We bought a very expensive house, very unexpectedly

Our second baby is here and just as we hoped, she’s perfectly lovely and wonderful. Our home feels beautiful, full and chaotic. Just as we expected. 

But you know what wasn’t on my bingo card? Buying a house when we were planning to rent the next few years.

And buying it in all cash, closing in 12 days, replacing a roof and lining a sewer in the following 3 days…then having a baby the same week.

Yup! It was a crazy April. So crazy in fact I’m starting to feel my shoulders tense just recapping this story for you. But it’s worth sharing. From obtaining a margin loan to accidentally becoming a 100% equities investor, here’s all I learned from this big unexpected home purchase. 

Celebrating our new baby's arrival in our lovely backyard

Getting the bad news

Last year, we moved from Ogden, UT down to Salt Lake City. A move we were excited about, but also realize is a big change and so we didn’t want to jump right into homeownership. After 4 years of living through a renovation, we were excited to be renters. The chance to focus on being parents, making new friends, working on Yield & Spread, and getting to walk away from the never ending list of to-do’s that come with home ownership.

When we first toured our current house as a rental, I explicitly told the property manager not to rent it to us if the landlord planned to sell the place anytime soon. We wanted to rent for the long-term then explore buying later down the road. 

At the end of last year, I let our landlord know we were expecting and intended to renew our lease. Everything seemed to be in order. Then 3 weeks before the baby’s due date we got a dreaded call from our property manager: “The landlord wants to sell.” This meant we’d have to relocate 2 months after the baby was due. 

I was. not. happy. 

After losing my mind for 5 minutes begging the property manager not to do this to us (for anyone who has been pregnant before you know how vulnerable of a time this is), I somehow reached into the depths of my brain to ask “Would the landlord be willing to sell the property directly to us off-market?”. She said she’d he'd consider it.

I didn’t even know if it was feasible to buy this place! The house was DOUBLE the price of our last. 

What would this mean for our early retirement portfolio?

Would we have to go back to work? 

Would we need a loan? And if so, how would we get one?

Which assets should we sell to fund this?

What about the capital gains tax impact of selling? 

What if we fall off the Affordable Care Act (ACA) subsidy cliff? 

Ironically, we had spent the past few months talking about these sorts of things and how we might want to consult someone to guide us with this complex situation. Just an outside voice to help us navigate these choices as a couple, with some tax expertise to boot. We had actually reached out to multiple advisors and disappointingly found that no one was really equipped to help us. Our questions were either too advanced, or we were going to be charged way too much for this service.

But now, we were crashing into this situation head on. And we had no choice but to rely on our own brain power to make it happen.

Getting to work!

I’m a former consultant. Joe’s a former software programmer. That means I do a lot of the visioning, and Joe does a lot of the tricky math. We came up with a nasty looking spreadsheet to help us create a financial plan based on multiple scenarios.

Variable inputs we created: the home price, how much we would sell from our portfolio, what size of loan we would take, and which of our assets we would sell to make this happen (bonds vs. equities)

Fixed inputs that impacted the model: the loan interest rate, marginal tax rates, cost sharing and subsidies we receive as part of paying for healthcare via Obamacare

Insights we needed: What additional taxes would we have to pay due to this outsized purchase? Could we still be FI with our remaining portfolio post purchase? Was any of this financially reasonable?

Our very sexy and hectic home-buying spreadsheet

Getting a loan as an early retiree

Simultaneously while working on this spreadsheet, we got the ball rolling on obtaining a loan. Again, we were in a TIGHT time frame before the baby was due. I didn’t want to be closing on a house while literally pushing out a baby in the hospital.

It would take at least 5-10 days to get any sort of loan. Since we don’t qualify for a traditional mortgage – we don’t earn active income after all – we had to look for alternatives. From our research and from speaking with our savvy real estate friends, we landed on a margin loan. It's essentially a way to borrow against your existing assets and then this allows you to make an all cash offer. It can be risky if you're doing something stupid like borrowing against a single stock where the price could drop in half at any moment, but if you aren't playing with fire, then it's a pretty reasonable approach.

I asked my existing bank what the margin loan rates were and the best rate they’d give me was 11.5%. This is for a 7 FIGURE WELL-BALANCED PORTFOLIO! Ridiculous! But also kind of expected. Traditional brick and mortar banks aren’t really known for favorable margin loan rates. So we made the very quick decision to move half my portfolio to Robinhood where margin loan rates hover more around 5%, much more in line with a traditional mortgage if not a little bit lower. Margin loans are somewhat flexible – you have this cap established and then can take out as much or as little as you need at any given time. This flexibility helped us tremendously since we were moving so quickly and we weren’t quite sure yet how much we’d actually need. We could push forward with our spreadsheet experiment and negotiations while in the background we were waiting on Robinhood to approve us for the loan.

(Again, I’m literally sweating thinking about how we somehow managed all these moving parts!)

Deciding how to fund the purchase

As part of this process we were asking four big questions:

1. Should we sell some or all of our bonds at a loss to avoid a big tax windfall from selling equities that have appreciated significantly? This is one smart approach as capital losses offset capital gains. The obvious big risk here is only owning equities and having little-to-no diversification. That felt scary as people who don’t earn active income and can’t necessarily rebuild a bond portfolio very easily without selling more later down the line. 

2. We also had to decide how much to sell from our portfolios vs. how much to take out as a loan. The impact here being how much unnecessary tax we would face vs. how much interest we would have to pay from the loan. The more we sell, the greater the risk of entering a higher tax bracket and getting taxed even more. But the greater the loan, the more we'd have to pay in interest.

3. And then what seemed like the costliest ticket, if we did sell so much stock that it did artificially “inflate” our income, how much extra would we pay in healthcare costs? We get our healthcare from the state marketplace, which means each step up in income we have, we are likely to have to pay more in healthcare premiums, have a higher deductible, as well as a max out-of-pocket. In some cases, our spreadsheet was telling us that we might have upwards of $35,000 extra in healthcare costs just to afford this home (AH!). So just think of this as an unnecessary price tag to buying this house. 

4. And then the biggest question of course: Can we remain FI with this huge home purchase? How much is left over to actually fund our lifestyle? We definitely knew this might push us more towards the "lean FI" category. But then, of course, having a fully paid off home does mean our overall annual expenses would be reduced every year. Ultimately, we had to take a deeper look at our historical spending and decide if this purchase would be a threat to our future expected budget.

The final result

We were able to negotiate the initial asking price down to a point that all of this started feeling more doable.

Since we went without a buyer’s agent, the price came down 2.5% immediately. We then made the argument to the seller that he would save money and time because he wouldn’t have to put the house on the open market: he would avoid cleaning & staging, little things that needed fixing, foregone rent and any extra monthly mortgage payments. We just had to get the house under contract, then the ball was in our court.

Since we lived in the house, we had the added bonus of knowing all that was wrong with it. We knew the roof needed replacing and the sewer needed a new liner. We ended up negotiating another chunk off the price once under contract – meaning we got the house for $50,000 less than what the owner would have originally listed it for.

And that $50k reduction ended up being so much more than just that number. It took the pressure off the healthcare piece of our spreadsheet. We no longer had to sell quite as much of our portfolio, which meant avoiding a chain reaction of extra capital gains and an eye-watering increase in healthcare costs. It was the domino that made all the other pieces click into place.

Suddenly this crazy idea actually worked. We managed to make it happen.

The aftermath

We now have a small margin loan that we'll pay interest on, but we plan to have it fully paid off within the next two years. We essentially used the loan to cover the roof, sewer repairs, and a few other small projects. Spreading those payments over multiple tax years allows us to wait until our capital gains tax threshold resets rather than realizing all of those gains in one single tax year. This is good.

What’s less than good is that we did end up with 100% equities in our portfolio after selling all our bonds. Not exactly ideal when your portfolio is funding your entire life and the market could decide to drop 30% tomorrow because of an AI bubble…or any other unexpected event.

So the next challenge becomes: how do we rebuild a more resilient portfolio from here? I reached out to my friend Frank Vasquez, host of the Risk Parity Radio Podcast, to get his thoughts. Frank knows I'm passionate about using wealth to do more good in the world, so he thoughtfully tailored much of his advice around building a resilient portfolio as a "FI-lanthropist." If you've made it this far, I definitely recommend giving the episode a listen.

We’re working on this action plan now, and it will definitely take us at least 5 years to get back to a portfolio we feel really good about. But we feel safe for now.

What doesn't kill you makes you stronger

I learned a lot about myself and my financial prowess in this process. 

I saw how good of a team me and my husband make in challenging times. 

I experienced firsthand how you can’t always predict the future, but if you do the upfront work to set yourself up for financial success, it’s much easier to act when the opportunity arises. 

It further cemented my belief that there is no single FI number for anyone – it’s simply not reasonable to predict an exact plan with an exact annual budget. Nor is that practical when the market changes and shifts consistently, and more importantly, life does too. It’s more about ensuring your financial compass is pointed in the right direction, and that you can be somewhat flexible if life throws a curve ball your way. 

It also re-affirmed my deep-set tenet that you, and you alone, are responsible for your money. It’s ok to ask for help and in fact I highly recommend it. It’s why I have a coaching program after all. But when push comes to shove, if you know your money and you are equipped with the right tools, you’ll be able to act independently and more quickly if you know what you’re dealing with. Don’t ever lose sight of that by completely outsourcing your financial wellbeing to someone else.

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Cheers to many more memories in our "new" home!

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