Pay Down Debt Or Leverage Up To Buy More Property?

Palace Of Fine Arts, San FranciscoI’ve been dreading this day for the past five years. First Republic Bank sent me a letter in the mail stating that one of my 5-year CDs is coming due and that I have a seven day grace period to withdraw my funds before they renew for another 5-year term. I would be fine with renewing except for the fact that the renewal interest rate is only 2.2% vs. the 4.2% I’ve been receiving. I’m not locking my money up five years for a lousy 2.2% a year, no way.

The post “CD Investment Alternatives: Why I’m No Longer Investing In CDs” provides a longer explanation of why buying a CD now is suboptimal. But curiously enough, it doesn’t highlight the one investment that I’ve been gravitating towards since I received the letter from the bank: real estate.

Real estate is my favorite asset class, even though I’ve discussed selling my rental properties in the past due to the headache of dealing with tenant issues. I just love being able to live in my investment, do things to improve the value of my investment, and wake up 10 years later with a high probability of holding an appreciated asset with a lower mortgage. The tax benefits aren’t bad either.

A deep dive assessment of all my assets shows that real estate has provided the highest return on capital invested with the least amount of stress. I have a tendency to speculate in stocks in order to find that multi-bagger return that has eluded me since 2000. Many of my speculative bets have turned sour and I don’t want the temptation to speculate with larger amounts of money. The last thing I want to do is use my risk-free money to invest in stocks. I absolutely hate losing money and I’ve already got 25% of my net worth in the stock market. (See: Net Worth Allocation Recommendation By Age)

ONLY TWO CHOICES: PAY DOWN DEBT OR BUY MORE REAL ESTATE

I know it seems funny to narrow the use of my CD proceeds to paying down debt or getting into more debt, but that’s what I’ve decided unless you can convince me otherwise. The second safest asset to holding cash under the FDIC guarantee limit of $250,000 for singles and $500,000 for couples is paying down debt. Going into debt is not safe, but I’ll explain my position soon enough.

The Case For Paying Down Debt

The only debt I have and don’t mind is mortgage debt because it’s deductible and is tied to an asset which has a high probability of appreciating over time. Leverage is a wonderful thing on the way up, but not so much on the way down as we’ve seen most recently in 2008-2011. My main rental property has a mortgage rate of 3.35% that is fixed for the next three years (5/1 ARM). 3.35% is not quite the 4.2% I was receiving from my CD (interest rate arbitrage), but its sure better than the 2.2% being offered for another 5 years.

1) Increase cash flow. The rental mortgage amount is $277,000, therefore, I would increase my cash flow by roughly $774 a month, equivalent to the interest portion of my mortgage ($277,000 X 3.35%). I would actually free up more cash flow because my mortgage is amortizing, which means I would also pay down roughly $540 in principal with each mortgage payment for a total payment of $1314.

Even though I would no longer have to pay $774 a month in interest, I’m losing about $196 a month in cash flow because this money was making 4.25% in a CD instead. I just don’t see any other risk-free assets that can provide 3.35% given the 10-year yield is under 3% and volatile. The only thing that comes close to buying Treasuries is perhaps muni bonds, which are tax free and can yield 4%.

2) Slay the annoyance. Besides no longer having to pay a $1,314 a month mortgage, the other great benefit of paying off debt is that it simply feels wonderful having no debt. When I decided to pay off my business school loans, it felt magical – like a snuggling with a fluffy golden retriever puppy. It’s nice to know that a bank is no longer making money off me, even though the money is relatively cheap at 3.35%. I’ve noticed that the older I get, the more annoyed I am with having debt.

3) Lower tax payments. Finally, I’m no longer making as much as I once was. Therefore, the income earned from my rental property is being taxed at a 11.6% lower marginal tax bracket (39.6% vs. 28%). I’ve still got amortization to shield me from paying taxes on most of my income as well.

The Case For Buying More Property

Although property is becoming outrageously expensive in San Francisco, I believe just like every other international city in the world with a thriving economy (London, NYC, Hong Kong), prices will just keep on getting more expensive. Just one look at the job listings on Angel.co/jobs and you’ll see that basically every single startup job is between $80,000 – $200,000, and there are thousands.

1) Higher Return On Equity. If I decide to pay down the $277,000 mortgage the return on my equity goes down. The property is currently valued by Zillow at $1,045,000. Let’s cut that value down by 15% because Zillow is often wrong to get a value of $888,250. If the property appreciates by 10% ($88,825), the return on my $611,250 in equity is $88,825 / $611,250 = 14.5%. If I decide to pay down the mortgage, then my return on equity declines to 10% ($88,825 / $888,250). On the other hand, if I only had 10% equity in the property, my return on equity would be 100% ($88,825 / $88,825).

Let’s say I utilize $200,000 of the $277,000 for a 20% downpayment on a $1 million property instead of paying down debt. If the property appreciates by just 3% ($30,000), I make a 15% return on my down payment ($30,000 / $200,000). A 3% appreciation rate in San Francisco does not seem unreasonable given the robustness of the technology and internet sector in the area. AirBnB will go public. So will Dropbox and a host of other companies in the near future. Too bad the 5% selling commission rate still exists. Ridiculous, really.

2) New Adventure. I’ve lived in my current home for a little over nine years now. It would be fun to purchase a new property in a new neighborhood in San Francisco to live. Some places such as Telegraph Hill or The Mission come to mind for their different restaurants, parks, and night life. I don’t plan to buy a rental property for the main purpose of renting it out. I’m also not just going to buy any property. The property has to be something I really enjoy where rent can immediately cover the mortgage and taxes just in case something happens. The new property is where I plan to live for the next five years.

3) Frees Up A New Cash Flow Stream. I don’t want to get into too many details, but I can rent out my house for roughly double my mortgage interest + property tax amount a month. Renting out my house would therefore increase my cash flow beyond what I lost in CD interest income as I settle down in a new place. The trick is to find a place in a market when there’s hardly any inventory. I went to check out this nice three bedroom, three bathroom + bonus room house which I liked, but the asking price was literally 20% higher than what I had initially guessed.

THE BIGGEST DETERMINANT

So far I’ve simply assumed property prices will continue to go up or stay stable. I believe we’re in the 6th or 7th inning of a 10 inning ball game, but of course I don’t know for sure whether property prices will hold steady. Interest rates could surge higher (unbeliever after 35+ years of downwards interest rates) and there could be another terrorist attack, which could pop the bubble in tech and internet enthusiasm.

If there is a downturn in the property market, I’ll wish that I had paid down debt instead of leveraged up to buy a declining asset. That said, homeowners went through the worst economic decline in our lifetimes and we’ve turned out OK five years later if you held on. I don’t think we’ll seen another catastrophic economic crunch in the next 20 years, but who really knows? I do know that being stuck with a bad investment really hurts my mood.

I absolutely hate holding cash. Although my Personal Capital Dashboard classifies my CDs as cash instead of as investments, CDs are absolutely investments in my book. They are like bonds with a FDIC guarantee component.  I had to declare my CD investments at my previous employer because they consider my CDs outside investments. The fact of the matter is that I’ve got more expiring CDs that need to be put to use once this first CD comes due – five more actually.

If I don’t pay down debt or buy another property, I’m strongly considering just handing the money over to a financial adviser. I’ll tell the financial adviser that this money is to be invested conservatively with a target return of 5% per annum and to not mess things up! I’m busy writing, traveling, and consulting. I’m happy to manage my money as I’ve done for the past 15 years. But I’ve come to realize that after a certain threshold, I’m warming up to the idea of an adviser always looking out for my money as I’m doing other things. The key is finding the right financial adviser.

SO WHAT WOULD YOU DO?

If you were to come into a decent chunk of liquidity, would you pay down debt that doesn’t need to be paid off given the rental income more than covers the interest payments? Or would you leverage the money to buy a new home in a different part of your favorite city and rent out your existing home to unlock income? I don’t need more cash flow anymore because of my online business and consulting gig. It would be nice to own another piece of property if there aren’t any headaches involved in renting out my home.

The goal of this post is to hopefully come to a conclusion on what to do after laying out the various choices. I’ve spoken to several of you who are going through this exact same exercise now of paying down debt or buying more property for passive income purposes. I originally had a stretch goal of generating $200,000 a year in passive income by around 2017, but that was when I was preparing for leaner times after leaving my job. Now that two years have passed I’m not sure it’s worth being so mechanical about generating more income. I’ve overestimated how much I need to feel happy and secure.

What would you do if you were in my situation? Do you happen to be in a similar predicament? Investing more in the stock market at record highs is not an option. I just don’t know if I can find a nice property at a good price either. Perhaps it’s time to look for lagging property markets around the country instead. But that just sounds like a lot more headache. Any risk-free investments out there that provides a 4-5% return?

What would you do with your risk free money?

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Further reading: How To Correctly Value And Analyze A Rental Property

Recommendations For Homebuyers Or Homeowners:

* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?

* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Photo: Palace Of Fine Arts, SF.

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    I’m personally a big fan of real estate and see it (if the risk is managed appropriately) as the best way to build long-term wealth. Therefore, I voted for “Leverage up and buy another property and build more wealth”.

  2. Jacob Cayer says

    I voted to buy more property which leads to this question. A condo came on the market as a short sale and i’m thinking of buying it for cheap to rent it out. Would you ever own 2 units in a condo complex or would you advise against it?

    • says

      If you like the condo complex, no reason why not. I had an opportunity to own a neighboring unit 2 years ago, and didn’t jump. It’s probably up at least $100,000, or 15% now. Ah well.

  3. says

    Based on what you’ve been disclosing about your financial situation on this blog you seem to have enough income coming in where a $196 drop in cash flow which you’d realize by paying down the rental mortgage is not a problem. The security that you’d feel by paying off debt would cover the feelings of “loss” from the expiring CDs. You said it yourself that you overestimated how much money you really need to be happy, so why chase the tail if you already have enough? Besides, investing in another property is not only risky but also adds time commitment. With your current ramp up in work activities, are you ready to take on another management job?

    • says

      These are the things I’m debating right now. Yeah, a $200 drop in passive income isn’t that big of a deal, but I treat this entire financial thing as a game and a competition. I don’t want to lose progress.

      Dealing with tenant issues is really a pain when something happens. But the pain only happens around once every six months, and soon over.

      I think b/c I know my current house so well, I know the potential issues that may need addressing. Furthermore, I am going to screen the tenants to the max to get the right fit. We’ll see. Freeing up the cash flow value or the house is very enticing since it is more that I need right now. But, it would be also be stupid to leave a house I can grow into if my family does indeed grow.

      • mysticaltyger says

        I totally get that you treat this whole thing as a game and competition. It was a useful game to get you where you are today. But at some point, the game becomes counterproductive and pointless. I think you’ve reached that point now.

        • says

          Life could be pointless, but I’m much more optimistic than that. As you’ll see from other comments, other people have similar dilemmas ongoing right now.

          How’s that post coming along?

      • Adam B says

        This may seem like a dumb question, but why not hire a property management company? I know very little about real estate investing and rental properties, but have a good friend that has around 12 properties, but rarely if ever deals with tenants as he just sources everything out to a good prop. management company. Is there a benefit to not using one other than the extra cost that accompanies hiring one?

  4. Jon says

    Why not compromise and meet in the middle?

    For $200,000 you can purchase a single family property in “A” neighborhoods in places like Houston or Atlanta. You wouldn’t get 15%, but even with management company fees you’d blow the 3.35% out of the water while remaining relatively safe. It would also help to diversify your real estate holdings in the event the San Francisco economy hiccups. And as the other CDs mature: rinse/repeat.

    • says

      Definitely a consideration, which I’ve included in the survey.

      I personally don’t feel comfortable buying a property sight unseen, and a plane ride away. I want to live in it to extract utility. This way, if things fall apart, at least I’m still enjoying my property.

  5. says

    I think you should do a bit more research on the Cali Tax Free Munis. You’ve got to be at somewhere between 35 – 50% on your marginal rate still…

    Munis are like my fallback answer when I’m not bullish on other things. I guess I’m just still bullish on California’s ability to tax people!

    • says

      I’ve successfully got my income down to the 28% marginal tax bracket, and I plan to keep on going lower.

      4% tax free munis are enticing. I like them better than 1H2013 as they have sold down.

  6. Austin says

    Conservatively, I would look at trying to achieve 3-6% in Long-Short fixed income funds like BGX.

    If you are willing to have a long term outlook, there is no harm in taking advantage of low rates on a cash flowing property. A rise in rates may reduce market value of the property but as long as someone is covering the note over time I don’t see this as a huge detractor to the investment.

    I have a hard time justifying the paying down of debt at these rates.

  7. Max says

    I’d say pay off the mortgage to reduce risk and stress, since it appears you’re leaning that way. SF real estate will keep going to the sky…until it doesn’t. Otherwise, none of the above. Have you ever looked into BDCs? They are not at their peaks recently due to some index disruptions (Russell), with many trading around NAV, and throw off yields of 7-11% investing in diversified pools of senior secured loans using no more than 1:1 leverage (by statute). Also like REITS, they must distribute at least 90% of their income to avoid being taxed at the corporate level. While distributions are mostly ordinary, they’re not double-taxed like normal corporate dividends, so it still works out to be a more efficient structure. Might be worth a look. There’s a couple heavy commentors on SeekingAlpha like BDCBuzz who provide a great introduction to the less well-known asset class, which has been around for a few decades, including a nice ranking system and suggested portfolios by goal, more so than I could do in a single comment here. Another option to consider anyways.

    • says

      Don’t know much about BDCs at all. Something I’ll spend some time looking at. One of my core philosophies is to invest only in something I know and understand. Hence, with this type of liquidity coming through, it’s hard to mobilize into BDCs. Maybe a little, but not much more than 5%.

  8. says

    As much as I dislike being a landlord, mainly because I find my tenants don’t really care about the house that they live in I would probably look for a new house like you seem to be doing. I’m getting to a point in my life where I’m tired of living with roommates and I’m thinking of getting a smaller place and keeping my original house to rent it out. I view the SF market the same way, I think rent is getting kind of insane here so I would hate to sell my house since it can bring in so much income. I also see the market being at least stable or increasing slightly for the next 4 years or so.

    But for me, I’m thinking of buying a new place in Oakland instead of SF for a few reasons. I think that the east bay isn’t as overpriced as SF is at the moment and I just don’t think I could find something reasonable with what I have available. I also think that the overflow from sky high SF rent is pushing lots of people out (maybe even myself, ha!) so from an investment standpoint I think it has better potential. But then again, I think anywhere in the bay area will be a fine in the long run.

    and I also like the weather a little better over there :)

    • says

      Hi Zee,

      To clarify, do you currently own your house and rent out rooms to your roommates?

      I’m not familiar with the East Bay, although I know the weather is nice. I love SF too much to leave. Maybe Kenfield or Ross up north, or Hillsboro or Burlingame in the Penninsula.

      • says

        Yeah, I own a 3 bedroom condo in SF and rent out 2 rooms. I’m tired of roommates now so it’s not the ideal situation for me, but when I was 24 it was a great investment. Also, at the time it was what I could afford that wasn’t in hunter’s point or some other area that was just not desirable to live in.

        I grew up in the east bay and I have a lot of friends that live in Oakland now so that’s another draw for me. I think I would have moved there originally but at the time I worked in Palo Alto so the commute was shorter if I was already on the right side of the bay. But now that I work somewhere that I can take Bart to work it opens up other options.

        • says

          Pretty impressive that you owned a 3 bedroom condo in SF at the age of 24 no? How did you manage to take that puppy down?

          When I was looking at a 3 bedroom condo in the inner Sunset at age 24-25, it was going for $900,000!

          • says

            I just did what all the kids are doing these days, when I finished college I lived at home with my parents for 2 years with basically no expenses. Of course I didn’t spend like all of the other new graduates with their first “real jobs” I didn’t buy a new car because I thought I “deserved it”. The other thing is that my place is about 1 block from the Fillmore, BUT it’s also 1 block from HUD housing. I think that’s the bigger deterrent for most people.

            But in SF it seems like most places you are only a short distance from those less desirable neighborhoods so for me I don’t think it’s the biggest issue.

  9. Fatchance says

    I am 100% debt free. It feels great. But I do not have any real estate other than my primary residence. I have money in REITs as I am as yet unwilling to keep up maintenance on two properties when I can barely keep up with one right now.

    I voted for YOU to buy more property. SF is freaking awesome and having a new place in a new neighborhood sounds like it would give you a cool boost in life (sort of like the new job you took). It seems like none of the options are going to crater you so you may as well do what will increase your sense of adventure.

    My one question is: WTF is that about giving your money over to a financial advisor? There is a great post by a site called Financial Samurai about doing your own taxes. It says that NO ONE cares more about your money than you do. That same thing applies here. I lump doctors, attorneys, financial advisors and tax accountants into a similar group. No matter how much they spend on you, they still have other clients and cannot possibly be as invested in your particular case as you are.

    • says

      A sense of adventure is definitely something I long for. I used to move around every 2-4 years growing up because of my parent’s work. Then I came to the States and the moving around slowed. I’ve been in SF since 2001 and it would be nice to purposefully shakes things up a little. A new neighborhood vibe, coffee shop, etc, I think would do wonders. We’ve got lots of micro-cultures here.

      Good question on why I would consider handing over my money to a financial advisor. I had a section in the post about how I can save 50bps at Personal Capital given I’m currently working there. Not bad. Furthermore, I can walk 80 feet down the hall and ask my advisor, head of advisory, and head of portfolio management what’s up 2-5X a week if I want. I won’t, but it would be a nice option to have.

      I have a questions for you specifically though: Do you ever feel like you’re missing out on the ride up given your low leverage? This is the classic greed and fear syndrome. I fear if the SF property market is going up another 10-15% in the next 4 years, that’s a 50%-75% return on a 20% downpayment and I would feel a little silly paying down 3.35% debt.

      • Fatchance says

        Sam, you are a financial wizard compared to me. Just in this post you have analyzed debt and leverage and options etc. etc. more than I have ever analyzed anything in my own financial life. I was just drowning in debt and wanted to get out from under it. 10 years ago I was $1/4M in debt with $0 net worth. Now I have $0 debt and a healthier net worth. Am I missing out by not leveraging? Of course. But I am in a great place compared to where I was. I just never want to owe anyone for anything ever again. I do not want a mortgage. I do not even want points and miles if I have to spend on a credit card. I am just now starting to optimize my investments by looking at fees, allocations etc. I have plenty to learn. Thankfully I read F.S. religiously :)

        P.S. If you get to choose an advisor at PC, get Todd McFarland. I like that guy.

  10. Jordan Hanson says

    I find myself asking this question all the time. For me it is between my car note or investing in more stocks. Right now my stock portfolio is more than enough to pay off my car note but with such a low interest rate on my car loan (only 5%) I am finding it hard to decide what I should do. The feeling of having no debt would be great, but at the same time, making money in the stock market has been treating me well. Last I calculated, if I paid my car loan off early I would only be saving roughly 2,000. Although this is a good amount of money, it hasn’t registered as enough in my mind for me to pay it off instead of continuing to invest.

    • says

      Jordan,

      I would definitely pay off the car loan and promise yourself never to have a car loan again. 5% is not cheap money. If it was under 2%, it might be a little better, but 5% is 2.2% OVER the risk free rate of return (10 year yield at 2.8%) at the time of this writing.

      No more car loans man!

      Sam

      • Jordan Hanson says

        I will never again by a car unless I have the cash up front ! That is the most valuable lesson I have learned through this whole process. I appreciate your advice.

      • Ravi says

        Maybe one day the 0.9% financing will return, in which case I would definitely consider financing a vehicle purchase.

        Like any other type of liability, all leverage requires discipline. It’s easier to overspend when you’re spending long-term dollars; however, like you, I also understand leverage to be a powerful tool if used at the right time and in the right amount.

  11. says

    This is right up my alley! I am a huge proponent of leveraging to buy more properties. I have ten rentals that I have bought in the last three years with leverage. I have refinanced two of them to pull out cash to buy more properties.

    When I buy properties or refinance I always make sure they still have plenty of cash flow and I get great deals on them. That way if anything happens I can sell them.

    I actually just paid off my first rental thanks to taking all of my cash flow from my other rentals to pay down this property quickly. People ask why in the world I would do that if I want to buy as many as I can. It gets tricky trying to finance more than four or more than ten rentals. If I could get 30 year fixed rate mortgages on unlimited rentals I would not pay down on early ever! But I use ARMs because that is what my local lender who will lend on more than ten properties lets me finance with.

    My advice is to buy as many properties as you can, if they cash flow and you can get a great deal. If you are buying for appreciation I would hesitate to buy anything because we can’t predict the market,.

    • says

      With 95% of your net worth tied up in real estate from a previous comment, do you worry at all?

      How was your net worth structured in 2008-2010? How many properties did you buy on your own before taking over your fathers property business?

      I just want to get some perspective as I can’t come close to putting more than 50% of my NW in one asset class.

      I agree with you on cash flow properties for sure. I’m looking for cash flow and principal appreciation.

      thx

      • says

        Great questions. I am in different situation as you since most of my networth was created by real estate. My net worth has increased by 100% in the last year thanks to taking over the business and appreciation/getting great deals on new houses and adding value.

        Real estate has helped me create most of my net worth as that is why I am okay allocating such a high percentage to it. The more properties I buy the faster my networth increases.

        More than net worth I am concerned with cash flow. All though it helps the ego when the net worth goes up, it is all on paper. Cash flow it what matters to me. The more real estate I have the higher my cash flow.

        Before I took over the business I had the same allocation. As soon as I had enough money saved up I started buying rentals. It may not actually be 95% real estate now. It may be closer to 85 or 90% an the rest is cash used to buy properties.

      • says

        Oh, and I took over the business in sept 2013. I had 7 rentals on my own at that time. The business was only fix and flips and real estate sales. All my rentals I have purchased on my own. The business came with 5 fix and flips in the pipeline.

        • JJ says

          How were you able to refi your properties after acquiring 4? I have 4 rentals with conventional mortgages and have not been able to refi them. 2 of my properties have great equity, but higher interest rate loans. (those are in SoCal), I live out of state now, so many local lenders won’t work with me.

          • says

            I have a portfolio lender which is basically a local lender that loans their own money and do not sell their loans. I can finance as many properties as I want with them as long as I qualify. They do cash out refis at 75% loan to value after a one year seasoning. I talk a lot about my financing on my blog investfourmore.

  12. says

    So, in my opinion, this is more of a life question than a financial question! Are you looking to ramp up, trying to meet your financial goals? Or are you in the stage in life where you can coast/cruise the rest of the way towards your financial goals. Do you need to take a fresh look at WHAT your financial goals actually are?

    I think either of the top two strategies are perfectly fine. If it were me, right now, at 30, I would look to invest in real estate. I would be ready to build up that part of my business and increasing passive income aligns with my strategy.

    However, 10 years from now, I might be winding down a bit. I will have a handful of mortgages and I think I might choose to start paying them off, increasing my cash flow while decreasing how actively I have to participate in my investments.

    • says

      Dave,

      I think the question is always a hybrid. The bottom line for bothering about PF is to have a better lifestyle. The issue is that I overestimated how much I need to be happy in retirement ($120k/year is enough vs. $200K estimated, even though $200K would be nice).

      I think I will redo my financial objectives per your question and see what happens. The big variable is kids.

      I’m 6-6.5 years older than you, and I do feel that I have at least 5 years more of energy to deal with things. The other thing is, if I don’t have to work a traditional corporate job, managing properties is not so bad.

  13. says

    If you moved out of your primary residence in SF and rented it out, would it be subject to rent control? As a fellow SF resident, I would never lease out a property here that was — the rent control and tenants rights laws are completely nuts, and really limit your options in terms of what you can do with your own property.

    • says

      It’s not, because it is a single family home. Rent control pertains to multi-unit buildings and/or units build pre 1970.

      But even if my house was under rent control, it’s not so bad for the first 5 years since I’ll be renting the house out at current market levels.

      • says

        I could be wrong, but I believe San Francisco’s “eviction restrictions” still apply to single family homes. So even though the “rent increase limitations” might not apply, if your home was built before 1979 the eviction restrictions still would — and that’s the more troubling part of the ordinance. After you lease your property to a tenant, it can become very difficult to recover possession of the unit.

        Just something to consider! Hopefully your home was built after 1979, and none of this applies.

        • says

          Here’s a quote from sftu.org addressing renters:

          “Single Family Homes/Condos—You do not have full rent control protection if you live in a single family home (note that a single family home with an illegal in-law unit counts as a 2 unit building) or a condominium and you (and your roommates) moved in on or after January 1, 1996. While these units do not have limits on rent increases, they do have “just cause” eviction protection, meaning you can only be evicted for one of 14 just causes.”

          I can increase rent by up to 10% with a 30 day notice, and over 10% with a 60 day notice.

          BUT, the point is, if I’m renting it at current market rent levels, I’d actually love for my tenant to always pay these levels and not move b/c it would bring in double the costs every month. Even if the SFH was under rent control, rent can go up by an index every year equal to roughly 2% a year. Again, not bad at these prices.

  14. says

    Sam, in your situation it sounds like you don’t really need more leverage since you say you are comfortable with current cash flow. If you are not trying to grow your cash flow then I would start to pay down debt. It will strengthen your current position. How about investing some more in P2P lending? It sounded like you were thinking of that in past articles.
    Can I put a link to the article I wrote on whether to pay down debt or not? Is that allowed in the comments?

  15. says

    I think in your situation I would us the money to pay off the mortgage and get that monkey off my back. You seem to be in a place where you’re relatively content with the wealth & income you have right now, so I think you’d appreciate getting rid of that burden more than you would $X more in income from another property.

    In my situation I’d go for the property and build more wealth, but we’re in two very different places financially :)

    • says

      Here’s the thing though Jay: How much is really enough? Do you know how much you need to make and have in net worth to no longer strive for more?

      I stopped trying to accumulate wealth a couple years ago, although this site has helped in net worth growth. But now that the CDs are coming due, I’m forced to do something.

  16. says

    Sam, I think the tricky part is figuring out what role that the CDs play in your portfolio now. My guess is that they are the risk-free, not-exciting part of your portfolio (with the assumption that you have other assets in play with different, more aggressive roles). As such, if there’s still a need for that conservative role, then you have the answer for what to do with that money.

    • says

      The CDs are absolutely the risk-free part of my net worth. So to utilize the moneys for higher risk activities is not ideal.

      However, I now feel I’m a little too conservative with having this percentage of risk-free assets (25% of net worth) b/c I’ve experienced 2 years of unemployment/retirement/entrepreneurship, and it wasn’t as scary as I thought.

      The reasons are:

      1) It’s a bull market, so it’s easier to feel good and make money.
      2) I don’t need as much money in retirement as I thought.
      3) Entrepreneurial income targets have been achieved, faster than I thought it would. I also had some doubt whether I’d ever be able to get to my target.

      When times are good, it’s easy to forget being conservative.

  17. steve says

    I think one’s age and risk tolerance should be taken into account.

    Myself being LTD/retired and having two properties ,highly leveraged.,
    Selling my condo in SF ,leaving for Palm Springs ,reducing my debt and walking away with some cash was right. yes I left the culture of SF behind and had adjustment on my part.

    Not to sound doom and gloom but the big quake in the Bay area is not whether, it is when and %’s are going up that it will occur. (I alway bought or rented in SF on the hills and not in the flats.)

    My present house I have upgraded, instead of paying off the mortgage, which is 3.25% Adj.
    with cash in a balanced mutual fund. When the mortgage works against me, I will pay it off.
    I guess the older you are, the less risk and more security perhaps is needed.
    At least I seem to sleep better.

    • says

      I do wonder when the next Big One will occur. We can’t live our lives waiting for a disaster, hence the availability of insurance.

      If I were to buy a place, Im thinking Hawaii instead. I think China money is going to buy up Hawaii property like crazy like the Japanese in the 80s.

  18. Chaddogg says

    My thoughts:

    1. If interest rates were higher, you would have been willing to put this money back into the CDs, correct? And thus lock it in for 5 years….

    2. You have no “need” for this money right now, insofar as you are making enough money from everything else to cover your expenses/debts/etc.

    3. Financial advisers are expensive. Real estate involves transaction costs, big risks (particularly in an inflated market), and is illiquid. Paying down debt in your case means turn liquid cash into less liability on an illiquid asset (your rental property), all for a low rate of return.

    4. Given all of the above, why not just buy Vanguard Total Stock Market ETF (or the Admiral Shares mutual fund equivalent)? Stocks rarely lose money over a 5 year period (it does happen, but not all that often), the fund pays out 2% on average in dividends (which could be automatically reinvested), is low in costs/expenses, and is diversified across the entire U.S. market. If you’d rather have some bond/international exposure, you could do that too. And since you don’t “need” this money anytime soon, you can afford to “buy and hold” beyond 5 years even if the market experienced a (temporary) downturn.

    To me, if someone gave me $200k tomorrow that I had nothing to do with immediately, I’d just buy more index funds/ETFs and let it ride.

    • says

      These are some fair points. But putting liquid cash into an illiquid investment that doesn’t need it feels a little risky now that I come to think of it more. What if the house burns down or there is a massive earthquake?

      Your last line gives me hesitation “and let it ride.” That’s a gambling term to the highest degree. There really is no way I’m investing my safe portion of my net worth in the stock market at these levels. Even though over a 5 year time period things seem to work out fine. The BAD feeling I get during the downturns hurts the quality of my life b/c it is a mental issue.

  19. S says

    In Texas, your home is one of your best place for creditor protection, but I don’t know if CA has similar laws. Though you probably have sufficient insurance in place, the fact that you are wealthy makes you much more of a potential target. In Texas, if you were a doctor asking this question, you should strongly consider paying down debt of primary home for the creditor protection. That would be an additional factor to consider and one that strongly favors debt paydown. But I do not know whether CA offers the same thing, and you may feel that you have sufficient insurance to cover any potential liabilities anyway.

    With all that being said, I don’t know. Congrats for putting yourself in a win-win financial position. Seems like you are willing to trade the risk of a downturn in prices for the higher return. But are you willing to trade the additional time associated with managing a property? I don’t know about your personal life, but do you see yourself potentially getting married and having kids in the near future? If so, your time will become more scarce.

    Good luck. I’m sure you will let us know.

  20. says

    Sam,
    You are having the same internal debate that I am having. Just to reiterate a few asset classes that you haven’t brought up:

    MLPs, BDCs, Utility ETF’s, Asset Specific REIT’s

    all of which will give you a better ROR than a CD, and give you the liquidity you want for future adventures.

    So how about this strategy:
    Take the 200k, put it in a blend of equities with a weighted average dividend return of >=5%, and anything above ~2.5% goes directly toward the principle of your rental mortgage.

    • says

      Brian,

      Can you elaborate on this strat:

      “Take the 200k, put it in a blend of equities with a weighted average dividend return of >=5%, and anything above ~2.5% goes directly toward the principle of your rental mortgage.”

      If anything is above 2.5%, then that is going into a blend of equities no?

  21. Tom says

    Unless you’re looking at properties outside of SF I would probably just pay down debt. In a market like yours I imagine the COC returns are probably pretty bleak. So there is the turnkey option available where you can get a lot of bang for your buck elsewhere in the US.

  22. says

    Personally, I’m a “physical security” person. I get the math behind investments and rentals, etc. But, if something happens and it all goes to crap, I can live in my house. Investments can turn sour. Rental markets can dry up. But, even if your house loses a ton of value, you can still live in it.

    Of course, I also feel like being a landlord would be more of a headache than I’m willing to deal with. It would take a lot to convince me that owning a rental was worth it, even if it was financially the better deal.

    • says

      Cindy, you can still live in your house without paying off your mortgage, AND have lots of liquidity in the bank for more security :) Thoughts on that? At the end of the day, it’s just accounting if you have cash liquid or cash illiquid in a house.

      • says

        In my dream scenario, the BF and I have a paid off house, and live on his pension and my investments. Without a mortgage to pay, what we need to live off of every month wouldn’t be much. The security comes from the idea that if his pension fails (as pensions sometimes do) and the economy tanks, it would be easier to find a job that could cover our living expenses. Whereas if the pension fails, and the economy tanks, and we have a mortgage… well, that’s gonna be a lot tougher to swing.

        Of course, aside from his pension, we’re at the very beginning stages of this plan. I still have some debt, we both have houses to sell, etc. But, if we play our cards right, we could be all set in less than 7 years. We also don’t have rentals, or any other income streams that would diversify us against possible bumps in the road.

  23. Ace says

    Sam,

    I presume you were looking for the FDIC protection when purchasing the CDs? Anyway, treasuries would be the next best thing.

    If on the other hand, if you are just trying to protect yourself from yourself, paying down liabilities like a mortgage is ok. I’m not fond of this, because of the high liquidity risk. I think too many times, people undervalue liquidity.

    I do think that for some of the less sophisticated folks I sometimes advise, paying off a mortgage is not a bad thing. The alternative for many people would be to waste money on useless toys. At least with a mortgage free home, they will have a place to live.

    Another good alternative is a portfolio of high dividend stocks with risk balanced by cash in an FDIC savings account.

    There is also California municipal bonds. The tax advantages would likely amount to about a tax equivalent 4% return (depending on your current tax situation).

    • says

      I’m looking at CA munis for sure at 4% tax free.

      Protecting myself from myself is very important, b/c my risk tolerance is HUGE and out of whack. For example, I will dump 90% of one portfolio into a stock. It’s partly b/c I have real estate and CDs that my risk tolerance in equities is huge.

      • Ace says

        I have been thinking about this issue quite a bit over the last few months. I have been working with my kids in regards to purchasing a home. I don’t believe that they will ever be exceptionally financially savy. I have tried to instil some knowledge, but the level of interest isn’t there.

        I have also been speaking to many people whom own various properties. One of my best friends is big real estate investor. All of his properties are mortgage free (he owns four condos and two houses).

        In fact, thinking about it, another aquaintance of mine is also mortgage free on three different properties (one of them a strip mall).

        I think there is certainly many good reasons to pay off mortgages. Being mortgage free is very psychologically comforting to people. I can see this as a healthy positive, as long as folks have plenty of liquidity in order to protect themselves from unforeseen events.

        The thing I notice about mortgage free people, is an attitude of carefree in regards to home prices. They don’t care if prices go down. They don’t care if prices go up. Maybe that’s a good thing?

        I personally own one house mortgage free and have another with a small mortgage. It is a very nice feeling knowing that no matter what, you always have a place to live.

  24. sunil says

    I have the same problem, but I am not in favor of buying more real estate. As far as timing is concerned, buying between 2009 to 2013 was perfect especially in bay area. I ended up buying my primary home and 2 rentals in south bay between that period. I think duties of landlord are overblown, provided you NEVER compromise on the quality of tenants (something that I learned from you!). My strategy for the last few years has been to buy the most hated investment of the time. Currently that happens to be gold. I am no gold bug, but what I do know is that stocks were hated in 2008 to 2011 and housing from 2009 to 2013. I have a very unscientific method to find that out. I read comments on all the financial sites such as yahoo to gauge the sentiment. I invested most of my cash in stocks in 2009 and in REITs and rental properties from 2011 to 2013. Based on that I would say gold is currently the most hated investment so my investment theme for last year and this year is gold! GLD, mining etfs and some bullions!

  25. Grisell Plasencia says

    You can always paid off your current property and have an equity line of credit with no closing cost at prime, just incase you find a good deal. Where I lived property taxes and insurance are so high that buying single family does not make senses to rent.

  26. Rizzo says

    It’s interesting to me that you are so worried about buying total stock market index funds “at these prices” but are considering real estate in SF, which has exploded in price even more than stock, as primary your alternative.

    Have you considered your time horizon for owning real estate in the Bay Area? Personally I’m far less confident about investing in real estate for the long term, and urban real estate in particular. Why? I’ve mentioned my interest in autonomous vehicles previously, but it bears repeating since I don’t think people comprehend how big an impact this technology will have on everything. Not only will people be more willing to live further from “prime” areas because the psychological costs of commuting will drop, but all those parking lots will turn into new commercial and residential use spaces since autonomous car-sharing services will negate the need to even own a vehicle. This all means simultaneously increasing supply and decreasing demand in tight markets, dropping prices. Sure, the effects might not be felt for 10-15 years, but many properties are owned for longer time horizons.

    • Rizzo says

      whoops, my point about autonomous car-sharing services decreasing the need for parking capacity is more that they negate the need to leave your vehicle parked somewhere all day while one works or sleeps or shops, etc. I expect autonomous cars will be much more like an on-demand service like Uber where you don’t own it and just message your service provider when you need a lift.

    • says

      I actually think the trend is the opposite: More people want to live closer to city center due to the activities, food, nightlife, and horrendous commute traffic. That is why there are Google buses shuttling people 1 hour south from SF. The traffic truly is getting bad nowadays.

      For property, if you can make the cash flow work, that is one of the most important things. For stocks, especially momentum stocks, there is often no FLOOR because its all about valuations, which can change on a whim. The stock market has surged much quicker than the RE market. It’s the leverage that provides equal or surpassing upside.

      It all depends on the property. And I’m looking at it to live in, not to rent out initially. I believe wealth is tangible, not so much electronic ownership.

  27. TJ says

    I voted pay down debt, as I understand you already have “enough” income. I would not be surprised if we are in a start-up bubble right now, and if it bursts, SF could be hit particularly hard. Real estate prices would go down, and probably so would rent levels. I say reduce risk.

    • says

      It totally feels bubbliscious here in SF. But at least there are huge corporate earnings and large corporate cash balances associated with high valuations, unlike in 2000.

      Property prices in SF went down at most 15% I believe in the most recent correction.

      • Ravi says

        I’d be more worried about limited upside in the future than a big drop. Real estate rarely drops. Even when it does, the intrinsic value (PV of cash flows) is usually unaffected.

        In the recent real estate crash, most REITs that own and manage rentals had their book values decimated which was destructive if they had debt covenants requiring certain ratios. HOWEVER, cash flows actually improved in the past 5 years since rents have been skyrocketing (moreso in SF/NYC… but everywhere else as well).

        The key is to stay solvent and be liquid enough to weather a downturn, but as long as your cash flows are trending positively, does any “price change” really matter?

        I think not, but we shall see next time.

        • says

          The price change is a mental thing. A vanity point if you will. It really is about cash flow.

          I like real estate b/c there is no daily ticker about the value of my house. I get to focus on other stuff and not be distracted. No temptation to waste time.

  28. Anne says

    Hi Sam, I am in similar situation as yourself in a way that I feel I will have enough to fund my retirement ( and knowing how much is enough is an important thing to know so that it will influence my investment decisions, to not get greedy etc..) i do know that I should gear up to financially better off, but reducing debts gives me peace of mind, and I do it for psychological reason, not for financial reason. What is your priority now ? Given you know you will have enough ? For me it’s to simplify my life, and paying down debts makes me feel happier, so I paid off debts instead of gearing up. I also agree with you that putting money into the stock market at the moment does not make me feel comfortable. I am sure you will figure out what to do :)

    • says

      Anne – You’ve got a clear decision b/c you know that paying down debt makes you feel happier. I’ve noticed that whatever I do, I don’t feel happier b/c I’m pretty happy. But buying another property makes me feel more excited, which is different. Like a new adventure… maybe I’m just constantly looking for adventure, hence the travel, leaving my job, the consulting at a tech startup, and working online.

      • says

        Sam,
        You keep referring to adventures….so I suggest that you take the road less traveled. Buying another property for the sake of adventure will wear off quickly.

        You are skilled at writing and love traveling…I imagine that with your style applied to a travel blog/website you would probably do quite well (there has to be lots of places in the US that are uncharted territory for you to explore…my website is an example).

        • says

          Brian, before leaving my job, it was a dream of mine to just travel and write and make money from my writing online. I tried it for two years, spent 6 weeks in Europe at a time, 6 weeks in Hawaii at a time, and loved it.

          Now that I’ve tried it, the allure has lost its luster. I’d still like to do it at times. I think just having the OPTION to do it is the best feeling one can have.

          • says

            Which in your case, I suggest no more leveraged assets or any other investment that will tie you to a given location. Liquidity gives you options to opportunities that have yet to show themselves.

            However, I don’t think you are at risk of making a bad decision…you sir have what I call a “good problem”!

  29. Rob says

    I am facing a similar decision myself with my student loan. I am a recent graduate and have a stock portfolio and student loan that are almost equal. I really hate making a student loan payment every month. I keep watching that money go out and thinking “I could be putting this in my 401k or saving for a new car so I don’t have to take another loan” (my car has 280k miles on it, I figured you would be proud to hear that). However, I’m having a hard time rationalizing selling the stock when the market is doing well. Especially when the stocks are making more than my interest.

    • says

      280k miles is sweet! You’ll have to help me combat all the naysayers on my car posts who say that not spending at least $20,000 on a car is the way to go.

      If I were you, I’d pay down student loans now. We’re at record highs and your student loans are no longer providing a return since you already got your eduction and your career trajectory is about what you do.

    • Tom says

      Is your loan in separate amounts (i.e. one of them is 30k @ 3% and 25k is at 6%)? Perhaps you could take the approach of paying off only the high interest loans, but as Sam alluded to, there may be a market correction in the future so all of a sudden even saving any interest would look good.

      • Rob says

        That’s a good idea but unfortunately they are all at 6.5%.

        I hadn’t really thought about the market correction premise. I’m a big believer that an you cant time the market and right now may be a good time to cash out. I would probably be leaving some money on the table but there’s no way I can time it perfectly. Anyway, my guess is that sometime within the next 8 years (how long it will take to pay the loans off with monthly payments) there will be a correction of some sort…now I’m starting to convince myself what to do by talking through this.

        Sam and Tom – Thanks for the help. I think that’s what I needed to make a decision.

  30. nbsdmp says

    I realize I’m the extreme in this case…but I am firmly in the pay off all debt camp! It has been well over a decade since I’ve had debt of any kind and I can tell you hands down it was the best financial decision I’ve ever made. It forced me to live within my means, but because after I paid off my mortgage I built cash up so fast that I never noticed not having a big pile in the bank. It actually led me to some of my best investments because I had cash to act quickly when great opportunities strike…and surprisingly you get exposed to the good ones when people know you can act. I had a 45 year old friend miss out on my single greatest % return I’ve made because he didn’t have $60k he could right a check for that week…it will have cost him 10 years later well into the 7 figures…and multiple seven figures over time.

    You’ll sleep better at night…pay off the debt : ) Like you said, it doesn’t take that much to be happy!

      • nbsdmp says

        Well you sir are a lucky man! If that is the case I say lever up right to the point where you still can!

        • says

          Ha! Sounds good. But seriously, I feel everyday is a blessing.

          There will be long losing stretches, like we’re seeing now with tech/internet, but overall, things feel good. I’m waiting for the hammer to drop. I know it will at some point.

          • Nbsdmp says

            So true, everyday really is a blessing… I just have a friend my age have to have brain surgery because they found a golf ball size tumor, fingers crossed he will pull through, but damn you never know. Sort of makes me want to just go get that Italia I’ve had my eyes on vs. buying another rental property. It’s all about balance…

  31. Shane says

    I have been in a similar predicament. What I did was pay down mortgage debt, pay for earthquake insurance, and then get home equity lines of credit. Minimal risk with the insurance and no loss of liquidity. I am not maximizing my return however I am minimizing my exposure. I don’t love any asset class at current pricing so this was what I did. No real wrong answer to this question. It is more a function of net worth (and goal for net work or monthly passive income), risk tolerance, and your current willingness to work.

  32. The Alchemist says

    It sounds as though you’ve already answered your own question, Sam— at this point, you’re looking more for excitement than anything else. And you’re in a position where you can afford that excitement, while enjoying the benefit of it still also being a good long term investment. Win-Win!

    That being said, I’m having a hard time believing that the SF housing market will sustain its current rate of insanity/appreciation for much longer in the current cycle. Something will have to give sooner or later. You are of course aware of that. But the long term in SF is always good. Thus, you’re probably safe buying a new pad, assuming you can find just the right place in the current tight market.

    If you were *only* looking for a good investment with the cash coming available, I would toss out the suggestion that others have floated: consider buying a rental in another market. And don’t underestimate the value and benefit of a good property manager— it makes being a landlord pretty darned pain-free. Property management is a lot cheaper outside of the Bay Area, making it a feasible option. You could purchase a 3/2 sfr outright for the price of an SF down payment. Near Sacramento, rents are decent enough to make the cashflow worthwhile.

    But I still think you’re truly jonesing for a new residence for yourself. You can afford the risk potential, and you’ve worked hard to make doing what you truly want possible. Go for it!

    (Disclaimer: Admittedly, I want to vicariously experience the fun of watching someone who’s earned the right to do what he really wants DO it; I hope to get there someday myself!)

    • says

      You know what’s funny? Several commenters have said exactly this, “It sounds as though you’ve already answered your own question,” yet each commenter concludes something DIFFERENT! With this type of feedback, I feel I’ve done my part in being as unbiased as possible with this post. :)

      Every time I think prices can’t go higher, they do. I remember renting out my main rental for $2,100 back in 2005. It’s now at $3,800 and going higher. I never thought it would go over $3,000, but yet here we are knocking on $4,000. Inflation is more powerful than anything!

  33. says

    *You’re too financially savvy to use a financial advisor in this instance. I just don’t think you’d get your “money’s worth” out of such services. Plus, the fees would cut into your 5% required return (unless you meant 5% return after fees).

    *Reinvesting in the CD’s doesn’t even really seem like a legit alternative. It (most likely) would offer the lowest return and it seems you’re in a financial position where you don’t need to be that conservative.

    *A mixture seems like a headache and too time involved and would make it more difficult to put a 20% down on a new property (at least from the current CD proceeds).

    *Leveraging up and buying a new property seems like the most appropriate choice for you IF you can find the right property. My take is that you are financially secure enough to take the risk and would also be able to successfully navigate the waters if things didn’t quite turn out like you had originally anticipated.

    *Since the survey asked what “you” would do, I voted pay down the mortgage debt. That’s just me. KISS – Keep It Simple Silly. Then again, I am in a completely different financial situation than you are. I’m a bit more conservative by nature and I love the idea of having a property fully paid off (or very close to it).

    • says

      If I can find the right property to live in, then I think I would seek to buy another property and feel the FEAR of having less cash/liquidity to try and save more money again.

      The more money you save, the LESS motivated you become to save b/c you already have enough e.g. if you have $100,000 in the bank, who cares so much about another $1,000. But if you have $500 in the bank, $1,000 is a great achievement that makes a big percentage difference.

      • S says

        Then you have answered your own question. Put the money in savings, keeping it liquid, until (and if) you find a place worth buying. You have the luxury of holding out for something that is either exactly what you are looking for or too good a deal to pass up. In the meantime, if the market takes a substantial dip (for whatever reason) you could also decide to throw money in. Savings earn low yields, but there are benefits to having big cash piles.

        Of course if everything just goes up and you never find that perfect place or get that good deal, then you will just kick yourself for earning nothing.

  34. says

    If you can find a a good property at a reasonable price, you should invest. Reasonable is the key! If you do not need the (interest) income, it is still good to build or add to your assets.

  35. Ravi says

    Another option (assuming you find a viable property), would be to take on the additional cash flow and hire a property manager? I bet you could get a favorable rate now that you would have two properties to have managed.

    Your cash flows would not increase as much as if you do the “management” yourself, but it takes nearly all the stress out of owning the property.

    Plus, you have the opportunity to live in a new place, try out some new places, etc. Of course, the financial aspect is the most important, so the extra rent on your current home would make it even better!

  36. Wanda says

    I voted pay down debt. Another option is renew one of the five CDs. Invest the rest in solid dividend growth stocks that would pay dividends of ~3.5 to 4 percent, which are deposited into your brokerage account. I recently bookmarked this article which I thought was a good resource for stocks and DGI blogs. It will take some work to get the portfolio researched and set up, but it should be fairly easy to maintain.

    http://divgro.blogspot.com/2014/02/popular-dividend-growth-stocks.html

    Good luck!

  37. says

    Narrow down to your favourite 2 and then flip and coin and don’t look back.
    I predict you’re going to have a nightmare about earthquakes and more bad tenants if you agonize over it too much.

  38. James says

    Sam, I constantly have to decide the same question you’re dealing with. I voted to pay off the debt and get your satisfaction with some creative tax advantaged investments for any left over income and/or future income, as real estate is work. My solution: since I’ve done real estate in spades, I’ve kept the houses I want, paid them off, and now my new cash is flowing into what I consider to be safe investments: infrastructure MLPs, natural gas Storage and drilling firms, as MLPs distribute tax- free gains regardless of your income, mREITs, tax deeds for returns of 10-36%. I would probably add some option-income closed end funds, as their distributions are close to tax free regardless of your income – check out Eaton Vance for tax-managed ones (and Douglas Albo on Seeking Alpha is the resident expert). I don’t really trust muni bonds, as I believe Meridith Whitney will eventually be proven correct in her BK predictions for many.
    How’s that for options? A bit here, a bit there, get debt free, and if you really want to buy real estate, buy a small house that smells like cat pee and paint it all with oil-based Kilz, rip out everything, and rehab it all yourself to fill your time for a few months. Sell it when you’re done and do it again, or rent it for a year then sell to take advantage of capital gains tax. Hope that helps!

  39. says

    I voted pay down debt and save 3.35% in interest. You’ve won the game, you’re just piling on the wealth at this point. ;)

    If it was a 30 year fixed note at 3.35% I’d be tempted to say keep the money in CDs at 2.x percent (or cash at ~1%).

  40. M says

    You could do neither. Just keep it in cash. You don’t have to do a transaction just because the cd is due. The right time to buy the property is if the numbers are right not just because you have cash. Same with stocks. Sometimes it’s nice to keep an elephant gun loaded for when the opportunity arises. Paying down debt decreases liquidity and if interet rates rise you’ll wish you could invest in 6% CDs or if stocks are at record lows on the future you can invest in stocks.

    • says

      Sitting on the cash is not a bad idea. The reason why I’m planning/thinking now is so that when the CDs start getting released, I won’t have to sit on it as long given the opp cost.

      The right property will take time.

  41. David Michael says

    Sam…Whatever happened to your consideration for investing in P2P loans?

    I have been in Prosper for about five months now with over 400 loans, making 11-12%. No defaults yet, partly because I focus on A-B-C loans with a conservative set of filters. Generally, it takes about 30 minutes a day for me to select new loans to keep reinvesting the money turnover. I have been very happy with the results so far, realizing the return may drop to 7-8% after the first year. So much better than any of the CDs, Savings Funds, or even our I-Bonds which deliver a secure 4-5% because I purchased them 14 years ago.

    It just seems so much simpler and less stressful to balance out holdlings with P2P.

  42. joe says

    This is a good problem to have and a timely article. In 2015 I also have a 5 year CD coming due at which time I will have enough to pay off my mortgage. On one hand this is a guaranteed ROI vs. the other I feel it could also be a missed opportunity cost. Specifically, there are some reports that by around 2017 baby boomers will start “down sizing” in numbers significant to depress home values.

  43. Ricky says

    What makes you think AirBnB or Dropbox are going public soon? The former just received more private funding and has more cash than it needs really. I’m not liking the current way things are going with private equity firms benefitting from these amazing companies! Leave some for us!

    After reading Jim Collin’s post on real estate, I will never be one to buy into real estate and hope for equity appreciation. He posted an interesting chart which I’m sure you’ve seen that proves that real estate after inflation is at about the same levels as it’s ever been. Sure you will have fluctuations, but it’s not like the stock market that ACTUALLY appreciates over time. I would only bank on the tenant income myself. That said, I think you’re right in assuming SF has much more growth potential than many other places in the world. What happened to your Hawaii plans?

    If it were me, I’d pay down debt and invest some into “O”. 5% dividend and very strong financials and monthly income.

  44. Adam B says

    To be fair, any long term investment that can keep up with current inflation isn’t horrible. The Feds are printing our dollar into oblivion. Get into debt, print money to pay off that debt. Get into more debt. Rinse repeat. Unsustainable plan if you ask me.

    That’s why it’s so hard for me to keep paying higher taxes. They can hardly manage their own budget, yet they want more of my money so they can “disperse” it to the “less fortunate.” Riiiight.

  45. John says

    Late to the game on the comments….

    Definitely a very personal decision….

    If the goal is real wealth accumulation….then the 3.5% gain on paying down debt only makes sense if you are really long term bearish on property (assuming you are looking at buy and hold investments)….. Holding cash may not be a bad idea in the short term..until you either find the property or feel market valuations are more attractive…..

    That leads to the question…how short is short term? If you are looking at a year +, and this is supposed to be the “conservative” part of the investment portfolio, seems to me like a mix if Munis, widows and orphans dividend stocks, may even intermediate term treasuries might give a low beta 4% return……

  46. says

    Been discussing this exact issue with the wife for a few months now.

    We have the cash to purchase some rental real estate, but it’s going to be interesting to see what the Fed does at the end of the year as QE tapers and the market starts to respond. It could make home values rise and people leave the stock market looking for something “safer”, or it could bring it down as people panic and start going old school and looking at their mattress as the safest “investment”.

    All the markets have been so irrational lately, it’s resulting in our analysis paralysis. No clear signals, no clear solutions.

    For now, we’re paying down existing mortgage and student loan debt. At least we get to live in our investment and maintain the mortgage interest deduction (for now…)

  47. says

    I never see any point in CDs. The interest you get it less than the country’s inflation, making you essentially lose money.

    The only way to do it in that you make something, is investing abroad. That way, you can possibly get interest higher than your country’s inflation and hopefully gain on the currency exchange rate too.

    • says

      in 2009-2010, CDs were paying 4-4.5% as banks needed to attract as much liquidity to survive. I put a portion of my risk-free net worth there for safe keeping.

      But nowadays, at 2.2%, it’s tough.

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