Investing Options

**disneysteve** · 06-06-2010, 05:27 PM

What is this money for and what is your time frame for when you'll need it? It makes a big difference how it should be invested. If it is long-term money, like for retirement or some goal 10 or more years away, I'd go with equities via mutual funds or ETFs. If it will be needed sooner, I'd probably stay away from stocks.

As for real estate, what you want is a real estate mutual fund or real estate investment trust (REIT). That lets you invest in a diversified portfolio of real estate holdings in an incremental way rather than a single property where you are the direct owner.

**fsa3** · 06-06-2010, 05:36 PM

Yes, sorry for not posting some vital information.

The money is mainly to save up for a new house in the 3-5 year time horizon. It is also why one of my serious options (that I also forgot to mention) is to pay down my mortgage. However at a 5.625 interest rate I thought I could do better with a high yeild ETF.

With REITs, where does one purchase them? Or should I say where SHOULD one purchase them

**disneysteve** · 06-07-2010, 04:54 AM

You can invest in an REIT through many major fund companies.

Here is a list of available REIT mutual funds:
REIT Mutual Funds

**jIM_Ohio** · 06-07-2010, 05:46 AM

Originally posted by fsa3 View Post

Hi,
Here is my situation, I currently own a home (mortgage) with about $250k left on a 5.625 mortgage. I have no other debt and good credit. I have about 30K in money spread around a number of stocks already. I've accumulated about $25k that is sitting in my bank account and I'm not sure what to do with it. I'm looking to diversify and get a decent yeild, I'm willing to take some risk, but definitely less than the stocks.

Some things I've considered:

1) Put in a CD - ugh the rates stink.
2) ETFs - Seem to still be too risky.
3) Try to get into real estate investing.

Given my situation does any other investment vehicle come to mind? Is there a simple way to "invest" in real estate w/o actually being the direct owner? I'm open to a just about anything (at least to do my DD on).

Thanks.

Yes, sorry for not posting some vital information.

The money is mainly to save up for a new house in the 3-5 year time horizon. It is also why one of my serious options (that I also forgot to mention) is to pay down my mortgage. However at a 5.625 interest rate I thought I could do better with a high yeild ETF.

With REITs, where does one purchase them? Or should I say where SHOULD one purchase them

If you expect to move in 5 years or less, I would consider doing the following

1) If the 30k in stocks will be used to fund the purchase, sell them soon and move money to cash
2) Take the 25k in cash you have now, and get CDs which pay about 1-2%, but do not lock in a 3 year rate unless its above 3%.
3) Do not pay extra on current mortgage unless you know FOR SURE you will get money back when you sell, and even if you will get money back, only put a small amount of savings to paying extra on the mortgage.

Your biggest risk is liquidity. Not getting a high return is really not a risk- if you have 50k invested and it earns 5% that is $2500. If you invest it in a CD earning 2%, that is $1000. $1500 is not going to buy you a better house, you might be able to upgrade the kitchen floor for that

Your risk is not having the 50k available (liquidity), not having it earn a lot of money.

**disneysteve** · 06-07-2010, 07:31 AM

Originally posted by fsa3 View Post

The money is mainly to save up for a new house in the 3-5 year time horizon.

Money that you will need in 3-5 years needs to be kept safe in money markets or CDs. That is not money to be playing the market with. And I agree with not prepaying the mortgage if you will be selling within a few years.

**jpg7n16** · 06-07-2010, 11:09 AM

Meh... as long as 1) the home is worth more than the mortgage, 2) you ultimately want all of the money from the stocks to go towards the new home, and 3) you are going to sell the home before purchasing a new one (I mean do not own two houses at once, wait till it sells - then buy a new one) -

If those criteria are met, I would:

sell the stocks
keep 6 months max (3-6 suggested) of living expenses in cash (Money Market or CDs)
and put all extra onto the mortgage.

Depending on your tax situation, mathematically it's the same as earning somewhere between 3.65% - 5.625% guaranteed on your "investment."

When the first home sells, it will have less mortgage to pay off, and thus increase your takeaway from the deal when liquidating your equity.

And in paying down the mortgage, you incur no more risk than what you would have in CD's. The only new risk would be the increased liquidity risk, but if you have the proper EF coverage, (or would qualify for a home equity loan) that is not an issue.

**jIM_Ohio** · 06-07-2010, 07:00 PM

Originally posted by jpg7n16 View Post

Meh... as long as 1) the home is worth more than the mortgage, 2) you ultimately want all of the money from the stocks to go towards the new home, and 3) you are going to sell the home before purchasing a new one (I mean do not own two houses at once, wait till it sells - then buy a new one) -

If those criteria are met, I would:

sell the stocks
keep 6 months max (3-6 suggested) of living expenses in cash (Money Market or CDs)
and put all extra onto the mortgage.

Depending on your tax situation, mathematically it's the same as earning somewhere between 3.65% - 5.625% guaranteed on your "investment."

When the first home sells, it will have less mortgage to pay off, and thus increase your takeaway from the deal when liquidating your equity.

And in paying down the mortgage, you incur no more risk than what you would have in CD's. The only new risk would be the increased liquidity risk, but if you have the proper EF coverage, (or would qualify for a home equity loan) that is not an issue.

If the house sale will be taxed, do NOT put the new money into the existing mortgage...
but otherwise a decent plan

If you do above and rent between the sale and the purchase, there is significant savings while renting too (I speak from experience).

**jpg7n16** · 06-08-2010, 06:27 AM

Originally posted by jIM_Ohio View Post

If the house sale will be taxed, do NOT put the new money into the existing mortgage...

Why not? Sorry, I don't see what you're getting at.

The mortgage won't affect the taxes on sale regardless...

Taxes from sale is based on "Sales price - purchase price = taxable gain"

Cash from sale is "Sales price - remaining mortgage = cash in hand"

If they don't meet the 2 year rule for the $250k free gain, then they can use the extra cash from the sale to pay any taxes due at that time. But the amount of mortgage owed has no impact on the taxation of the sale

(unless you owe more than it's worth, and there's a short sale, but then paying down the mortgage would help you out - not harm you)

**jIM_Ohio** · 06-08-2010, 07:33 AM

House sales are capital gains, not just realized appreciation IIRC.

My thought was if house was purchased for 300k and sold for 750k its better to have only 200k equity than 300k equity (for example) because its the cash received which is taxed, not the purchase price of the house.

But I do not know that for sure (check the tax forms on house sales).

**jpg7n16** · 06-08-2010, 10:17 AM

Originally posted by jIM_Ohio View Post

House sales are capital gains, not just realized appreciation IIRC.

My thought was if house was purchased for 300k and sold for 750k its better to have only 200k equity than 300k equity (for example) because its the cash received which is taxed, not the purchase price of the house.

But I do not know that for sure (check the tax forms on house sales).

Oh then nope. That's not what happens.

If you purchase the home for 300k and sell for 750k, then you have capital appreciation of 450k. You would then get taxed on the 450k (plus any depreciation recapture) regardless of the equity/mortgage amounts. Because the mortgage outstanding on the property is independent of the value of the property.

Because imagine that the home was purchased with 100% down in cash for 300k, then sold the same year for 300k. According to what you said above, the sale would bring in 300k, none would go the mortgage, so would get taxed on your entire 300k investment even though it didn't gain any value. That wouldn't make sense. With a mortgage, technically the home was purchased with cash - it just happens to be borrowed cash.

According to IRS.gov (Sale of Residence - Real Estate Tax Tips) you report the sale of a home on 1040D.

http://www.irs.gov/pub/irs-pdf/f1040sd.pdf

Here's the instructions: http://www.irs.gov/pub/irs-pdf/i1040sd.pdf

Which requires sales price minus tax basis:
Finding Your Home's Tax Basis - Kiplinger

Investing Options