Author Topic: $50k in savings: How should I invest it?  (Read 7001 times)

newjerseybound

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$50k in savings: How should I invest it?
« on: March 12, 2013, 05:12:03 PM »
Hi all. I've been living a very Mustachian lifestyle since graduating from college and have managed -- with long hours and lots of hard work, some entrepreneurship and a little luck --  to save a little more than $50k. I'm in my mid-20s, unmarried and haven't begun investing because, up until now, I thought I'd need access to that money. Now that my career is stable, I am fully aware of how unwise it is to leave that sum sitting in a low-yield savings account. My primary financial goal is to increase my net worth so that I can retire by age 35, which is about 11 years from now.

Here is my plan so far:
1. Contribute $5,000 to a traditional IRA for 2012 (I need the tax benefit)
2. Contribute $5,500 to a Roth IRA for 2013
3. Invest about $10,000 in a Solo 401(k) at the end of this year

That leaves about $30k. Should I invest the remainder in index funds or take advantage of low interest rates and buy a rental property? Or take a completely different path? I'd love to hear people's thoughts on how to make the most of this money.
« Last Edit: March 12, 2013, 06:23:05 PM by newjerseybound »

mpbaker22

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Re: $50k in savings: How should I invest it?
« Reply #1 on: March 12, 2013, 08:41:32 PM »
the mpbaker22 bank is now accepting deposits.  Guaranteed returns of 25-30% until the ponzi scheme runs out:P

Seriously, I'm in a similar situation.  I have ~20% in a 401k through my employer, can't do much there.
another ~65% is in various stocks (a few of which are actually funds).   I have about 5% in Lending Club, though I hope to increase this to 10% or more this year.  The rest is in cash/cash equivalent.

I'm interested in property as well.  I'm not sure of the real estate market where you are, but I live near St. Louis.  St. Louis has a ton of multi-family buildings.  I'm thinking about buying a 2 unit, 2 bedroom each building.  They generally cost about the same as a single family house, except you can rent out one unit for ~cost of mortage + taxes + some repair costs.  Additionally, you could live in the other unit and rent out the 3rd bedroom for half the cost of mortgage + taxes + some repair costs.  This should give a positive cash flow while paying down principal (double win).  This is all theoretical as I haven't actually bought anything yet.  An example below
Costs
House cost - $100,000
Mortgage - $477 (assuming 4% interest)
Taxes - $100
Repairs - ?

Income
Rent from unit 1 ~ $550 (after accounting for time spent unoccupied)
rent from 3rd bedroom ~ $200 (would charge a friend less)
savings from me not needing to rent ~ $330

Delta Cash Flow - 550+200+330-100-477-? = $503-?

It seems like a good deal to me.  But I still have to bide my time and make sure to get a solid building for 100k, or a proportionally better building for 150k, etc.
And you'd have to run your own numbers for your own rent to see how they compare.

DoubleDown

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Re: $50k in savings: How should I invest it?
« Reply #2 on: March 13, 2013, 07:58:09 AM »

Repairs - ?


A rule of thumb you can use is 10% of your gross rent each year. Don't subtract for vacant months, and be sure to actually set that money aside somewhere so it is available when needed. So, if your place rented for $1,000/month = $12,000 per year, plan for at least $1,200 in maintenance/repairs each year. You can always add to that if there are any known repairs coming up or if the building is old or out of date, but I would never revise downward, below 10%. And that 10% would also not include any capital improvements.

Another Reader

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Re: $50k in savings: How should I invest it?
« Reply #3 on: March 13, 2013, 08:24:27 AM »
You should separate the investment from your personal cash flow to evaluate whether a property is a good deal.  If the property generates $1100 a month if both sides of the duplex are leased, apply the 50 percent rule to estimate your free and clear capitalization rate.  $1100 x 12 = $13,200 x 0.5 = $6,600, or a 6.6 percent capitalization rate.  Leverage 75 percent at 4 percent, and your cash on cash return is theoretically higher.  Not much cash flow, though, and some big expenses will wipe that out.

Over time, if you rent out half, you are are going to come out of pocket to meet expenses.  With the $200 in added room mate income, you should be able to handle repairs and maintenance without too much stress.  I might be cautious about doing this strictly as an investment, but as a way to reduce your cost of living and get into an investment property at historically low owner-occupied interest rates, I would certainly consider this approach.    Eventually you can lease out both sides and move into a new property.

I would only do this if my $100k bought a property in a good neighborhood that was in good condition and the area was a strong rental market.  I would not buy if the neighborhood was borderline, was deteriorating and/or there was little demand for rentals.  And no fixers with those numbers.

chucklesmcgee

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Re: $50k in savings: How should I invest it?
« Reply #4 on: March 13, 2013, 02:08:57 PM »
Hi all. I've been living a very Mustachian lifestyle since graduating from college and have managed -- with long hours and lots of hard work, some entrepreneurship and a little luck --  to save a little more than $50k. I'm in my mid-20s, unmarried and haven't begun investing because, up until now, I thought I'd need access to that money. Now that my career is stable, I am fully aware of how unwise it is to leave that sum sitting in a low-yield savings account. My primary financial goal is to increase my net worth so that I can retire by age 35, which is about 11 years from now.

Here is my plan so far:
1. Contribute $5,000 to a traditional IRA for 2012 (I need the tax benefit)
2. Contribute $5,500 to a Roth IRA for 2013
3. Invest about $10,000 in a Solo 401(k) at the end of this year

That leaves about $30k. Should I invest the remainder in index funds or take advantage of low interest rates and buy a rental property? Or take a completely different path? I'd love to hear people's thoughts on how to make the most of this money.

When do you plan on retiring? Do you expect your earnings to increase above inflation in the next few years? I would suggest putting more into that Solo 401(k), preferably in Roth.

SamV

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Re: $50k in savings: How should I invest it?
« Reply #5 on: March 13, 2013, 02:57:43 PM »
You should keep some of it in cash for emergencies if you don't already have emergency fund.

Aside from that, why not increase Solo 401(k) contributions? If you put more money in the tax advantaged account now, it will have more time to work for you, thereby generating more income in future.