One of the best ways to get a better deal on a home is by paying cash. Sellers prefer all-cash offers because there’s less risk the transaction will fall through once in escrow. As a result, some sellers are willing to discount the sales price or take your cash offer over another offer with a mortgage.
One way to pay cash even if you don’t have all cash is to make an offer with no financing contingency. A no financing contingency offer says your bank or your rich aunt has you covered. If you decide to back out due to the inability to get financing for whatever reason, the seller gets to keep your earnest money deposit.
Another way to pay all cash for a house is by selling stocks. I’ve done so twice before and I’ll probably do so again in the future. An asset transfer is one of the most common ways to pay cash since most people don’t have enough cash lying around.
In this article, I’ll discuss:
- The process of selling stocks to pay cash for a home.
- Some considerations before selling stocks to pay cash for a home
- The psychological mind-bender you might end up going through due to fear and greed
Why I Invest In Stocks: Buying A Home Is A Big Reason
There are three main reasons why I invest in stocks.
The first reason is for my traditional retirement. When I’m over 65 and potentially have no interest in making any sort of active income again. Every year, I contribute the maximum allowable to my tax-advantaged accounts.
The second reason is to pay for my children’s college education. I contribute the maximum gift tax limit amount to each of their 529 plans each year. If there is money left over after college, part of the funds will be rolled over into a Roth IRA for their retirement.
The final reason is to buy a home. Everything else can be paid for through active and passive income, e.g. food, clothes, trips, gas, electronics. However, given the sheer cost of buying a home, paying for a house with cash flow is impossible for me. I would need to save and invest for years in order to come up with the down payment.
I believe stocks are types of funny money. There is no utility in stocks. Therefore, it’s important to occasionally transform some of your stock gains into real assets or experiences.
Since 1995, I’ve made and lost small fortunes in stocks. Over time, I’ve learned that once I’ve made enough from stocks to buy what I want, I sell. At the same time, I’m OK with not making as much in the future if I had held, because I will always still hold some stocks.
The Latest Decision To Sell Stocks To Pay Cash For A Home
In 2022, my public stock holdings declined by about 25%, worse than the S&P 500’s decline of 19.6% due to my overweight technology holdings. I regretted not selling more stocks in early 2022 given what a bonanza year 2021 was.
In May 2022, I experienced a tremendous amount of real estate FOMO when I found a dream home. It was about 50% larger on a 100% larger lot with a view. It was a home I could see myself living until my last days.
There was just one problem. The house was about 20% out of my price range, so I begrudgingly had to pass.
A Second Chance At Buying The House
Then in April 2023, something positive happened. My public stock holdings had rebounded by over 20% while the home I wanted came back on the market at a price 7% less. I was intrigued!
But after about a month of deliberation, I felt the price was still too high for us to comfortably afford, so I passed again. Following my home-buying guide had kept me out of trouble so far. Further, we were still enjoying our existing home we had purchased in mid-2020.
Although I had found my dream home, I was at peace with my decision to be happy with what we had.
Two months later, however, the agent contacted me and said the seller would be taking the home off the market. She wondered if I had any last interest. I threw out a lowball offer 7.5% below their new asking price, which was already 7% less than last year’s asking price. The seller refused.
The Final Chance To Buy
About three weeks later, in a last-ditch effort, I decided to write a real estate love letter to explain where I was coming from and make a connection.
To help blunt the blow of my offer price, I convinced the listing agent to be a dual agent and represent me. This way, the seller wouldn’t have to pay a 2.5% commission to a buyer’s agent that did not exist.
From the listing agent, I knew that if the house was taken off the market it wouldn’t come up for at least two years, until the seller’s daughter graduated from high school.
For me, buying the house two years later would have been ideal. However, I also felt that by 2025 home prices would be higher and there would be little chance I’d win a bidding war if the house came back then.
The seller ultimately accepted my offer with a begrudging but kind letter to me. ” After accepting my offer in July 2023, I began selling more stocks in order to pay cash for the house. I had already been selling some stocks in May and June in anticipation I might buy the house.
By July 2023, the S&P 500 had risen another 8% from when the house re-appeared for sale in April 2023. Hence, I felt more emboldened to buy the house with each passing week. To be specific, I sold both stocks and bonds to pay cash for the house.
Let’s now talk about all the considerations before selling stocks to buy a house with cash.
The Tax Implications Of Selling Stocks To Buy A House
Selling stocks creates a taxable event. Therefore, one of the biggest challenges is selling enough stock to buy a house without having a huge capital gains tax bill. A large capital gains tax bill can easily wipe away the price discount you get from buying a house with cash.
To minimize your capital gains tax, you need to conduct tax-loss harvesting where you sell your losers to match your winners. For me, I had enough losers from unfortunate stock purchases in 2022 to offset roughly 80% of my winners.
Here’s the short-term and long-term capital gains tax rates for singles. Notice the large difference in tax rates if you hold your stocks for more than one year.
Deciding Which Stocks To Sell Can Be Hard
If you’ve held a stock for a long time, you might get attached to it. The more attached to a stock you are, the harder it may be to sell.
Winning stocks like Apple, Google, and Tesla have been winning for over a decade. Based on the employees who work there and the consistent innovation in technology, there’s a decent chance these stocks will be higher 5-10 years from now.
To sell these stocks, you must convince yourself that these stocks are overvalued. If you feel the stocks are undervalued, then you will find it difficult to sell them. Constantly having to think about valuation decisions is why I publish and regularly update posts such as How I’d Invest $250,000 Today. Conditions are always changing.
Selling losing stocks also reminds you of how much of an idiot you are. I bought some stocks in 2022 that were down 70% from their highs. These stocks then proceeded to decline by another 50%! Check out names such as Affirm and Moderna.
You Might Feel Good After Selling Stocks If Stocks Go Down
One of the conflicting emotions you may experience is happiness after selling stocks that go down soon after. But this happiness may be misguided because a decline in the stock market may portend lower corporate profits, slower GDP growth, and lower demand for housing, which would be bad for your new house purchase.
When my stocks rebounded by 20%+ since the October 2022 low, I felt like I had a second chance to sell. Phew! When the house I wanted to buy came back on market, I became even more motivated to take profits because I had a specific reason to sell.
When stocks started selling off after July 31, 2023, I felt both good and bad. On the good side, it felt nice to not lose money in the stock market. Stocks ultimately corrected by 10.3%. On the bad side, I worried that a declining stock market forecasted future economic difficulty.
The more stocks go down, the more interest rates tend to go down as well given investors tend to buy Treasury bonds for safety. Hence, you might find yourself rooting for a stock market crash after you sell stocks!
You Might Feel Bad Selling Stocks As Stocks Eventually Rebound
If you hold the S&P 500 index long enough, you will eventually make money. Hence, selling the S&P 500 will eventually start to feel bad after a long enough time passes.
After a 10.3% correction, I felt happy to have protected a lot of my stock gains for the year. However, stocks eventually bottomed on October 27, 2023, and began to rebound after Treasury bond yields began to decline.
As stocks rebounded, I started feeling bad I wasn’t participating as much! Such a mind bender. I know it’s almost impossible to sell stocks at the top and then buy at the bottom. But I still longed to want more exposure to stocks in a rising market.
Mentally, I had to tell myself that a rebounding stock market was a good thing. In this market, it meant interest rates have likely peaked and there’s optimism about future corporate profits.
Ultimately, higher stock prices should lead to more demand for real estate, especially if there are local economic catalysts in the neighborhood you buy.
A Simple Asset Shift From Stocks To Real Estate
To feel better about missing out on stock gains, I had to tell myself that with my all-cash house purchase, I simply shifted my net worth composition from a more volatile risk asset (stocks) to a less volatile risk asset (real estate). Both stocks and real estate are risk assets whose prices are highly correlated.
Some people think that paying cash for a house is a low-risk or risk-free investment. However, that’s not quite true. The homeowner still has risk exposure to the economy. The cash-paying homeowner simply isn’t levered with a mortgage, as is usually the case with most homebuyers.
In a bull market, it is usually more profitable for the homeowner to have more exposure to stocks than in unlevered real estate. Stocks have historically returned about 10% a year versus only 4.2% a year for real estate. Therefore, in a bear market, it’s better to have a greater percentage of one’s net worth in an unlevered home with no mortgage.
The reality is, most homebuyers purchase with a mortgage. So the more common situation is for homebuyers to sell stocks to come up with the downpayment, which is usually 20%. As a result, sellers of stock to buy real estate often make more than if they just held stocks due to leverage.
Real Estate Can Offer Diversification To Your Portfolio
Long term, real estate price performance tends to be correlated with stock price performance. But over the short term, prices might move in the opposite direction, partially due to lag effects.
A good example is when the S&P 500 fell 19.6% in 2022 while the median U.S. home price increased by 10% from $433,000 to $479,000.
In 2023, as the S&P 500 has increased by more than 14% so far, while the median U.S. home price declined by about 8% so far according to the St. Louis Fed. Hence, buying real estate when prices are down and selling stocks when prices are up can make logical sense.
Own More Unlevered Real Estate In A Weak Market
A 10% decline in your home’s price hurts. But it doesn’t hurt as much if you sold stocks to buy a house with all cash. If you didn’t sell stocks to buy your house, your stocks would have likely declined by 10% or more anyway.
Therefore, if you’re going to lose money in stocks and real estate, you may prefer to lose money in real estate because at least you will get to enjoy your wealth. Seeing the value of your stocks evaporate is a disheartening feeling.
In a strong market, you are happy to own either stocks or real estate. By owning stocks you feel good because you get to buy more things with your gains. With real estate, you feel giddy because not only do you get to live for free in a nicer home, you also get to make money too.
Own More Stocks And Potentially Borrow In A Strong Market
If you feel stocks are undervalued and have tremendous upside, then you might want to consider a Security Based Line Of Credit (SBLOC) instead of selling stocks. Here’s an SBLOC example shared by Financial Samurai reader James:
If you have a $1,000,000 portfolio, a lender will typically let you take up to 70% of the value of your portfolio in cash ($1M*70%=$700,000) for LIBOR+ interest. Essentially you become your own bank in this scenario.
This is particularly effective for real estate acquisitions where you want to come in “all cash”. You can pay interest only for a period of time on your SBLOC until you close, then work out longer-term traditional mortgage financing with a bank on your acquired property (it’s fully paid for in the bank’s eyes) and with then repay fully or partially your SBLOC.
In the meantime, you haven’t sold your stock or mutual funds and haven’t missed potential upside. In other words, you stay invested. You’ve simply taken a loan again them as an asset. Finally, you’ve not paid any capital gains taxes since you didn’t sell the securities in the first place.
An SBLOC makes a ton of sense if the interest rate is reasonable and stocks are undervalued and go up. However, if interest rates are egregious and stocks collapse while you take a loan out on your stocks, you are double losing. Add on the fact that your house may also be losing in value then you may be triple losing!
Hence, always be careful when borrowing from a risk asset to buy another risk asset.
Ultimately, You Want Stocks To Rise Even If You Have Less Exposure
Investing FOMO increases when stocks are going up and you have less exposure. That said, you still want stocks to go up as much as possible because it bodes well for your real estate holdings.
The real estate percentage of your net worth will most likely lag the stock market’s returns. However, this lag in returns should be made up by the joy you experience living in your mortgage-free home.
Remember, the reason why you sold stocks was to have a better lifestyle in a nicer home. If you never sell stocks, then you never capitalize on the reasons why you invest.
The Main Goal After Paying All Cash For Your Home
After you sell stocks to pay all cash for your home, your net worth composition will have a greater percentage in real estate. Therefore, your main goal, if you want to feel better, is to aggressively save and invest more in stocks to return to your old net worth composition.
Initially, you may want to replenish your cash balance. After you have accumulated a comfortable amount of liquidity, then you may want to aggressively invest your free cash flow into stocks. With a much lower exposure to stocks, you may find investing in stocks much easier than in the past.
Personally, once I reached a certain amount of exposure in stocks, I had a hard time investing more. The swings were too big for my comfort as a semi-retiree and a non-working spouse. Understanding your risk tolerance in terms of time lost is paramount!
For example, let’s say I have $3 million invested in stocks and live off $200,000 a year after tax. A 10% historical return in stocks would generate $300,000 in gross profits, enough to cover my $200,000 annual expenses. However, losing 20% of $3 million would mean losing more than three years of living expenses. That’s too painful for this jobless old man.
But each time after selling stocks to buy a house, I found it easier to buy stock again simply because I had less exposure. For me, funny money stocks are simply a means to an end, that is to live a better life.
Overcome The Mind Bender To Sell One Asset To Buy Another
After reading this post, I think you will appreciate how much psychology is involved in investing. The first hurdle to overcome is the fear of financial loss. The next hurdle to overcome is the fear of not making as much as you could!
Make sure you invest for specific purposes. If you do, you will feel much more motivated to invest. In addition, you will be more diligent in staying on top of your finances to make sure you’re on track.
The one thing I will never regret about selling stocks to buy a house is enjoying life today. If purchaed responsibly, owning real estate is actually a hedge against many bad things in your life.
Reader Questions And Suggestions
After you have old stocks to pay all-cash or for a down payment for a house? If you did, how did you feel after and what were some emotions or circumstances you dealt with after? After paying cash for a house have you ever done a cash-out refinance to get liquidity out?
If you want to dollar-cost average into a weak real estate market, take a look at Fundrise. Fundrise primarily invests in residential and industrial properties in the Sunbelt, where valuations are lower and yields are higher.
In addition, take a look at the Innovation Fund that invests in private growth companies. Roughly 35% of its fund is in artificial intelligence companies, which I’m very excited about over the next couple of decades. You can review the fund’s holdings before you decide to invest, unlike traditional venture capital funds where you commit capital and hope the partners invest wisely.
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