A couple has found a place in Boulder at $2.8 million. They can write a check for the whole thing, put 25% down and finance the rest, or borrow against the portfolio with a securities-based line of credit. Jumbo rates are where they are, the portfolio is doing what it’s doing, and selling to raise cash means a tax bill they would rather not create. One more wrinkle, and it’s the one that usually decides these things: the husband is opposed to the securities-based loan.
This is a very common situation as wealth increases, and I want to be clear up front that none of these three options is a wrong answer. Assuming this house is not a significant portion of the family’s net worth, none of them is a hard no. But there is usually a best option, and finding it comes down to two follow-up questions almost nobody asks first.
Question One: What Percentage of Your Net Worth Ends Up in Real Estate
Paying cash is the easiest path by a wide margin. If the cash is available, you write the check and you’re done. Where it becomes a problem is when those invested dollars are what sustains your current lifestyle, or the trajectory you’re on toward future wealth.
The reason that matters is that the Boulder home is not going to earn you a return. Research on primary residences puts the real return at roughly zero once you account for inflation and the cost of updates, taxes, insurance, and everything else the house asks for over time. And yes, you could rent it out when you’re not using it. In practice that rarely lasts. Homes that were not built to be rentals tend to become management headaches, or you eventually want to use the place yourself.
So before choosing a structure, add up what happens after closing. If your net worth is $10 million and the primary home plus this one put $5 million of it into real estate, you now have a liquidity problem worth taking seriously. If your net worth is $50 million and real estate is $5 million of it, that’s a very different picture.
There Is No Perfect Real Estate Ratio, But There Is a Useful Rule
People always want a target percentage here, and I don’t have one, because the right answer isn’t a ratio. What I look at instead is whether your liquid wealth can already accomplish everything you want it to accomplish, personally and for your family. Once it clearly can, dollars above that line are the ones that can comfortably go into real estate.
In practice that looks like a family with $10 to $15 million of liquid wealth, fully confident they can cover every expense and every goal ahead of them, who then have another $10 million on top of that. That second $10 million can go into real estate without meaningfully changing the odds their plan succeeds. That’s the test I’d run before anything else.
Cash Versus Debt Is Closer to a Wash Than You’d Think
There are real benefits to debt, particularly the deductibility of mortgage interest up to the $750,000 limit. But at today’s rates, when you compare financing against cash that could have stayed invested, it lands close to a wash. Which is why I don’t really see this as three options. I see it as one question: are you paying with cash you already have, or are you selling assets to create that cash?
Measure the Tax Against the Liquidity, Not Against the Gain
That’s where the interesting part lives. “I don’t want to disrupt the tax situation by selling” is an entirely reasonable instinct, and it’s the instinct that sends people toward a securities-based line of credit. That structure adds complexity and leaves you somewhat at the mercy of the markets, including margin calls, which is a fair thing to be uneasy about.
But before you accept that framing, look at the actual holdings. There are probably positions in the portfolio where the tax cost is small relative to the liquidity they unlock. Say you sell $1 million of securities carrying $100,000 of gain. At roughly 23%, that’s $23,000 of tax to free up $1 million. People fixate on the tax as a percentage of the gain, which looks painful. The number that matters is the tax as a percentage of the liquidity you’re creating, which in that example is a bit over 2%.
When One Spouse’s Discomfort Is the Right Tiebreaker
Start with facts. How much cash is genuinely available, how much more is available at minimal tax cost, and what the mix looks like against total net worth. Run each of the three structures against your plan and see what actually changes.
Then, if one of you is uncomfortable taking on additional leverage against the portfolio, that discomfort is a legitimate reason to say no. When all three options are defensible, and here they are, there is no version of this where I’d tell you one path is so superior that it’s worth a real argument or leaving one spouse uneasy about your finances for the next decade. Get the facts from us, your advisors, then let the answer that lets you both sleep win.
This post is adapted from a recent episode of the Scholar Wealth Podcast. For more perspective on funding a second home purchase, listen to the full podcast episode here.