Author Topic: What to invest in?  (Read 2384 times)

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
What to invest in?
« on: March 16, 2021, 05:13:24 PM »
We are in the privileged position to be FI with still having a large income compared to our reasonably frugal existence. We're not interested (at this time) in the RE part of things. My work (conservation/environmental) is meaningful and pleasurable for me. We're also not into buying lots of crap even though we can and the things that we do want are well within our current FI means. At this point our financial goals are really about building generational wealth & philanthropy.

We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with. Our current thinking is real estate to build what I consider 'real wealth', but I was curious what others might do in our situation. Just keep dumping more into the markets?

RWD

  • Walrus Stache
  • *******
  • Posts: 5743
  • Location: Mississippi
Re: What to invest in?
« Reply #1 on: March 16, 2021, 08:13:25 PM »
You moved two thirds of your investment portfolio to bonds/money market a little over a year ago (S&P 500 = ~3000). Are you really going to stick with it this time starting at S&P 500 = ~4000? You're probably better served by real estate.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #2 on: March 16, 2021, 10:21:17 PM »
You moved two thirds of your investment portfolio to bonds/money market a little over a year ago (S&P 500 = ~3000). Are you really going to stick with it this time starting at S&P 500 = ~4000? You're probably better served by real estate.

Why the hostility that I'm sensing in your post?

RWD

  • Walrus Stache
  • *******
  • Posts: 5743
  • Location: Mississippi
Re: What to invest in?
« Reply #3 on: March 17, 2021, 06:55:21 AM »
You moved two thirds of your investment portfolio to bonds/money market a little over a year ago (S&P 500 = ~3000). Are you really going to stick with it this time starting at S&P 500 = ~4000? You're probably better served by real estate.

Why the hostility that I'm sensing in your post?

Sorry, that really wasn't my intent.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5849
Re: What to invest in?
« Reply #4 on: March 17, 2021, 08:18:49 AM »
By real estate do you mean being a landlord - collecting rent, arranging repairs, and finding new tenants?  Might want to weigh those against REITs that invest similarly, but with more diversification.


We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with.
I see a lot of variation in index fund investing.  Could you give more details about your allocation, even in rough fractions?  (for example: 1/3rd U.S. total stock, 1/3rd international, 1/3rd total bond market)

bwall

  • Handlebar Stache
  • *****
  • Posts: 1169
Re: What to invest in?
« Reply #5 on: March 17, 2021, 09:18:11 AM »
At this point our financial goals are really about building generational wealth & philanthropy.

This sounds interesting. Do you already have a plan to go about it?
If you have already a thread about this topic, can you please share?

Thx!

tawyer

  • Bristles
  • ***
  • Posts: 261
Re: What to invest in?
« Reply #6 on: March 17, 2021, 09:50:57 AM »
At this point our financial goals are really about ... philanthropy.
You should open a donor advised fund (DAF). We did this during our highest earning years for tax efficiency, just before the standard deduction increased: donate a lump sum so that you benefit from itemized deductions and donate equities with the most unrealized capital gains.

Telecaster

  • Magnum Stache
  • ******
  • Posts: 3071
  • Location: Seattle, WA
Re: What to invest in?
« Reply #7 on: March 17, 2021, 10:16:15 AM »
We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with. Our current thinking is real estate to build what I consider 'real wealth', but I was curious what others might do in our situation. Just keep dumping more into the markets?

Not enough information to say.  Real estate investing requires a specific skill set.  If you want to acquire that skill set, then why not? 

joe189man

  • Pencil Stache
  • ****
  • Posts: 773
Re: What to invest in?
« Reply #8 on: March 17, 2021, 11:41:07 AM »
if i were in your shoes and wanted to build generational wealth through real estate i would look at vacant development property. Find a market that is growing rapidly, and purchase as much land as you can outside of town that can be developed or sold in the future.

Mr. Green

  • Magnum Stache
  • ******
  • Posts: 3970
  • Age: 39
  • Location: Wilmington, NC
Re: What to invest in?
« Reply #9 on: March 17, 2021, 01:24:35 PM »
if i were in your shoes and wanted to build generational wealth through real estate i would look at vacant development property. Find a market that is growing rapidly, and purchase as much land as you can outside of town that can be developed or sold in the future.
This is highly speculative and I would not recommend it unless you know what you're doing. Politics play a big role in land development. We bought ~20 acres 11 years ago on the edge of a rapidly growing area thinking we'd build a house and the property would be developable at a higher density 30-40 years down the road. A developer came knocking not long after and we signed a contract that would have seen a multi-seven figure payout in less than 3 years. Over a decade has now passed and the project still hasn't gotten past square one because of infighting between government entities. Had we bought the land with the sole goal of development we'd have shit our pants years ago. If you don't have prior exposure to land development, the process is more complicated than you think.

evme

  • Stubble
  • **
  • Posts: 228
  • Age: 41
  • Location: Arizona
Re: What to invest in?
« Reply #10 on: March 18, 2021, 01:35:53 AM »
At this point our financial goals are really about ... philanthropy.
You should open a donor advised fund (DAF). We did this during our highest earning years for tax efficiency, just before the standard deduction increased: donate a lump sum so that you benefit from itemized deductions and donate equities with the most unrealized capital gains.

Excellent suggestion. I second this.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #11 on: March 18, 2021, 10:55:47 AM »
By real estate do you mean being a landlord - collecting rent, arranging repairs, and finding new tenants?  Might want to weigh those against REITs that invest similarly, but with more diversification.

I am more interested in owibg actual property and landlording. though I am not opposed to REIT's too though I know nothing about them. I am not interested in development real estate.

Quote
We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with.
I see a lot of variation in index fund investing.  Could you give more details about your allocation, even in rough fractions?  (for example: 1/3rd U.S. total stock, 1/3rd international, 1/3rd total bond market)

Our current allocations (per personal capital) are roughly:

70% u.s. stocks
15% foreign stock
4% foreign bonds
5% u.s. bonds
2% alternatives
3% metals (on hand)
2% cash

These holding are about 50/50 in retirement accounts and taxable. Most of the u.s. stock is in vanguard admiral though I have a large individual position in Apple, Nvidia, Agilent (and spin offs). I am definitely a bit tech heavy due to how much Nvidia has exploded (yay bitcoin!).

I just received a chunk of inherited securities which for some reason were dumped into about 3 dozen funds of which I am not familiar (lots of alphabet soup). For whatever reason my dad's financial guy had him do that. The sum is less than 5% of our net but I will have to realign those for our goals.

Other holdings that are not stock:

We also own our home for which our equity is about 15% of the total value of the above market investments and the estimated value is about 30%

Both my dad and my grandpa died this winter, so we own 50% (split with my sibling) of their two homes and cash holdings which will be roughly 15% of our current holdings. No, I don't want to rent these out there is too much emotional intersection with those and they aren't good prospects anyway due to age and locale.

Figuring out what to do with my inheritance is a priority, though my intent is to pass those funds directly on to my descendants and to keep them segregated (but grow them). I had always hoped my parents would spend every dime but they died youngish.

But as in my OP I want to reassess overall strategy with our post FI excess income going forward.
« Last Edit: March 18, 2021, 11:03:42 AM by MilesTeg »

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #12 on: March 18, 2021, 10:56:54 AM »
At this point our financial goals are really about ... philanthropy.
You should open a donor advised fund (DAF). We did this during our highest earning years for tax efficiency, just before the standard deduction increased: donate a lump sum so that you benefit from itemized deductions and donate equities with the most unrealized capital gains.

Oh I had no idea such a thing existed. I will definitely look into this! Thanks!
« Last Edit: March 18, 2021, 11:03:57 AM by MilesTeg »

ChpBstrd

  • Magnum Stache
  • ******
  • Posts: 4967
  • Location: A poor and backward Southern state known as minimum wage country
Re: What to invest in?
« Reply #13 on: March 18, 2021, 11:43:45 AM »
Our current allocations (per personal capital) are roughly:

70% u.s. stocks
15% foreign stock
4% foreign bonds
5% u.s. bonds
2% alternatives
3% metals (on hand)
2% cash


The only things I see missing from this allocation are REITs and preferred stocks. These probably didn't come to mind because you don't need current income, and you are plenty exposed to the risk of rising rates already without adding some of the most sensitive asset classes. Plus, you already own some of them through other funds.

You can bet the "alphabet soup" of funds you inherited will contain some high-load, high-fee mutual funds recommended by the "financial guy". Trade these for VTI as it becomes feasible. A stock-heavy approach is appropriate for your donor advised fund because your stated objective is growth.

Overall it's hard to recommend an AA to someone who is already beyond FI and does not seek to maximize consumption. What's there to optimize? Low volatility for the sake of low volatility? Speculative returns during retirement for the thrill of it? Current income when you are maintaining a job already? There's no factor to maximize, so set it and forget it with VTI.   

Paper Chaser

  • Handlebar Stache
  • *****
  • Posts: 1470
Re: What to invest in?
« Reply #14 on: March 18, 2021, 12:09:42 PM »
REITs often have tons of commercial real estate exposure which is looking pretty shaky these days.
Becoming a landlord in the current market also seems pretty risky with purchase prices being very high and many tennants having a lot of income uncertainty/eviction protections.

Real Estate is usually invested in as an alternative to other asset classes because the investor has more control and the markets are less efficient. But good RE deals are thin on the ground these days for even knowledgeable investors unless you're speculating on property appreciation. The Real Estate section here has tons of valuable discussions worth browsing if you want to learn more.

If you just want to invest in Real Estate in an attempt to diversify your investments that's probably easy enough to do just about any time. But if you want to optimize your investment money such that it will grow as much as possible for future generations, then the RE market is pretty dicey right now, and will likely be outperformed by stocks if we assume historical average returns.

srad

  • Bristles
  • ***
  • Posts: 295
Re: What to invest in?
« Reply #15 on: March 18, 2021, 01:17:58 PM »
Real estate is nice but its a lot of work...  More doors = more problems.  When i only had 2 single family homes, I'd only be working maybe 1 hour every 3 months, and all i did was move money from rent deposited account to account the mortgages were pulled from.  Then as I grew my portfolio, things got busy.   

This week, I've spoken to 4 different tenants, paid for a drain snake, had electrical worked on in two units (these two are newly acquired so I wont have a call like this again),  reluctantly agreed to allow a cat in a unit with an existing tenant (hit em up for a non refundable $400 deposit and increased the rent by $20), and i have a washing machine leaking that i get to go look at this weekend. 

So, does that sound fun?  if so, great, you can make money here and when its time to pass it down the line, you inheritors could be set for life.   Real estate has performed well, but getting dividend checks and really not having to work for it, is priceless.


MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5849
Re: What to invest in?
« Reply #16 on: March 18, 2021, 08:33:52 PM »
We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with.
I see a lot of variation in index fund investing.  Could you give more details about your allocation, even in rough fractions?  (for example: 1/3rd U.S. total stock, 1/3rd international, 1/3rd total bond market)

Our current allocations (per personal capital) are roughly:

70% u.s. stocks
15% foreign stock
4% foreign bonds
5% u.s. bonds
2% alternatives
3% metals (on hand)
2% cash

These holding are about 50/50 in retirement accounts and taxable. Most of the u.s. stock is in vanguard admiral though I have a large individual position in Apple, Nvidia, Agilent (and spin offs). I am definitely a bit tech heavy due to how much Nvidia has exploded (yay bitcoin!).

I just received a chunk of inherited securities which for some reason were dumped into about 3 dozen funds of which I am not familiar (lots of alphabet soup). For whatever reason my dad's financial guy had him do that. The sum is less than 5% of our net but I will have to realign those for our goals.
...
But as in my OP I want to reassess overall strategy with our post FI excess income going forward.
You also asked if you should continue investing in the markets, but without knowing what you invested in, it's hard to say if you should change that or not.  Historically stock markets have performed well, but over some time periods perform badly.  One way to spread that risk is with more international, which I would recommend for your portfolio.

"Vanguard Admiral" describes dozens of funds.

You might read up on "step up in basis", since I believe that means selling the alphabet soup of funds won't have a tax impact.  In your place, I'd have Vanguard transfer that account over to Vanguard - let them deal with pulling the funds / money out.  The existing advisor will want to keep the money where it is.

If you're approaching FIRE and have more than you need, 85% stocks and 5% alternatives could probably be re-examined.  You can lower your stock allocation and still have the retirement assets you need.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #17 on: March 19, 2021, 11:19:43 AM »
Real estate is nice but its a lot of work...  More doors = more problems.  When i only had 2 single family homes, I'd only be working maybe 1 hour every 3 months, and all i did was move money from rent deposited account to account the mortgages were pulled from.  Then as I grew my portfolio, things got busy.   

This week, I've spoken to 4 different tenants, paid for a drain snake, had electrical worked on in two units (these two are newly acquired so I wont have a call like this again),  reluctantly agreed to allow a cat in a unit with an existing tenant (hit em up for a non refundable $400 deposit and increased the rent by $20), and i have a washing machine leaking that i get to go look at this weekend. 

So, does that sound fun?  if so, great, you can make money here and when its time to pass it down the line, you inheritors could be set for life.   Real estate has performed well, but getting dividend checks and really not having to work for it, is priceless.

It is a lot of work or some expense for property management but it's also a real, tangible asset which is appealing to me as a way to diversify our wealth (though I realize its also not necessarily the best ROI).

The rental market in my area is (IMO) astronomical. Looking at properties and rental rates most rentals in my area rent for 20-30% above a P&I+pmi+tax+hoa with 0% down. That's during COVID.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #18 on: March 19, 2021, 11:42:49 AM »
We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with.
I see a lot of variation in index fund investing.  Could you give more details about your allocation, even in rough fractions?  (for example: 1/3rd U.S. total stock, 1/3rd international, 1/3rd total bond market)

Our current allocations (per personal capital) are roughly:

70% u.s. stocks
15% foreign stock
4% foreign bonds
5% u.s. bonds
2% alternatives
3% metals (on hand)
2% cash

These holding are about 50/50 in retirement accounts and taxable. Most of the u.s. stock is in vanguard admiral though I have a large individual position in Apple, Nvidia, Agilent (and spin offs). I am definitely a bit tech heavy due to how much Nvidia has exploded (yay bitcoin!).

I just received a chunk of inherited securities which for some reason were dumped into about 3 dozen funds of which I am not familiar (lots of alphabet soup). For whatever reason my dad's financial guy had him do that. The sum is less than 5% of our net but I will have to realign those for our goals.
...
But as in my OP I want to reassess overall strategy with our post FI excess income going forward.
You also asked if you should continue investing in the markets, but without knowing what you invested in, it's hard to say if you should change that or not.  Historically stock markets have performed well, but over some time periods perform badly.  One way to spread that risk is with more international, which I would recommend for your portfolio.

"Vanguard Admiral" describes dozens of funds.

You might read up on "step up in basis", since I believe that means selling the alphabet soup of funds won't have a tax impact.  In your place, I'd have Vanguard transfer that account over to Vanguard - let them deal with pulling the funds / money out.  The existing advisor will want to keep the money where it is.

If you're approaching FIRE and have more than you need, 85% stocks and 5% alternatives could probably be re-examined.  You can lower your stock allocation and still have the retirement assets you need.

Sorry I was lazy. Most of the stock (60%) is in VTSAX & VTI along with the international fund available in my 401k.

We're already at our beyond our FI point, but have no intention to RE at this time (and still have ~30 years before typical retirement) which is why we've stayed with a stock heavy allocation. Whenever we decide to actually retire we would of course adjust.

Paper Chaser

  • Handlebar Stache
  • *****
  • Posts: 1470
Re: What to invest in?
« Reply #19 on: March 19, 2021, 12:03:12 PM »
Real estate is nice but its a lot of work...  More doors = more problems.  When i only had 2 single family homes, I'd only be working maybe 1 hour every 3 months, and all i did was move money from rent deposited account to account the mortgages were pulled from.  Then as I grew my portfolio, things got busy.   

This week, I've spoken to 4 different tenants, paid for a drain snake, had electrical worked on in two units (these two are newly acquired so I wont have a call like this again),  reluctantly agreed to allow a cat in a unit with an existing tenant (hit em up for a non refundable $400 deposit and increased the rent by $20), and i have a washing machine leaking that i get to go look at this weekend. 

So, does that sound fun?  if so, great, you can make money here and when its time to pass it down the line, you inheritors could be set for life.   Real estate has performed well, but getting dividend checks and really not having to work for it, is priceless.

It is a lot of work or some expense for property management but it's also a real, tangible asset which is appealing to me as a way to diversify our wealth (though I realize its also not necessarily the best ROI).

The rental market in my area is (IMO) astronomical. Looking at properties and rental rates most rentals in my area rent for 20-30% above a P&I+pmi+tax+hoa with 0% down. That's during COVID.

It can also add stress to your life, cannot typically be bought/sold cheaply or easily, makes taxes a bit more complex and ties up your money into a single asset (not too different from owning stock in a single company).

Are you familiar with the 1% rule, the 50% rule, and the reasoning behind each? Renting for 20-30% more than PITI might even cost you money, especially if you're using a property manager that takes 10% each month. Buildings break down over time. Things break and need replacement. That's especially critical with a plan for long term, generational ownership. They sit empty between tenants but still have a mortgage, insurance, and utilities to pay during that time. All of those things erode your profits. A new roof, or sewer repair might cost tens of thousands of dollars and negate many years of monthly profits. Appliances every 7 years, HVAC every 15-20, a roof every 25-30, flooring potentially every couple of years, paint, drywall repair, plumbing/electrical emergencies, can be death by a thousand paper cuts.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #20 on: March 19, 2021, 12:35:05 PM »
Real estate is nice but its a lot of work...  More doors = more problems.  When i only had 2 single family homes, I'd only be working maybe 1 hour every 3 months, and all i did was move money from rent deposited account to account the mortgages were pulled from.  Then as I grew my portfolio, things got busy.   

This week, I've spoken to 4 different tenants, paid for a drain snake, had electrical worked on in two units (these two are newly acquired so I wont have a call like this again),  reluctantly agreed to allow a cat in a unit with an existing tenant (hit em up for a non refundable $400 deposit and increased the rent by $20), and i have a washing machine leaking that i get to go look at this weekend. 

So, does that sound fun?  if so, great, you can make money here and when its time to pass it down the line, you inheritors could be set for life.   Real estate has performed well, but getting dividend checks and really not having to work for it, is priceless.

It is a lot of work or some expense for property management but it's also a real, tangible asset which is appealing to me as a way to diversify our wealth (though I realize its also not necessarily the best ROI).

The rental market in my area is (IMO) astronomical. Looking at properties and rental rates most rentals in my area rent for 20-30% above a P&I+pmi+tax+hoa with 0% down. That's during COVID.

It can also add stress to your life, cannot typically be bought/sold cheaply or easily, makes taxes a bit more complex and ties up your money into a single asset (not too different from owning stock in a single company).

Are you familiar with the 1% rule, the 50% rule, and the reasoning behind each? Renting for 20-30% more than PITI might even cost you money, especially if you're using a property manager that takes 10% each month. Buildings break down over time. Things break and need replacement. That's especially critical with a plan for long term, generational ownership. They sit empty between tenants but still have a mortgage, insurance, and utilities to pay during that time. All of those things erode your profits. A new roof, or sewer repair might cost tens of thousands of dollars and negate many years of monthly profits. Appliances every 7 years, HVAC every 15-20, a roof every 25-30, flooring potentially every couple of years, paint, drywall repair, plumbing/electrical emergencies, can be death by a thousand paper cuts.

Oh I'm not discounting the expenses you mention and that would certainly eat up most or even more than the income from the property, but only while there is a mortgage. Handing off several paid for properties to descendants would be the goal.

Thanks for the pointers, those rules are something I can noodle on as I think about this.

srad

  • Bristles
  • ***
  • Posts: 295
Re: What to invest in?
« Reply #21 on: March 19, 2021, 12:56:28 PM »
if you're using a property manager that takes 10% each month.

^^
And 10% property management fee on a mortgage with 20-25% down, will be close to 50% percent of your profit.  If you do go the property route, self manage.  At least till you get over 10 units, then it could be time to start thinking about hiring it out.

Another route would be to go in with some other parties and buy a big apartment complex.  One large enough with onsite property management, that way management fees are baked into the cost of the apartment.  A buddy of mine has this and was doing well up untill covid came through and their collection of residential rents dropped by over 20% and their anchor tenants (main floor shops) mostly stopped paying too and or closed shop. 


Now i have no idea how set you are, if you have something like 8 figures in the bank, you could afford some properties for the diversification of your portfolio and ride the 4 cap into the sunset.... 20 years from now those properties should be worth a substantial amount more.  And 40-50 years from now your estate will love you:)



Fishindude

  • Magnum Stache
  • ******
  • Posts: 3075
Re: What to invest in?
« Reply #22 on: March 19, 2021, 01:00:55 PM »
We are in the privileged position to be FI with still having a large income compared to our reasonably frugal existence. We're not interested (at this time) in the RE part of things. My work (conservation/environmental) is meaningful and pleasurable for me. We're also not into buying lots of crap even though we can and the things that we do want are well within our current FI means. At this point our financial goals are really about building generational wealth & philanthropy.

We have already done all the typical index fund and other securities investments and have a large surplus of cash we are looking to invest with. Our current thinking is real estate to build what I consider 'real wealth', but I was curious what others might do in our situation. Just keep dumping more into the markets?

I'd think a farm would be perfect.
Get something that generates enough income to cover the taxes and possibly pay a little.  Half income producing, half woods. marsh, etc. where you can play around pursuing you conservation / environmental interests.   You'll get some income, some long term growth, a great place to securely preserve some money, a really neat asset to pass to the next generation, and a great place to relax and play around.

yachi

  • Handlebar Stache
  • *****
  • Posts: 1057
Re: What to invest in?
« Reply #23 on: March 19, 2021, 01:52:23 PM »

Oh I'm not discounting the expenses you mention and that would certainly eat up most or even more than the income from the property, but only while there is a mortgage. Handing off several paid for properties to descendants would be the goal.

Thanks for the pointers, those rules are something I can noodle on as I think about this.

The return on cash from real estate is not real high unless you're carrying a mortgage.  Also real estate is significantly more work than any other investment you could pass on to your kids.  It's much closer to giving them a company to run than giving them money.  I suggest you poke around some real estate investment boards and do some searches for "inherited rental properties".  One of the difficulties is tax-efficiently selling inherited rental properties. Even if you run these with a management company, you and your descendants will still need to make decisions.

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #24 on: March 19, 2021, 02:14:47 PM »

Oh I'm not discounting the expenses you mention and that would certainly eat up most or even more than the income from the property, but only while there is a mortgage. Handing off several paid for properties to descendants would be the goal.

Thanks for the pointers, those rules are something I can noodle on as I think about this.

The return on cash from real estate is not real high unless you're carrying a mortgage.  Also real estate is significantly more work than any other investment you could pass on to your kids.  It's much closer to giving them a company to run than giving them money.  I suggest you poke around some real estate investment boards and do some searches for "inherited rental properties".  One of the difficulties is tax-efficiently selling inherited rental properties. Even if you run these with a management company, you and your descendants will still need to make decisions.

Sorry I don't follow this. It sounds like you are saying properties without mortgages have less ROI than those with. That doesn't make sense to me.

Also, my understanding is that inherited properties have an adjusted cost basis set at the fair market value at the time the the decedent's death. That seems like it solves the issue of tax efficiency (assuming such laws stay on the books). Am I understanding I correctly or missing something?
« Last Edit: March 19, 2021, 02:18:27 PM by MilesTeg »

srad

  • Bristles
  • ***
  • Posts: 295
Re: What to invest in?
« Reply #25 on: March 19, 2021, 03:05:33 PM »
You are correct.  At the time of death you get the stepped up value. You get an appraisal to establish the value within a certain period of time (I don't know what that time period is).  So if the house is worth 100k at time of death, you sell it for 100k or less, the estate owes no taxes.  You sell it for 110k, estate owes 10k.  But I'm not sure how this all works if you sell it quickly.  Maybe you don't need an appraisal and the sales price will suffice so you won't owe that 10k?  Now if you hold the property for 5 years and sell it for 150k, the 50k is what you will pay taxes on.

RWD

  • Walrus Stache
  • *******
  • Posts: 5743
  • Location: Mississippi
Re: What to invest in?
« Reply #26 on: March 19, 2021, 05:21:26 PM »
Sorry I don't follow this. It sounds like you are saying properties without mortgages have less ROI than those with. That doesn't make sense to me.
You can buy more properties with the same available capital if you get mortgages. So it's using leverage to increase ROI.

Paper Chaser

  • Handlebar Stache
  • *****
  • Posts: 1470
Re: What to invest in?
« Reply #27 on: March 19, 2021, 07:37:39 PM »

Oh I'm not discounting the expenses you mention and that would certainly eat up most or even more than the income from the property, but only while there is a mortgage. Handing off several paid for properties to descendants would be the goal.

Thanks for the pointers, those rules are something I can noodle on as I think about this.

The return on cash from real estate is not real high unless you're carrying a mortgage.  Also real estate is significantly more work than any other investment you could pass on to your kids.  It's much closer to giving them a company to run than giving them money.  I suggest you poke around some real estate investment boards and do some searches for "inherited rental properties".  One of the difficulties is tax-efficiently selling inherited rental properties. Even if you run these with a management company, you and your descendants will still need to make decisions.

Sorry I don't follow this. It sounds like you are saying properties without mortgages have less ROI than those with. That doesn't make sense to me.

As RWD mentioned, leverage is a powerful tool. Let's say you have $100k to invest. You can pay cash for a hypothetical $100k property that rents for $1k/mo (just barely meeting the 1% rule). That nets you $12k annually in rental income. But your property manager is going to take 10%($1200), you still have to pay property taxes @ say 2% of the value since it's an investment property ($2000), insurance ($1000) and then set aside money for vacancy and maintenance/CapEx. All told you're probably seeing a real profit around $4-5k (depending on taxes and insurance) from your $100k investment.

Alternatively, you could divide your $100k seed money into 5 $20k down payments and mortgage 5 $100k properties with each renting for the same $1k/mo. Now you see $60k in rent coming in annually. Looks like mortgage principle and interest will be about $350/mo per property, or $21k each year. Youd still have the other costs for management, taxes, insurance, vacancy, and maintenance for each of the 5 properties too, so we'll multiply all of those numbers by 5 and subtract from the 39k remaining from rents. Management becomes 6k, taxes become $10k, insurance becomes 5k, and you probably end up in the 8-12k annual profit range from the same 100k initial investment. It could be more if you can capitalize on scale in some way (perhaps a large umbrella insurance policy or needing to hold less back to cover for vacancy since you wouldn't likely have all properties vacant at the same time, etc).

**This is just a hypothetical example with very rough numbers. Hopefully you can see the overall point
« Last Edit: March 19, 2021, 07:50:49 PM by Paper Chaser »

MilesTeg

  • Handlebar Stache
  • *****
  • Posts: 1363
Re: What to invest in?
« Reply #28 on: March 20, 2021, 12:06:04 AM »

Oh I'm not discounting the expenses you mention and that would certainly eat up most or even more than the income from the property, but only while there is a mortgage. Handing off several paid for properties to descendants would be the goal.

Thanks for the pointers, those rules are something I can noodle on as I think about this.

The return on cash from real estate is not real high unless you're carrying a mortgage.  Also real estate is significantly more work than any other investment you could pass on to your kids.  It's much closer to giving them a company to run than giving them money.  I suggest you poke around some real estate investment boards and do some searches for "inherited rental properties".  One of the difficulties is tax-efficiently selling inherited rental properties. Even if you run these with a management company, you and your descendants will still need to make decisions.

Sorry I don't follow this. It sounds like you are saying properties without mortgages have less ROI than those with. That doesn't make sense to me.

As RWD mentioned, leverage is a powerful tool. Let's say you have $100k to invest. You can pay cash for a hypothetical $100k property that rents for $1k/mo (just barely meeting the 1% rule). That nets you $12k annually in rental income. But your property manager is going to take 10%($1200), you still have to pay property taxes @ say 2% of the value since it's an investment property ($2000), insurance ($1000) and then set aside money for vacancy and maintenance/CapEx. All told you're probably seeing a real profit around $4-5k (depending on taxes and insurance) from your $100k investment.

Alternatively, you could divide your $100k seed money into 5 $20k down payments and mortgage 5 $100k properties with each renting for the same $1k/mo. Now you see $60k in rent coming in annually. Looks like mortgage principle and interest will be about $350/mo per property, or $21k each year. Youd still have the other costs for management, taxes, insurance, vacancy, and maintenance for each of the 5 properties too, so we'll multiply all of those numbers by 5 and subtract from the 39k remaining from rents. Management becomes 6k, taxes become $10k, insurance becomes 5k, and you probably end up in the 8-12k annual profit range from the same 100k initial investment. It could be more if you can capitalize on scale in some way (perhaps a large umbrella insurance policy or needing to hold less back to cover for vacancy since you wouldn't likely have all properties vacant at the same time, etc).

**This is just a hypothetical example with very rough numbers. Hopefully you can see the overall point

Oh I grok the leveraging. My mentioning no mortgages is about the goal state. Having, say 10 properties paid off 20-30 years from now and generating 20k gross a month (not inflation adjusted) is the idea.  At that point you could easily live very well off that and rotate 1 or two properties out every few years as they age or slowly expand.

I'm just saying the biggest chunk of expense for a property is the P&I and once that's gone the small profit margins go away too. Unless you want to try to expand indefinitely you can generate lots of income without them.

P&I also drops significantly in real cost over the term of a loan due to inflation which expands your profits in the medium to long term.

Spaarwalvis

  • 5 O'Clock Shadow
  • *
  • Posts: 12
  • Location: A suburb near you
Re: What to invest in?
« Reply #29 on: March 20, 2021, 07:43:56 AM »
Subscribing.  The OP's situation is a first cousin to what I'll probably be thinking about in a decade or so.  I've been trawling the MMM forums and elsewhere for good leads on investments that are uncorrelated with standard stocks and bonds.  So far the most promising I've heard of are timber and commodity REITs.

Not sure about the farm thing, unless I had a huge pot of extra money that I felt like risking.  From experience, I know local farmland rental markets are . . . varied and sometimes illiquid.  Farms take a lot of maintenance and can lose money in a blink if you're not careful.  Do that too often (3 years out of 5 for IRS purposes iirc) and you lose business tax deduction and possibly agricultural zoning benefits.  I'm talking about actual full size farms, mind you.  The same thing applies in miniature to . . . I don't know what to call them in English ("erf" in Dutch).  Hobby farms?  10 acres with horses and some fruit trees, that sort of thing.  If that's your pleasure, go for it.  Same as I'd tell someone who wants a hunting or fishing cabin.  But be very cautious in considering that an investment.

The Donor Advised Fund thing sounds like a good prospect.  You're allowed to pay yourself and directors/family members/managers "reasonable" expenses to oversee the fund.  Tax courts have been sorting through a lot of amusing stories about what's "reasonable."  I do like an idea someone told me on this forum:  rent a big cabin somewhere each year for a week or 10 days.  That is the "board meeting" to figure out where to donate that year.  That doubles as a permanent built in family reunion.

MustacheAndaHalf

  • Walrus Stache
  • *******
  • Posts: 5849
Re: What to invest in?
« Reply #30 on: March 20, 2021, 11:37:51 AM »
The Donor Advised Fund thing sounds like a good prospect.  You're allowed to pay yourself and directors/family members/managers "reasonable" expenses to oversee the fund.  Tax courts have been sorting through a lot of amusing stories about what's "reasonable."  I do like an idea someone told me on this forum:  rent a big cabin somewhere each year for a week or 10 days.  That is the "board meeting" to figure out where to donate that year.  That doubles as a permanent built in family reunion.
Most people use established providers of Donor Advised Funds:

No account minimum, grants $50 minimum, expense 0.6% or $100 / year
https://www.fidelitycharitable.org/giving-account/what-it-costs.html

No account minimum, grants $50 minimum, expense 0.6% or $100 / year
https://www.schwabcharitable.org/features/fees-and-minimums

$25,000 minimum , grants $500 minimum, expense 0.6% / year
https://www.vanguardcharitable.org/giving-with-vc/fees-and-minimums

bwall

  • Handlebar Stache
  • *****
  • Posts: 1169
Re: What to invest in?
« Reply #31 on: March 20, 2021, 02:19:23 PM »
As RWD mentioned, leverage is a powerful tool. Let's say you have $100k to invest. You can pay cash for a hypothetical $100k property that rents for $1k/mo (just barely meeting the 1% rule). That nets you $12k annually in rental income. But your property manager is going to take 10%($1200), you still have to pay property taxes @ say 2% of the value since it's an investment property ($2000), insurance ($1000) and then set aside money for vacancy and maintenance/CapEx. All told you're probably seeing a real profit around $4-5k (depending on taxes and insurance) from your $100k investment.

Alternatively, you could divide your $100k seed money into 5 $20k down payments and mortgage 5 $100k properties with each renting for the same $1k/mo. Now you see $60k in rent coming in annually. Looks like mortgage principle and interest will be about $350/mo per property, or $21k each year. Youd still have the other costs for management, taxes, insurance, vacancy, and maintenance for each of the 5 properties too, so we'll multiply all of those numbers by 5 and subtract from the 39k remaining from rents. Management becomes 6k, taxes become $10k, insurance becomes 5k, and you probably end up in the 8-12k annual profit range from the same 100k initial investment. It could be more if you can capitalize on scale in some way (perhaps a large umbrella insurance policy or needing to hold less back to cover for vacancy since you wouldn't likely have all properties vacant at the same time, etc).

**This is just a hypothetical example with very rough numbers. Hopefully you can see the overall point

The point I see is 5x the work, risk and stress for 2.5x the profit! :) :)

Not trying to be a smart-a**, even though it probably reads as such.

I don't see how real estate can secure generational wealth where other vehicles, such as stocks, cannot.

TomTX

  • Walrus Stache
  • *******
  • Posts: 5079
  • Location: Texas
Re: What to invest in?
« Reply #32 on: March 20, 2021, 03:42:45 PM »
if i were in your shoes and wanted to build generational wealth through real estate i would look at vacant development property. Find a market that is growing rapidly, and purchase as much land as you can outside of town that can be developed or sold in the future.

...and then put a wildlife conservation easement on it. Note OP's goals. Not scraping the Earth bare for a new strip mall or cookie-cutter McMansions.

TomTX

  • Walrus Stache
  • *******
  • Posts: 5079
  • Location: Texas
Re: What to invest in?
« Reply #33 on: March 20, 2021, 04:47:59 PM »
As RWD mentioned, leverage is a powerful tool. Let's say you have $100k to invest. You can pay cash for a hypothetical $100k property that rents for $1k/mo (just barely meeting the 1% rule). That nets you $12k annually in rental income. But your property manager is going to take 10%($1200), you still have to pay property taxes @ say 2% of the value since it's an investment property ($2000), insurance ($1000) and then set aside money for vacancy and maintenance/CapEx. All told you're probably seeing a real profit around $4-5k (depending on taxes and insurance) from your $100k investment.

Alternatively, you could divide your $100k seed money into 5 $20k down payments and mortgage 5 $100k properties with each renting for the same $1k/mo. Now you see $60k in rent coming in annually. Looks like mortgage principle and interest will be about $350/mo per property, or $21k each year. Youd still have the other costs for management, taxes, insurance, vacancy, and maintenance for each of the 5 properties too, so we'll multiply all of those numbers by 5 and subtract from the 39k remaining from rents. Management becomes 6k, taxes become $10k, insurance becomes 5k, and you probably end up in the 8-12k annual profit range from the same 100k initial investment. It could be more if you can capitalize on scale in some way (perhaps a large umbrella insurance policy or needing to hold less back to cover for vacancy since you wouldn't likely have all properties vacant at the same time, etc).

**This is just a hypothetical example with very rough numbers. Hopefully you can see the overall point

The point I see is 5x the work, risk and stress for 2.5x the profit! :) :)

Not trying to be a smart-a**, even though it probably reads as such.

I don't see how real estate can secure generational wealth where other vehicles, such as stocks, cannot.

That's just the cashflow. The real multiplier is appreciation.

 

Wow, a phone plan for fifteen bucks!