What to do with sale proceeds

[Jayjayem]

Hi folks,

I've just sold a rental property and I am trying to finalize what to do with the proceeds of $230k. It doesn't qualify for 1030.

Summary of my financial picture:
Primary residence: FMV $880K, mortgage $485k, 2.65%. Monthly mortgage including taxes and insurance is $2650.
Rental property 1: FMV $880k, mortgage $280K, 3% investment mortgage. Monthly rent $3300. Current cash flow $1300.
Rental property 2: Just sold and netted $230k
Retirement and taxable securities: $2.6M in index funds, some individual stocks. About 10% of this is bonds. 

Option 1: Payoff Rental Property 1 $280k mortgage. Since it's not enough, I would sell $50k index funds. I would own that property wholly, and the $3300 rent would cover my primary residence mortgage and the rest put aside as repair reserve. No housing cost going forward. The money that this frees up will go to buying more index funds every month.

Option 2: Pay down rental property and refinance $50k. Monthly mortgage payment would be something like $500 - 600, and the rental cash flow would cover most of my primary residence mortgage.

Option 3: Buy $230k in index funds. Keep mortgage situation as-is.

Between cash flow and return, I think I'd prefer return. But I am drawn to option 1 for psychological comfort of having no housing cost. Since I have a good chunk in stocks already, putting in $230k to produce $3300 (increase current rental cash flow by $2000) seems like a good diversification move (akin to bonds).

Is there another way to think about this?

Thank you in advance. This community has always been very helpful.

[waltworks]

At ~$4 million NW, this amount of money is pretty irrelevant, so forget optimizing or spending mental effort on it and just do whatever's easiest and will require the least work/time.

I mean, I probably wouldn't put extra money into a 3% mortgage on a property that is worth so much and rented for so little, but you do you. It won't matter, you already won the money game. Now you have to switch mindsets to time optimization instead.

-W

[sammybiker]

@Jayjayem Well done.  Nothing really to add except I wouldn't touch those mortgages unless you really believe the psychological benefits will improve your daily life.

I also don't like shoving it into indexes.  I would be looking to keep the funds in the RE market somehow - provide some private lending secured by RE, have a look at Re funds, something. 

[lhamo]

What is your FIRE plan?

[feelingroovy]

Is the $230k above after what you'll owe for capital gains taxes? Make sure you've got that covered first.

[PMJL34]

OP,

You've already won the game. This means you can do whatever you want. You don't need to maximize every transaction or compromise anymore.

Go with option 1 since that is what you want to do. You will sleep great at night.

[Jayjayem]

@lhamo I am fired.

Feedback seems to be that I shouldn't sweat optimizing this amount of money, but I can't help it. I didn't get here without an optimization mindset.

Perhaps I should set aside some of that for financial counseling. I gotta say I am more risk averse now than during the accumulation phase.

[srad]

Let me guess, your favorite days are the weekend, why?  Cause the market is closed on the weekend...  (That's going to be me as well)

What to do with your money depends on what you need, do you need the additional rent?  if so, just pay off the mortgage.  If you don't, then invest. You are now optimizing time, not money.   

You sure 3300 is fair market rent?  That seems awfully low on a 880k property.

[lhamo]

@lhamo I am fired.

Feedback seems to be that I shouldn't sweat optimizing this amount of money, but I can't help it. I didn't get here without an optimization mindset.

Perhaps I should set aside some of that for financial counseling. I gotta say I am more risk averse now than during the accumulation phase.

It isn't necessarily that you stop optimizing, but maybe you optimize for different things.

What is your annual spend and where are you with taxes/ACA credits?

For me, I have ended up with a paid off house + very large cash stash that we have been living of of since FIRE, which many here would consider not financially optimal, but for us it has worked out great because it keeps our income low enough that we qualify for a bunch of stuff we wouldn't if we were having to generate the money to pay a mortgage.

In the meantime, the longer term investments just keep doing their thing and have grown to the point that even with a huge amount of our stash locked up in a house and cash our withdrawal rate has dropped from around 3% to less than 2%.  Once we start drawing SS in a few more years we will have a sub 1% WR. 

I don't have to worry about optimizing every financial decision anymore because we basically are never going to run out of money.  It is a good place to be.

[sonofsven]

Hi folks,

I've just sold a rental property and I am trying to finalize what to do with the proceeds of $230k. It doesn't qualify for 1030.

Summary of my financial picture:
Primary residence: FMV $880K, mortgage $485k, 2.65%. Monthly mortgage including taxes and insurance is $2650.
Rental property 1: FMV $880k, mortgage $280K, 3% investment mortgage. Monthly rent $3300. Current cash flow $1300.
Rental property 2: Just sold and netted $230k
Retirement and taxable securities: $2.6M in index funds, some individual stocks. About 10% of this is bonds. 

Option 1: Payoff Rental Property 1 $280k mortgage. Since it's not enough, I would sell $50k index funds. I would own that property wholly, and the $3300 rent would cover my primary residence mortgage and the rest put aside as repair reserve. No housing cost going forward. The money that this frees up will go to buying more index funds every month.

Option 2: Pay down rental property and refinance $50k. Monthly mortgage payment would be something like $500 - 600, and the rental cash flow would cover most of my primary residence mortgage.

Option 3: Buy $230k in index funds. Keep mortgage situation as-is.

Between cash flow and return, I think I'd prefer return. But I am drawn to option 1 for psychological comfort of having no housing cost. Since I have a good chunk in stocks already, putting in $230k to produce $3300 (increase current rental cash flow by $2000) seems like a good diversification move (akin to bonds).

Is there another way to think about this?

Thank you in advance. This community has always been very helpful.

If you're interested, I've seen bank/brokerage account bonuses on Doctor of Credit with pretty big deposit requirements, like $200K. Not sure what they pay out, since I don't have $200K lying around.

[Dicey]

How about Option 3, keep the mortgages, but then follow @sonofsvens finger over to Doctor of Room's site for some non-traditional and extremely low-risk options?

If you worry in the least about inflation, remember mortgages are an excellent hedge.

[taco_sushi]

Suggest to keep mortgages with interest rates so low.
But if you're intending to sell your last rental property, but want to maintain real estate exposure. I'd suggest putting half into Fundrise (RE fund), and half into REITs in your stock portfolio, like O. Then you have some real estate exposure when/if you dispose of all your real estate assets.

[clarkfan1979]

Let me guess, your favorite days are the weekend, why?  Cause the market is closed on the weekend...  (That's going to be me as well)

What to do with your money depends on what you need, do you need the additional rent?  if so, just pay off the mortgage.  If you don't, then invest. You are now optimizing time, not money.   

You sure 3300 is fair market rent?  That seems awfully low on a 880k property.

It's worth a few hours of your time to decide on where to park 230K. You were not being dramatic in your post and your questions are very reasonable.

If you feel like you can get a psychological win from paying off the mortgage on a rental, then do it. It's not money optimized, but it seems like you don't really need more money.

I don't think he said $3300/month is fair market rent. It's current rent. It's very possible that he rents lower than market value because he has good tenants and it makes his life easier. 

His ratio of 3300/month rent on 880K is the same ratio as my $4850/month rent on 1.1 million rental property. My fair market rent is probably $5200/month. In my experience and personal opinion, when you have a run up in house prices, rental increases lag about 6-12 months. I also have COVID-19 restrictions for raising rent, at the moment.

[lhamo]

Suggest to keep mortgages with interest rates so low.
But if you're intending to sell your last rental property, but want to maintain real estate exposure. I'd suggest putting half into Fundrise (RE fund), and half into REITs in your stock portfolio, like O. Then you have some real estate exposure when/if you dispose of all your real estate assets.

O is a very different type of real estate investment than a single family rental.  They invest in commercial property -- mostly strip mall type places where they offer long-term leases to large chain retailers.  Not sure I'd want to be putting a bunch of money in commercial property right now.  Their dividend structure is also not a great match for people still earning income, though it can work well for lower-income seniors like my mom, who lived off of SS + her O dividends for many years.  I cashed out the shares she left me because O was not a good fit for my investment goals.

I personally would also be very careful with crowdfunded REITs.  Several have gone under already.  The next bear market will probably take out more.

[taco_sushi]

Suggest to keep mortgages with interest rates so low.
But if you're intending to sell your last rental property, but want to maintain real estate exposure. I'd suggest putting half into Fundrise (RE fund), and half into REITs in your stock portfolio, like O. Then you have some real estate exposure when/if you dispose of all your real estate assets.

O is a very different type of real estate investment than a single family rental.  They invest in commercial property -- mostly strip mall type places where they offer long-term leases to large chain retailers.  Not sure I'd want to be putting a bunch of money in commercial property right now.  Their dividend structure is also not a great match for people still earning income, though it can work well for lower-income seniors like my mom, who lived off of SS + her O dividends for many years.  I cashed out the shares she left me because O was not a good fit for my investment goals.

I personally would also be very careful with crowdfunded REITs.  Several have gone under already.  The next bear market will probably take out more.

Good callouts. Fundrise is the home rental play. O is 80% retail, but has a good monthly dividend if you're looking to replace some monthly income you were getting from a rental. Depends on your investment objective and if you like the monthly dividend.

In 2020 closing, they collected 93% of contracted rents. In 2021 closing, they collected 99.5% of contracted rents. So I think they manage a strong book, but yes sector risk.  Any REITs you like?

One note about Fundrise, is that they will suspend withdrawals during a crash to prevent a bank run, like March 2020. But if you opted for their dividend fund, those dividends will still pay out.