Should you sell your stocks to buy your dream home?

should you sell your stocks to buy your dream home?

Plan ahead before you sell your investment portfolio to buy your dream home

By MeTheMillennial

Stocks are up over 70% since the pandemic lows in March 2020, in fact the S&P 500 has been hitting record highs every other day in 2021. It’s currently well over 4,000.

This is fuelling a key question from ordinary people who have ventured into the stock market, they are now asking “whether they should cash out and sell their investments to buy their dream home”?

Given a lot of folks are now sitting on huge growth in their stock portfolio I completely get it. I’ve considered doing the same. It’s only natural to – if you have seen gains of 50+% in your investments why not use those gains to live a better life for you and your family. Isn’t that the point of investing after all?

Well before you take the plunge let’s look at some of the considerations you should be planning for.

Let’s first start with the Positives (Pro’s) and Negatives (Con’s) of selling your stocks and investments to buy your dream house.

For this scenario let’s assume we have a stock portfolio worth $750k – of which the vast majority, $550k are in accessible brokerage accounts. The cost of the house is $500k so you can completely pay in cash. We will explore other approaches such as a downpayment approach further down. But let’s first start with this scenario.

1) All cash option – sell your stocks to buy your dream portfolio with cash:

If you are in this position, first of all congrats. Getting your brokerage account to this value is no mean feat. Take into consideration the below before making the plunge and selling your stock portfolio to buy your dream home.

Pro’s:

  • Plain old peace of mind! Buying a house outright means that the days of worrying about a recurring monthly mortgage payment is a thing of the past. This would be a huge relief for a lot of people out there. I see the posts day in and day out on Reddit. The pressure alone knowing you’re in debt to a bank can be soul crushing and really affect people’s anxiety levels. It can even force them to stay in a job they hate and live an unfulfilled life. Okay I might be being a little over dramatic here, but you get my point.
  • You are essentially protecting your finances long term, with a healthy margin of safety given you no longer have this monthly payment expense on a mortgage. 
  • In the long run, you will save yourself a lot of real dollars from not having to pay the interest a bank would have charged you for a mortgage. For this example a $500k home over a typical thirty year timeline with a fixed 3% interest rate would save you approx. $257k in interest payments! That’s over half the actual mortgage amount.  See the image below if you don’t believe me. A lot of people don’t fully comprehend how much they pay over the lifetime of a mortgage in just interest payments alone. This is why getting a competitive interest rate helps, and why it pays to shop around. Run your own numbers here to see for yourself.
  • Having cash to buy a house outright will make closing on your dream home so much easier. Ask any real estate agent, if a bidding war ensues, the old adage ‘cash is king’ holds true.
  • There are also some cost benefits on paying in cash for example you will save on transaction related costs, and the requirement for expenses such as mortgage default/life insurance. Check out this post to understand some of the hidden costs of buying a home with a lender backed mortgage.
  • Further stock market gains could be lower going forward, in fact they could actually lose value – especially if your investment is not diversified or invested only in a small number of individual stocks. Given we have been on a market bull run for the last 10+ years, past success is no predictor of future returns. There is no guarantee your investments will continue to grow.
  • However, given that you will now no longer have monthly mortgage payments you could take this extra disposable income and dollar cost average into the market every month and build back up your investment portfolio. Or just go on some kick ass vacations!
  • There is also the potential for appreciation of your house in the future. In fact depending on the location of where you buy your new home. You could actually have better returns from buying a house than in the stock market. However this will hugely depend on the location and size/condition of your dream home. Also, if it’s your dream home you probably will want to hang on to it, and eventually pass onto your kids.
Mortgage Interest Calculator

Con’s:

  • The great thing about stocks is that they are highly liquid, meaning you can sell them in an instant though your Robinhood app or whatever brokerage you use. The bad thing about homes is that they are highly illiquid. It takes a long time to sell a house, depending on your location, price and the demand – it can take anywhere from weeks to years. Your money is essentially tied up in this one concentrated asset. Anything could happen, you could get wood termites or a prison could be built next to you (okay, highly unlikely). These types of events would drastically reduce the value of your home. Versus investing in the stock market and index funds which will give you instant risk diversification across 1,000’s of companies.
  • There are tax benefits to taking on a mortgage – mortgage interest payments are usually deductible depending on your location. If you pay all cash, there is obviously no need for a mortgage so you miss out on this tax benefit.
  • Interest rates are the lowest they have been in decades due to the current Federal Reserve policies. At the same time we are seeing rising inflation, locking in a low interest rate now means that every year your payments are getting smaller and smaller due to inflation (assuming wages rise alongside). At these crazy low rates you are essentially borrowing for free!
  • You could miss out on massive gains in the stock market if this record bull market continues. As noted from the start the S&P500 has increased over 70% since the pandemic lows in 2020 – if you’re not in the market you can’t win. So you must consider the opportunity cost. You are also missing out on passive income in the form of dividends which would be substantial for a portfolio of over $500k. In fact I intend to retire at age 35 from passive income.
  • This one is perhaps the most important. You are crystallizing tax (capital gains) requirements. Once you sell your stocks you will be hit with long term capital gains tax depending on your location (e.g. typically 20% for the US, higher for other countries like Canada, Australia, Ireland etc.). This report here will provide a breakdown on capital gains tax rates by every country in the world. So taking our example, if you sold $500k of stock investments in the US, if we assume they appreciate in value from $400k to $500k since you bought them. You would be hit with a $20k tax bill at the beginning of the next year. Clearly due to the sums involved, make sure to research the tax impacts on your stock sale before actually selling. You can calculate how much capital gains tax you would have to pay here.

Okay the above 100% cash option scenario may not be applicable for most people. I know my current net worth would not be enough to buy my dream home outright, especially where I currently live in Toronto. So what if you instead want to sell your stocks to cover the downpayment on your dream home? Let’s explore this scenario and the key considerations you should be thinking of.

2) Downpayment Option – Sell your stocks to cover just the downpayment on your dream home

To cover the down payment required for a dream home, some millennial home buyers are borrowing money—from themselves.

Take for example a colleague of mine, John Doe and his wife Jane (yes you guessed it clever clogs, those are made up names). This lovely couple when buying a home in Hartford, Connecticut for $1.2 million dollars, decided to sell a portion of their stock investments to cover the down payment. 

Their stock portfolio was quite considerable – they had $600k in a brokerage account alone, excluding retirement accounts. Jane was arguing to put 40% as a down payment. She thought the piece of mind that came with with having a larger down payment and smaller mortgage would be best. 

But John, the mathematical type, ran the numbers. He calculated that if they only put a 20% down payment (the minimum) that extra cash left in the stock market would make far more returns versus the low cost of interest they would be locked into for next 30 years (which is also tax deductible). He ran the numbers based on expected market returns of 7%, adjusted for inflation.

When Jane realised this, along with the expected capital gains tax they would have to pay when going for the 40% down payment, she agreed with John. 

They settled on 20%. John being the mathematically inclined guy that he is, was safe to say very chuffed with himself.

The key point here is to assess your own situation before making such big life decisions. Run the numbers based on conservative assumptions and base your decision on the numbers, and not an emotional factor such as piece of mind. 

You will be much better off for it financially in the long run.

Currently about one-fifth of borrowers sold stocks or bonds or borrowed against their retirement accounts to finance a home purchase but there is another way.

3) Alternative to selling your stocks investments 

There is an alternative. Mic drop, whhaaat???!! 

This approach doesn’t seem to be widely known in the public domain. But it exists, if you want to get your dream home but don’t want to miss out on growth of your stocks over the foreseeable future.

You can actually get a loan from a lender secured against your stock investments. Most leading financial institutions offer this option (e.g. JP Morgan, Merill Lynch, RBC etc.). Essentially they will offer a line of credit to you based on the amount you have in your brokerage account.

You can then use these funds to cover your dream home down payment. In most cases with the same lender that holds your brokerage account.

There are also benefits to this, if you have a stock portfolio of a certain size you can actually get more competitive interest rates due to the size of your assets. 

There is a word of caution here though and some requirements that need to be in place.

Such as if you plan on following this route you will need at least 125% more in your brokerage account versus the amount you want to borrow for the down payment. So for example, if your down payment is $100k and you want to borrow that full amount, you will need at least $125k in your brokerage account. This is a requirement by lenders to account for any market fluctuations. 

Also if the market does crash in the future like during the pandemic of 2020. Lenders may actually initiate what’s called a margin call – which means you could be forced to pay the difference between what you borrowed (i.e. your down payment) and the current market value of your brokerage stocks that you secured the loan against.

This option is definitely worth considering especially if you hate paying capital gains taxes when you don’t necessarily have to, like me.

There are no hard and defined rules regarding if and when to sell your stocks and buy your dream home. The key thing is to do your own research (good job on getting this far in the post). Weigh up the pro’s and con’s of each and run the numbers. Make it a fact based decision versus an emotional one.

Here are a few more factors to consider

If you are looking to go ahead and purchase a home, first of all congrats this is a huge step and one of the biggest financial decisions you will make in your life. Here are some additional considerations you should also consider when planning the best route for your specific circumstances:

  • Don’t wait forever to sell your stocks. Once you make a decision – follow through. I have come across examples where first time buyers will wait until the very last second before they sell, with the hope of squeezing out every last dollar of growth in the market. The opposite can and does occur, a stock market drop could even affect your ability to borrow and also can delay the actual transaction process due to the time it takes money transfers to satisfy lender requirements.
  • Sell early. Lenders love seeing actual cold hard cash in your bank account (in reality this means numbers on a screen but you get the picture). When it comes to qualifying for a mortgage, lenders only value your stock holding at about 70% of its market value.
  • Tax considerations – capital gains. As noted earlier, the more your stock has appreciated or in other words went up in value the more capital gains tax you will have to pay. Make sure to factor this into the cost of your dream home. You can calculate how much capital gains tax you would have to pay here.

For those interested, my personal take is not to buy a home right now. Although this may change in the future. Currently I want to let my investments compound and grow over the long term, and eventually retire in 5 years time and live off the passive income my stock portfolio generates. Then travel to as many countries as possible and as far as possible. 

My current location in Toronto is also crazy for Real Estate prices right now, and I just down fancy paying $800k for a one bedroom condo, and yes those numbers aren’t a joke! 

However I have been getting more and more into the Tiny House craze – if you haven’t come across this before, check out these seriously impressive Tiny Homes for a fraction of the price of a typical suburban house.

I hope you found this article informative, it took some time (my weekend) to pull together. If you found value in it please let me know in the comments. I would appreciate it.

As always, I hope you find some of these areas helpful in your own journey to whatever your goal is. Make sure to follow along on my journey on how this thing called life and my goal of financial freedom works out, I keep my net worth updated here. Sign up to my newsletter, you will receive some great free content such as a first steps to financial freedom guide and an overview of the easiest sites/places to invest, While also staying up to date on my latest blog posts to show you the path forward. I post at least weekly and no spam, I promise.

Leave a comment or contact me if you would like to get in touch and update me on your progress towards your goals.

Catch you soon,

MeTheMillennial

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