Advice in Action: Funding a Second Home Without Selling the First Home

My longstanding clients George and Sue came to me with a dilemma. They found a dream home in Arizona that they hoped to purchase and live in long-term. Due to job constraints, they were not interested in selling their existing home in another state first to free up the capital to buy the new home. Since this couple would not be receiving proceeds from the sale of a home to cover the down payment on a second home, they came to me with the question: Where would we find the funds to make the purchase of this second home possible?

This question came coupled with a clear challenge: How can we bridge the gap and temporarily borrow the capital needed in order to submit a competitive offer in a rapidly moving real estate market, without triggering large capital gains for this short-term need?

I work to be efficient in keeping my clients’ financial plans up-to-date as living documents. As a result, this couple’s financial plan served as an excellent roadmap to guide our discussion. I was able to illustrate the costs associated with making this long-term shift. In addition, I identified where we could find the funding to purchase their second home while keeping their financial journey on track for a successful retirement. 

George, Sue, and I discussed a few different funding options and proceeded with the following steps:

1. I introduced them to a mortgage professional in my network to review current lending rates and future mortgage payments.
2. Together, we dug into their financial plan and modeled the anticipated costs of the new property versus their existing home, and explored funding options.
3. I introduced a solution of borrowing against their non-retirement brokerage account using what is called a “Pledged Asset Line.”
4. Working with their custodian, Charles Schwab, we were able to access the funds needed to assemble a down payment strong enough to win the bid for the home that they desired.

Based on Rebalance’s solid relationship with Schwab, the cost to borrow capital in this manner was more competitive than procuring a bridge loan, which was another option we considered. We reviewed the risks and options together and decided to move forward with a Pledged Asset Line. 

A Pledged Asset Line is a unique tool — a line of credit that allows investors to borrow against the non-retirement assets in their portfolio — without having to liquidate their investments. The secured assets are held in a separate pledged account maintained by Schwab, and one can access their line of credit while keeping investments intact and avoiding capital gains. Since George and Sue required less than the 50%—70% collateral range that must be maintained in funds in the portfolio, this became an attractive solution. 

As is often the case in hot real estate markets, time was of the essence, and we had to act fast to produce a strong bid. The entire process of procuring a pledged asset line only took a few days and avoided the lengthy timeframe and mountain of paperwork (including W-2s and bank statements) that a bridge loan through a mortgage company would require. In the following year, when George and Sue retire and the real estate market where their family home is located hits its seasonal stride again, they will sell their primary property, repay the loan against their investment account, and plan to pay off the new property in full.

Real estate problem-solving is not unique to this couple. This type of situation comes up rather frequently with my clients, especially those who are retirees: whether it is a full-scale location change, the purchase or sale of a second property, or just a downsize with unique constraints. I always appreciate my clients looking to me for guidance in solving their financial puzzles, and for the opportunity to use their financial plan as a guide.

Rebalance advisors are here for more than just questions about investments; we are here to help you outline goals and attain them, and have lifestyle discussions as well. Just ask!

Christie Whitney, CFP®

Christie is a passionate active listener, who, through education and engagement, works to improve client literacy of retirement investment best practices. She is a seasoned Certified Financial Planner™, and has over 25 years of experience in the private financial services sector. Her goal is to provide clients with peace of mind by educating them throughout the investment process, and keeping an open avenue of communication.