Being "house rich, cash poor" means you’ve got a lot of value tied up in your home, but not much in liquid assets or cash. This can happen when a homeowner has a lot of equity in their home but can’t or won’t tap into it. This might be due to overspending or other financial obligations, leaving the homeowner feeling cash-strapped.
I’m a prime example of this. I paid for my house in cash, stretching my budget to get the best house I could afford. Now, I’m scrambling to come up with cash due to unexpected capital calls from one of my venture capital funds. I don’t want to sell my stocks to cover this, as I’m trying to rebuild my stock portfolio. So, I need to figure out how to get cash-rich again!
A study showed that 73% of homeowners feel house rich, cash poor at times. This could be due to taking on a large mortgage, having an adjustable mortgage rate that’s increased, buying an expensive house, living beyond their means, losing a job, or facing an unexpected financial emergency.
In my case, I had unexpected capital calls due around Christmas. These were not only unexpected but also higher than usual. I need to manage my future capital calls better.
Here’s an example of how this works. Let’s say a couple bought a house in San Francisco in 2019 for $2.4 million. They put down 20%, leaving them with a mortgage loan of $1.92 million. Their monthly mortgage payment is $9,166. Four years later, their house is worth $2.8 million. However, they decide to divorce and one partner buys out the other for $380,000. Now, one partner has $880,000 in home equity but only $15,000 in savings. They’re house rich, cash poor.
If you’re in this situation, you might be spending a large portion of your income on your mortgage. If you lose your job, you could quickly run out of money. But, you might have a backup plan. Maybe you meet someone at work and they move in with you, helping to cover some of the rent.
If you’re feeling house rich, cash poor, here are some ideas to get cash-rich again:
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Take out a home equity line of credit (HELOC). This might not be the best option as the rates are usually higher than average mortgage rates. But, it could help you pay important bills.
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Do a cash-out refinance. This also might not be the best solution due to the cost and time it takes.
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Reduce your extra mortgage principal payments. This could help raise liquidity.
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Check your taxable investment portfolios for idle cash.
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Cut back on discretionary spending. This could help you save money and lose weight!
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Get a consulting job or second job. This could help you make more money quickly.
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Do some tax-loss harvesting. This could help offset capital gains taxes and raise cash.
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Borrow money from a family member or friend. This should be a last resort.
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Use a credit card as a bridge loan. This could help you solve your financial problems privately, but be aware that credit card interest rates are high.
I hate feeling house rich, cash poor. I love my new house, but I hate being cash poor. I haven’t felt this way since my first year of work in New York City. I was determined to save as much as possible. The more I saved, the richer I felt.
If you’re feeling house rich, cash poor, you might need to reconsider your lifestyle. Most of the solutions I’ve offered are just temporary. Instead, cut back on discretionary spending until you have enough funds to no longer feel cash poor. This could take a few months or a few years.
Personally, I plan to sell some Treasury bonds to pay for my capital call. I also plan to live more frugally for the next six months to boost my cash reserves. I’m going to get a consulting job and rent out or sell my old house in the new year. Being house rich, cash poor is no way to live forever. The challenge to become cash rich again is on!
