

I don't have much to offer about the bigger house or using it as a spendable asset, but the following examples occasionally mention one or the other as a debate point.

The "pay of the mortgage" debate has been gone over serveral times here and other boards. I haven't grown tired of it yet, and if others haven't we may have another one in this thread. Here are a few other threads to tide you over until the responses come here:

http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=faq;action=display;num=1082669746
http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=inv_strat_board;action=display;num=1083517728
http://early-retirement.org/cgi-bin/yabb/YaBB.pl?board=inv_strat_board;action=display;num=1083517728

EDIT: After re-reading your question a few times I'm not sure you propose to buy your new house completely or just put a lot of cash into it and still have a mortgage. (This sentence was added at the same time as his response.)

 

[oldcrowcall]

No mortgage on house but of course that raises the question whether to take one at these low rates but save that one for another time.

 

[oldcrowcall]

Thanks for those links. I intend to read through them. This brings a related question to mind. How much of one's net worth should be represented by the net value of one's residence? Is it ever subject to a rebalancing decision? To me this is a question separate from whether it is a spendable asset. Maybe I should post this question as a separate subject.

 

[oldcrowcall]

Sorry, I guess my original question was not well worded. This would entail selling present unmortgaged house for a higher quality one. I know this question is heavy with personal aspects but if one is doing it partly to long term park retirement funds- does it become speculating?

 

[Cut-Throat]

Oldcrow,

I think the best thing you can do when purchasing a house, is not to look at the financial aspects of it.

Look at it as a place to live. If you're very happy there you won't care if you're making money or losing money. And if you're not happy there, you also won't care if you're making money or losing money.

One of the biggest mistakes I ever made, was buying a house for financial reasons. I hated it every day I lived there. I would have actually spent less if I would have stayed in the apartment that I basically liked. But I listened to all the experts that said I was throwing my money away on rent. I was only 26 then.

 

[Bob_Smith]

Personally, I'd rather have liquid assets. I can adjust to changing times quickly, re-balance, etc. If I had a huge chunk of my net worth in my house, I'd be concerned about the lack of diversification. Having real estate in a mutual fund is one thing, but being tied to the value of one specific house would worry me. My modest 3 bedroom/1 bathroom house would sell for about $75,000, and I like it that way.

 

[John Galt]

Hello Bob_Smith. I understand your feelings about real estate. In fact, a good friend recently expressed the same opinions, i.e. he wants to stay liquid and so
avoids real estate. Obviously, you could easily go
overboard. But, my infatuation with real estate goes
back decades. I have done well and expect to do well
in the future. Currently I have about 50% of my net worth (including our house) in real estate. I would not do this if it was all in my residence, however. Also,
everything we own is a potential residence for us.
Thus, we have many options. Always helpful when investing in anything.

John Galt

 

[riverrat]

i'm going through the various scenarios of whether or to sell or rent my house and use the $ to pay mortgage in a mountain community closer to grandchildren. If I sell I lose my Prop 13 tax advantage ($1,100/yr propery tax on S600,000 house). If I rent I have the landlord headheaches and I'm more leveraged in an already highly valued real estate market. If I sell now while the market is still hot I'll get asking price or more. Or, should I just stay put - I even like my neighbors and this is the house where we raised our two beautiful daughters.

Isn't life great?

 

[John Galt]

Man riverrat, you are pumped, as well you should be.
If you enjoy being retired as much as I do, you will be one happy camper. BTW, an aside................my oldest
daughter was born on July 2nd and my favorite author
(Hemingway) died on July 2 also. A date branded into
my brain. Good luck!

John Galt

 

[sgeeeee]

I am thinking of taking a substantial sum out of my taxable retirement account and putting it into a much better house. That should leave enough in the retirement fund for a SWDR to age 83--unless we have hyper inflation of course.   Around 83  I could sell or do a reverse mortgage.  Right now I am 65/35 equity to fixed income. I am afraid of a lotta things- higher oil, higher interest rates, terror attacks, inflation, etc.  Good strategy? Better to wait until higher rates drive values down then do it?

Hi oldcrowcall,

It sounds to me like you are talking about a fairly unique type of reallocation of your retirement funds. You will be reducing your allocation out of your taxable investment account and increasing your allocation into one particular piece of real estate.

You haven't told us what your taxable account is invested in (stocks, bonds, REITs, ). Or what your pre-house and post-house purchase allocations will be. That may have some impact on the decision. If you are effectively moving a small percentage of your allocation from equities to your house, this may not be a big thing.

As cutthroat points out, if you are buying a house for an optimum investment, you might not be picking out the best house for you to live in. And putting a large amount of investment into one piece of property may imply a lot of risk. (There are people who do this all the time and are quite successful at it, but it is something to consider if your aren't a real estate wiz).

As Bob Smith has indicated, one effect of the shift is to make your retirement investments less liquid. Depending on how much of your total retirement funds the house purchase will take up, that may or may not be an acceptable trade-off to you.

I'm too tired to talk about mortgages again.

 

[LA_Newsboy]

Hello Riverrat. You might not lose your Prop. 13 tax base. That depends on where you are moving to. Some counties in California will allow you move your old tax base. But it's a county option. Rich counties generally won't allow it; poorer counties often will. It's allowed under either Prop. 60 or Prop. 90, i forget which one. AARP follows the issue, and you can Google it, too, to find out more. Of course, if you're moving out of state, that's another issue.

 

[riverrat]

If memory serves me the CA counties that participate in Prop 13 property tax transfer are: San Mateo, Santa Clara, Alameda, San Diego, Modoc, Kern, and maybe Ventura. When I come across the letter I got from the assessors office I will make a separate post with this info as its hard to get and may be of interest to others.