[USER]

Need advice, planning to buy a home of 700K for All-Cash. What do you think? Details below.

Us:
42 yr old me (160K Gross) and 44 yr old my spouse (181K Gross). We are FI, but want to keep working till kids go to college. We like it!

Financial Situation:
Current Net worth 2.8 Million USD in VTI+ BND 90% + 10% ( does not include house or any physical assets)

Living in Paid off home 2000 sqft home ( estimated value today: 525k)
$0 Debt

Why I asking a question:
Planning to buy another home in good school area for $700K, almost 3000 sqft kind of a dream house.

Question:
I am planning to liquidate 700K mostly from my BND side of portfolio ( less taxes) from the 2.8 Million and use it to buy all cash.

Rent out the current home for $3500 monthly income. Invest that and income that we have been doing for years!

Reason, I do not want to get a mortgage for 7.2% and pay the fees and heavy interest.

Have been living debt free from last 5 years, do not want any debt, are we crazy?

Has anyone else bought all cash properties?

Any advice would be appreciated!

[Frank]

Why bother keeping the current home? Sell it, take the massive tax exclusion on the capital gains and invest it.

[Andrew]

I’d sell your current house. Single family homes make bad rentals generally. You’d want someone with an income of ~$7500 a month to rent to.

If they make that much and they can’t afford to buy a house, they’re often irresponsible, or looking to buy a house soon (high vacancy rate).

If you sell, look at a bridge loan so you don’t have to pay capital gains on the 525k.

[Christina]

My husband and I just bought a vacation home in cash. We are debt free and we have the cash sitting around. Is it the best financial decision?

No, but it made sense to us and we are enjoying the home with no financial worries.

I’d not turn your current home into a rental and risk giving up your capital gains exemption. Landlording is not for everyone.

[Damon]

Your analysis is, at best, incomplete. Generally, I’m not a fan of people just moving and renting out the old primary residence because of exactly what you are doing.

You aren’t approaching it like an investment rental.

You need to examine the all-in cost- insurance, property taxes, capex, vacancies, etc.

So, I’d clean that all up then you measure that expected investment return with your other investment options, and adjust for associated risk.

[Marc]

Can you net more than $50,000 per year on that $500,000 house? If not, then I’m selling and rolling the equity into house 2 and not unplugging $500k of my investments that should average 10% a year generally

[Johnathan]

Personally I don’t understand why you’d keep the current home instead of selling it, taking the $250/500k cap gains exclusion on it & put those funds towards the new home.

What’s more attractive to you about keeping it vs.

selling part of your portfolio, creating a taxable event & decreasing the amount you have invested in the market?

Before any expenses & time/hassle spent on the property you’re only getting paid $3,500 per month to keep it & you have zero leverage on the property to enhance your ROI.

[Rick]

A few things are not mathing. Or I am not yet awake and need some coffee.

You have 10% of your 2.8m net worth is in BND yet most of the $700k for this additional home is going to come from BND?

You are ok renting a home valued at $525k for about $40k a year. But that $40k will be drastically reduced by obvious landlord costs and the somewhat less obvious true landlord costs.

I expect the rate of return will be low. Unleveraged real estate is historically a very low performing asset.

You share concern about paying a high mortgage rate. We all pay a high not invested rate when cash is put into a house.

The less obvious but still very real cost very very often exceeds the mortgage rate.

So, you are paying a high cost to buy in cash, even if it is not as obvious as the mortgage rate.

For me, a paid off house is a lifestyle choice, mostly as it fails most to all financial tests.

It begins to become a financial choice when having a payment would cause you to “create” more taxable income which then reduces Roth conversion room and/or increases taxes on forced events like RMDs or large asset sales.

I would strongly suggest mathing this up as all cash vs minimal cash down. I would get brutally honest on the true landlord costs.

I think the math will show you your current proposal is quite expensive, ongoing and to your fire journey.

[Joel]

Just to double check, you are holding BND in a taxable account with little capital gains?

As others have pointed out, your modeling needs some work.

Please consider the tax costs for generating the cash in your model.

[Jennifer]

If this house is in an area where natural disasters are a thing then having some kind of mortgage maybe worth while.

I totally get your mindset but if it all went south do you think it’s easier to be made whole by yourself or have a partnership like a bank demanding to be made whole….

[Karl]

Just be careful to not become house poor since you need that portfolio to generate enough to cover expenses if you retire (zero worries while working).

Be careful to not be overly comfy with the market.

Those bonds are there for ballast when stocks go down and if cash is tied up in a house it’s not available to rebalance back into stocks.

You’re not crazy, but make sure your portfolio can still do what it needs to do for you.

[Shannon]

You’re probably better off selling the house and investing the money.

[Leah]

If you really want to try being a landlord, rent out your current home for 2 years. If it goes well, do the analysis and decide if you want to lose the $500 tax exclusion.

We did this.

Even though the property was cash flowing 1k a month, we decided we did not want to be land lords any more.

[Author]

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