Where do I take my $100k?

[bobbukka]

Hi

I am 41. My wife and I together make $150k/yr. Our home was bought in 2005 for $500k and is valued at $400k today. Our mortgage has a balance of $300k. Both of us have been maxing out our 401k contributions each year for the last 10 yrs, most of it invested in growth/mixed mutual funds.

Here is where I need help with a decision. We have $100k in a savings account. Our choices are:

- Refinance our home for a lower rate and pay down our home loan by 100k in the process. This can help us in a scenario where we're able to pay off our home in 5 yrs, and target future earnings to our 3 kids college costs.
- Buy a townhome/condo cash down in this down market, earn rental income on it and possibly sell it for a gain in 5-7 years

We do not want to use the money to change our house because we'd have to sell for a loss. We do not want to put this money in stocks because we are well invested in stocks in our 401ks. What should we do?

[jpg7n16]

Well we'd first need to see what your goals are.

• How much do you know about stocks?
• How much do you know about owning rental real estate properties?
• What is the ultimate financial goal for your family?
• Any children you're wanting to send through school?
• In your mind, would the real estate be a good investment because of the growth potential? Or because you would like extra income each month? (obv it could do both, but which is more important to you?
• Is this money in addition to your emergency fund? Or is your EF part of the $100k?
• Have you been maxing out your Roth/Traditional IRAs as well as the 401k?
• What are your typical expense for 1 month?

The answers to those questions will help us decide if you need current income, or additional growth for retirement, etc.

[dczech09]

How much is your mortgage. You said your house value is $400k and if you sold the house, you'd have to sell for a loss as you bought at $500. I am assuming you're currently underwater with your house, or within the 90% LTV range?

Do you have an emergency fund set aside? It is recommended that you have at lease 3 to 6 months set aside depending on your personal situation and risk tolerence.

Personally, I would use the $100k to pay down your mortgage during the refi process; this is of course assuming you have an emergency fund already set aside. The reason I say pay down the mortgage is because you have a guaranteed savings of your APR X mortgage value.

Investing in real estate would not be a bad idea since you have the cash, however if you are not able to find tenants or you take in tenants who default, you will lose money. Obviously you would not have to worry about the mortgage, but you still have property taxes and maintenance to worry about. If you get some solid tenants, your ROI will likely be greater than your savings on your mortgage, but that is an "if" whereas the mortgage payoff is essentially a risk free investment.

[bobbukka]

Thanks dczech09 for your input- very thoughtful.
Mortgage- $300k. Emergency fund separate.
Would you add/change your suggestion now?

jpg7n16, answers to your questions:

How much do you know about stocks?
just this- diversify, stick to mutual funds, don't try to beat the market, don't sell or stop investing in a bear market.

How much do you know about owning rental real estate properties?
not much, but know friends who do.

What is the ultimate financial goal for your family?
enough money for retirement or a little before in case we lose our jobs in our 50s, and afford (top-tier) college fees for 3 kids (in elementary school now)

Any children you're wanting to send through school?
same as previous

In your mind, would the real estate be a good investment because of the growth potential? Or because you would like extra income each month? (obv it could do both, but which is more important to you?
growth potential more important (hopefully a bit of a hedge against the decline in primary residence value)

Is this money in addition to your emergency fund? Or is your EF part of the $100k?
this is in addition to EF


Have you been maxing out your Roth/Traditional IRAs as well as the 401k?
No- both of us max out 401ks and get company matches too. I know we could put away more for retirement than what we do with 401k, but it seems we have retirement well covered with stock based assets

[jpg7n16]

jpg7n16, answers to your questions:

How much do you know about stocks?
just this- diversify, stick to mutual funds, don't try to beat the market, don't sell or stop investing in a bear market.

That's good you have a better understanding of stocks than real estate.

How much do you know about owning rental real estate properties?
not much, but know friends who do.

That's not as good. They wouldn't be risking their money, you're risking yours. So I'd rather you understand how owning a rental property works for yourself.

What is the ultimate financial goal for your family?
enough money for retirement or a little before in case we lose our jobs in our 50s, and afford (top-tier) college fees for 3 kids (in elementary school now)

Have you considered Coverdell savings and 529 plans? Both allow for tax free withdrawals if used for school expenses.

And although 529 plans do not provide a federal tax deduction, some states allow a state tax deduction on contributions.

In your mind, would the real estate be a good investment because of the growth potential? Or because you would like extra income each month? (obv it could do both, but which is more important to you?
growth potential more important (hopefully a bit of a hedge against the decline in primary residence value)

Okay this I don't understand.

How is real estate a hedge against real estate?

Have you been maxing out your Roth/Traditional IRAs as well as the 401k?
No- both of us max out 401ks and get company matches too. I know we could put away more for retirement than what we do with 401k, but it seems we have retirement well covered with stock based assets

Okay it looks to me like the following:

Stocks:
- good understanding of mutual funds and a buy low / sell high mentality
- provides growth potential more than income
- would be an appopriate investment choice for either retirement or college savings (both a 5+ years away)
- stock mutual funds may be purchased in some 529 plans
- differing asset class from real estate, provides a hedge against the asset class
- easy to liquidate holdings in event of a job loss

Rental real estate:
- not personally knowledgable about the asset class
- usually provides more income than growth
- would be appropriate for either retirement or college savings (5+ years away)
- not able to be purchase in 529 plans
- same asset class as real estate, so doubles asset class holdings rather than hedging against them
- hard to liquidate holdings in event of a job loss

IMO stocks suit all the goals you stated above better than real estate would.

As you're already doing well saving for retirement, I would suggest that you look into opening a 529 account for your children. With split-gifting and the accelerated gifting rules for 529 plans, you and your spouse could contribute up to $130k per child.

So of your goals above:
1) retirement - doing great, maxing 2 401ks every year
2) have money in case of job loss in 50's - already has an EF in place
3) college savings - nothing in place yet

So I'd suggest speaking to a planner in your area about a type of 529 plan best suited for your college savings goal.

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[jpg7n16]

And as far as voting, I vote "neither."

[MonkeyMama]

I'd second the *neither.*

If you can refinance your home to a lower rate and need to use some of that money to do so, then fine. (Refi @ 75% loan to value ratio should be pretty easy peasy though). OF course, depends on the numbers (cost to refi, current rate, etc.).

I completely agree with jpg. Your approach to investment real estate sounds a little *ideal* and *get rich quick* (just like it is with most people).

Personally, I would invest the money for college, in mutual funds. IT's a very large and important financial goal for you, and odds are that is a better investment than paying down a low-interest mortgage.

I am not a huge fan of 529 plans for the average person, but in your case I think a 529 plan is a good idea. You have enough money to invest and a long enough time horizon that you can really benefit from the tax-free earnings. Just keep in mind it has to be used for specific college costs, or money taken out of 529 plans is penalized. Just be careful in case you save for Harvard and junior gets a full scholarship.

If you are elgible for a ROTH, I'd also consider putting money aside in ROTHs. IT doesn't have to be used for retirement, but is an excellent vehicle for long term savings goals (like college, for one). I mention since you don't feel you need to save more for retirement. That may be so, but I would put money into ROTHs anyway. You can take out contributions any time - the earnings grow tax-free *forever.*

Paying down the mortgage faster is a fine idea, but I would cash flow that rather than tying up that $100k.

[bobbukka]

Thanks

Thanks for your responses.

About the investment property- what do you say to buying foreclosured condos in say CA or NV that I can rent out (for a small income, or at least break even) until in 5-10 years i can sell for a gain, which would be tax free?

[MonkeyMama]

Thanks for your responses.

About the investment property- what do you say to buying foreclosured condos in say CA or NV that I can rent out (for a small income, or at least break even) until in 5-10 years i can sell for a gain, which would be tax free?

Who would rent them?

I live in California, and everyone (From all over the world) is snatching up foreclosures for rentals. The rental market is compeltely flooded.

I'd say it is probably a terrible investment. No guarantee of renters, and the market is completely flooded with foreclosures. Prices are artificially high because for every foreclosure on the market there is probably 10 that haven't gotten through the red tape yet - not for sale - sitting empty. Go walk through any neighborhood - more abandoned homes than occupied homes. I am referring to homes and condos, equally. They are all in the same boat.

Banks are holding on to artifically high prices by controlling the supply. I see a lot more losses before real estate rebounds. Home prices are not that low here. They are just where they were a few years ago. Still pretty expensive in the grand scheme of things.

It's a matter of opinion, I suppose, but I would not expect to make a profit in 5-10 years - it is a complete mess here. NV is no better off.

Anyway, seeing so many friends buying real estate with $0 down and record low interest rates, I just see another bubble forming before the last one even finished popping.

[MonkeyMama]

P.S. Here is a really good article I found that addresses many of my concerns about California real estate (& more).

10 Reasons Why California is Years Away from a Housing Bottom: Rebuttal to Those Calling for a Bottom for California Housing. » Dr. Housing Bubble Blog

It was written in 2008, but just as timely today. The true bottom is nowhere in sight. IT is about LA, but the problems seem the same in Northern California where I live.

[kork13]

I agree with the idea for a 529. You can (should) still refi your mortgage, and can even use some of your cash to pay it down. However, since your plan would be to save heavily for college after the mortgage, it's better to start now and give the money more time to grow. Take $70k-$80k for the 529, $20k-$30k toward the mortgage to knock it down somewhat for you.

[rj.phila]

in broad terms, i much more satisfied-financially-with paying down a mortgage vs. owning a rental property. i'd suggest the former, personally. roughly speaking, a 100k prop will generate around 600-800/mo, depending on locale. have you amortized your mortgage and looked at how much interest youll save?

[rj.phila]

by my calculations, youll shave about 91k in interest, and 6 yrs, if you pay your loan down by 100k, at the end of the day. rental prop generating about 8-10k/year. how do those numbers sound to you?

[LiveTradingZone]

To put it in real estate or your house is not that great of an idea. The real estate market will NEVER be where it was.

You should start looking into trading futures, commodities, forex if you want to double or tipple your account in a few years. With that much money you can have very low risk (1-2%) and double your account in 2 years. With that said, you would want to be watching it every day. If you don't have the time to be on the computer, then you should be able to do longer term trades that will still yield 20% or better in a year. Much better than any bank can do for you! Not sure if I am allowed to post my link, but livetradingzone.com is my site. You can take a look if you want, free membership also. The best part is you can manage your own money yourself and not have to rely on some financial advisor just trying to churn your account for commissions