Author Topic: Selling Index Fonds for House OR take on new mortgage?  (Read 3022 times)

DaKini

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Selling Index Fonds for House OR take on new mortgage?
« on: February 26, 2014, 01:11:30 PM »
Hello,
i wonder if it is wise to sell ones stock to finance a house? I mean on a general term.
The background is a hypotethical case however: my parents (which will live healthy and long into the future i hope) own a house in which we have a flat rented (for a heavy discount, so basicly its just a cost sharing and not for a profit). The house would be passed to my sibling once both parents have died. I guess i would need to pay out my siblings part to him as there is no interest to own a house on the siblings part.

I have the impression that it would be mostly better to open a mortgage and have the stock dividends go to pay for part of the interst. That way i could keep investing my surplus from my job and also would stay fairly liquid and also more diversified. I would either move in to save on lease or more probably would rent out the house.

This should hold even more true with currents low interest rates, shouldnt it? am i right that this will pay off in the long run if the interest payd would be lower my dividens+appreciation of my shares?
What am i overlooking? When would it be better to sell the shares to avoid the mortgage?

soccerluvof4

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #1 on: February 26, 2014, 01:55:11 PM »
Depending on the Interest rates and what you should be currently be able to get I would most certainly get the mortgage and keep dumping into the retirement fund. But that's a generalization based on a lack of non specifics. 

DaKini

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #2 on: February 26, 2014, 02:28:08 PM »
I wonder still where is a good "break even point" while dealing with the uncertainitys of the stock market.

Lets just drop some hypotetical numbers to help me guide my thoughts:
- Say, 100k where on stake, 100k in stocks could possibly avoid 100k of debt.
- If i assume i get about 2% from dividends, quite safely thus equaling 2k of yearly income.
- Assume, i could get a mortgage @4%, equaling 4k of interest.
- then assume, i can either save on rent or rake in rents myself, say 7k annually which equals direct positive cashflow (set aside saving money for repairs etc).

I would calculate:
- If i take the mortgage: (7k+2k) 9k income - 4k interest = +5k (+3k in case i wont get dividends due to black swan crash)
- If i sell stock: 7k income - 0k interest = +7k (rather safely)
So there is 2k wiggle room for dividend rising and stock appreciation. If my stock generates more than 2k per year (2% of the portfolio) i would be better of holding the stock, is that right?

Its just i hate debt. But from the (rather pessimistic?) example i assume holding the stock would be a good idea until a interest rate of about 6%. Do i conclude right, or is there a flaw? I have the strong feeling im overlooking something, beeing it a major risk or some other stuff.

PeteD01

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #3 on: February 26, 2014, 02:42:03 PM »
Yes, you are overlooking something: One is a minimum risk strategy the other takes market risk amplified by leverage.
The question you must ask yourself is if you are in a position that you should take that risk or not.

Here are two extremes to consider:

If you have only 100k in index funds and you sell them, you will end up being not diversified and have lost the opportunity for market gains which are be critical if you are young and wish to retire early. The risk should be taken - get the mortgage.

If you have 2000k in index funds and you sell 100k worth, your allocation will hardly change and the possible foregone gains could not possibly have a major influence on reaching your goals. Not a risk worth taking - invest your profits in your personal real estate.


Peter

foobar

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #4 on: February 26, 2014, 08:24:15 PM »
Your options are
a)Take the mortgage and invest the 100k and getting 8% return gives you a total of 720+100k house: 820k
or
b)Pay cash for the house and invest the "mortage" payment = 513k investment account +100k house = 613k

There are some tax issues involved but in general if you think you can get more than 4%, your better off investing from a mathematical point of view. Having a loan  serves as an inflation hedge but on the other hand you run the risk of market failure. The odds of averaging less <4% over 30 years is small but not zero. With interest rates about 6% I wouldn't gamble.

And when in doubt, you should always think about splitting your bet. Half your risk and half your reward.

I wonder still where is a good "break even point" while dealing with the uncertainitys of the stock market.

Lets just drop some hypotetical numbers to help me guide my thoughts:
- Say, 100k where on stake, 100k in stocks could possibly avoid 100k of debt.
- If i assume i get about 2% from dividends, quite safely thus equaling 2k of yearly income.
- Assume, i could get a mortgage @4%, equaling 4k of interest.
- then assume, i can either save on rent or rake in rents myself, say 7k annually which equals direct positive cashflow (set aside saving money for repairs etc).

I would calculate:
- If i take the mortgage: (7k+2k) 9k income - 4k interest = +5k (+3k in case i wont get dividends due to black swan crash)
- If i sell stock: 7k income - 0k interest = +7k (rather safely)
So there is 2k wiggle room for dividend rising and stock appreciation. If my stock generates more than 2k per year (2% of the portfolio) i would be better of holding the stock, is that right?

Its just i hate debt. But from the (rather pessimistic?) example i assume holding the stock would be a good idea until a interest rate of about 6%. Do i conclude right, or is there a flaw? I have the strong feeling im overlooking something, beeing it a major risk or some other stuff.

DaKini

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #5 on: February 27, 2014, 01:19:58 AM »
From a risk standpoint also i think it would be wiser to do the mortgage.
I have a very secure government-like job that is not linked to the performance of markets. So my paycheck is very stable and even if markets crashed i could continue to fulfill the mortgage obligations, it would just be that i would save less (this would be the dividend reinvestment not happen due lack of dividends in a heavy market crash).

Does this fact alter the "i wopuld not gamble with interest rates at 6%" a little?

Sorry that this is all just hypotethical, but i try to learn from a case that could be my reality sonner than i like it to happen.

foobar

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #6 on: February 27, 2014, 11:10:48 AM »
That is a different risk.  The question is what can you expect to earn out of portfolio for the next 30 years.  Something like 6-8% after tax is a really decent guess. There are a few periods that perform slightly worse and a few that are much better.  If your market portfolio isn't going to return higher than the interest rake, it doesn't make sense to keep it. The people recommending pay off the house in the 90s early 2000s were giving solid advice. When your paying 8%+ on your mortgage it doesn't make sense to gamble by buying stocks or bonds. When you paying <4%, it makes sense to gamble.

his would be the dividend reinvestment not happen due lack of dividends in a heavy market crash).

Does this fact alter the "i wopuld not gamble with interest rates at 6%" a little?
.

DaKini

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Re: Selling Index Fonds for House OR take on new mortgage?
« Reply #7 on: February 27, 2014, 12:34:12 PM »
Thank you for clarifying!