The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

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Topic Author
daniel2000
Posts: 44
Joined: Wed Oct 03, 2018 6:25 pm

The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by daniel2000 »

I am planning to take a cash out mortgage from an investment property and investing that money into a diversified portfolio.

I can take the cash out at around 2.5% APR.
The amount of money I am taking out would be roughly 10% of my existing liquid assets.
I am currently maximizing 401k, Backdoor Roth, Mega Back door Roth and putting my bonus in an NQDC. I am choosing not to use an HSA because I am in California.

I am in my late 30s and hold roughly the following allocation for liquid assets:
6% cash. (all in taxable accounts)
56% US equities.
15% long term treasuries. (all in IRA 401k plans)
20% Ex US equities.
2.5% Precocious metals.

I would prefer to target based on my age and risk tolerance:
5% cash (all in taxable accounts)
50% US Equities
15% long term treasuries. (all in IRA 401k plans)
25% Ex US equities.
5% Precocious metals.

Also current liquid assets taxation~:
50% Traditional IRA 401k/NQDC
20% Roth
30% Taxable (with cost basis ~= 50% of current value)

This will become:
46% Traditional IRA 401k/NQDC
18% Roth
36% Taxable (with cost basis ~= 75% of current value)

My allocation of assets is close to even across taxations, with the exception all cash in taxable accounts and no bonds in taxable accounts.

I currently live in very high Tax CA and may retire or at least 6 months> in an income tax free state (or even Puerto Rico).
32% federal bracket + 9.3% state. :(
With the cash out mortgage (on an investment property) I will be able deduct at the ~=42% rate and pay long term capital gains at the 15% + 9.3% ~= 24% rate.

My plan was to dollar cost average the money into Ex US Equity and Precocious metals in my taxable accounts while dollar cast averaging from some equities to more bonds in my 401k plans. I was planning to take about 3 months to make the move. August and September have traditionally been bad months to own stocks.

Is this a good plan or have I missed something?
Diversification.
retiringwhen
Posts: 4743
Joined: Sat Jul 08, 2017 10:09 am
Location: New Jersey, USA

Re: The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by retiringwhen »

How do you plan to repay the mortgage? What percentage of your wealth is tied up in real estate? Not really enough info to evaluate your plan. Bottom line you are leveraging real estate to invest in the market, only you can decide if that risk is worth a modest tax arbitrage.
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retired@50
Posts: 12821
Joined: Tue Oct 01, 2019 2:36 pm
Location: Living in the U.S.A.

Re: The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by retired@50 »

daniel2000 wrote: Tue Jul 27, 2021 12:47 am ...
I am choosing not to use an HSA because I am in California.
...
15% long term treasuries. (all in IRA 401k plans)
If you hold treasuries in the HSA, CA cannot levy any state tax against them.

Just a thought...

Regards,
If liberty means anything at all it means the right to tell people what they do not want to hear. -George Orwell
Topic Author
daniel2000
Posts: 44
Joined: Wed Oct 03, 2018 6:25 pm

Re: The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by daniel2000 »

retiringwhen wrote: Tue Jul 27, 2021 7:26 am How do you plan to repay the mortgage? What percentage of your wealth is tied up in real estate? Not really enough info to evaluate your plan. Bottom line you are leveraging real estate to invest in the market, only you can decide if that risk is worth a modest tax arbitrage.
My plan for the time being if rates are low in 10 years repeat.

If rates go up, pay off the mortgage (>3.5 on a similar 10 year ARM?). The balance will be a about 25% lower in 10 years.
If this end like the fall of 2008 I will be in trouble. Image

I am thinking at two years left I will either hedge the mortgage (if rates are low) or start selling the portfolio.
Currently the best hedge would be Eurodollar futures in the future this may be SOFR futures.
This is my first experience with an ARM.... I could have saved a little with a 7 year ARM (I think 0.05% per year after closing costs included) . The seven year ARM cash out would probably match the appreciation better. But I am a little skittish.
Diversification.
Topic Author
daniel2000
Posts: 44
Joined: Wed Oct 03, 2018 6:25 pm

Re: The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by daniel2000 »

retired@50 wrote: Tue Jul 27, 2021 11:19 am
daniel2000 wrote: Tue Jul 27, 2021 12:47 am ...
I am choosing not to use an HSA because I am in California.
...
15% long term treasuries. (all in IRA 401k plans)
If you hold treasuries in the HSA, CA cannot levy any state tax against them.

Just a thought...

Regards,
Thanks great idea.
Diversification.
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Lee_WSP
Posts: 10401
Joined: Fri Apr 19, 2019 5:15 pm
Location: Arizona

Re: The plan: Cash out mortgage then Lump sum vs DCA to rebalance and stay tax efficient

Post by Lee_WSP »

It's a risky plan, but I think you recognize that. If you have the cash flow to make it work, the risk is limited to the bet. However, it's not exactly a Bogle head approved plan, so you'll be unlikely to get much cheerleading. I can see no fatal flaw so long as you're able to make the payments and recognize the risk.

That said, a fixed rate is a lot safer.
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