House Rich Cash Poor Retirement?

[pb4uski]

Not necessarily criticizing, but this is essentially the same as buying on margin, right? Arbitrage the certain loan rate vs the hoped-for investment gains.

I guess one could view it that way.

But the risk of a mortgage and a risk of margin are totally different because the interest rate paid on the loan is totally different so the net risk is different. With a mortgage then the investments that would have been sold had you not gone with a mortgage only need to yield more than the mortgage rate over 30 years for the borrower to come out ahead. With margin the interest paid is much higher therefore the return needed to win is much high higher... plus the timeframe is much shorter so volatility can kick you a$$. Plus, there is no such thing as a margin call on a house so it really isn't even close the same thing.

What about all those people who can't buy a home for cash but instead make a down payment and then take a mortgage loan for the rest? I guess that they are real risk takers!

 

[pjigar]

Not necessarily criticizing, but this is essentially the same as buying on margin, right? Arbitrage the certain loan rate vs the hoped-for investment gains.

Few key differences:
1. 30 year fixed rate is WAAAY lower than one you pay for margin.
2. The rate you pay is (nominal - inflation) which could be negative in the future, which further drives down the real rate of interest.
3. No margin call EVER and lender will not forcefully liquidate your asset unless you stop paying mortgage.
4. Access to otherwise locked up equity at least during the first decade of mortgage.

I think the idea of financing is actually a very good one if OP really wants to enjoy a nice house in RE. It is a personal choice and mortgage may allow them to live life with minimal downside to their finances.


PS:

OP,

If you decide to finance the next house then be sure to invest the "saved equity" into some board market mutual funds or index funds. If you keep that money saved up in cash then you will be losing real money over time and the whole theory of mortgage benefits will fall apart.

 

[Mountain skier]

We haven't had a mortgage in a very long time and never thought we'd ever get one again however with rates very low and housing becoming very expensive it might be a reasonable solution.

I don't know if getting a mortgage is difficult for a retiree...but we have mostly income from pension with SS a few years away. You'd think a state teacher pension and SS would be considered a safe and reliable income stream...certainly more secure than a job.

 

[tmm99]

With a mortgage you can have the best of both worlds... take the $350k value of your current home as a down payment and get a $650k mortgage. At 3%/30 years that would be $2,750/month but your home equity would be the same $350k as it is today. The $2,750 (plus increased property taxes and other costs) is the cost of the lifestyle choice.

As long as your portolio return exceeds your mortgage rate then you are good.

His AA is 27/73 (cash, not bonds)...

 

[daylatedollarshort]

A slight rephrase might be:
the departing folks are more likely to be the ones who can afford $1M houses, and the immigrants are mostly folks who cannot.

Do you have a source for that? The opposite seems to be true...."Are rich people fleeing California to escape astronomical state income taxes? That’s the word. But it’s fake news....In fact, more wealthy people are moving to California than leaving, research indicates. It’s the poor and middle class who are departing." https://www.latimes.com/politics/la...me-tax-california-wealthy-20190311-story.html

More Californians left for other states in 2018 | The Sacramento Bee (sacbee.com)
A 2017 Bee analysis found that people leaving California tended to be relatively poor, and many lacked college degrees. Higher up the income spectrum, slightly more people were coming than going.

'Not the Golden State anymore': Middle- and low-income people leaving California | CalMatters
Middle and Low Income People Leaving California - U.S. Census Bureau numbers show that the middle- and lower class are leaving California at a higher rate than the wealthy. Many who left in recent years say they simply couldn't afford to stay...The majority of people leaving reported an annual income of less than $100,000. while the state has seen an influx of those making $100,000 and more."

 

[pb4uski]

His AA is 27/73 (cash, not bonds)...

Yes, but even if future returns are only 1/2 of what historical returns have been for that AA the OP would easily cover a 3% mortgage. I guess it depends on what their "cash" is in... over 50% of my retirement is in CDs that have a weighted average yield of 2.94%... some would consider CDs as cash.

Source: https://investor.vanguard.com/investing/how-to-invest/model-portfolio-allocation

 

[daylatedollarshort]

Is this a feasible idea? I realize my financial comfort level would drop quite a bit. What do you folks think about this?

Thanks

I live in an older home in a coastal California, though I didn't buy it recently. I think at current prices I would not buy the same size house. If it were me, I would definitely still move, buy something smaller and get a mortgage, locking in historically low rates as pb4uski suggested. If you get a fixed rate and rates go down you can always refinance, and if rates go up you've locked in a great rate for 30 years.

Otherwise you have to be prepared that there could easily be a 30% or maybe more dip in prices in the near future that may not recover for years. Housing here goes in boom and bust periods, and it has been awhile since we had a bust. A bigger home means not just higher prices, but higher property taxes, insurance, utility bills, and upkeep. Earthquake insurance, if you choose to buy it, probably cost at least several thousand a year on top of homeowners insurance with something like a $100K deductible.

We know a number of people who moved here in retirement from our senior clubs. The people with your level of income / assets seem to be more inclined to buy lock and go kind of condos, like in a nice golf course community or walkable urban area with theater and restaurant amenities, and still have money for travel and entertainment. Some keep their "back home" homes. The ones who buy the seven figures homes are usually the ones who seem to be really rich and aren't price sensitive to even housing prices.

 

[Koolau]

Someone here a lot more savvy on the "search" function can probably find it, but I'm pretty sure we've done a poll (or 2 or 3) about House as %of Net Worth. IIRC, the sweet spot might have been around 20%. I think 50% +/- would have been unusual. More than 50% "house" may be a real outlier.

Also, I know we "argued" a bit, but "most" of us came down on the side of the argument "Is house value really a part of what you consider your invested NW?" Most said they ignore house value (IIRC) when thinking about their invested NW.

I understand the allure of beach or ocean or just close-to-the-ocean location (remember, location, location, location?). My condo overlooks the ocean and I love it. BUT, I'd never get even close to 50% of NW in my residence (unless it were some necessity for reasons other than personal desire.)

NOW, having said all this, it is YOUR retirement and your money. What brings you happiness is not my business, so you gotta do what brings you happiness - as long as you understand any other issues.

Let us know where you end up. And remember that YMMV.

 

[Koolau]

The question is how cheap are you buying the house? Current market value? Or, is it a buy too good to pass up? Could you turn that house any day and get back your initial investment?

I ask these things because you may be the most middle class person in your neighborhood. And money doesn't grow on trees when you're no longer working.

My sister had a condo in Aspen for 15 years, and she sold it in 2007 at the top of the market. With the proceeds, she bought a house in the NC mountains that's now worth $1.5 million plus a LearJet 45 to fly back and forth in.

Please tell me you're pulling our leg. No wait! Please tell me you're NOT pulling our leg. I think this would be cool beyond belief.

 

[Starsky]

Is it really feasible from a lending standpoint? Can you qualify for a $650K mortgage on a $1M home with $35K of annual income? It seems like the bank's ratios would be very challenging with your numbers. Especially since you are both at least a couple of years away from collecting any SS income at all. They really want to see regular cash flow that is more than adequate to service the loan.
Even if you both were 62 and took SS, you'd still only have $67K in income in CA which is still not a lot of income for a loan that costs close to $50K per year. Your current assets will likely not be factored into the loan decision.
You might want to see if you could qualify for a $1M loan @65% LTV and see what it would really cost before you worry about whether to move forward or not. It may be better for you to rent than to own.

 

[bclover]

The location we are thinking is near the Pacific Ocean and yes house prices are quite high. It is not the size of house but location and lifestyle it offers that we are interested in.

But I agree with you in that I have always preferred to have most of our net worth in liquidity not housing...so this would be the direct opposite....which is a bit concerning and why I am seeking counsel.

It appears we can financially do this but a concern is if the real estate market has a big correction...suddenly our primary part of our net worth would drop potentially a lot. The liquidity part of our net worth would be lower with this purchase and if there is a big real estate correction one can see the danger in this scenario.

But why would that matter if you're planning on making this your retirement home?

My friend did this and has had no problems. Upsized to a beach house on the Maryland shore. Brought it for the lifestyle. Living by the beach and all that entails. Now of course no one can predict the future but are you planning on needing the liquidity in your house for something?

 

[freedomatlast]

I put a high priority on home and lifestyle in retirement. Many retired people spend the majority of their time in and around home, so it's important that you have a place you really enjoy.

A little more than year ago, right before prices skyrocketed, we bought a house that was twice as expensive as our current house at the time. I wake up everyday enjoying the new house and especially the location. This new house is less than 14% of our NW, and the appreciation over the last year has been phenomenal based on recent sales prices in the same area. While the new house is larger and taxes are higher, the utilities and repairs are lower since it is a newer, better constructed, better insulated house. So although our overall expenses have risen slightly, the comfort and location have increased our enjoyment of life dramatically. After all, this is what we worked hard to be able to do if we chose to do so.

 

[pjigar]

I put a high priority on home and lifestyle in retirement. ....

This new house is less than 14% of our NW.

And that's the rub in OP's case. OP is trying to spend about 59% of Networth on a house which IMHO is little too high even during retirement.

PS: FWIW our forever home (for now!) is about 15% of NW today. It may represent even smaller percentage of NW in the retirement if other assets + savings grow faster than the house.

 

[GTFan]

Few key differences:
1. 30 year fixed rate is WAAAY lower than one you pay for margin.

Not necessarily, Interactive Brokers offers margins at less than 3%, Schwab has a pledged asset credit line at less than 3%. Tied to current low interbank rates, of course, so they could go up over time. And of course tied to margin calls if market tanks.

 

[Mountain skier]

concerning % RE value NW....would one include pension value to overall NW?...if so a $1M house would be 36% of our NW. This does not include SS....if I include SS the $1M becomes 26%. I calculated values as if living into our early 90's.

 

[OldShooter]

Few key differences:
1. 30 year fixed rate is WAAAY lower than one you pay for margin.
2. The rate you pay is (nominal - inflation) which could be negative in the future, which further drives down the real rate of interest.
3. No margin call EVER and lender will not forcefully liquidate your asset unless you stop paying mortgage.
4. Access to otherwise locked up equity at least during the first decade of mortgage. ...

I'll concede that some aspects of an arbitrage scheme may be less risky if a home mortgage loan is used to finance the equity purchase, but the structure of the deal is the same.

For those suggesting that the OP borrow on his house in order to invest in equities, have you done this personally? If yes, why and to what extent? If no,why not?

 

[Ramen]

concerning % RE value NW....would one include pension value to overall NW?...if so a $1M house would be 36% of our NW. This does not include SS....if I include SS the $1M becomes 26%. I calculated values as if living into our early 90's.

Personally, I would not count pension value or SS as part of my net worth. They might be expected or promised, but I don't consider them to be guaranteed.

Also, I consider net worth and wealth to be separate. NW would include a house, but wealth would not. Wealth is what you can tap right now, today. A house is an asset and must be sold before its value can be spent -- unless you get a HELOC, which then becomes a debt (liability). Just my opinion and how I think of this. Other folks might feel otherwise.

 

[MarieIG]

I can only speak for myself. If I had the same numbers, I would not be comfortable sinking that much money into a house. Obviously, YMMV.

 

[W2R]

Someone here a lot more savvy on the "search" function can probably find it, but I'm pretty sure we've done a poll (or 2 or 3) about House as %of Net Worth. IIRC, the sweet spot might have been around 20%. I think 50% +/- would have been unusual. More than 50% "house" may be a real outlier.

I'm not all that savvy, but after reading the above I got curious and somehow managed to find a three year old poll on that topic. Here it is in case anybody's interested:

https://www.early-retirement.org/forums/f28/poll-primary-home-as-of-net-worth-91439.html

I was amazed to discover that my house was 15% of my net worth when I bought it back in 2015, and due to the recent dual booms in housing and the stock market, it is still 15%. Not that it matters; I don't ever intend to sell. They can take me out of here feet first but I'm not leaving voluntarily as long as F lives next door.

 

[W2R]

I put a high priority on home and lifestyle in retirement. Many retired people spend the majority of their time in and around home, so it's important that you have a place you really enjoy.

A little more than year ago, right before prices skyrocketed, we bought a house that was twice as expensive as our current house at the time. I wake up everyday enjoying the new house and especially the location. This new house is less than 14% of our NW, and the appreciation over the last year has been phenomenal based on recent sales prices in the same area. While the new house is larger and taxes are higher, the utilities and repairs are lower since it is a newer, better constructed, better insulated house. So although our overall expenses have risen slightly, the comfort and location have increased our enjoyment of life dramatically. After all, this is what we worked hard to be able to do if we chose to do so.

+1000 (bolded emphasis mine) Yes!! Like you, my first thought when awakening each morning is how happy and lucky I am, to be living in this wonderful house. Sure starts my day on a happy note. Others might see my home as an average 1960's 1500 sf ranch house, but to me it is everything I always dreamed of.

I look on realtor dot com every day out of curiosity, and haven't yet found another house at any price that I would like as much. Plus, this house has the advantage of being right next door to Frank's house and that has been wonderful for us.

 

[Koolau]

I'm not all that savvy, but after reading the above I got curious and somehow managed to find a three year old poll on that topic. Here it is in case anybody's interested:

https://www.early-retirement.org/forums/f28/poll-primary-home-as-of-net-worth-91439.html

I was amazed to discover that my house was 15% of my net worth when I bought it back in 2015, and due to the recent dual booms in housing and the stock market, it is still 15%. Not that it matters; I don't ever intend to sell. They can take me out of here feet first but I'm not leaving voluntarily as long as F lives next door.

YES! That's what I was looking for. Thanks, W2R - you are way more savvy than I on the search function.

I guess its "worse" than I thought - The sweet spot is more in the 10 to 15% range for a goodly chunk of us here. Heh, heh, 50% isn't even mentioned, so OP might be exploring new territory, % of NW wise.

Once again, what WE do should only be one of the aspects to consider. Still, all of us "old timers" must have done a couple of things right along the way, so the young 'uns ignore us at their own peril.

As always, YMMV.

 

[pb4uski]

And that's the rub in OP's case. OP is trying to spend about 59% of Networth on a house which IMHO is little too high even during retirement.

PS: FWIW our forever home (for now!) is about 15% of NW today. It may represent even smaller percentage of NW in the retirement if other assets + savings grow faster than the house.

True, but another factor to consider is that the OP have a $35k/year fixed joint life pension. That is probably worth ~$800k and would drop the % from 59% to 40%... still higher than most but less than 59%.

 

[pb4uski]

I'll concede that some aspects of an arbitrage scheme may be less risky if a home mortgage loan is used to finance the equity purchase, but the structure of the deal is the same.

For those suggesting that the OP borrow on his house in order to invest in equities, have you done this personally? If yes, why and to what extent? If no,why not?

Whoa there hoss. Where has anyone suggested that the OP borrow on his house to invest in equities?

To me and and I suspect most others other than you, there is a huge difference between 1) taking on a mortgage to buy a house rather than liquidating investments (equities or whatever) to pay cash and 2) borrowing on a paid off house to invest in equities.

 

[daylatedollarshort]

Getting a mortgage at low interest rates we may never see again is also cheap asset protection in states without great asset protection laws for personal residences, especially if the funds that could be used to pay off the mortgage are left in more protected assets classes, like retirement accounts.

 

[Koolau]

Getting a mortgage at low interest rates we may never see again is also cheap asset protection in states without great asset protection laws for personal residences, especially if the funds that could be used to pay off the mortgage are left in more protected assets classes, like retirement accounts.

Yes, and remaining slightly off-topic, holding a mortgage - WITH a fixed rate - is one of the more-or-less iron-clad inflation hedges. Unless you default, you will pay back the loan with inflated dollars - thus "beating" inflation at its own game. Now returning you to today's topic since YMMV.