Author Topic: House purchase decision: empty savings/investments or access HELOC  (Read 2659 times)

ellevendollarbill

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Hi there.  I'm interested in some advice from some fellow mustachians. My wife and I are considering putting an offer in for our dream house.  It is currently listed at $70k as a foreclosure. Our realtor believes (as do we) that this is severely underpriced and will elicit loads of competition, so we are considering making a cash offer with a quick closing to be more attractive to the seller. The problem, of course, is that this will require us to access between some and all of our investments and savings. 

We can use some combination of investments ($70k), savings ($30k) and a HELOC ($30k at Prime+1%).  Our offer is $70k and it will require roughly $20k of work to be performed within 2 months of purchasing.  Somewhat outside of the scope of this question is the fact that we will be renting our current house, rather than selling it.

What's the best use of these capital resources? Right now we are thinking to empty investments for the cash offer and use $20k of our cash for repairs, so as to avoid any finance charges and eliminate a mortgage from our budget.  Is this wise? It seems a shame to wipe out the investment account, but we are thinking we can replenish fairly quickly by eliminating the mortgage and gaining rental income. We anticipate having an extra $1000 per month to put towards investments from eliminating a mortgage and gaining rental income.Similar houses on the same block have sold for low $200's in the past 2-3 years, so we are in a sense doubling our investment with this purchase, even if it's not liquid. 
Any input is welcome, and if we're being stupid, consider my face your punching bag :)

sherr

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Re: House purchase decision: empty savings/investments or access HELOC
« Reply #1 on: February 11, 2013, 08:35:30 AM »
It's really hard to say what is definitely best, but I will add my meagre advice and hopefully something with resonate with you. It's really hard to say because it depends entirely on what your goals / values are and what your risk tolerance is. What my be the best decision for you may not be for someone else.

First of all, I don't think there's necessarily anything stupid about liquidating investments to purchase your dream home, especially if it is undervalued like you think it is. You need a place to live, and if your current home is going to to become a rental then you are essentially just trading types of investment, from stocks / bonds to real estate. Traditional investing advice applies here too, if you can "buy low" on your new house then you should. If you can potentially turn around and sell if for 2x what you paid for it then you almost definitely should, although if this really is your dream home and you plan on living there indefinitely then the potential sales price is less relevant.

As for which account to take the money out of, or whether to take out a HELOC, the mathematical answer is that you should take the money out of whichever source has the lowest interest rates. If you expect the stock market to return 7% per year, and the HELOC would be 4.25%, then it's mathematically cheaper to take a HELOC than to withdraw from your investments. However, mathematics are not the end of the story because there are varying levels of risk involved. The stock market is fairly volatile. By withdrawing your invested money you may be avoiding a huge drop in value, or you may be missing out on a huge increase in value. There's no way to know. The HELOC should be very stable by comparison.

If it was me I would use all of the $30k that you have in savings (unless you are saving for something in particular that is coming up soon), take out the HELOC for the other $30k, and leave as much in the investment account as I could. But if you were more risk-adverse then withdrawing from investments before taking out a HELOC is equally valid. It's true that rental income would allow you to build up investments / pay off debts faster, but that is true regardless of how you fund the initial purchase.

Anyway, I hope you find some of that rambling useful.

Done by Forty

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Re: House purchase decision: empty savings/investments or access HELOC
« Reply #2 on: February 11, 2013, 08:39:02 AM »
I agree with the approach above.  The math says that using the entire HELOC avoids the most opportunity costs, and then using the cash next does the same.  I'd cashflow the repairs.

ellevendollarbill

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Re: House purchase decision: empty savings/investments or access HELOC
« Reply #3 on: February 11, 2013, 10:31:25 AM »
I appreciate this input.  It's especially helpful to hear from an objective/outside perspective, since my wife and I are going a little crazy weighing the various options. 
We are attracted to both the low cost of living and the eventual profit from selling the house.  The low cost of living leads me to use the investments, while the investment perspective pushes me towards the HELOC.  I guess the interest payments on $30k HELOC are minimal enough that I can defer the decision by simply starting out with the HELOC and then liquidating investments, if I don't like that monthly payment later.
Either way, I greatly appreciate you weighing in, and I'll try to follow up whether we get the house or not.  The whole experience has been an exercise in learning what we love and hate about our current living situation.  It's also inspired us to think about converting some investments into real estate, regardless of whether or not we move.

ellevendollarbill

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Re: House purchase decision: empty savings/investments or access HELOC
« Reply #4 on: February 12, 2013, 12:43:23 PM »
Figure I'd close the loop here.  We found out today that the seller accepted another offer.  Still don't know how much, but we know we didn't get it.  We're bummed, but are considering it a learning experience, esp about our willingness to access investments for a house that we really like.
Thanks again.