You’ve scoped out the neighborhood and love what you see. Now that you’ve found the perfect house, it’s time to strategize about how to pay for it. How can you compete with other buyers in today’s hot real estate market, in which all-cash deals are the new normal?
Once you determine what you can afford, you have to come up with the down payment. Unless you are sitting on $1 or $2 million in cash, you may lose out on your dream home.
Here are three strategies we use with clients that may work for you.
Borrow against your brokerage account until your mortgage is approved and funded.
With this strategy, you margin your investment portfolio to pay cash for the home. When your mortgage is approved and funded, you repay the margin loan. You can borrow up to 50% from your Schwab taxable brokerage account. For example, if you have a $2 million portfolio, you can borrow $1 million. The beauty of this strategy is that you avoid paying capital gains tax, because you are not selling from the portfolio. The cash is available immediately to be wired out to the escrow company. Keep in mind that if the market drops to a level where your loan is more than 50% of the value of the account, you would need to sell securities. We recommend the margin loan be no more than 40 to 45% of the account value to provide a buffer for market volatility.
Take a 60-day loan from your IRA.
You can borrow from your IRA for short-term cash needs. You must sell holdings to raise the cash, but no tax is due on the trades, since the money is in a tax-deferred vehicle. This strategy is called a rollover, and it’s imperative that you return the money to your IRA within 60 days. If you fail to do so, the withdrawal will be permanent and you’ll owe taxes on the amount withdrawn. If you are younger than 59 ½ and are unable to return the borrowed funds within 60 days, you’ll also owe a 10% early withdrawal penalty. You are limited to one 60-day rollover per year. (Note that trustee-to-trustee transfers between IRAs do not count toward this limit.)
Exercise and sell stock options, or sell restricted stock.
Work with your tax preparer to determine the true net sales proceeds after calculating all taxes—withholding may not be enough to cover your tax due. Restricted stock becomes yours to sell as the restrictions lapse (at that time tax withholding is done). Be sure to have a tax projection prepared to confirm the withholding is sufficient to cover your full tax liability.
Buying a home in the Bay Area is challenging for many reasons. Be sure you understand what you can afford, both in terms of a down payment and ongoing cash flow. And if you’re raising cash from your portfolio or selling company stock to pay for your home purchase, get your tax preparer involved so there are no unpleasant surprises come April 15.