May 2017 Real Estate Q & A
This spring has seen the housing market heat up precisely when concerns about interest rates are also beginning to simmer. This has left many homeowners considering a change, feeling some urgency and seeking guidance as they assess their options.
Many seek a new home but also need to factor in their long term financial health. To that end we’ve engaged Wealth Advisor Joe Burgess to help with this month’s ‘Ask A Pro’ as we marry the wisdom of two professionals adept at collaboration.
Burgess is on hand to answer the financial side of the equation while Zach can weigh in on the impact in today’s real estate market on a variety of topics:
- Selling Investments to Fund a Home Purchase
- Windfall: Pay off My Mortgage or Invest?
- Purchasing the Family Cabin
I’m planning to buy a new home soon. It seems easier to buy first, move, then sell my existing. My first inclination is to sell a few investments to help me cover this. Is this a good idea? – Stewart in Mound
ZACH- From the real estate side of this equation, the biggest impact will be how long you will you be paying for two homes, regardless of how you choose to fund them. Making a decision here hinges greatly on the current market conditions. They will dictate how attractive your home will be to buyers and therefore how hard it is to sell.
Speaking generally, we are in a low inventory environment for homes in the $350k - $500k space, so if you are planning to sell in this range and have found a home already, you may have some flexibility to wait. The best way to know for sure is to have us prepare a Home Valuation on your current home, we can also define the price point and inventory available for your next home. Both will help you to understand the market nuances better.
Armed with that, you’ll be able to make a more informed decision.
JOE- Financially the answer to this question means marrying the timeline your real estate professional provides with what exactly you mean by “selling a few investments”. If we are talking about cashing out retirement savings in tax qualified accounts, it likely won’t make sense.
If you are referring to non-qualified accounts like brokerage accounts or other investments, it may be possible. Factors like your tax liability on gains, expected returns, goals for the future and other factors will all come into play. The short answer is that all require more info and careful analysis by a Wealth Advisor who understands the tax implications as well as the long and short term impacts to your overall investment strategy and cash flow needs.
I’ve recently received a large bonus at work. Is it more beneficial to pay off my home or invest the money? Paying off that mortgage would feel pretty good, but I want to be smart. – Dave W in Eden Prairie
JOE- As you allude to in your question, every financial decision involves trade-offs. The value of advice lies in systematically weighing your options while managing risk and planning for the future. This won’t always lead to a clear path, but it will help you consider multiple angles.
Option 1- Math- Defining this option means modeling the opportunity cost for the other possible uses for your bonus. While removing the mortgage may feel good, determining if it makes sense to pay it off requires comparing and contrasting the alternative outcomes. A simple projection can help greatly. This will show each scenario based on interest rate, assumptions for the return rate on a potential investment and tax implications. Specifics will tell the tale, but in our current interest rate environment, the math answer will likely lean toward investing versus paying off the loan.
Option 2- Emotional Decision - If you have more than you need to retire and can already fund goals like education and others, maybe the most efficient math matters a lot less. If so this may become an emotional decision. If you feel better paying off the house and you don’t need the money, there is something to be said for retiring an obligation and sleeping easy.
Option 3- The Know Thyself Angle- There is the third, real life answer that has a lot less to do with financial models or emotions. A big part of being smart with money is managing behavior. This comes with self-actualization and accountability. If you know you are a poor saver and you don’t trust yourself to leave that money alone, do yourself a favor and pay off the mortgage. It may not be the best option on paper, but it would provide a tangible immediate uptick and guard against squandering the bonus on something that won’t improve your overall net worth.
My parents are in declining health, facing long term care and are looking to sell the family cabin. Each of the four kids would like to buy it together. How exactly might that work and can you give me any advice? -- Katie in Excelsior
ZACH- There are two items at play here, a partnership and how the purchase will be completed (ie. cash or financed). Financing would likely be the toughest part. If you intend to finance the home with a mortgage, then all four parties would need to be included on that mortgage. If each party is able to pay cash for their share or has financing not tied to the cabin (like a line of credit on a current home) then it simplifies things. At Zachary Adams and Associates we have some great lending partners we work with that could provide the best possible financing options to facilitate the appropriate financing for your situation.
The other important factor would be defining the ownership interest and the use of the property by each party. Likely some form of partnership agreement may be necessary to clearly identify who is entitled to what use of the property. This will include items like how many days per year each party gets to use it, who pays for common use items like the dock and boat lifts, how property taxes will be paid, how maintenance expenses are distributed, etc.
My advice would be to sit down with a real estate agent to define the goals and options for purchase, then scope out what additional items are needed and proceed on that logical path. It is likely that any formal partnership agreement would need to involve professional legal advice.
JOE- Zach raises several pertinent points. I would only consider this type of arrangement with a clear partnership agreement. It should spell out how expenses are shared, how you handle a sibling wanting to cash out, what happens at death of a sibling, etc. All the "down the line" things can make joint ownership a serious challenge.
The family dynamics of a transaction like this are tricky and the inclination can be to work off of a handshake agreement. Resisting that urge and getting everything in writing can be key to maintaining harmony and making the most of your investment. If a sibling does not want to do a written agreement, I would respectfully walk away.
To submit a question for Ask a Pro click here
Zachary Adams is a residential real estate expert with 100s of transaction in the west metro of Minneapolis. In Ask a Pro he responds to email questions on all things residential real estate related.
This article was co-written with Joseph S Burgess, CFP®, AIF®, CLU, ChFC in collaboration with a professional third party.
Financial Advisors do not provide specific tax/mortgage/real-estate advice and this information should not be considered as such. You should always consult your tax/mortgage advisor regarding your own specific tax/legal situation
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Joe is a registered representative and investment advisor representative of CRI Securities, LLC and Securian Financial Services, Inc. Moxie Wealth Management is an affiliate of North Star Resource Group which is independently owned and operated. North Star Consultants, Inc., Insurance Products and Services| CRI Securities, LLC - Securities and Investments | Securian Financial Services, Inc. – Variable Products and Securities | North Star Resource Group offers securities and investment advisory services through CRI Securities, LLC and Securian Financial Services, Inc. Members FINRA/SIPC. | CRI Securities, LLC is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource Group is not affiliated with Securian Financial Services, Inc. Moxie, North Star, CRI and Securian are not affiliated with Zachary Adams and Associates.
1790577/DOFU 5-2017.