Monday, April 30, 2007

Reader Submitted Question?

Here is a question from an email I received. What do you think this person should do?

We're selling a house in the states and will do very well (the downturn has not hit our neighborhood at all--doubled our investment in 5 years, not bad) and have a substantial downpayment but even hundreds of thousands of dollars here is really very little. But we also have investments that we could liquidate (not our retirement accounts) to pay the down payment--"total" liquidation would add about 80-85 percent to a downpayment. This would leave us with little reserve. But with a relatively low mortgage, we can save money prettyfast--right now we save pretty well--about 15 percent of after tax income--and that wouldn't change too much with the kinds of mortgage we're considering. Is that stupid?

Pros: more downpayment, nicer house, better neighborhood and/or less mortgage.

Cons: Little reserve. Investments seem to do well now. My wife feels it's insane to get rid of investments and it makes her nervous. She may be right.And related: given your feeling about the market, if you had the cash to buy a house now (we're looking east van) would you? Or does it make sense to keep money in the market until things turn...if they turn (about which I am somewhat doubtful, given what it looks like in our current neighborhood, Kits.)

What should this person do?


AndrewJ said...

You should most definitely not sell your equities. That would be putting all your eggs in one decidely worn looking basket. Maintaining diversification will do you well in the the long run. The short term risk for real estate has rarely if ever been higher.

Paul said...

rent until buying makes sense. Rent is a bargin for the time being and he can buy whenever he wants.

jesse said...

I assume you are selling an investment property? I'm a bit confused.

Obviously it is best to sell at a peak, rent, and buy at a trough. Barring that, upconvert when the market is in a downturn. You do better than upconverting when the market has peaked. I am guessing the advice you will get here is a bit bear-biased though maybe they are who you should be listening to after all. Who knows.

If you figure out what to do with your investments, let me know. If you're feeling dangerous, max out DP then HELOC like crazy back into equities. Then hold on tight.

mightymouse said...

Not an Expert but…

I sold my property in late 2005 (I also bought in 2005 and only made about $15,000.00 on the transaction after fees). I’m waiting to get back in. I’ve had to be very patient.

My down payment has been earning 4% as of a year ago. This covers my rent. I still feel strongly that the market will turn, however I realize now, that I should not underestimate the craziness of this home buying frenzy. I plan to continue saving for up to two years, if by then house prices have continued to appreciate, well, I guess that’s the new way of Vancouver.

I figure my worst case scenario is that home prices will continue to appreciate in single digits. Even if that is the case, I won’t have lost financially as my renting will have allowed me to save on property taxes, mortgage interest payments and income on my down payment.

Anonymous said...

I assume it's ok to reveal that I sent in the question:

Jesse said: I assume you are selling an investment property? I'm a bit confused.

Actually, no, it was our primary residence. We've been renting here while we decided to stay or not. It turned out it was a good idea to rent and not sell last summer, since the market in our neighborhood back home, at least on our block, went up and our mortgage was covered by rent, etc.

What does it mean to "max out DP and then HELOC like crazy into equities"? The lingo is foreign to me (perhaps it's canadian english that I don't know yet?)

I guess our fear is the classic fear: getting priced out. If prices are up double digits this year as of March, our down payment is getting smaller by the day, even if it's invested pretty well.

It's a hard and agonizing decision, as we all know.

Thanks for the thoughts.

jesse said...

"max out DP and then HELOC like crazy into equities"

Max out your downpament. Then take out a Home Equity Line Of Credit and invest it in equities. You can write off the interest on the HELOC against your income tax, if you use it for investing. The issue is that HELOCs are usually at a slightly higher interest rate though it is not crazy. I don't know if I would recommend this now unless you are focused on >15 years down the road.

If this is your primary residence, as I mentioned above, you are best to sell at a peak and re-buy at a trough (duh). If you are not comfortable doing this, it is actually better to move up the property ladder when the market is in a trough, even if your home equity position as a percentage of market value looks better at the peak.

Simple example: buy house at 200K 50K down. Price goes up to 250K. Move to 400K house (which was 320K). You make 75K downpayment (19% down). Mortgage is 325K.

Buy house at 200K 50K down. Price goes down to 150K. Move to 240K place (was 320K). You have 0 downpayment saved but your 100%mortgage is 240K.

Same house.