Housing, pt11: it’s over.Posted: 2016-02-18
Previous readers will know I’ve spent the last two months unexpectedly buying a house. It’s been quite a journey, and it’s now complete. HOORAY!
This is not just any house; it’s the most overpriced house in its expensive area of London. I have paid a premium per square foot of over 15% compared to any of the immediate neighbours. I don’t anticipate making any return on this purchase for years, and even then I will be lucky to beat inflation.
This is not just any house but it’s a Dream Home, at least according to me and Mrs FI RE v London. Two months in, I still think this, which is a good sign. We are finding ourselves welling up with tears at the prospect of leaving our former home, and then bursting into broad grins when we arrive at the new Dream Home. Hopefully the grins will win out.
This is not just any house purchase, but a purchase made by liquidating my investment portfolio in some of the biggest market turmoil we’ve seen for years, with UK/US equities both down almost 15% at one point and six swings of over 5% in either direction in less than three months.
And this house is not my only new commitment. I also am responsible for a new >£1m loan. This loan is not even secured by the house; it’s secured by my investment portfolio – which in theory could fall enough to trigger a liquidation of the whole portfolio. But even if that happens, I keep the house(s).
I couldn’t have bought this house without the help of my readers. Well, I probably could, but I would have bought it differently and I’d have been considerably more stressed. Thank you all for helping me think through my finance options, helping me analyse the risks I’m running, helping me deliberate over whether a house move will add or subtract from the net happiness in my life, helping me get my head around the colossal taxes I have to pay for this transaction, and helping me manage the process in a reasonably efficient way.
I left paying the stamp duty until last. This has been a significant relief, because it has allowed me almost twice as long to liquidate the trickiest assets in a market which has been bouncing around in all directions. This has saved me thousands of pounds.
It seems ages ago but in December when I started liquidating assets I couldn’t believe how slowly the funds came together; I was liquidating funds across about ten accounts, as well as moving significant sums from some accounts to others. I needed a spreadsheet to keep track of it all. But it all worked in the end, as you can see in the graph below:
My investment portfolio has shrunk dramatically. To allow for the riskiness inherent in a leveraged portfolio, I have adjusted my target asset allocation significantly towards bonds and away from equities, and away from the Brexit-affected UK. At this moment my rebalancing is incomplete, so I am unhealthily exposed to UK equities and insufficiently cushioned by bonds in the UK and the US. I am giving myself until the end of March to get within acceptable tolerances of my new targets, and hoping that any market meltdown can wait until after March.
I am feeling nervous about my ability to manage my cashflow over the next few months. My investment income, which I rely on for my unencumbered lifestyle, is much reduced. And my expenses are up significantly. I will be slowly draining my principal until I sell my former home. This is a new experience for me; while I have been using investment income to fund living expenses for some time now, I have always had enough income to be able to reinvest a sizeable proportion.
My temptation now is to throw any spare incoming cash at reducing the loan. But this misses the point; the reason I have this loan is to enable me to maintain my investment portfolio. So the rational way to invest incoming cash is in this portfolio. At the same time I feel my loan is too toppy for peace of mind. So my conclusion is to try to divide incoming cash roughly half:half between paying down the loan and adding to the investment portfolio.
My big priority for the next few months is to sell my former home. The selling/moving process feels alarmingly expensive at the moment, with various expenses associated with moving / selling / etc now looming unexpectedly. And it turns out the old house has been measured to be smaller than I had realised, so my valuation expectations have been depressed too. Time will tell how we do on this front. Any tips would be much appreciated.