Second house advice please !

[wanaberetiree]

Hello

We are thinking of buying a second house (unclear what to do with the first one, rent or sell, etc.).

My question is about financing/paying options.

We can pay for it outright. But if we do this we will have ~$140-180K in tax liability for capital gains.

The second option is a mortgage loan, and on current interest rates ~$50K in interest/year.


What would you do?

Thank you in advance!

 

[RunningBum]

First thing I'd do is decide what I'm doing with the first one. What is the etc, that is, the other thoughts besides rent or sell?

This would tell me if I need money for the short term or long. For short term, I'd probably get a margin loan or HELOC to bridge until I sold the first home.

For long term, it'd depend on whether I'm still working, if selling investments would leave me cash poor, and probably other factors I can't think of right now. I'd be more concerned with the interest rate rather than the amount of interest paid in a year.

 

[wanaberetiree]

First thing I'd do is decide what I'm doing with the first one. What is the etc, that is, the other thoughts besides rent or sell?

This would tell me if I need money for the short term or long. For short term, I'd probably get a margin loan or HELOC to bridge until I sold the first home.

I would say that the first house is staying as-is for now.

I am still working and selling my investments to cover for a second home willl be ~30% of my portfolio. So I'd say the only what concerns me here is capital gain taxes and also lost of investment opportuntiy.

For long term, it'd depend on whether I'm still working, if selling investments would leave me cash poor, and probably other factors I can't think of right now. I'd be more concerned with the interest rate rather than the amount of interest paid in a year.

Well interest rate vs the amount of interest paid in a year are conneted to each other, are they not?

 

[OldShooter]

Make sure you understand the tax details. It sounds like the first house is now your principal residence. If so, there is a big tax shelter there -- on up to $500K of gains. If by "selling investments" you include tIRA investments you will be paying on ordinary income, not capital gains.

Also make sure you understand your options. Schwab and probably most others will give you a loan based on the value of your taxable accounts. If your present house is clear, you can get a cash-out mortgage or a HELOC as a swing loan. You can also borrow from a 401k, though that has always sounded to me like juggling with hand grenades.

But don't let the tax tail wag the investment dog. If the net of a sell/buy transaction substantially hurts your portfolio, you may want to re-think the idea. If money starts to run low in the future, you can't eat a fancy house, its upkeep will be bleeding your assets, and a hurry-up sale might hurt even more.

We are doing almost exactly what you're thinking of, but the house we are selling is a second home so no principal residence tax shelter and the difference money is coming out of tIRAs so we're also getting whacked with tax on ordinary income. We'll end up going backwards on the net transaction but we've been very lucky in life and can afford it. Also, the pain on tIRA liquidation will have to be borne some day anyway. Everyone's situation is different.

 

[RunningBum]

I would say that the first house is staying as-is for now.

I don't really understand that situation unless one is a vacation home, which it doesn't sound like. So I don't know whether any advice below applies. And I agree with oldshooter, understand the tax implications of turning a primary home into secondary.

Well interest rate vs the amount of interest paid in a year are conneted to each other, are they not?

Variable rate or fixed? Balloon, 15 year, 30 year? Do you have a mortgage on your existing house? Lower or higher rate?

Most people are concerned with getting a fair rate, and whether they can afford the full PITI (principle, interest, taxes and insurance) payment, not just the interest. That's why I asked.

If rates were still below 3%, I'd get the mortgage. I don't even know what current rates are now but you may have to take on more investment risk to beat them, so I don't know if I'd do that, but maybe you could do a balloon or low variable rate and spread your investment sales out over a few years and pay the mortgage off then. I don't know how those rates compare to fixed right now.

I don't know if there's a difference if it's going to be a rental home vs. first vs. second home. Those who do own rental housing should know, if that's what it'll be.

Final answer on what I would do? I wouldn't buy a second house in this inflated housing market if I was keeping the first. Maybe they'll keep going up, but things really got crazy in the last year. But your question is about finance options, so I guess that doesn't apply.

 

[SnowballCamper]

We can pay for it outright. But if we do this we will have ~$140-180K in tax liability for capital gains.

The second option is a mortgage loan, and on current interest rates ~$50K in interest/year.

Are you still in accumulation phase? The tax bill is one and done, but mortgage interest could be recurring for a long time. If you still have regular income and a long time horizon a fixed rate mortgage might be better. Or, depending on tax situation, take the mortgage, and payoff early over a few years in a way to keep in a lower tax bracket. It is a terrible time to be selling stocks...even if you still have gains. If the gains are all taxed as LT Capital gains anyway, and you're done working, then just pay the tax bill. Good Luck.

 

[Sunset]

I have to ask, OP why are you considering buying a second home ?

What is the purpose of this second home, and why would need to keep the old one ?

How far apart are these 2 homes ?

 

[Philliefan33]

At no time in my accumulation phase would I have drained 30% of my portfolio for a second home. That would feel like way too much ground to make up.

 

[pjigar]

Final answer on what I would do? I wouldn't buy a second house in this inflated housing market if I was keeping the first. Maybe they'll keep going up, but things really got crazy in the last year. But your question is about finance options, so I guess that doesn't apply.

Bingo.


You have triple whammy right now:
1. You will pay inflated price on the new house and not selling the old house.
2. Mortgage rates are high and investments are down (plus CG). Either way, it will cost you dearly.
3. You will loose preferential tax treatment on CG of your primary home if you decide to keep.


My general rule is: I am "upgrading" the house then I would buy+sell during the down market. If downgrading then, sell during the up market. Notice that I would sell the existing primary home simply because of tax free CG on primary home. I would also compare tax saved on CG vs. buy+sell cost. Last time we "upgraded", I unlocked the equity in the primary house and bought two rentals from that money. We still came out ahead in terms of impact cost (=CG tax - buy-sell costs)


Buying personal home is always a subjective decision. Tell us more so we can add other factors:
* What is the cap rate for rentals in your area? After all regular and differed maintenance costs? Rental friendly area?
* Current price of the house you are in and house you are thinking of buying?


Food for thought:
Do you have to move? Can you simply renovate the current house? Renovation can be much cheaper endeavor.

 

[wanaberetiree]

Make sure you understand the tax details. It sounds like the first house is now your principal residence. If so, there is a big tax shelter there -- on up to $500K of gains. If by "selling investments" you include tIRA investments you will be paying on ordinary income, not capital gains.

Also make sure you understand your options. Schwab and probably most others will give you a loan based on the value of your taxable accounts. If your present house is clear, you can get a cash-out mortgage or a HELOC as a swing loan. You can also borrow from a 401k, though that has always sounded to me like juggling with hand grenades.

But don't let the tax tail wag the investment dog. If the net of a sell/buy transaction substantially hurts your portfolio, you may want to re-think the idea. If money starts to run low in the future, you can't eat a fancy house, its upkeep will be bleeding your assets, and a hurry-up sale might hurt even more.

We are doing almost exactly what you're thinking of, but the house we are selling is a second home so no principal residence tax shelter and the difference money is coming out of tIRAs so we're also getting whacked with tax on ordinary income. We'll end up going backwards on the net transaction but we've been very lucky in life and can afford it. Also, the pain on tIRA liquidation will have to be borne some day anyway. Everyone's situation is different.

Thank you @OldShooter
I am digesting your points...

 

[wanaberetiree]

At no time in my accumulation phase would I have drained 30% of my portfolio for a second home. That would feel like way too much ground to make up.

Well, I see your point.
But it probably depends on a particular situation, say your assets are 2M vs 20M + what amount of money is needed to live comfortably. In out case its ~60-100K/y

 

[wanaberetiree]

Bingo.


You have triple whammy right now:
1. You will pay inflated price on the new house and not selling the old house.
2. Mortgage rates are high and investments are down (plus CG). Either way, it will cost you dearly.
3. You will loose preferential tax treatment on CG of your primary home if you decide to keep.


My general rule is: I am "upgrading" the house then I would buy+sell during the down market. If downgrading then, sell during the up market. Notice that I would sell the existing primary home simply because of tax free CG on primary home. I would also compare tax saved on CG vs. buy+sell cost. Last time we "upgraded", I unlocked the equity in the primary house and bought two rentals from that money. We still came out ahead in terms of impact cost (=CG tax - buy-sell costs)


Buying personal home is always a subjective decision. Tell us more so we can add other factors:
* What is the cap rate for rentals in your area? After all regular and differed maintenance costs? Rental friendly area?
* Current price of the house you are in and house you are thinking of buying?


Food for thought:
Do you have to move? Can you simply renovate the current house? Renovation can be much cheaper endeavor.

Based on what you said I'd have to reevaluate my whole financial strategy
(which is a great point!)

I wanted to address the only one question if I buy a house do I better - sell assets to cover a buy or get a mortgage?

Assuming that current interest rates are rising and are ~4% now and my capital gain tax liability would be as high as $140-180K

 

[wanaberetiree]

Are you still in accumulation phase? The tax bill is one and done, but mortgage interest could be recurring for a long time. If you still have regular income and a long time horizon a fixed rate mortgage might be better. Or, depending on tax situation, take the mortgage, and payoff early over a few years in a way to keep in a lower tax bracket. It is a terrible time to be selling stocks...even if you still have gains. If the gains are all taxed as LT Capital gains anyway, and you're done working, then just pay the tax bill. Good Luck.

"It is a terrible time to be selling stocks.."

True, but I am in my early 60 and not getting younger

It remained me

remember?

 

[W2R]

Final answer on what I would do? I wouldn't buy a second house in this inflated housing market if I was keeping the first. Maybe they'll keep going up, but things really got crazy in the last year. But your question is about finance options, so I guess that doesn't apply.

+1

At no time in my accumulation phase would I have drained 30% of my portfolio for a second home. That would feel like way too much ground to make up.

+1

Bingo.

You have triple whammy right now:
1. You will pay inflated price on the new house and not selling the old house.
2. Mortgage rates are high and investments are down (plus CG). Either way, it will cost you dearly.
3. You will loose preferential tax treatment on CG of your primary home if you decide to keep.
[...]
Do you have to move? Can you simply renovate the current house? Renovation can be much cheaper endeavor.

+1

You are getting a LOT of terrific advice on this thread, some of which I have quoted above, plus other equally good posts I did not quote. Seems like you are inclined to ignore it all (unless I misunderstood your comments). So, I'm not going to add to it except to say I think it's all top notch advice.

 

[ncbill]

Based on what you said I'd have to reevaluate my whole financial strategy
(which is a great point!)

I wanted to address the only one question if I buy a house do I better - sell assets to cover a buy or get a mortgage?

Assuming that current interest rates are rising and are ~4% now and my capital gain tax liability would be as high as $140-180K

Neither!

if you have that large a taxable account use a margin line of credit.

Over on bogleheads forums people have reported negotiated rates for margin loans as low as under 1.5% (ignore the much higher posted rates)

then use your cash flow since you're still working to pay down the margin loan ASAP

 

[Sunset]

...

You are getting a LOT of terrific advice on this thread, some of which I have quoted above, plus other equally good posts I did not quote. Seems like you are inclined to ignore it all (unless I misunderstood your comments). So, I'm not going to add to it except to say I think it's all top notch advice.

+1

OP appears to be considering only 1 thought, buy a second home and wants to know best way.
OP doesn't seem to have a clear plan for the 2 homes, which points it being a mistake/waste.

There are a lot of good valid reasons for owning more than 1 home, and there are some really bad ones.

 

[wanaberetiree]

Neither!

if you have that large a taxable account use a margin line of credit.

Over on bogleheads forums people have reported negotiated rates for margin loans as low as under 1.5% (ignore the much higher posted rates)

then use your cash flow since you're still working to pay down the margin loan ASAP

When I read your post I thought "what a bunch of baloney".
But then called Schwab, and ...

That is true that clients can request a personal margin interest rate to be reduced. I did not get it yet but it's a possibility.

That was a great point!
Thank you!

 

[wanaberetiree]

+1

+1
+1

You are getting a LOT of terrific advice on this thread, some of which I have quoted above, plus other equally good posts I did not quote. Seems like you are inclined to ignore it all (unless I misunderstood your comments). So, I'm not going to add to it except to say I think it's all top notch advice.

Indeed I am getting a LOT of terrific advice!
Thank you all!!!

Now it sounds like my initial questions were addressed, but the great community of the early-retirement.org actually addresses a wider topic - to buy a second house or not.
I am sure it will be useful for many people here.

Let me throw a hypothetical example.

Say we have two portfolios:
4.5M and 7.5M (60/40 AA) current value (~20% off the historic high)

Age - early 60s

Income - early SS 25K + 30K = 50K/year
Annual spending $80-100k

The first house (paid off) ~1.5-2.0M value (no interest in selling at the moment)

Both houses are in the Bay Area.

(Note: Personally, I think that the second house can be considered as AA diversification (you can shoot at me here ))

So let's play Suze Orman's ‘Can you afford it?’ game:

Can you afford to buy a second house?

Option 1 ? (4.5M in assests)
Option 2 ? (7.5M in assests)

What say you?

 

[Scuba]

At no time in my accumulation phase would I have drained 30% of my portfolio for a second home. That would feel like way too much ground to make up.

I agree 100%. I’ve always preferred to borrow as long as I’m not borrowing more than what I could afford to pay off if necessary.

 

[Sunset]

......

The first house (paid off) ~1.5-2.0M value (no interest in selling at the moment)

Both houses are in the Bay Area.

(Note: Personally, I think that the second house can be considered as AA diversification (you can shoot at me here ))

.....

Can you afford to buy a second house?

Option 1 ? (4.5M in assests)
Option 2 ? (7.5M in assests)

Here is the issue to me, this is a lot of concentration of assets not a AA diversification and this increases the risk , vs a house in the Bay area and one in NY city. Risks can be Fire, Riots, Earthquake, Rent Control, etc.
Whatever happens will affect both houses.

I have to wonder, the expenses of the new house may not be frozen property taxes, but a new owner rate which will be steep on a $2M house.
Even the old house, if not used is just a drag of expenses.

 

[RetireBy90]

Lots of opinions already but I wanted to just add a brief comment. We have a rental and have retired couple years ago. We found a good management company and they cover all the details of rent collection and finding a tenant when needed. Cost is a bit steep for my thinking but it doesn't take much of my time, just approving repairs and new tenants. Plus side I get one more retirement check each month.

On your choice of loan or not for new purchase, just wanted to note you can get a mortgage at 4.5% or 5% now and inflation is at 8-9%, so a mortgage would be less than inflation. You will be repaying the mortgage with "cheap" money in a few years unless we get back to 2% in short term. If so you can always refi when rates fall. I'd look at a 15 year if you can afford it as rates will be lower than 30 and you will be able to see it paid off one day.

Just one view

 

[pjigar]

Don't confuse RE holdings with AA diversification. In my book, Assets that are part of AA HAVE TO generate free cash flow otherwise it goes in the liability column. If you are considering second home as an "investment" then different set of rules apply: Cash-on-cash return, Cap ratio, Rent control risks, Age of the building, Differed expenses, etc. Don't fall in to mental accounting trap: If RE is not rented then it is NOT an investment, it is in fact an expense. YMMV.

 

[folivier]

I'd be careful if thinking of a margin loan with the stock market so volatile lately. No telling how low it will go before it recovers.

 

[street]

I would do the mortage loan and then you have choices on what works for you on your other home. I personally would not alter my investments from a loan etc. at this time. If the ship was sailing in calm waters, I would consider it with an early pay back only.

I see no concern financially not to go forward with the purchase. It looks like you can easily handle the purchase and still have a backup plan with first home and a promising financial future in retirement.

 

[wanaberetiree]

I'd be careful if thinking of a margin loan with the stock market so volatile lately. No telling how low it will go before it recovers.

I hear you!
But margin rates may be very attractive ~2%

Would you say that if you used 30% of your margin power that'd be very safe even in today's market?

And on the market volatility - how low can it go? from a historical perspective? another 20% down?