A caller named “M” wonders if liquidating stocks for a larger down payment makes sense in a high-interest rate environment.
An anonymous caller wants to take a pay cut to pursue his passions. But 75 percent of his net worth is in real estate. Is this too risky?
Tiffanie hasn’t saved enough for early retirement, but she has a plan to use home equity to accelerate her goals. Is this going to work?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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“M” asks (at 01:56 minutes): Given current high interest rates, should we raid our brokerage account in order to make a larger down payment on a house?
My husband and I live in the Bay Area, and we’re looking to buy a house in the $1.4 million to $1.8 million range.
We have $200,000 in cash and another $900,000 in a brokerage account. Our mortgage interest rate would be 6.25 percent, assuming a loan of $1.25 million.
Instead of putting 20 percent down, we want to liquidate most of our brokerage account and put down 50 percent for the following reasons:
- An interest rate of 6.25 percent isn’t far from an expected market return of 8 percent.
- 40 percent of our income is derived from stocks and bonuses that only come a couple times a year, so it’d help to have lower monthly payments.
- We can only deduct the mortgage interest for the first $750,000. So having a larger mortgage doesn’t help us tax-wise.
- A larger down payment could help with securing the mortgage itself
On the flip side, I don’t love the idea that most of our non-retirement funds would be tied up in home equity. Though the lower monthly payments would allow us to rebuild savings over time.
Is there anything we haven’t considered?
Anonymous asks (at 18:27 minutes): Is it safe to Barista FIRE if 75 percent of my net worth is in residential real estate assets?
I’m 46 years old, unmarried with a 3-year-old son, and two parents who’re comfortably in retirement.
I work part-time with my previous employer and plan to do so for another one to two years.
This job brings in $14,000 a month and provides access to health benefits, 401k contribution matches, HSAs, and ESPPs.
My expenses are $8,600 a month, driven primarily by my son, who makes up 40 percent of those expenses.
I’d like to shift to a level of income in the $30,000 to $50,000 a year range doing something I’m more passionate about.
But with my real estate heavy asset allocation, I’m concerned about the risk associated with housing inflation, climate change, and rising insurance costs in Florida.
I own $4.1 million in real estate with $900,000 of debt at a 4.2 percent 30-year fixed rate. This cash flows $9,200 after taxes and reserves are set aside.
The average tenure of my units is fairly long, about seven years. However, I’m expecting $75,000 in upcoming renovations for three of the units.
I’ve saved $600,000 in retirement accounts, 90 percent of which are pre-tax, invested in diversified equities.
I have no after-tax brokerage assets, and I choose not to purchase a primary residence.
My cash reserves are $200,000 total: $100,000 in CapEx reserves for real estate, $50,000 for an emergency fund, and $50,000 for future expenses such as cars.
Am I missing anything or am I ready?
Tiffanie asks (at 34:09 minutes): I have a plan to use the equity in my home to semi-retire in 10 years with a lower-paying part-time job, but I’m running into obstacles.
I’m 48 years old. I was previously divorced and remarried three years ago. My husband works for himself as a contractor and plumber. He has no retirement savings.
I’ve saved $300,000 in a 403b, which is not enough for retirement. But I have significant equity in my home. It’s worth $1.1 million with a loan balance of $350,000.
Instead of waiting to downsize, I’d like to sell my house now and split the proceeds into four buckets.
My current income allows me to borrow $450,000, so I’d use loans to make up for any shortfalls.
The first portion would go towards a fixer-upper primary residence that my husband would remodel.
Another towards a rental property near the college that I anticipate two of my children attending.
$100,000 in cash would be set aside for renovations and to start a side business.
And, if possible, I’d purchase an additional rental property.
Some problems I’m stuck on:
- I want to retire a few hours south of where I currently live. This means I can’t stay in the home I purchase now. And when I quit my job, I’ll no longer qualify for a new loan.
- I’d be giving up a primary home loan rate in order to move south.
- I can’t move into the college investment property because it’s too far from my job.
- I want the second investment property to be down south. We’d do better with short-term rentals there and its proximity would make it easier to manage.
Having two investment properties with large loans and higher loan rates doesn’t seem smart, but I can’t figure out another way to execute my plan.
What do you think? Do you have other suggestions to reach my retirement goals?
Resources Mentioned:
Profit First: Transform Your Business from a Cash-Eating Monster to a Money-Making Machine | Book
The E-Myth Revisited: Why Most Small Businesses Don’t Work and What to Do About It | Book
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