Sell stocks for down payment or use heloc

Rachel M. · 2017-06-13T19:03:07-07:00

Would you sell stocks for a down payment or use home equity to finance an investment property? Background: I purchased my home for $325k. Put $185k down. Comps in my neighborhood are selling for around $430k at this time. I want to purchase an investment property in my area (central coast of Ca. Paso Robles/ Atascadero/ San Luis Obispo). The median home price here is $530k (San Luis Obispo). Because my income is not very high and the housing prices are high, I won't qualify for very much. I do have quite a bit in blue chip stocks but not much in savings. Ideally, I want to purchase a larger home that I can move in to and rent out a granny unit (either air bnb or LTR) and keep my current home to rent as a LTR. Realistically, I'm thinking I will have to sell my current home to purchase the bigger home, unless I come up w a large enough down payment to put toward the bigger home. So, w that information, what the heck should I do?

Scott Weaner

Rental Property Investor · Yardley, PA · Member since 2008 · 1k+ posts · 561 votes

9y

I am no accountant, but I have done both. I would rather use a HELOC, as interest is tax-deductible. If you sell stock you will have to pay capital gains taxes.

2 Reply

Linda WeygantPro Member

Investor and CPA · Arvada, CO · Member since 2015 · 2k+ posts · 3k+ votes

9y

Selling stock that is currently at a loss or around break even is actually an ideal scenario if you're determined to divert those funds to real estate. While it's true you only get to deduct $3000 worth of capital losses each year, there is at least no tax to pay and no payments/interest on the HELOC to pay either.

You're essentially taking a non performing asset and investing it in something that hopefully performs better.

If you've got a mixture of stocks that are at a loss and at a gain, see if you can sell enough of each (in the same calendar year) to get as close to $0 Net Gain and you've actually got the ideal scenario. Dumping crap stocks that haven't performed, Cashing out the gains on stocks that did perform and invest in a different asset class. Win, win, win.

If all of your stock is currently showing gains, then selling it and taking the tax hit is way too painful in my opinion. You're essentially starting out your real estate investment in the hole. But if you've lost faith in stocks and really want to be in real estate, it's not an awful way to start. (Although I'd argue that if all of your stock is showing gains, then I'm not sure why you've lost faith in stocks, but that's a whole religious war that I don't want to get into).

HELOCs on a primary residence are also pretty awesome. The interest is deductible to the new property (via interest tracing rules) so you get the deduction on Schedule E (if you're holding) or in a business (if you're flipping) instead of on Schedule A, so it is more advantageous from a tax standpoint.

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2 Reply

Rachel M.

OP

Atascadero, CA · Member since 2017 · 20 posts · 6 votes

9y

Linda Weygant wow, thank you so much for the thoughtful response. I will look further in to both options. I appreciate your help.

0 Reply

Owen SchwaegerlePro Member

Real Estate Broker · San Luis Obispo, CA · Member since 2016 · 181 posts · 69 votes

9y

I wouldn't sell your home to buy a bigger one. I would find a way to keep the home as an LTR, then use some of your current equity through a HELOC or a home loan to help you get into the next home. Especially since you put down $185K, you have a huge amount of equity which you can draw on! Have you considered adding more units than just a granny unit in your next property?

0 Reply

Thomas S.

Member since 2016 · 13k+ posts · 12k+ votes

9y

You are conflicted between investment and personal life choices. Before you make a decision to intermingle your decisions you need to first assess if the property you presently own is a worthwhile candidate as a rental. Secondly is your priority to purchase a more luxurious home as a lifestyle choice or do you want to invest in real-estate. The two are not compatible.

Will your present home rent for a minimum of $4500/month.

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Daniel Lehrman

Financial Advisor · Phoenix, AZ · Member since 2016 · 50 posts · 21 votes

9y

I think the answer depends on the interest rate you would get on your HELOC, and how long you plan to invest that money If the HELOC is less than 3% and your time horizon is at least 10 years, I would make the argument that taking the HELOC is a better idea. The stock market long term performs much better than 3% on average. The risk in doing that, of course, is that your stocks will happen to tank during that time. However, there are very rare cases in history where the stock market has not gone up in a 10 year time horizon.

0 Reply

Rachel M.

OP

Atascadero, CA · Member since 2017 · 20 posts · 6 votes

9y

Just spoke with a lender. I found out my income to debt ratio isn't high enough to take out a heloc. I'm confused bc I should have access to at least the $185k that I put in to it, right? I'm a total newbie so I really have no idea. The only debt I have is the balance on my home loan and my car loan. No credit card debt. Besides a private lender, what can I do to get money for a down payment on a property that I can move in to and use my current home as a LTR?

0 Reply

Rachel M.

OP

Atascadero, CA · Member since 2017 · 20 posts · 6 votes

9y

Thomas S. no, comp rentals rent for around $2200 per month

0 Reply

Victor N.

Investor · Wellington, KS · Member since 2016 · 256 posts · 188 votes

9y

The applicable long term capital gains rate depends on the level of your other income. It sounds like that may be low so I would check with your tax advisor to find out your applicable rate.

0 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

That is a good way to build your portfolio, but I would be cautious at this phase in the RE cycle. I'm not crying the sky is falling, or trying to call a top, but think we are closer to the top of this cycle than we are to the bottom. Doesn't mean you shouldn't invest, only that you need to be cautious and very disciplined investing right now. I do not like to leverage up towards the end of the cycle ... if/when I do leverage up, I prefer to do it after a crash, closer to the bottom of the cycle. So, in your case, if/when you find a great deal, I would sell stock to finance the down payment. Don't try to force any deals, though ... only buy great deals where you can force some appreciation and build in some equity quickly ... this will insulate you to some extent from any short term market fluctuations, keep your exit strategies cleared up, and hedge your bets ... this is important to do any time, but especially important when we are late in the RE cycle.

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Bill ExeterBusiness Member

1031 Exchange Qualified Intermediary · San Diego, CA · Member since 2008 · 1k+ posts · 1k+ votes

9y

Hi @Rachel M.,

The decision as to whether or not you should sell stock is not always an easy decision to make. There is some really good advice above, but only you can decide what is right for you.

I thought I would throw one more option on the table. You might want to reach out to the brokerage firm that has your account and ask about the possibility of borrowing against your securities (often referred to as a margin account). This would allow you to access some of the money by using the securities as collateral, but there are risks with a margin account if the value of your stocks drop significantly (often referred to as a margin call).

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Sell stocks for down payment or use heloc

Sell stocks for down payment or use heloc

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