Are you wondering what is a good short-term investment? Let's discuss with a guest post.
Greetings fellow Financial Samurai. Bruce here. I recently dropped a note to Sam about a financial conundrum that I was working through as I appreciate the analytical approach on this blog. Sam suggested that I write it up and engage the Samurai community to help with the alternatives analysis.
Background
My wife and I are in our early 30s, are currently child-free, and live in the suburbs of Atlanta, Georgia. About three years ago we sold the condo we had purchased as our first marital home and bought a suburban house northeast of Atlanta in an area with the best public schools in the city called Marietta.
The house was the cheapest house in the best school district and definitely on the low end of the neighborhood as well. We paid 167K and there were only one or two other homes less than 200K in the high school district at that time. As luck would have it, we just happened to be buying within 30 days of the market bottom in January 2012 for the suburban Atlanta area.
We invested a decent chunk of change (~50K) in renovating the finishes of the home to give in a semblance of the style we like from watching exorbitant hours of “Property Brothers” and other similar shows on HGTV.
After living in this area for the last two and half years, my wife came to me with a proposal that we look into moving further south from the suburbs of Marietta closer to the urban center of Atlanta. She
laid out the logic including the following:
- She works closer to downtown Atlanta and her commute would go from 45 mins to an hour each way to around 20 minutes each way
- The neighborhood/area we currently live in is dominated by families and children with very few single couples. This affects making friendships and means we will always be driving somewhere else if we are going out with our fellow child-free friends. Basically, why don’t we live in the city of Atlanta and enjoy the more active community while we have the opportunity? We can always move back to the suburbs if and when we do have a kid and they don’t start into public schools until they are six or so years old anyway.
- The restaurants and bars in the suburbs are typically chain restaurants and sports bars. All the music venues, hip restaurants and bars are in Atlanta
I heard my wife’s impassioned appeal and decided to get on board with her plan to move to the City of Atlanta. I think the part that excites me the most is the opportunity to live in a walkable community. Everything in the suburbs involves getting in a car, but the area we are moving to allows for a ten minute walk to one of the most popular bar and restaurant districts in the city.
Upgrading Homes
When we purchased our suburban house upgrade, we had pictured being there for the long haul (probably ten years or so), but with the renovations adding value and the market appreciation we felt confident with the numbers and changing our plans to move in-town.
However, we both agreed that because we have never lived in-town before, we would rent for the first year as opposed to buying a home in the city. The houses in the area we are going to be renting are almost twice as expensive as the suburbs we currently live in. We want to make sure we are buying in the right area where we will want to settle in for at least 4-5 years so that we don’t repeat the same mistake of moving to an area that doesn’t end up being our cup of tea. By renting a home in the city, I think we will be able to figure out what makes the most sense to buy when we are ready after our 12 month lease is up.
Selling Our House
We listed our house ourselves with a realtor firm that allows you to get the home on the MLS listing system but does not involve a listing broker commission outside of a small fee. We hired a professional photographer to take the listing photos and had the house under contract within a week. The cost to sell a home was a lot.
After closing costs (we offered 3K to the buyer) we will be walking away with just over $90,000 in appreciation from our cost basis when accounting for the money we put in to renovations (around 50K on top of the 167K purchase price). If my math is correct that is around a 16% average annual return based on our investment and the approximate two and a half years we lived in the home.
The closing is scheduled to go down in approximately two weeks if we don’t hit any snags (already have had appraisal and inspection). While living in the house we also aggressively paid the mortgage down. When you add on the appreciation in the housing market since the bottom, our large downpayment, and our mortgage pay downwe are going to be receiving a check for just over $280K at closing.
What To Do For A One Year Investment Window?
While this influx of cash is extremely exciting, it has left me wondering.
What investment would make the most sense for a one year time period? If we decide to buy a home in Atlanta after our lease is up, we may want to put a large down payment down to facilitate a monthly payment that would be comfortable allowing the flexibility in our monthly budget that we have grown accustomed to. As such, we are focused on the 12 month window while we figure out the future holds. Remember, homes downtown are roughly twice as expensive as where we used to be living.
To give some perspective, if we do end up buying in the in-town neighborhood we are renting after our lease is up, the home price we would likely be buying would be around 450K to 550K for a house that needs some work. We like to put our own touch, so we would likely buy and renovate again. As such, we will probably need around 100K for the 20% down payment if we decide to buy in this area and IF prices are similar to the current market values in a year.
Here’s an example of what a house we would be interested in that is for sale at 465K in the new in-town neighborhood:
My wife and I have always directed the bulk of our retirement investments to be in index ETF funds as we like the dollar cost averaging, low-fee approach to long term investments.
I do not think we are particularly risk-adverse as neither of us holds any bonds or CDs in our portfolios. However, I have historically bought into the theory that you do not put the money in to the stock market if you don’t intend to leave it there for at least five years. This is just gambling if you don’t have the five year window is how the theory goes.
So What Short-Term Investment Choices Do I Have?
I began my search as I always do with a Google search. Some of the short term investments ideas that I came across include the following (cheers to investopedia):
- Treasury (T) bills
- Certificates of Deposit (CD)
- Commercial Paper
I already knew that T-bills and CDs are currently paying next to nothing (2-2.4%) for a 5-year CD, so that didn’t particularly turn me on. (Related: CD Investment Alternatives)
The commercial paper option was something I had not heard of , but reportedly consists of a short-term loan issued by a corporation, typically for financing accounts receivable and inventories. I dug a little deeper and it looks like they really don’t pay much more than a CD so I don’t think that is for me.
So I thought of some other investments. Here's a good post on how I'd invest $100,000 today.
Saving Money In An Overseas Bank
Fixed deposits in Indian banks pay out average annual returns of around 9%. I found this really hard to believe, so I checked with an Indian colleague of mine to see if he knew anything about this. He confirmed that this is the rate of return, but that you have to convert your money to Indian Rupees to make the fixed deposit. This will involve whatever fees are tied to the conversion and subject your money to the currency and inflationary fluctuations in the Indian Rupee during the length of investment.
Also, there are probably tax implications as you will have to likely pay tax on the earnings in India and may or may not have to pay additional tax in the States. Historical inflation rates have been very high in India (~7%), which appears to negate any interest rate advantages. I suppose the only reason that this would make sense is if I thought I had some reason to believe the inflation rate would be dropping over the next 12 months in India.
My Indian colleague (a very bright guy) does believe that the Indian government is committed to mitigating inflation to spur investment/development but I don’t think his opinion is enough to push be into currency plays on a market I have very little knowledge of.
More Real Estate Investments
Another thing I began to think about was real estate. If we had not sold the house we would have had the money effectively invested in residential real estate for the next 12 months. By this logic, if we were to invest the money back into real estate for the next 12 months while we rent, we would effectively be in the same position as we would have been had we not sold the house.
This begs the question: What is a good real estate investment for 12 months?
I thought maybe it would make sense to put the money into a Real Estate Investment Trust (REIT)? This would expose us to a high quality portfolio of properties across the US (or the World).
There are many REITs focused on different real estate investment objectives. In my eyes, this would actually be a more conservative approach than the position we had been if we had kept the money invested in the suburban house in Marietta for a year. Instead of being invested in one specific house, our money would be spread across several locations and different real estate markets. REITs pay healthy dividends as well that are tax advantageous.
Private Real Estate Is Attractive
Another potential real estate investment would be paying off the rental home that we currently have a 50% interest in. We partnered up with my Dad back in 2008 to buy a rental home in a different suburb of Atlanta. The house was financed with a home equity loan against my parent’s home which is currently fixed just under 6%. I believe this rate is fixed for at least for a few more years, but I need to confirm the terms.
This rental house is worth around 110K and the current cost basis is approximately 90K for all parties. The original plan was to fix and flip the house for a quick profit, but deteriorating market conditions at that time led us to make it a rental. It has been steadily rented for six years and currently rents at $950 a month.
My wife and I’s 50% ownership interest in this house represents the last remaining debt on our balance sheet. Since we are already committed to 50% of the debt on this home, we will get an immediate 6% return on investment by paying off our half (around 45K).
My dad recently retired and he may actually want to sell his half of the investment as well. We could offer to pay the full 90K off and give my parents the additional 10K that represents their return on investment (assuming the 110K Zillow estimate is accurate).
The taxes and insurance are relatively low for this rental house and we have had no trouble keeping it rented with high quality tenants as it is also in a very good school district. The more I think about it, this is probably a no-brainer but will only represent a portion of our investment.
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Other Short-Term Savings Ideas
Other ideas that probably deserve some consideration include real estate crowdfunding, structured notes, or an online savings bank. The online bank would likely be a paltry ~1% return, but perhaps that is the price to pay for liquidity.
Perhaps I need to give up on trying to get too cute with what may be just a 12-month investment window. Times are good and everybody seems to be making money everywhere you look. But if we're serious about buying another home in 12 months, then it's probably best to be more on the conservative side.
I'd love to get some ideas from the community on what to do with the $280,000 in cash in the short-term considering we likely will be using at least $100,000 to buy another house in Atlanta. What am I missing out on that we should be looking in to?
Related: Why I Sold My Rental Home – Had To Invest For The Future
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Consider diversifying into private growth companies through an open venture capital fund. Although not a short-term investment, investing in private growth companies couldgenerate a tremendous amount of returns long term.
Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
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The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
About the Author:
Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Hi –
I just went through a very similar scenario where I had a year between the sale of a home and the purchase of another. I had approximately $500k in equity that I didn’t want to earn .1% on for a full year (the savings rate at my bank).
For what it’s worth, here’s what I did:
50% in an online savings account with Ally.com (earning .8%)
20% in the Vanguard short term corporate bond index eft (VCSH)
15% in a Minnesota Municipal Bond fund through Fidelity (tax free yield of almost 4%)
10% in a small selection of preferred stocks (PSA.PZ is an example, 6% yield)
5% in cash with my bank
Understanding that I was taking on some risk with some of these choices, this worked out well for me.
Good luck!
Ben
Great situation to be in. Have you made any decisions, Bruce? Leaning one way or another. I like the idea of investing 20-30% in the market- a specific stock like AAPL or now even BABA. Well, maybe not BABA. You never know though.
I agree with the comments surrounding longer term plans though. I’m sure you and your wife have them and I don’t totally disagree with the poster saying if you’re not sure if you want kids in your 30s, you may not want them. That’s why I’m thinking you already have a plan for kids and have your decision. It’s just proven to be harder to conceive into your 30s and gets harder each year. You seem like the planning type so sure you’re already aware of that. My wife and I experienced that and went the adoption route to grow our family. I’m not saying you’re like this but starting a family doesn’t always go as planned or as easy as people thing. Okay, enough about that. I just get emotionally involved since kids are so wonderful and I want everyone who wants them to experience it the love.
Good luck with your decisions. Keep us posted.
Are there any tax impilcations for the profit you made on the house sale?
Cash!
Inflation is low…… Why take on unnecessary risk with complicated investment schemes.
If you want equity exposure, buy a few SPY call options.
For 1 year, find a local credit union with a decent rate and let it sit. Most any other option you risk losing a significant chunk.
REIT can be just as volatile as stocks. I would not look at a foreign bank either.
1 year return on $90k won’t break your early retirement.
I’d also consider renting the current place as may be more suitable for you in the future or keeping as is as well as renting a place near the city.
If definitely selling I would
a) buyout the dad and payoff rental, can always refi that down the road to generate liquidity if needed.
b) given short term needs, I would be risk adverse. CDs is what I would buy for the amount you may need in 1yr, excess could invest in other ways.
Seems like a lot of work to assemble a portfolio strategy for this cash only to disassemble it a year later while hoping it appreciated? More like gambling than investing. I’d reluctantly bite the bullet and stick it in something safe even if it’s only 1-2%. The possible $5K+ you could lose by not investing? Think of it as insurance on your asset to keep the house (i.e., cash) from burning down. …And for the love of God man, stay away from foreign banks. All sorts of weird foreign withholding tax quagmires you could get yourself into there. I wouldn’t send my dog to India for a year for safekeeping, let alone $200K.
1031 brother.
Are you factoring in transaction costs? Selling this home to buy another one, then potentially sell in 4-5 years is giving away an awful lot of money to your local Realtor.
Also, you say your early 30s (I’ll guess 32) and you really have no idea of whether you want kids or not? Understand that people have kids later nowadays, but I would not buy a property with no plan if little ones come along. What if you decide 2 years from now you want kids, and are stuck in a property that doesn’t work for you, even if it’s in the area with cool bars and coffeshops? What if prices lose 10% over that timeframe?
It’s not the sexiest option, but staying where you are is 100% the best financial decision
If you decide to look into real estate investment trusts I would recommend BXMT it’s a subsidiary of the blackstone group. It’s profits increase with rising interest rates it will be a 7% risk less dividend at the very least this upcoming year as they provide loans to senior notes of class A properties. + interest rates will most likely rise.
Paying off the 90k on the rental loan @ 6% seems like a no brainer. If your parents don’t want to sell you their half, they can start paying those juicy 6% interest rates to YOU rather than the bank on their half of the property’s income.
You will never find a safe 6% returning investment nowadays. If you want to use leverage then you will have plenty on your new house purchase.
By paying off the 6% 90k note you just improved your cash flow on the rental for the upcoming year (and all years forward) by $5400.00 = $450/month. The best you can do on a high yield savings account might be 1% so that’s an arbitrage gain of 5% = $4500 profit in the first year.
Also I would NOT sign a lease for a one year rental unless it has a clause where you can back out with no penalties on maximum of 60 days notice in the event you find a house you want to purchase. You may find a great deal in your new neighborhood well before a year has passed and you won’t want to miss out. Otherwise just go month to month.
So that leaves $190 K. I would take $10k each (= 20k) and buy max I bonds for you and your wife right now. Then on Jan. 1 2015 another 20k, do the same thing. Total I bonds is 40k leaves: $150,000.00
I am assuming you have already maxed out your tax advantaged retirement space such as IRAs, Roths, 401ks. If not obviously you should do that as well.
You said you would need $100 k for your down. That should go in a short terms savings account or perhaps short term bond fund or maybe municipal bond fund depending your tax situation. I like vanguards short term investment grade bond fund, a little more yield than a savings account and not too much risk. If the bond market crashes you might lose a few percent but that won’t kill you.
So we are now down to $50k. I assume you will have moving expenses, your wife will want to buy furnishings, probably fancy stainless steel appliances since you guys are moving up in the world, so let’s say that’s $25k for a contingency amount. I would probably just throw that in the short term bond fund with the other 50k
So that leaves about $25k after everything else. That could go into some more speculative things such as stock index fund, maybe another rental property, an intermediate term bond index fund, or you could just throw it in the short term fund until you get your bearings in your new home, your renovations might be more involved than you suspect.
One redneck to another…
Not to rain on your parade, but you seem to be doing a lot of short term thinking – buying a house for 2 years, another house for a few years, investing here, selling there, what do I do with my money for 12 months, etc.
You need to sit down and figure out what your long term goals are, and make the plan to get there. For example, if you’re in your 30s and haven’t decided if you want kids or not? Guess what, you don’t want kids. Or even if you do, you’re probably too late to have them.
I applaud your success at putting some money away, making some financial moves, and being lucky in timing and coming up with a pile of extra cash. But doing anything with that but putting it in the bank until you figure out what you want to be when you grow up is pointless.
Ummm…30’s is not too late to have kids. I had my first kid at 39 and my second at 41. And we didn’t decide on kids til we were in our late 30’s.
Wholeheartedly agree with figuring out long term goals. Early 30s isn’t too old to have kids though. In SF area, many folks wait til mid to even late 30s to have kids. I had all my 3 kids after turning 30 and they’re not as expensive as people claim as long as you’re willing to send them to public schools.
Please tell me those posts trying to give this guy stock-picking advice were jokes?
You might as well head to Vegas and put it all on red.
Always bet on black. If you net your annual net income on black and win that’s one less year you have to work!
I’ve been working like a dog and that’s all I have to do?! Thanks for the tip Sam. Haha.
It wasn’t a joke. I gave him advice on a very specific stock, not the general market :)
First congratulation on your equity gain! If it was me, I’d just put most of it in cash in an online savings account and take half of the 90k gain into a more risky investment. For me housing equity gain really isn’t blood, sweat, and tears money, so taking some risk with it makes sense. Apple is good. I’d put the $45k into amazon and keep my fingers crossed for a blowout holiday season. Good luck!
Bruce, I really enjoyed your post especially since I also live in the Atlanta area. I can relate to your desire to put that money to work. I have about $10,000 that I received from my employer through their tuition reimbursement program. I have a loan with Sallie Mae for that exact amount but it is interest free and doesn’t have to be paid back for another 18 months which is 6 months after I graduate. I thought long and hard about investing that money in the stock market or real estate, but I realized that since I will need it in about a year, I will put It in an online savings account with Amex earning about 0.85%. Not very exciting I know but higher returns come with more risk. Use money from your disposable income to make the big bets.
I would stay away from the stock market if you only have a 1 year target.
Find a high interest savings account and put it there. Mine is 1.3% at the moment. If you have a longer window, than you can start thinking seriously about investing it.
Put 100% of it on Apple (Appl) for a year. Better and safer than any bank ;)
Agreed, but not sure about just a year time horizon. Maybe have to let it ride a bit longer
Lol, awesome. As a shareholder, I am bullish about this new product cycle! But I cannot recommend 100%!
Come on Sam Apple currently has a P/E ratio of 16.4 which is already cheaper than most on the market. Most analyst haven’t even accounted for the transaction fees that Apple will receive from Apple Pay yet. This is the best short term (1 yr horizon) advice anyone can ever give him. Haha lol
When you move to in-town and rent, can you keep your current house, rent it out and break even or positive cash flow? If so, that’s what I would do.
Keep your current house as a rental, now you have 2 rental homes. You keep the tax deduction of depreciation and interest, tenants help pay down mortgage, and if you have kids and want to move back to the suburbs, you don’t have to buy a another house.
If you want to buy another house, you can either save for a new down while renting (hopefully), or sell your house and can still keep cap gains tax free as long as you lived in house for 3 of the last 5 years.
Best case scenario, you start having kids, buy another house, and have 2 rentals cash flowing positive.
If you have to sell your current house, keep your money in no risk account if holding period is 1-2 years. I love dividend stocks, but they can still fluctuate 3-5% in a 6-month period.
Take 5% and shoot for the moon in a risky investment.
Keep the rest in cash. Everbank is good.
Also I’m a bit confused why you don’t just want to dump the money into the stock market.
You need ~$100k for the down payment and another $30k? for reno. take the $150k left over and invest with a long time horizon.
Mortgages are almost free these days…
BTW I’ve lived in-town Atlanta for 4 years, what neighborhood you looking into?
I like this too. Just keep enough for down payment and renovation, then invest the rest. No point keeping the ~$150k for short term if you don’t need it right away.
$150k in atlanta is almost enough to buy another rental property…if you want to go that route instead of securities. You’re pretty flush right now, and while Atlanta real estate is not the “deal” it was 2 years ago, you could still cash flow pretty well. Rents are high and valuations are still WELL below pre-crash levels.
I recognize my free internet advice is worth what you pay for it; however,
I’m going to agree to not tie the entire amount in short term safe savings.
If I woke up in your shoes tomorrow:
1) 1/2 to next year’s home purchase/renovations. Don’t lose principle. High-interest online savings account. Whatever you don’t use next summer you can invest then.
2) 1/2 to long-term investing. Index funds, another rental, pay off your current rent house. Can’t really go wrong unless you invest in something you don’t understand because someone on the internet said you’d make 12% betting pork belly futures. If you do go with the stock market – dollar cost average it into the funds instead of one $140k dump.
and most important
3) You and your wife both make a top five list of places you want to visit. Take 5-7k and take a trip to whatever place is highest on both of your lists. You’ll regret not doing anything fun with the money, but you’ll also regret loading up on 800/month car notes because you wanted new BMWs.
Thanks John,
This sounds like what we are going to do. Mostly all our other investing is in index funds and that’s where just over half of this is headed as well.
Mr B,
The neighborhood is morningside close to the north end of Virginia Highlands,
Just buy there ASAP! That part of town isn’t going to get any cheaper. I’m looking there myself. Great area.
Great area and the elementary school there is tops so you won’t be missing out on the good school district if you do decide to have kids.
i say youve got to use your money to live your life for maximum enjoyment. Its not just about “how can i make the most money”. there is a balance and imho and no need to live somewhere thats not working for you. Sounds like you want a different lifestyle and that means moving to a more expensive neighborhood, but not a ridiculous mcmansion.
it sounds like you can afford, and you have a track record of reasonable spending and experience w renovation. you’ll live there 5 yrs at least. so think about that piece in terms of worst case scenario when you decide if you want the property brothers version of reno. would you be ok if that house just broke even when it came time to sell? i suggest $90k pay off rental house. the rest just put somewhere “boring” that keeps up w inflation and maybe makes a little. it wont be that exciting in a year if its lost value and you have to reconsider your new house plans. now anytime you have a rental house in a good school district with a history of solid tenants i say keep it! that profit can go straight to your savings for the long haul. once you start having kids youll have a lot of choices. you can move back to the burbs, and will probably be able to buy a house there for cash which will probably allow one of you to stay home for a year or2 if you want to. the rental income can go straight to savings, and once the kids start coming, that house will probably cover college. thats just one idea. id encourage you to think about what options give you the most choices down the road. believe me, whats important when you are in your 40s with kids will be different! one of you may end up hating your job. or both may love your jobs and want a nanny. having choices is just so liberating.
Seems like really sound advice. We are definitely in a transitional state so it really isn’t about making a quick buck at this point. For all I know, we may want to take a job opportunity in another city as we both work at larger companies with offices in most major cities. Discretion is likely the better part of valor.
I have been thinking about buying a conservative bond fund (AGG) but I need to do a little more reading up on it. It seems pretty conservative with over a third of the index in t-bills.
Pe-tee-tong, Bruce! This move, if it works perfectly, will 1) reduce 1 hour/day of your wife’s commute. 2) allow you to spend money drinking and eating at cool places but save money by walking home and avoiding DUIs; 3) you will make friends with childless couples in urban Atlanta; and 4) after paying one year’s rent out of the $90K profit will leave you with $60K to show for this effort.
It is unclear what this does to your commute, btw. And being in your 30s, married for a few years, and still unsure about having children is interesting. If you do have children, you will then be leaving all the childless couples behind. And you won’t stay friends. In my experience, making friends with other couples was, is, and always will be difficult when all four people enjoy each other enough to socialize regularly. Just making (and keeping) one friend worth your time and effort would be a good goal. Same for your wife. Sometimes not everything is measured in dollars, and it sounds like you are a good husband and respecting your wife and her happiness. She clearly is looking for a change, and it sounds like selling your existing home is a done deal.
One year will go by quick, and you do not want to put this money at any more risk than necessary $60K on $280K is 21.4%, and the money could go ‘poof’ if home prices in urban Atlanta increase by that amount, anyway. In order, my thought is to 1) pay down the rental; 2) put $10,000 in a Money Market; and 3) put the remainder in one-year CD. This is not money to ‘invest’, it is money ‘in transition’. Good luck!
Pe-tee-tong to you as well,
My commute stays about the same so it’s a wash there (35 mins). I can take marta (subway) if I prefer as my office is attached to a train station. That’s a nice feature I may utilize occasionally. We did find a pretty nice price on a rental so the numbers are a little better but you are not far off($22,200 for a years rent).
You’re right, I would even say that 5 years is not enough on the stock market.
I faced a similar situation about 17 years ago, I handled it differently. I rented out my home for 3 years. I sold it a year after I bought my (downsized) townhouse. If you investing horizon is only a year, I would stick with a liquid investment. If you do not need the money invest in a solid long term investment. I took the proceeds of the sale of my home and invested it in a (healthcare) mutual fund. I am very happy with the results.
Bruce,
I have been confronted with a very similar challenge…but with a little more difficult twist. I will tell you what I did…but first…
Paying down the 6% seems like a complete no-brainer for the first step. 6% is pretty expensive money now….even if you need to take a larger loan in a year, you can probably get that money for under 4% in a years time…and if the loan is for real estate, you probably will get it for under 3% in real terms.. I would get rid of the 6% debt asap…
Now…for my situation….as it applies to you….
After being practically debt-free for almost 8 years, I decided to re-lever my paid-off house and use the $$ to invest in a couple income-producing properties here in North Carolina. My wife was interested in real-estate, and I have been on the hunt to increase my passive income. Got a 3.5% rate for 7 year ARM…so my effective interest rate after tax is about 2.2%. Unfortunately, we were only able to find one property so far that met my minimum target of 6% cash-on-cash return (in hindsight, my area is not so great for finding income-producing real-estate)…so I still have about $384K still looking for a good income-producing real-estate home. I need to preserve the capital…but I also want to have this $384K produce enough income/gain to pay off the effective 2.2% interest rate I have on part of this money.
I also have about a 1 year horizon (I hope it will be less, but it may turn out to be longer…unfortunately).
The folks at Schwab strongly recommended I put the $$ in a money market account….their model is anytime you have less than a 2 year horizon, go with money markets. I understand their rationale…and if I did not have to deal with the interest payment, that is probably what I would do (being pretty risk averse). But in addition to the inflation loss…I really want to cover my interest expense as well….
So, I chose to diversify the $$ as follows…
Money Markets and Cash – 33%
REIT Fund (safest I could Find – 5%
MLP (Safest I could find) – 3%
Large Cap (Alot of Utility, Telco…Dividend Producers) – 16%
Small Cap – 3%
Intl – 2%
Fixed Income (Split between Vanguard Muni Fund, Short Term Bond, Intermed Term Bond) – 38%
I did this split in April….so far according to the Schwab Math, my YTD return has been about 5%…
I am going to lighten up on the stock allocation some…and put a little more in cash (which means paying some tax, unfortunately). But I think Stocks and Bonds both are expensive now….
I actually looked at P-t-P lending…but at the time, Prosper and the other P2P companies could not take investors from North Carolina (I believe due to state laws here in NC). So, I cannot help you there…
Good luck with your search…let us know what you end up doing.
John
Thanks John,
My mom actually handles the books on the rental (she’s a tax accountant) and after discussing paying off my half, she informed me that the heloc is only 2.7%. I’m not sure when it adjusts as it has been fixed for some time, but she is going to send me the paperwork. We will likely sell it when the current tenant moves out next July, so if it doesn’t adjust before then, it may not be as much of a no-brainier as I originally thought. I’d still be happy to pay it, but she says it will take some work for her to do all the math to figure out the exact cost basis (her personal finance organization takes a distant back seat to her paying clients). I have a pretty decent idea of what it would be now that I know what the interest rate is, but she would be upset if I overpaid, and I am definitely not going to underpay. She feels guilty about the books on the house being a little sloppy, so I think I might just wait till It sells next July to do the accounting work and settle up. In the future, I have no plans to invest with family. It’s not a good business arrangement for me because we both spend too much energy worrying about the other persons interests to make sure we don’t hurt the people we love.
Great stuff John! Good to hear from you after our last conversation. I’m glad you are outperforming your interest cost by 2x! Definitely reduce exposure IMO.
1 year is not a long enough timeframe to take on any risk at all.
For the portion of the money you need to buy the next home and renovate- you should look only at risk free investments. Period.
If the balance of the money has a longer investment horizon than you can broaden your options.
Doing anything else is shortsighted at best. If you buy an S&P index fund or dividend stocks and you lose 50% like in 2008 you will be kicking yourself.
I’m agreeing with you here. Even buying 10-year treasuries for a 2.5% annual yield is risky since anything can happen to principal within 12 months.
I wouldn’t invest more than 35% of your money Bruce!
I’m in a similar situation and after extensive research decided to keep the majority in cash. Paying down a current HELOC was evaluated as well, but my concern would be that the bank could reduce our LOC and keep the money.
I did put smaller amounts into a municipal bond ETF and YYY, also been selling puts on XLP for an extra 12% annualize return.
If you truly only have a year to do something with the money, keep it liquid. It may not be overly exciting, but even if you only earn 1%, that’s still $2,800 for doing absolutely nothing!
Be sure to spread the money around a bit as well. Some in a high-yield savings, some in a 1-year CD, and perhaps some in those T-bills. I would allow myself to have some fun with a small portion (say $10,000) and purchase some index funds for a higher return (haha, can’t you tell how crazy a guy I am? ;) ).
Best of luck!
For 12 months, I wouldn’t get too excited about it. You could do a structured note or buy a solid dividend stock that is trading at a good margin of safety and sell some puts on that (netting some upfront cash plus a move into the stock if the put is exercised… make sure you aren’t unhappy to own this stock). I wouldn’t count on more than 5-10% appreciation in 12 months… with that it’s not too big of an investment decision.
For reference, I kept more than twice that in cash for a few years before finding a good opportunity to use that capital.
-Mike
I couldn’t help but wonder if Bruce understands that if he has a house that is just about paid for he should stay there. Selling the house is a poor financial mistake. The first main financial rule to becoming financially independent is paying off your debt. The house is number one. This is he first step to financial freedom. Although he made money on the house he is buying into a recovered market and may end up with more debt. What if the market tanks again. He loses the windfall that you can hear the enthusiasm in his writing that omg I have so much money in my pocket. Anyway I think your making a huge mistake moving after only two years in the house. Pull up your big boy pants and realize that you have a good thing and stay put.
Thanks for your input CJ and I certainly appreciate the advantages of a paid off home. That was the goal we were working on for several years. I’ll keep an eye out for those big boy pants when we decide to buy back in.
Cutting commute time in half and improving your health and quality of life? That’s excellent use of money…especially when those additional housing costs will be offset by savings in transportation costs, etc.
I paid a ridiculous amount of money, which is partially offset by slashing my transportation costs (gas, insurance, parking, which is $30/day where I live), so I can walk to work, and I have never regretted that decision. I wake up on the walk to work in the morning and I de-stress on the walk home in the afternoon…all the while, the streets are clogged with cars that are inching forward at a slower pace than my strolling.