Look before you leap into using investment capital to buy a home

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Published Date 8/13/2024

In the 1976 movie Marathon Man, Laurence Olivier’s character harrasses the lead character by repeating — “Is it safe?” When it comes to where we put our money — in real estate and/or investments, the same question must be asked.

While having a 30-year mortgage is not necessarily listed as a top priority in that American Dream list, most homeowners have one. Realtor.com’s Julie Gerstein reports, however, that these days, homebuyers are increasingly opting for an alternative route—using their investments to bypass a home loan altogether.

“Mortgages have traditionally been considered a ‘good’ type of debt because of their relatively low interest rates, compared to personal loans,” says Gerstein. “Yet, with today’s interest rates, people are looking for low- or no-interest ways to pay for a home and choosing to liquidate their investment funds instead.”

Then she poses the question — is this wise? Should you use investment funds to purchase a home and forgo a mortgage? Her answer — It all depends on your investment portfolio and your appetite for risk.

She consults finance expert Kris Mullins: “Cashing out investments can be a strategic move, driven by unique market dynamics,” she says. “Using investment funds can save money in the long run, especially if you’re facing high interest rates like we see now.”

Mullins adds, “Buying real estate with your investments circumvents the immediate financial strain of a mortgage and strategically positions the investor to benefit from both real estate appreciation and the liquidity of their remaining portfolio.”

Gerstein notes that this approach leverages the advantages of real estate investment without tying up capital in mortgage payments—and can save a ton in interest payments.

Financial planner R.J. Weiss says a number of factors are at play in whether this is a strategic decision for you. “Your age, employment status, and holdings size will all factor into whether using investment funds for a home purchase makes sense. You should ensure you’re meeting your retirement goals or have enough cash flow after you buy a house to make up for the lost savings.

If you have enough cash flow to replenish your investment accounts after buying the home, he says using your investments for the purchase is not irresponsible. Mullins adds that you should also consider your “investment time horizon” as you decide whether to use investment money — the length of time you can keep cash in investments without dipping into it for major expenses.

Weiss adds, “If your investment horizon lines up with your home purchase timeline and other financial goals, you can ride out market ups and downs without having to sell off your investments in a hurry so as that homebuying date approaches, make sure your investments are set up to minimize risk. That way, market dips won’t ruin your homebuying plans.”

Wealth advisor Andrew Hall agrees that using investment funds to pay for a home gives homebuyers flexibility. “Clients can sell investments and have cash quickly,” he explains, which “can be the difference in writing the winning offer in a tight housing market.”

Gerstein reminds us that thanks to new SEC rulings, money from selling investments is usually available the day after you sell the funds, which gives homebuyers an edge in competitive markets.

Hall is bullish on looking into portfolio loans —kind of like a home equity line of credit. “Different security types receive a different percentage of leverage,” says Hall. “This loan has payment flexibility, can be secured in much less time than traditional mortgages, and can avoid some very high capital gains.”

Taxes, you ask? It’s true that any time you take money out of an investment account, you’ll pay capital gains tax (a tax on the profit your investments have made). But you can factor those tax dollars into the overall “cost” of using investment funds, says Gerstein, by including it in your calculations to give you a clear picture of the total monetary picture of using your investment funds. But be aware: Neglecting to do so could lead to unexpected financial shortfalls, potentially jeopardizing your overall investment strategy and long-term financial goals.

As for using those retirement funds as your vehicle in all this, Gerstein says to proceed carefully before using them to buy a home. “There are specific rules and penalties regarding retirement accounts. The IRS assesses a 10% tax on money taken out of a 401(k) before the age of 59.5, in addition to the income tax you’ll pay on those funds.”

She adds that some investment advisors allow clients to take out loans of up to $50,000 against their 401(k) for a certain amount of time without incurring penalties. If you can’t be approved for a mortgage or the only other options are high-interest loans, this might be an attractive option, however. And if you pay off the money on schedule, it won’t impact your credit score. She also reminds first time homebuyers that the IRS also has a program that allows them to withdraw up to $10,000 penalty-free from an IRA to use as a down payment.

Whatever decision you make around using your investments, Mullins and the other financial experts recommend you consult a financial advisor before making any decisions. And financial advisors agree that each decision should be tailored to individual financial goals and market conditions in order to ensure a balanced and forward-thinking strategy.

Realtor, TBWS

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