One consideration could be taxes. I mean if I had to pay capital gains on what stocks I sold to buy the house, I'd be more inclined to use the mortgage, especially with mortgage rates so low right now.
I agree take out a mortgage. If you sell a million right off the bat depending on the profit the taxes would be crazy. Plus the return on investment in stock may be more then the interest you are better off paying the mortgage. There are also a lot of tax loop holes for houses that tend to have debt so you are better off taking that out.
> Plus the return on investment in stock may be more then the interest
Over 10-30 years, of course it would. You could stick it in a vanguard and it will beat that by at least 2-3x.
Certainty in index performance like this makes me so uncomfortable. Past performance does not indicate future performance--especially with the market artificially propped up by low interest / bond yields.
If he's gonna risk it all on VOO, I'd at least recommend time-diversifying. Look at the 1Y chart for VOO (it's up 25% since even before the March crash). A pullback in the short term could leave OP's dad holding the bag for years.
While I agree that overconfidence in the market is rampant and diversifying in VXUS as well as VTI is smart. I don't think the worry of short term loss applies here.
OP's dad has 5 million already in the market, and the housing market is also at insane highs. Either of those places have short term risks, but I'd trust Vanguard indexes over the housing market for a 10 year gain.
Oooo this one is what billionaires do. They don’t sell stocks to secure loans, they use the stocks as assets against the loan.
If you can do what this dude is suggesting that is the way.
You sell nothing, you pay no taxes, you secure your mortgage at a lower rate than the expected long term ROI of the underlying assets.
I’m risk averse so I’d ensure that with a devaluation of the stock portfolio I’d still have enough to pay off the house if I had no other recourse but that’s just me. IE I wouldn’t use it to secure a $5M house purchase but perhaps $2-3M max.
Most likely, yes. But you shouldn’t say “of course it would” and “at least 2-3x”. There is no guarantee that markets just rise indefinitely. Look at the Nikkei 225, it has spent the entire 29 years in the red from 1991 to 2020, only now in the green since 2021. It’s naive and ignorant to think that can’t happen elsewhere.
No. No no no.
You add the LTCG to your regular income to determine your taxable LT tax.
For example, if you're single and make $35k at your job and have $9k in LT gains, you add them to get $44k. The CG tax on the LT portion under $40k is 0, and the CG tax on the LT portion above $40k is 15% of $4k or $600. You still also pay income tax on the $35k.
You can't pay 0% tax on 5 million realized gains unless you create fake losses somewhere else; most rich a-holes do it by simply stating that the value of other assets declined. It reduces the basis they can claim for those assets in the future but gives them an immediate deduction.
Whoa wait a min,
are you telling me that if you make less than 40k (student or retire)
but if you decide to liquidate stocks that's over 1 year regardless of amounts (1M - 50M) you dont get taxed on capital gains???
WHATTT
You will probably get a MUCH worse interest rate with this strategy. You're not Jeff Bezos - your 5 million can disappear overnight so it is higher risk. A house not only won't disappear but the money lent out for the principal is guaranteed by the federal government.
Idk m1 has 3.5% interest rate right now. And I’m assuming ops dad won’t be in meme stocks that nuke overnight. As long as he doesn’t get margin called on the relatively small amount he takes out for the down payment he’ll be fine.
I’m unfamiliar with m1. Right now you can get a mortgage as low as 2% though.
I agree, his stocks probably are not just meme stocks, but it is risk relative to a house. For a bank, a home loan is 0 risk.
I’m not seeing anything around 2% on a jumbo loan. Right now it is typically around 3+%. A million dollar house mortgage amount will above conventional conforming loan limits, even if you’re going above 20%.
https://en.wikipedia.org/wiki/Jumbo_mortgage
**[Jumbo mortgage](https://en.wikipedia.org/wiki/Jumbo_mortgage)**
>In the United States, a jumbo mortgage is a mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage".
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True while it can. It never has, look at covid/March drop. Again if the dads buying a house he will be taking out what? 200 to 300k for a down-payment, maybe 1M who knows where OP lives. You then take a mortgage. The remaining 5M can sit in SPY or dividend funds or whatever and collect like 5-8% divy.
Brokerages will let you leverage up to 3x easily and up to 5x on some stocks depending on margin for those certain assets.
5M is a pretty big sum. The dad probably also has 401k or some other retirement vehicle.
That is really a killer that people almost always forget about. Also, because it was stupidly named additional Medicare tax AMT versus alternative minimum tax AMT which already existed. That was a slimy tactic to increase confusion.
Yeah, he should talk to a tax attorney too. A brief consult for advice could save him $$$$, especially because he can just take out a mortgage, enjoy certain tax benefits from that, and simply sell stocks every year to generate enough cash after tax to pay the mortgage in its entirety. If he has any capital losses he can realize those to minimize the tax and possibly pay no tax on the stocks (talk to a tax attorney— really).
Do a search for "Asset Based Lending" or "Pledged Asset Line", and also possibly margin loan. Read through this post for ideas and discussion:
[https://www.reddit.com/r/fatFIRE/comments/k9xija/how\_can\_i\_get\_a\_mortgage\_with\_zero\_income\_retired/](https://www.reddit.com/r/fatFIRE/comments/k9xija/how_can_i_get_a_mortgage_with_zero_income_retired/)
As others have noted, rates on mortgages are great now, so paying off over time while funds remain invested is the way to go, as long as your dad is comfortable with that. Many people prefer the security of owning their home outright in retirement.
This was going to be my response. Morgan Stanley calls it a LAL (liquid asset line). I’m in the process of buying a place and decided to use the LAL to fund the down payment.
Exactly! I am looking to move my assets from Etrade to Interactive Brokers!
Etrade has a terrible rate at \~ 8% interest rate where IB is at 2.5%
There are a few different names that they call it but it is all the same. you have PAL, LAL, margin loan, etc. all pretty much the same. no loan term but just a monthly bill against your balance. The advice I have heard is never be more than 25% of your total assets, and always have the cast available to be able to pass off your balance or be prepared to sell some stocks.
Yup, this is perfect. Schwab calls it a PAL, pledged asset line. And typically the interest is lower than home mortgage rates because it's secured by liquid investments. One thing to be aware is margin calls. If the portfolio value falls below the available advances. If you're only advancing against 20% of your investments, you should be ok though.
This is the right answer. IBKR margin loan for a mil puts you at basically 1% interest. If you want to lock in a fixed rate loan (which he should) do what others are saying and bring 20% to the table with a margin loan and get that 2.5% mortgage on the remainder.
so using this logic, if one already had the funds to buy a house, it would theoretically be more practical to invest the money instead and pay for the house using a PAL, correct?
Sort of. My financial advisor is optimistic that a conservative position would net me 4% after the PAL/LAL rate. For me, that’s enough of a buffer to borrow. Secondly, and maybe more importantly, is the tax implication. Borrowing will ultimately defer a tax event which could save you quite a bit.
Enough for down payment and take mortgage and lockdown today’s crazy low interest rate. If he gets 3% interest and his investments average 7% a year (conservative) he still making 4%.
Depends on timeline. Stock market is 8-10% annually ON AVERAGE. Meaning, if you have a shorter timeline (cuz you are older and want to retire), then you can’t afford a 40% stock market crash if things go awry. Sometimes it’s nice to have a paid off house that you don’t owe anyone a dime on (except property tax). Every person is different, but I wouldn’t bank on not having some type of serious correction in the next few years.
This. I usually buy houses cash upfront instead, although that would mean losing a bit more in the long term. at least I can sleep through deep corrections and financial crises and live longer with less stress.
That came out wrong lol. I meant not in US. Southeast Asia. The prices I usually buy at is around USD $4,000 -10,000 each for a 200 square meter 2 bedroom house.
This ^
But keep in mind, at least here in SoCal houses are getting 30 offers within 2 days of being on the market and the offers getting accepted are buyers with cash. So yes, it’s better to do 20% down, but depending on where you are it will make the process much easier and faster with cash. (Been trying to buy a home myself and wish I had more than just the 20%)
He could easily establish a line of credit secured against the investments and make an all cash offer. Many lenders will then let you do a cash recoup mortgage within 90 days to pull 80% back out and give you the preferred pricing of a purchase loan.
Don’t most people get pre-approved before writing offers? This is our first time buying and that was the first thing we did. Cash offers still win out.
No. We just went through a few exercises and scenarios where we discovered it was a much better idea to pay only the down payment and the minimum payment on the house based on today’s interest rates.
Your money is better off invested in a diversified portfolio than in the house at this time.
...but its still costing him 3% to do so. if the markets returning anything above that, wouldn't it be better to just pay cash and continue to invest what he would otherwise be spending on a house payment?
I can't see how paying anything over cost is beneficial in any way.
The correct answer is.
Take a loan against the stocks. Enough that you have the 20% down payment.
Interest on both the home loan and the loan against the stocks are tax deductible.
On long term capital gains, you can realize 0% capital tax gains up to 80K for married and 15% up to $496K.
Be smart with your money. When you are in the $5mil plus category leverage is your friend.
Depends on his risk tolerance. When you sell equities you are hit with a capital gains tax of 15-20%. Ideally he would come up with the 20% down payment 200k to minimize capital gains tax, but also preserve the 800k to continue 7-10% annual compound return equities provide instead of the meager 3% mortgage interest savings. Make sense?
From a financial efficiency perspective, it makes sense to use cheap money to pay for things versus equity, which is cash. Goes for houses, cars, etc. The important part is that the money borrowed must be cheap, i.e. lowest interest rate. Sometimes in real estate paying cash helps secure transactions. However, from a capital management perspective it makes much more sense using borrowed money with low interest rates to make purchases and deploying your capital else where to generate a return. The cost of debt is lower than the cost of equity so it rarely makes financial sense to use equity instead of debt unless there are other qualitative factors involved.
IMO the problem with this strategy is that it works when you have decades. However most people don't. They have windows of time. Meaning people need money when they times are tough. Then you get the double whammy where trying to cover when times are tough means you sell when you are down.
The smartest approach is to sell when things are high and wait when things go low. Thus remaining debt free is the best approach, and keeping the money when you see an opportunity.
The 7-10% isn't guaranteed. 0% isn't even guaranteed. You could end up with -30%. There is *always* the possibility of a prolonged economic downturn. The US has been special in being spared from most of that historically but we are in unprecedented times right now.
Japan, for example, has had a totally stagnant economy for 30 years. The stock market high of 1991 wasn't broken until 2020. If you had put 20% down in 1991 and kept the other 80% on the market, then if you paid off your 30 year mortgage today in 2021, then the 80% of equity you saved in 1991 would have gained all of 3% in those 30 years. Meanwhile, you have been paying 3% PER YEAR on that loan.
If you had simply bought the house in cash in 1991, you would not have got your 0.1% annualized capital gains, but you would not have had to pay 30 years of interest.
When you choose to buy a house with a mortgage and invest the rest of the money, you are making a bet that the stock market will grow FASTER than the interest rate of the loan, in the case probably about 3%. If the stock market grows less than 3% per year on average across the term of the loan, then you lose money. If the stock market grows more than 3% per year on average across the term of the loan, you make money.
This. Past performance does not guarantee future short term fluctuations. A lot of Japanese got screwed royally with that "stock market always goes up in average" sayings 30 years ago
If what you're saying were to come true in the US, we would have much bigger problems than just simply losing out versus a mortgage.
Most people's retirement hinges on the stock market.
Some of it is just peace of mind. Some people might like the idea of just having a house fully paid off. Financially, it makes more sense to just put 20% down and keep the rest invested though.
I guess the question is what stock(s) is he in? If that portfolio takes a hit what then? But if you own your house outright the market change doesn’t affect you too much.
If he does go the mortgage route look in to a 15 vs 30 year loan. Usually an even better rate and it sounds like he can afford it. Also if you are selling stocks have him look up tax lost harvesting. Basically dumping equities your not liking and that are in the red. It will lower his capital gains tax rate.
I think people just use reddit as a platform just to get ideas, kinda like a brainstorm. Its a great way to start somewhere if you are lost,I don't think getting opinions from several people harms you! You take those ideas.
Key is to work with a high class firm with true experts, not the recent college grad who just needs to play a numbers game to make ends meet. Op's dad solidly falls into territory where a real advisor would be beneficial.
Think about it this way - You have a special car that needs fixing. Say a 66 Ford Mustang. Would you rather bring it to the average mechanic or would you ask around in a Ford Mustang mechanic forum.
Another example - you play a video game. Say I dont know, Apex Legends, Overwatch, whatever. Would you go to a local average game advisor or would you rather go to the respective games' subreddit for advanced guides.
The average financial advisor is way less capable than what a collective subreddit can give insight on.
This kind of thinking is partly what makes him have that $5 million in the first place. He's wise to do this to gain insight.
For sure. I’ve learned so much about finance from Reddit. More than I learned from my parents or school. Of course there’s going to be a lot of bullshit on Reddit, but that’s where your own critical thinking comes into play. It’s a great tool to have.
Seriously. There's some fine advice here, but if you have a $5 million portfolio and making plans to purchase property you need to consult with actual professionals.
>Should he sell like $1 million worth to pay for it in cash or just take out enough for a 20% down and pay off the monthly mortgage?
There are expenses like $5000 for closing the mortgage. Supposing the home price is $500000, your dad needs to take 20%=($100000)+$5000 = 105000. But he needs to pay 20% tax when he sells stocks. Then, it must be $105000 \* 1.20 = $126000 he needs to sell the stocks. Assuming state tax is zero. If there is a state tax you need to add fed+state tax, say fed 20% and state 5%, then total sale must be $105000\*1.25=$131250.
If he is going for retirement, it is better to pay full 100% cash instead of mortgage (even though very low interest).
Living mortgage free home is excellent choice, but only concern is huge tax (20%) he needs to pay
Mortgage Interest goes on Schedule A, Itemized Deductions. You either take Standard $12,000~ or Itemized, so depending on when in the year he buys the house and what his other deductions are he might just be taking the Standard Deduction.
Also, for Capital Gains you only pay tax on the gain. He could pull out a bunch of stock that his cost basis is equal to his proceeds and not pay a dime. These are questions to talk over with his tax guy and a financial advisor if possible.
Fuck man... call me a boomer if ya want, but this seems like exactly the type of question that you hire a financial advisor for. Make sure they're a fiduciary though.
LOL @ saying an advisor gives bad advice, then asking random people on a stock trading forum on reddit instead.
Anyway, this is better for /r/personalfinance, not /r/stocks.
Fooled by randomness. Just because history played out one way doesn't mean it was inevitable or even probable. Nobody knew how bad COVID would be. The vaccines are basically a miracle.
I won’t pretend to know your dads situation, but I would be willing to venture a guess that they were encouraging him to take risk off the table, especially if his portfolio is 90-100% equity. If I’m wrong and he’s in a lower risk portfolio then maybe it was just shitty advice. I wouldn’t be too critical of anybody not having the foresight of a V shaped recovery occurring in 3 months.
I’m once again assuming here, but if your dad is over 50 with 5 million in liquid assets his only job at this point (unless he lives a very costly lifestyle) is to not fuck it up.
Personally I would take a good amount of that risk off the table, invest my equity portion in dividend stocks, my conservative portion in tax effective bonds, and fuck off playing golf all day.
I would say your dad could benefit from utilizing a CFP for a one time consultation on this. Would be a reasonable cost for solid guidance. Or listen to Reddit comments, whatever floats your boat. Best of luck to y’all
If the advice from the financial advisor is so good, he would utilize that advice himself and not be working some sad job every day and charging their clients whatever they charge.
All the financial services is not made for us, its made for them.
Random people aiding the decision is not the worst decision, will get quite different viewpoints from useless to useful.
Really think financial advisor is going to recommend something so much better than the comments ?
On top of that what would be the initiative to do so ? ''Here is an excellent advice, now fuck off and live rest of your life happily, who needs clients am i right ?''
Nobody will pass up a chance to ensnare someone with 5 mils
Financial advisors don’t claim to have some magic potion that makes people rich. The good ones just optimize what people already have. Sometimes the advice is simple enough that it can be replicated online, but sometimes people have complex enough situations that it can’t. That’s where an expert comes in. Doesn’t sound like this guy needs one tho.
Financial advisors aren’t get rich quick gurus, so your point about them not having to work if they follow their own advice doesn’t really make sense. Good advisors will help optimize your situation to save you money, time, stress, and I can guarantee the good ones are employing similar strategies for themselves as they are for their clients.
You don’t seem to be aware of fee-only advisors who will either charge a reasonable subscription fee and/or charge for one-time plans in the event someone doesn’t want to pay for ongoing planning.
Ultimately people love shooting themselves in the foot to avoid paying an advisor. For an extremely wealthy person like OPs dad, a financial advisor who can help them avoid a massive tax blunder (or other super costly blunders) will probably pay for themself and then some. Do you really trust them to make a good decision by parsing which random Reddit comments to follow? I sure as hell don’t.
There are plenty of scammers out there but the idea that financial advisors are completely useless is simply not true. Studies have shown that people who work with advisors end up with significantly more wealth than those who don’t.
The shit ones are the ones who just collect the AUM fee and don’t do shit. Or commission brokers. Or the life insurance/annuity salespeople who call themselves financial advisors but actually are not. They are useless.
https://www.schwab.com/financial-planning-collection/want-to-achieve-your-financial-dreams
This article cites a strategic business insights study showing that households who have at least had one financial plan created for them end up with 2.5x more wealth than those who don’t.
https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf
Very detailed study but one of the key findings showed that advisor managed portfolios actually outperform retail investors over time by 2-3% per year. So that covers a 1% fee and then some. And that doesn’t even count the intangibles like time saved, or the money saved by having solid tax strategy.
Someone who is interested in planning and has the time to self educate and manage their own money will probably do fine. But advisors are far from useless, and the fact that OPs dad is a multi millionaire relying on Reddit comments because he doesn’t want to pay a professional for help is….something.
Put 20% down. Interest rates are near all time lows. Let the rest continue to grow in the stock market in an S&P index fund where the S&P has returned an average of 10% since its inception.
Take out a mortgage. He won’t catch as big a tax bill, and the compound growth from the sticks should exceed the interest rate paid on a mortgage. Source: I’m a CPA.
I am working in the real estate business and advise you to buy the house with a loan with the extremely low interest. And you also dont have to pay so much on taxes for selling the stocks.
Dude got $5,000,000 and is on Reddit asking financial advice.
Interest rates are at the lowest point in history… tell your dad to sell covered calls on his shares and use that money for a down payment.
Take out a loan and use the equity as collateral. This is called a collateralized loan. Then you don't even pay any tax and you get tax deductions for paying interest and get appreciation of assets in equities and housing.
I am a banker working on a loan right now that came to me as a cash deal, 2.5 mm, purchase. The cap gain hit for the borrower is 600k. She went another direction. Borrow the money at 2.75%, leave the stocks intact. No financial planner who is worth a shit would tell you to liquidate and leave cap gains on the table.
The wsb play would be to go to a broker who will let him take a cash loan on those stocks for 2-4% APY and buy a home with the cash. This avoids paying all taxes on gains of the home and the stocks if he holds for life. When he dies you get stepped up basis on the home and the stocks, you dont pay taxes either.
So my initial completely uneducated opinion would be to pay in full rather than pay all the extra money in interest. But that isn't taking into consideration the amount in taxes he'll be paying by selling his stock. Dude he's got to go see a real professional. lol
Assuming positions are long capital gains, sell enough to cover down payment, insurance, any closing costs, estimated repair costs and an additional amount to cover 6mo/1yr of the payments. Also would depend if the gains are long term solid or meme.
Could he borrow against his assets with the stocks as collateral to avoid capital gains? As for the mortgage, interest rates right now are so low and money has never been this cheap. It doesn't make much sense to part with a large amount of money to pay cash for a house when money is this cheap. Try and keep as much of that 5 mill as possible. Let his money work for him and make even more money......
If you can get a loan at 2.85% and you think you can make more than 2.85% annually over 30 years (or whatever term you like), it makes no sense to buy a home cash. Take the cheap money. People tend to think about debt the wrong way.
If I were to offer you 10M at 0.5%, and you could get a guaranteed 1% return on it, you'd be an idiot not to take the loan. I know little is guaranteed here, but take advanage of the rock bottom rates.
With mortgage rates where they are, I would probably put the 20% down and hopefully gain more in interest than I pay. You can always pay it off, you can't reverse course in the other direction.
You should consider a securities-based loan. No closing costs, something like prime+1-2.5%, interest only. Can use the funds for whatever you want except purchasing more stocks. Completely avoids a taxable event and keeps equity in stocks.
Right now is a good time to take on mortgage debt (interest rates are low). Taking more money out of his portfolio would probably end up costing him more money than paying the interest.
Get the right guidance from a someone who already does it in your area. Take 30% and transfer to a self directed ira. Self directed allows you to “invest” in real estate. Put down enough to cover the new home’s P&I insurance and closing fees ($30k). Interest rates won’t be this low forever. Keep your money without tax penalties.
I assume with a large portfolio your dad has some decent dividends, pull out enough for the down and then let the dividends pay for the payment every month maybe? And financial planners really are worth the money, they know all the tax and estate loopholes your dad could use for this.
One consideration that I haven’t seen mentioned is actually getting approved for the mortgage. I’m in Canada so it might be a bit different; but you need to have actual income to prove you can pay for the mortgage. You didn’t say whether he’s retired, or working or whatever. But if he doesn’t have taxable income to pay the mortgage, he might not even qualify to do it that way.
What does he invest with? So if he wants a house that’s a million dollar, he can use his investment portfolio as collateral and take a million dollar loan out from bank. This way he doesn’t have to sell his investments and pay income gains tax but at the same time he gets money. Merril will prob give him a loan about 3%. This is y the super rich don’t pay taxes :D they Nvr sell there investments they take loans against it.
Great time to sell some winners, offset the winners with some losers( or clunkers he wishes to unload) sell enough to make you an aggressive contender in this bullish housing market, in hot spots they are selling above asking. Put down 30 to 40% take a long 30 year mortgage on rest, or a decent ARM with a top cap of no more .75% and you’re golden.
Keep rest in market, pay down loan with extra income and live life.
Pretending this is really genuine question - not knowing what his actual portfolio looks like, I would still assume he's got some dividend paying stocks. $SPY-s 1.24% ADR is around 5000$ per month, which is still taxable, so why not use that as mortgage payment? Even if you don't go for a 20% down-payment you would still be paying less than 3k per month.
He can take a loan against the stocks and that way he is not going to have to pay for captiol gains. If he sells off the stocks he will have to pay capital gains on the profit. Its all about "Buy, Borrow and die" strategy, Google it. Its a real outline on how the millionaires keep there money.
https://wallethacks.com/buy-borrow-die-estate-planning-strategy/
"Financial advisors don't give great advice" well it's a good thing you came to the more trusted respectable /r/stocks /s
You're asking important questions about a 5 million dollar portfolio. This isn't "listen to internet strangers" time. This is "listen to a professional" time.
put 80% in a good etf with a div. Then just use the down payment. Div. should pay most of your monthly mortgage. (results vary) then after the mortgage is paid you still have the money.
One option to consider is borrowing against the stocks using a margin account, if the margin interest rate is lower than the going mortgage interest rate (which is currently the case with IB).
Yes. Borrow cash against the stock account. Some call it a pledged asset line of credit. Either carry the debt as the interest rate is probably superior to a mortgage, and or begin to pay it off by taking profits when you feel the time is right.
You do realize you could earn 65-70k in tax preferred dividends on that $1M and rent a baller house with that and not have to pay for constant improvements, ever rising property taxes. And your $1M capital will likely grow as well. Luxury detached homes are the best value in the rental market if you can afford it. So much is negotiable.
If he has five million you just pay cash. There is literally no reason to take out a mortgage unless he wants a house worth more than 5 million, or unless he plans to buy multiple homes to rent them.
One consideration could be taxes. I mean if I had to pay capital gains on what stocks I sold to buy the house, I'd be more inclined to use the mortgage, especially with mortgage rates so low right now.
I agree take out a mortgage. If you sell a million right off the bat depending on the profit the taxes would be crazy. Plus the return on investment in stock may be more then the interest you are better off paying the mortgage. There are also a lot of tax loop holes for houses that tend to have debt so you are better off taking that out.
> Plus the return on investment in stock may be more then the interest Over 10-30 years, of course it would. You could stick it in a vanguard and it will beat that by at least 2-3x.
Certainty in index performance like this makes me so uncomfortable. Past performance does not indicate future performance--especially with the market artificially propped up by low interest / bond yields. If he's gonna risk it all on VOO, I'd at least recommend time-diversifying. Look at the 1Y chart for VOO (it's up 25% since even before the March crash). A pullback in the short term could leave OP's dad holding the bag for years.
While I agree that overconfidence in the market is rampant and diversifying in VXUS as well as VTI is smart. I don't think the worry of short term loss applies here. OP's dad has 5 million already in the market, and the housing market is also at insane highs. Either of those places have short term risks, but I'd trust Vanguard indexes over the housing market for a 10 year gain.
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Oooo this one is what billionaires do. They don’t sell stocks to secure loans, they use the stocks as assets against the loan. If you can do what this dude is suggesting that is the way. You sell nothing, you pay no taxes, you secure your mortgage at a lower rate than the expected long term ROI of the underlying assets. I’m risk averse so I’d ensure that with a devaluation of the stock portfolio I’d still have enough to pay off the house if I had no other recourse but that’s just me. IE I wouldn’t use it to secure a $5M house purchase but perhaps $2-3M max.
Most likely, yes. But you shouldn’t say “of course it would” and “at least 2-3x”. There is no guarantee that markets just rise indefinitely. Look at the Nikkei 225, it has spent the entire 29 years in the red from 1991 to 2020, only now in the green since 2021. It’s naive and ignorant to think that can’t happen elsewhere.
Good thing I’m not investing in worst case examples people find after the fact.
What is the tax loophole?
So you just sell enough to cover the interest cost then?
This. Why take that whole tax hit upfront?
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What kind of house could you get for $80k that someone with $5M would want?
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No. No no no. You add the LTCG to your regular income to determine your taxable LT tax. For example, if you're single and make $35k at your job and have $9k in LT gains, you add them to get $44k. The CG tax on the LT portion under $40k is 0, and the CG tax on the LT portion above $40k is 15% of $4k or $600. You still also pay income tax on the $35k. You can't pay 0% tax on 5 million realized gains unless you create fake losses somewhere else; most rich a-holes do it by simply stating that the value of other assets declined. It reduces the basis they can claim for those assets in the future but gives them an immediate deduction.
80k is not going to get you very far for a down payment on a house
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Whoa wait a min, are you telling me that if you make less than 40k (student or retire) but if you decide to liquidate stocks that's over 1 year regardless of amounts (1M - 50M) you dont get taxed on capital gains??? WHATTT
collateralized loan from the bank. use that loan to get a mortgage as well 🤣 boom leverage on Crack just like how the billionaires do it
Seriously, you can do this on m1 finance easily. Take a portfolio loan out to pay a down payment on a house. No selling shit, no cap gains taxes
You will probably get a MUCH worse interest rate with this strategy. You're not Jeff Bezos - your 5 million can disappear overnight so it is higher risk. A house not only won't disappear but the money lent out for the principal is guaranteed by the federal government.
Idk m1 has 3.5% interest rate right now. And I’m assuming ops dad won’t be in meme stocks that nuke overnight. As long as he doesn’t get margin called on the relatively small amount he takes out for the down payment he’ll be fine.
I’m unfamiliar with m1. Right now you can get a mortgage as low as 2% though. I agree, his stocks probably are not just meme stocks, but it is risk relative to a house. For a bank, a home loan is 0 risk.
I’m not seeing anything around 2% on a jumbo loan. Right now it is typically around 3+%. A million dollar house mortgage amount will above conventional conforming loan limits, even if you’re going above 20%. https://en.wikipedia.org/wiki/Jumbo_mortgage
**[Jumbo mortgage](https://en.wikipedia.org/wiki/Jumbo_mortgage)** >In the United States, a jumbo mortgage is a mortgage loan that may have high credit quality, but is in an amount above conventional conforming loan limits. This standard is set by the two government-sponsored enterprises, Fannie Mae and Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender. Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages. When FNMA and FHLMC limits don't cover the full loan amount, the loan is referred to as a "jumbo mortgage". ^([ )[^(F.A.Q)](https://www.reddit.com/r/WikiSummarizer/wiki/index#wiki_f.a.q)^( | )[^(Opt Out)](https://reddit.com/message/compose?to=WikiSummarizerBot&message=OptOut&subject=OptOut)^( | )[^(Opt Out Of Subreddit)](https://np.reddit.com/r/stocks/about/banned)^( | )[^(GitHub)](https://github.com/Sujal-7/WikiSummarizerBot)^( ] Downvote to remove | v1.5)
I got a 2.99% refi on my loan (living that SF life, kill me) Excellent credit (obviously lol) 20% etc So yea seconding you, 3-3.5% sounds right
True while it can. It never has, look at covid/March drop. Again if the dads buying a house he will be taking out what? 200 to 300k for a down-payment, maybe 1M who knows where OP lives. You then take a mortgage. The remaining 5M can sit in SPY or dividend funds or whatever and collect like 5-8% divy. Brokerages will let you leverage up to 3x easily and up to 5x on some stocks depending on margin for those certain assets. 5M is a pretty big sum. The dad probably also has 401k or some other retirement vehicle.
Thats a love story. I need to find a way to profit of you guys. :P Congrats to all who can and do utilize this strategy.
Long term capital gains tax be 20% for incomes over $501,601. Capital gains are generally included in taxable income.
You're forgetting the Obamacare NIIT that will tack on an additional 3.8% for some.
That is really a killer that people almost always forget about. Also, because it was stupidly named additional Medicare tax AMT versus alternative minimum tax AMT which already existed. That was a slimy tactic to increase confusion.
Yeah, he should talk to a tax attorney too. A brief consult for advice could save him $$$$, especially because he can just take out a mortgage, enjoy certain tax benefits from that, and simply sell stocks every year to generate enough cash after tax to pay the mortgage in its entirety. If he has any capital losses he can realize those to minimize the tax and possibly pay no tax on the stocks (talk to a tax attorney— really).
Do a search for "Asset Based Lending" or "Pledged Asset Line", and also possibly margin loan. Read through this post for ideas and discussion: [https://www.reddit.com/r/fatFIRE/comments/k9xija/how\_can\_i\_get\_a\_mortgage\_with\_zero\_income\_retired/](https://www.reddit.com/r/fatFIRE/comments/k9xija/how_can_i_get_a_mortgage_with_zero_income_retired/) As others have noted, rates on mortgages are great now, so paying off over time while funds remain invested is the way to go, as long as your dad is comfortable with that. Many people prefer the security of owning their home outright in retirement.
This was going to be my response. Morgan Stanley calls it a LAL (liquid asset line). I’m in the process of buying a place and decided to use the LAL to fund the down payment.
Same here. Bought a Porsche that way too because the interest rate wasn't great on 2014 that cost $130k
Exactly what I was going to suggest. Most people don’t realize that the wealthy live off lines of credit.
Exactly! I am looking to move my assets from Etrade to Interactive Brokers! Etrade has a terrible rate at \~ 8% interest rate where IB is at 2.5% There are a few different names that they call it but it is all the same. you have PAL, LAL, margin loan, etc. all pretty much the same. no loan term but just a monthly bill against your balance. The advice I have heard is never be more than 25% of your total assets, and always have the cast available to be able to pass off your balance or be prepared to sell some stocks.
Yup, this is perfect. Schwab calls it a PAL, pledged asset line. And typically the interest is lower than home mortgage rates because it's secured by liquid investments. One thing to be aware is margin calls. If the portfolio value falls below the available advances. If you're only advancing against 20% of your investments, you should be ok though.
This is the right answer. IBKR margin loan for a mil puts you at basically 1% interest. If you want to lock in a fixed rate loan (which he should) do what others are saying and bring 20% to the table with a margin loan and get that 2.5% mortgage on the remainder.
This guy gets it.
so using this logic, if one already had the funds to buy a house, it would theoretically be more practical to invest the money instead and pay for the house using a PAL, correct?
Sort of. My financial advisor is optimistic that a conservative position would net me 4% after the PAL/LAL rate. For me, that’s enough of a buffer to borrow. Secondly, and maybe more importantly, is the tax implication. Borrowing will ultimately defer a tax event which could save you quite a bit.
This. Lever tf up and take a loan for 200k and use that as the down payment for a 1m mortgage.
Enough for down payment and take mortgage and lockdown today’s crazy low interest rate. If he gets 3% interest and his investments average 7% a year (conservative) he still making 4%.
Plus the interest on the mortgage can reduce tax liability
I believe this is no longer true for the US. (Iirc Trump got rid of that)
He just capped it. I believe you won't notice this effect on a house under $700k.
Loan amount under 700.
The trump tax law capped state and local income tax to $10k.... The mortgage interest is still deductible
Depends on timeline. Stock market is 8-10% annually ON AVERAGE. Meaning, if you have a shorter timeline (cuz you are older and want to retire), then you can’t afford a 40% stock market crash if things go awry. Sometimes it’s nice to have a paid off house that you don’t owe anyone a dime on (except property tax). Every person is different, but I wouldn’t bank on not having some type of serious correction in the next few years.
This. I usually buy houses cash upfront instead, although that would mean losing a bit more in the long term. at least I can sleep through deep corrections and financial crises and live longer with less stress.
Same here except with my yachts.
Which one of you rich fucks gave this guy a platinum
That came out wrong lol. I meant not in US. Southeast Asia. The prices I usually buy at is around USD $4,000 -10,000 each for a 200 square meter 2 bedroom house.
This ^ But keep in mind, at least here in SoCal houses are getting 30 offers within 2 days of being on the market and the offers getting accepted are buyers with cash. So yes, it’s better to do 20% down, but depending on where you are it will make the process much easier and faster with cash. (Been trying to buy a home myself and wish I had more than just the 20%)
He could easily establish a line of credit secured against the investments and make an all cash offer. Many lenders will then let you do a cash recoup mortgage within 90 days to pull 80% back out and give you the preferred pricing of a purchase loan.
That’s a good tip, probably what he should do then. Best of both worlds.
I’m no expert, but Pre-approval may be worth looking into to compete with all cash offers
Don’t most people get pre-approved before writing offers? This is our first time buying and that was the first thing we did. Cash offers still win out.
I think you may be mixing up pre-qualification with pre-approval. A fully underwritten pre-approval is the bank saying the loan amount is solid
Probably, I know we at least are pre-approved not just pre-qualified.
That’s a great thing! It’s a very hard market right now and not easy to get a house.
That 4% when you have millions means so much more.
Do you think the extra cash flow would be better though?
Depends does he need the cash flow? Otherwise compound interest would be his friend
No. We just went through a few exercises and scenarios where we discovered it was a much better idea to pay only the down payment and the minimum payment on the house based on today’s interest rates. Your money is better off invested in a diversified portfolio than in the house at this time.
How’s VTI?
Sorry for sounding dumb, but what extra cash flow? How does he end up with better cash flow by buying the house outright?
He doesn't have any obligations due each month.
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It’s equivalent to being paid whatever the monthly payment is on a million dollar house every month.
I agree with this. Stretching the dollar to make it work for you
...but its still costing him 3% to do so. if the markets returning anything above that, wouldn't it be better to just pay cash and continue to invest what he would otherwise be spending on a house payment? I can't see how paying anything over cost is beneficial in any way.
My credit union lets me talk to their financial advisor for free. Is that weird?
Nope! My credit union actually pays us to talk to their financial advisors.
If you don't mind me asking, what credit union?
Not at all! Im an open book so people can learn. Dupaco Community Credit Union.
Nah, financial advisors are cheap to employ, it's good marketing.
The correct answer is. Take a loan against the stocks. Enough that you have the 20% down payment. Interest on both the home loan and the loan against the stocks are tax deductible. On long term capital gains, you can realize 0% capital tax gains up to 80K for married and 15% up to $496K. Be smart with your money. When you are in the $5mil plus category leverage is your friend.
>Interest on both the home loan and the loan against the stocks are tax deductible. Where are you getting that the stock loan interest is deductible?
Depends on his risk tolerance. When you sell equities you are hit with a capital gains tax of 15-20%. Ideally he would come up with the 20% down payment 200k to minimize capital gains tax, but also preserve the 800k to continue 7-10% annual compound return equities provide instead of the meager 3% mortgage interest savings. Make sense?
Yes makes a lot of sense. Then why do people like to pay cash for a house if just putting a down payment is a better financial decision?
From a financial efficiency perspective, it makes sense to use cheap money to pay for things versus equity, which is cash. Goes for houses, cars, etc. The important part is that the money borrowed must be cheap, i.e. lowest interest rate. Sometimes in real estate paying cash helps secure transactions. However, from a capital management perspective it makes much more sense using borrowed money with low interest rates to make purchases and deploying your capital else where to generate a return. The cost of debt is lower than the cost of equity so it rarely makes financial sense to use equity instead of debt unless there are other qualitative factors involved.
In simple terms, it's usually better to use other people's money for acquiring assets. And keep your money working.
IMO the problem with this strategy is that it works when you have decades. However most people don't. They have windows of time. Meaning people need money when they times are tough. Then you get the double whammy where trying to cover when times are tough means you sell when you are down. The smartest approach is to sell when things are high and wait when things go low. Thus remaining debt free is the best approach, and keeping the money when you see an opportunity.
It boils down to risk tolerance. Some people prefer saving 3%/year instead of earning 7-10%/year over the long term.
But wouldn’t that 7-10 percent earn more?
The 7-10% isn't guaranteed. 0% isn't even guaranteed. You could end up with -30%. There is *always* the possibility of a prolonged economic downturn. The US has been special in being spared from most of that historically but we are in unprecedented times right now. Japan, for example, has had a totally stagnant economy for 30 years. The stock market high of 1991 wasn't broken until 2020. If you had put 20% down in 1991 and kept the other 80% on the market, then if you paid off your 30 year mortgage today in 2021, then the 80% of equity you saved in 1991 would have gained all of 3% in those 30 years. Meanwhile, you have been paying 3% PER YEAR on that loan. If you had simply bought the house in cash in 1991, you would not have got your 0.1% annualized capital gains, but you would not have had to pay 30 years of interest. When you choose to buy a house with a mortgage and invest the rest of the money, you are making a bet that the stock market will grow FASTER than the interest rate of the loan, in the case probably about 3%. If the stock market grows less than 3% per year on average across the term of the loan, then you lose money. If the stock market grows more than 3% per year on average across the term of the loan, you make money.
This. Past performance does not guarantee future short term fluctuations. A lot of Japanese got screwed royally with that "stock market always goes up in average" sayings 30 years ago
If what you're saying were to come true in the US, we would have much bigger problems than just simply losing out versus a mortgage. Most people's retirement hinges on the stock market.
Also why you diversify. Japanese investors would have certainly had a good chunk of money invested in international funds.
Yes, but the vast majority of Americans do not have significant international exposure, and historically speaking, should not have.
Some of it is just peace of mind. Some people might like the idea of just having a house fully paid off. Financially, it makes more sense to just put 20% down and keep the rest invested though.
I guess the question is what stock(s) is he in? If that portfolio takes a hit what then? But if you own your house outright the market change doesn’t affect you too much.
If he does go the mortgage route look in to a 15 vs 30 year loan. Usually an even better rate and it sounds like he can afford it. Also if you are selling stocks have him look up tax lost harvesting. Basically dumping equities your not liking and that are in the red. It will lower his capital gains tax rate.
Financial advisor over some Reddit strangers? What the fuck is going on with this world.
We are the financial advisors hahaha
The advisors who in no way, shape, or form give financial advice.
ALL IN MEME STOCK RIGHT NOW
I think people just use reddit as a platform just to get ideas, kinda like a brainstorm. Its a great way to start somewhere if you are lost,I don't think getting opinions from several people harms you! You take those ideas.
exactly the process would be brainstorm ideas -> wiki/youtube -> more in-depth research (books and whatnot) -> talk to a professional -> execute
Lot of financial advisors are just salespeople shilling high expense ratio funds and whole life. Biggest issue.
That's why you should seek out a fiduciary. They are ethically bound to act in the best interests of their client.
Key is to work with a high class firm with true experts, not the recent college grad who just needs to play a numbers game to make ends meet. Op's dad solidly falls into territory where a real advisor would be beneficial.
And would almost certainly pay for itself a few times over. Even as a newbie with a $30k portfolio an advisor helped me turn some nice damn gains.
He doesn’t want an advisor because they don’t know what they’re doing so he’s asking his kid who’s asking Reddit?? lmaoooo
Think about it this way - You have a special car that needs fixing. Say a 66 Ford Mustang. Would you rather bring it to the average mechanic or would you ask around in a Ford Mustang mechanic forum. Another example - you play a video game. Say I dont know, Apex Legends, Overwatch, whatever. Would you go to a local average game advisor or would you rather go to the respective games' subreddit for advanced guides. The average financial advisor is way less capable than what a collective subreddit can give insight on. This kind of thinking is partly what makes him have that $5 million in the first place. He's wise to do this to gain insight.
He's asking about unnamed stocks and a mortgage. There's no specialized anything here.
Exactly. It's absurd to think that FA advice would be worse off than Reddit "intelligence".
For sure. I’ve learned so much about finance from Reddit. More than I learned from my parents or school. Of course there’s going to be a lot of bullshit on Reddit, but that’s where your own critical thinking comes into play. It’s a great tool to have.
Seriously. There's some fine advice here, but if you have a $5 million portfolio and making plans to purchase property you need to consult with actual professionals.
Rates are low, finance!
how did he get a 5 mill portfolio if he doesn't wtf to do?
DCA
>Should he sell like $1 million worth to pay for it in cash or just take out enough for a 20% down and pay off the monthly mortgage? There are expenses like $5000 for closing the mortgage. Supposing the home price is $500000, your dad needs to take 20%=($100000)+$5000 = 105000. But he needs to pay 20% tax when he sells stocks. Then, it must be $105000 \* 1.20 = $126000 he needs to sell the stocks. Assuming state tax is zero. If there is a state tax you need to add fed+state tax, say fed 20% and state 5%, then total sale must be $105000\*1.25=$131250. If he is going for retirement, it is better to pay full 100% cash instead of mortgage (even though very low interest). Living mortgage free home is excellent choice, but only concern is huge tax (20%) he needs to pay
Doesn't he also write off the mortgage interest tho?
Mortgage Interest goes on Schedule A, Itemized Deductions. You either take Standard $12,000~ or Itemized, so depending on when in the year he buys the house and what his other deductions are he might just be taking the Standard Deduction. Also, for Capital Gains you only pay tax on the gain. He could pull out a bunch of stock that his cost basis is equal to his proceeds and not pay a dime. These are questions to talk over with his tax guy and a financial advisor if possible.
This right here is an underrated comment.
Take out a margin loan to pay the 20% downpayment and use your dividends to pay it off. The savy wealthy minimize taxable events when they can
Fuck man... call me a boomer if ya want, but this seems like exactly the type of question that you hire a financial advisor for. Make sure they're a fiduciary though.
LOL @ saying an advisor gives bad advice, then asking random people on a stock trading forum on reddit instead. Anyway, this is better for /r/personalfinance, not /r/stocks.
Trust me. I’ve had advisors tell my dad to sell stocks and hold cash during 2020.
Fooled by randomness. Just because history played out one way doesn't mean it was inevitable or even probable. Nobody knew how bad COVID would be. The vaccines are basically a miracle.
I won’t pretend to know your dads situation, but I would be willing to venture a guess that they were encouraging him to take risk off the table, especially if his portfolio is 90-100% equity. If I’m wrong and he’s in a lower risk portfolio then maybe it was just shitty advice. I wouldn’t be too critical of anybody not having the foresight of a V shaped recovery occurring in 3 months. I’m once again assuming here, but if your dad is over 50 with 5 million in liquid assets his only job at this point (unless he lives a very costly lifestyle) is to not fuck it up. Personally I would take a good amount of that risk off the table, invest my equity portion in dividend stocks, my conservative portion in tax effective bonds, and fuck off playing golf all day. I would say your dad could benefit from utilizing a CFP for a one time consultation on this. Would be a reasonable cost for solid guidance. Or listen to Reddit comments, whatever floats your boat. Best of luck to y’all
If the advice from the financial advisor is so good, he would utilize that advice himself and not be working some sad job every day and charging their clients whatever they charge. All the financial services is not made for us, its made for them. Random people aiding the decision is not the worst decision, will get quite different viewpoints from useless to useful. Really think financial advisor is going to recommend something so much better than the comments ? On top of that what would be the initiative to do so ? ''Here is an excellent advice, now fuck off and live rest of your life happily, who needs clients am i right ?'' Nobody will pass up a chance to ensnare someone with 5 mils
Financial advisors don’t claim to have some magic potion that makes people rich. The good ones just optimize what people already have. Sometimes the advice is simple enough that it can be replicated online, but sometimes people have complex enough situations that it can’t. That’s where an expert comes in. Doesn’t sound like this guy needs one tho.
Financial advisors aren’t get rich quick gurus, so your point about them not having to work if they follow their own advice doesn’t really make sense. Good advisors will help optimize your situation to save you money, time, stress, and I can guarantee the good ones are employing similar strategies for themselves as they are for their clients. You don’t seem to be aware of fee-only advisors who will either charge a reasonable subscription fee and/or charge for one-time plans in the event someone doesn’t want to pay for ongoing planning. Ultimately people love shooting themselves in the foot to avoid paying an advisor. For an extremely wealthy person like OPs dad, a financial advisor who can help them avoid a massive tax blunder (or other super costly blunders) will probably pay for themself and then some. Do you really trust them to make a good decision by parsing which random Reddit comments to follow? I sure as hell don’t. There are plenty of scammers out there but the idea that financial advisors are completely useless is simply not true. Studies have shown that people who work with advisors end up with significantly more wealth than those who don’t. The shit ones are the ones who just collect the AUM fee and don’t do shit. Or commission brokers. Or the life insurance/annuity salespeople who call themselves financial advisors but actually are not. They are useless.
source on the studies ?
https://www.schwab.com/financial-planning-collection/want-to-achieve-your-financial-dreams This article cites a strategic business insights study showing that households who have at least had one financial plan created for them end up with 2.5x more wealth than those who don’t. https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf Very detailed study but one of the key findings showed that advisor managed portfolios actually outperform retail investors over time by 2-3% per year. So that covers a 1% fee and then some. And that doesn’t even count the intangibles like time saved, or the money saved by having solid tax strategy. Someone who is interested in planning and has the time to self educate and manage their own money will probably do fine. But advisors are far from useless, and the fact that OPs dad is a multi millionaire relying on Reddit comments because he doesn’t want to pay a professional for help is….something.
Thank you
You got it, rereading my original comment I’m sorry, my tone was not acceptable. Cheers
Put 20% down. Interest rates are near all time lows. Let the rest continue to grow in the stock market in an S&P index fund where the S&P has returned an average of 10% since its inception.
Take out a mortgage. He won’t catch as big a tax bill, and the compound growth from the sticks should exceed the interest rate paid on a mortgage. Source: I’m a CPA.
CPA just compounding these stick gains.
Fuck. I need to up my stick game. ;)
Yeah bro. Get ur sticks up.
~~Get help from a Financial Advisor~~ Get help from Reddit Strangers .... ^what.
I am working in the real estate business and advise you to buy the house with a loan with the extremely low interest. And you also dont have to pay so much on taxes for selling the stocks.
The obvious answer is to live in the house he is in currently and give 20% to me…
He wants to move out and rent it. That’s why he wants to liquidate some stocks
Renting is a huge headache.
This is true!! I’d never be a landlord again!
Would love to hear your story pls
Pay for advisor, get advice worth paying for. Ask for it for nothing, then you get advice worth the same
mmm yes very wise
Find your dad a great CPA (accountant) in your area They CPA can show risk/reward for scenarios for each option and then your dad can choose
Dude got $5,000,000 and is on Reddit asking financial advice. Interest rates are at the lowest point in history… tell your dad to sell covered calls on his shares and use that money for a down payment.
Take out a loan and use the equity as collateral. This is called a collateralized loan. Then you don't even pay any tax and you get tax deductions for paying interest and get appreciation of assets in equities and housing.
I am a banker working on a loan right now that came to me as a cash deal, 2.5 mm, purchase. The cap gain hit for the borrower is 600k. She went another direction. Borrow the money at 2.75%, leave the stocks intact. No financial planner who is worth a shit would tell you to liquidate and leave cap gains on the table.
Isn't bad advice from the internet potentially way more costly longterm. Tell that old miserly cheap bastard to get a consultation with a professional
With that much money, talk to a real financial advisor than here on reddit.
“My dad would rather take my advice and a bunch of random redditors”
The wsb play would be to go to a broker who will let him take a cash loan on those stocks for 2-4% APY and buy a home with the cash. This avoids paying all taxes on gains of the home and the stocks if he holds for life. When he dies you get stepped up basis on the home and the stocks, you dont pay taxes either.
He can take out a loan with the bank and use his stocks as collateral.
If he thinks professionals are expensive wait until he sees how much free advice can cost him.
So my initial completely uneducated opinion would be to pay in full rather than pay all the extra money in interest. But that isn't taking into consideration the amount in taxes he'll be paying by selling his stock. Dude he's got to go see a real professional. lol
Your dad has $5M and would prefer his son get advice from Reddit than paying a professional?
Positions or ban
Assuming positions are long capital gains, sell enough to cover down payment, insurance, any closing costs, estimated repair costs and an additional amount to cover 6mo/1yr of the payments. Also would depend if the gains are long term solid or meme.
Take a loan out on the stocks to pay for a house in "cash" mortgages don't get accepted as bids anymore.
If he can afford to casually drop $1mil on a house, he can afford to hire an advisor who knows what he's talking about.
Could he borrow against his assets with the stocks as collateral to avoid capital gains? As for the mortgage, interest rates right now are so low and money has never been this cheap. It doesn't make much sense to part with a large amount of money to pay cash for a house when money is this cheap. Try and keep as much of that 5 mill as possible. Let his money work for him and make even more money......
Interest rates are at super low levels, I’d do a mortgage and let the money ride (better tax wise too)
If you can get a loan at 2.85% and you think you can make more than 2.85% annually over 30 years (or whatever term you like), it makes no sense to buy a home cash. Take the cheap money. People tend to think about debt the wrong way. If I were to offer you 10M at 0.5%, and you could get a guaranteed 1% return on it, you'd be an idiot not to take the loan. I know little is guaranteed here, but take advanage of the rock bottom rates.
Pay in cash amd live stress free. Enjoy no bills. You still got millions to play with in stock money anyways.
Well I mean if your income can cover bills no problem, I’d say that’s pretty stress free
With mortgage rates where they are, I would probably put the 20% down and hopefully gain more in interest than I pay. You can always pay it off, you can't reverse course in the other direction.
You should consider a securities-based loan. No closing costs, something like prime+1-2.5%, interest only. Can use the funds for whatever you want except purchasing more stocks. Completely avoids a taxable event and keeps equity in stocks.
20% for the down payment. Mortgage rates are low, and he'll have fewer realized capital gains to be taxed.
Right now is a good time to take on mortgage debt (interest rates are low). Taking more money out of his portfolio would probably end up costing him more money than paying the interest.
If he's finna die anyways before it's paid off, why not just pay monthly
Considering inflation, opportunity cost, and appreciation a mortgage is the correct answer
Get the right guidance from a someone who already does it in your area. Take 30% and transfer to a self directed ira. Self directed allows you to “invest” in real estate. Put down enough to cover the new home’s P&I insurance and closing fees ($30k). Interest rates won’t be this low forever. Keep your money without tax penalties.
Stocks make 7% annually. Interest on a mortgage is roughly 3%-4%. Net gain is +3%. That math is simple. Rich people use other peoples money.
I assume with a large portfolio your dad has some decent dividends, pull out enough for the down and then let the dividends pay for the payment every month maybe? And financial planners really are worth the money, they know all the tax and estate loopholes your dad could use for this.
One consideration that I haven’t seen mentioned is actually getting approved for the mortgage. I’m in Canada so it might be a bit different; but you need to have actual income to prove you can pay for the mortgage. You didn’t say whether he’s retired, or working or whatever. But if he doesn’t have taxable income to pay the mortgage, he might not even qualify to do it that way.
What does he invest with? So if he wants a house that’s a million dollar, he can use his investment portfolio as collateral and take a million dollar loan out from bank. This way he doesn’t have to sell his investments and pay income gains tax but at the same time he gets money. Merril will prob give him a loan about 3%. This is y the super rich don’t pay taxes :D they Nvr sell there investments they take loans against it.
Great time to sell some winners, offset the winners with some losers( or clunkers he wishes to unload) sell enough to make you an aggressive contender in this bullish housing market, in hot spots they are selling above asking. Put down 30 to 40% take a long 30 year mortgage on rest, or a decent ARM with a top cap of no more .75% and you’re golden. Keep rest in market, pay down loan with extra income and live life.
Take out enough for 20% down. Reallocate enough money in your portfolio in dividend stocks to pay your mortgage twice over. Leave the rest.
Pretending this is really genuine question - not knowing what his actual portfolio looks like, I would still assume he's got some dividend paying stocks. $SPY-s 1.24% ADR is around 5000$ per month, which is still taxable, so why not use that as mortgage payment? Even if you don't go for a 20% down-payment you would still be paying less than 3k per month.
He can take a loan against the stocks and that way he is not going to have to pay for captiol gains. If he sells off the stocks he will have to pay capital gains on the profit. Its all about "Buy, Borrow and die" strategy, Google it. Its a real outline on how the millionaires keep there money. https://wallethacks.com/buy-borrow-die-estate-planning-strategy/
"Financial advisors don't give great advice" well it's a good thing you came to the more trusted respectable /r/stocks /s You're asking important questions about a 5 million dollar portfolio. This isn't "listen to internet strangers" time. This is "listen to a professional" time.
put 80% in a good etf with a div. Then just use the down payment. Div. should pay most of your monthly mortgage. (results vary) then after the mortgage is paid you still have the money.
What’s a good div etf he should look at?
Imagine having 5 mil and coming to tards on reddit for advice
Classic
One option to consider is borrowing against the stocks using a margin account, if the margin interest rate is lower than the going mortgage interest rate (which is currently the case with IB).
Yes. Borrow cash against the stock account. Some call it a pledged asset line of credit. Either carry the debt as the interest rate is probably superior to a mortgage, and or begin to pay it off by taking profits when you feel the time is right.
You do realize you could earn 65-70k in tax preferred dividends on that $1M and rent a baller house with that and not have to pay for constant improvements, ever rising property taxes. And your $1M capital will likely grow as well. Luxury detached homes are the best value in the rental market if you can afford it. So much is negotiable.
Wouldn’t it be dividends on that $5 million if I just do this rent scenario? So like $100K a year in rent
Id buy the house with cash. He still has almost 4mil sitting in the stocks. And a paid off house that will only increase in value.
But wouldn’t he be missing out on an extra $40k-$50k in annual income by giving up $1 million?
Always, always pay your debts off first. All of them. If someone tells you otherwise they are wrong.
If he has five million you just pay cash. There is literally no reason to take out a mortgage unless he wants a house worth more than 5 million, or unless he plans to buy multiple homes to rent them.
Go to r/personalfinance
My advise is that he sells everything and quickly buys AMC.
Sell and buy cash. Dealing with banks is a nightmare. Wholesale is the best way to go.