Cash and what to do with it

[apamburn]

We just sold our home and move to North Carolina. This resulted in a large (to me) payout that gives us options.

We spent a chunk of it paying off credit card debt (something we managed poorly when we were a little younger, and have learned from) and on moving expenses.

We are of course buying a house, but aside from that we are trying to be smart about how we use the equity we cashed out on.

We are interested in getting into some cheap rentals to get our foot in that door, but we eventually want many more.

So with our remaining funds I see two options:

1. Put a full 20% down payment on residence, leaving just enough to buy appliances, change carpets, and save 3 months of living expenses as an emergency fund. This avoids PMI but ties up all of our cash.

2. Put minimum down payment on residence, still buy our appliances, change carpets, and save 3 months of living expenses, plus purchase a rental or two (cash, again cheap. Would net about $500 per mo each), and set aside 10k or so as a rental repair fund. But I pay MI. If I need to be more liquid I assume I could take out a mortgage on the rentals.

Tentatively PMI will come in at around $230 a month, and combined with increased principal (from smaller down payment) we would be shelling out about $500 more per month. That would be the cost to keep about $50k more in our pocket to, like I said, get into rentals.

The monthly math doesn't quite work out to me.

$500 - cost of keeping $50k cash (PMI + increased p&I)
$150 - tax + insurance on cash-bought property 1
$150 - tax + insurance on cash-bought property 2

Income of $1000 (or so)

Means I'll be bringing in only $200 monthly. Subtract periodic repairs and any amount of my time, at all, and suddenly I'm in the red.

I'm thinking if cheap rentals are what I really want, I'd be better off going with option (1) and save for rentals.

Anyone have any suggestions on how to intelligently spend?

[kabar]

A widely accepted rule of thumb among real estate investors for rental property is that the monthly rent it returns should equal at least 1% of the sales price. That's for gross rental income. In low priced markets (Omaha, Nebraska for instance), 2% deals might be found, and in high priced markets (like Denver or D.C.), 1% might be impossible. You can also factor in appreciation/depreciation into the equation. Just remember that in real estate, you make your money on the purchase, not the sale.

[grizzlyblake]

Get at least a year of expenses in savings then think about spending money. We are on the brink of a financial collapse so wait until prices hit the floor before buying property.

[apamburn]

Get at least a year of expenses in savings then think about spending money. We are on the brink of a financial collapse so wait until prices hit the floor before buying property.

I'd ideally like to have 6 months expenses in the bank, but I'm not sure about 12 months. Seems like that much cash could be put somewhere that will grow it faster.

[Gabriel Suarez]

Think about retirement.

[CB3]

Assuming no other debt to pay off, put away cash for three months worth of expenses in your own secure safe, not in a bank where you might not be able to get it out when you need it. Then consider:

1. Paid up life insurance/good health insurance
2. Durable food storage
3. Self sufficiency items for hard times
4. Some gold and silver
5. Retirement plan

The smartest retirement plan may be to combine a paid up life insurance product with investments. Watch out for gov’t sponsored tax advantage plans. There’s always a hook where you lose and the gov’t wins.

None of these items are monthly revenue generating, and that sounds like your goal. However, these are assets that will be more valuable than income rental property if you hit really hard times. They will be a base that can allow you to keep producing when others cannot. Without these, it’s hard to fight. Kinda like allowing yourself to be tied up in a home invasion.

If after obtaining these items you have cash left over, think of owning a local business you can control and grow—a car wash, storage units, vending machines, etc. You have more flexibility than with real estate and renters.

Whatever you invest for profit should be money you are able to lose.

[henri]

Consult a financial professional, actually 2 or 3 and see what their opinions are, in addition consult your cpa, obtain his opinion as well. Whatever advice you would obtain on an Internet forum would be relevant to that individuals bias /particular financial situation. I only own two properties now, both no mortgage, only expenses are taxes, utilities, and condo maintenance fees. Everyones financial situation varies, some are more comfortable than others, some work out of necessity, some just for fun and to keep busy 10-12 hours/week. As far as cash on hand, is concerned, 3-4 months is basically nothing, a year would be a better option,for some that would 250k, others 600k, others 1M, it varies according to ones standard of living. However, not having to be concerned about it is quite a secure feeling. All the best to you!

[TwoBodyOneHead]

If I'm following you will have your new primary residence paid off and you are talking about equity left over from your previous home sale.

I assume you have a 3 month buffer of cash reserves in a money market giving you 2.2%ish.

You are already heavily in real estate with your primary home

I'd invest in a mix of stocks and bonds. Lots of good info out there. Motleyfool.com. MerilEdge etc. I'd echo to talk to several financial advisors. Try some who work on commissions and some who charge a flat fee.

[apamburn]

No, I will have a mortgage on my primary with some down payment between the conventional loan minimum (I think 3% == ~$15,000) and 20% (== ~$75000).

With a full 20% down I'll have enough leftover cash to do some new-home maintenance (carpet, appliances, etc...) and put a 3 month reserve in the bank.

With the minimum down payment I will have enough cash to do that, plus something else (real estate? stocks and bonds? I lean towards real estate / rentals). But as a consequence I have PMI and higher principal + interest that just about balances out any rental income.

I think I'd rather put the larger down payment on my house, have more monthly cash flow, and save for rentals or whatever I want to invest in. But I'm no expert and I'm asking for opinions from people that might have more experience than me.

I am currently looking for a financial advisor.

[Eldora]

Personally, I would put the 20% down which saves you the PMI, do the maintenance, put aside an emergency fund (I like 3-6 months) and then invest the rest. IMHO real estate pays off better the younger you are because you have the time to wear out the mortgage(s). Stocks, bonds, cash and some physical gold/silver is my preference but your mileage may vary. Another thing, unless you have experience with real estate management, your small positive cash flow can go away very quickly. If I may ask, where in NC are you coming to?

[apamburn]

We are in Nash county.

[kabar]

One thing to remember is that PMI can be eliminated once your loan to value ration is lower than 80%. I have no idea about the real estate market in your purchase area, but if you expect some appreciation in the short term, PMI may not last all that long, especially if you can squeeze in some extra payments.

[H60DoorGunner]

Only 20% down?

F*ck that. Pay off the debt, and use the cash to buy a house where you're mortgage free (or very nearly so).

You'll have significantly more disposable income if you have no mortgage and all the other associated expenses... mortgage insurance, etc. Having a mortgage is completely stupid if you can avoid it.

[Greg Nichols]

Only 20% down?

F*ck that. Pay off the debt, and use the cash to buy a house where you're mortgage free (or very nearly so).

You'll have significantly more disposable income if you have no mortgage and all the other associated expenses... mortgage insurance, etc. Having a mortgage is completely stupid if you can avoid it.

if you roll the cash into a more expensive property you can avoid capital gains taxes on the sale. I'd buy a multi-family dwelling (like a quad condo) and live in one of them until I could buy something else.

[Mike OTDP]

Pay off the debt, and use the cash to buy a house where you're mortgage free (or very nearly so).

You'll have significantly more disposable income if you have no mortgage and all the other associated expenses... mortgage insurance, etc. Having a mortgage is completely stupid if you can avoid it.

I agree 100% with this. People are so accustomed to being shackled up to a mortgage (either their own or someone else's) that they don't even consider the potential to own outright. Which is an option I can recommend from first-hand experience. It's not just the financial freedom, it's the satisfaction of standing clear of debt.

Also, consider going for a 15-year loan vice a 30-year note. You can usually get a significantly lower interest rate, and you have a fighting chance of paying it off completely.

[ZeroTA]

Only 20% down?

F*ck that. Pay off the debt, and use the cash to buy a house where you're mortgage free (or very nearly so).

You'll have significantly more disposable income if you have no mortgage and all the other associated expenses... mortgage insurance, etc. Having a mortgage is completely stupid if you can avoid it.

It depends. I'm financed at 3%. I could drop the hammer on paying it off, but I'm making much more investing that money than I'd be saving by throwing it at my mortgage.

I build homes, and I've looked into rentals but never got into it (I'd rather just build more homes). The whole point of rentals is to get somebody else to pay for it. So when it's paid for you have either an asset you can sell, or an income stream if you keep renting it. Sounds great, but then you have to deal with renters. Everyone I know who does it says it's not worth it until you get so many that you outsource the maintenance and don't get all the phone calls.

[H60DoorGunner]

if you roll the cash into a more expensive property you can avoid capital gains taxes on the sale. I'd buy a multi-family dwelling (like a quad condo) and live in one of them until I could buy something else.

Everyone's situation is different, but generally speaking, if a married couple (for example) sells their home and buys another within the alotted time period, they won't pay any capital gains tax at all. Unless they've made no improvements on the home, and spent no money in the improvements and sales, and they made an insane profit... and can't justify the move for "health, work, or some other unforeseen event"

We sold our house in Austin not long ago for a very handsome profit, and moved back to the Appalachian region. We were able to buy a similarly sized house on nearly 60 acres, pay off what little credit card debt we had, and still had some cash left over. Now, with the exception of income taxes, nearly all our annual income is disposable. Which effectively has amounted to a significant pay raise. So even if we had had to pay a capital gains tax, the increase in disposable income would have more than made up for it.


And very soon, we'll be starting two businesses, both of which will almost certainly "operate at a loss" for the next five years (:laughing:)... another big tax break. I might even start "farming" so I can take all the federal agricultural subsidies and tax deductions they'll give me

There are a lot of loop holes people never take advantage of

[Greg Nichols]

Everyone's situation is different, but generally speaking, if a married couple (for example) sells their home and buys another within the alotted time period, they won't pay any capital gains tax at all. Unless they've made no improvements on the home, and spent no money in the improvements and sales, and they made an insane profit... and can't justify the move for "health, work, or some other unforeseen event"

We sold our house in Austin not long ago for a very handsome profit, and moved back to the Appalachian region. We were able to buy a similarly sized house on nearly 60 acres, pay off what little credit card debt we had, and still had some cash left over. Now, with the exception of income taxes, nearly all our annual income is disposable. Which effectively has amounted to a significant pay raise. So even if we had had to pay a capital gains tax, the increase in disposable income would have more than made up for it.


And very soon, we'll be starting two businesses, both of which will almost certainly "operate at a loss" for the next five years (:laughing:)... another big tax break. I might even start "farming" so I can take all the federal agricultural subsidies and tax deductions they'll give me

There are a lot of loop holes people never take advantage of

3 years is better, 5-7 usually gets you audited.

[ZeroTA]

And very soon, we'll be starting two businesses, both of which will almost certainly "operate at a loss" for the next five years (:laughing:)... another big tax break. I might even start "farming" so I can take all the federal agricultural subsidies and tax deductions they'll give me

There are a lot of loop holes people never take advantage of

My brother bought 60+ acres of hunting ground. You could consider it an investment, but he really just bought it because he wanted it to hunt on. He's on some Forestry program which basically pays him to do nothing to his property, and it covers the property taxes on his house (the one he actually lives at).

[H60DoorGunner]

3 years is better, 5-7 usually gets you audited.

Good call. Thanks for the advice!


My brother bought 60+ acres of hunting ground. You could consider it an investment, but he really just bought it because he wanted it to hunt on. He's on some Forestry program which basically pays him to do nothing to his property, and it covers the property taxes on his house (the one he actually lives at).

I had considered buying some land that was managed with a similar forestry program, but I'll make more money if I can "farm" my land. My property taxes aren't very high here.

[Jeff22]

I work with two guys who own rental properties. One is in the process of selling a four unit apartment. The other guy is keeping his two flat. He's quite handy with doing maintenance himself so he saves money by doing lots himself when required.

Both guys have always said if your have rental properties you need to keep a chunk of money available to pay for unforeseen emergency repairs, and be REALLY careful about who you rent to.

[BillyOblivion]

I'd ideally like to have 6 months expenses in the bank, but I'm not sure about 12 months. Seems like that much cash could be put somewhere that will grow it faster.

"In the bank" doesn't necessarily mean in your checking account.

Ideally I would like to have 3 months savings in my savings account, 3 months (plus growth) in a money market account, and then 6 months in a better, but low risk investment. Then I can get to that first 3 months at *any* time, the second 3 months on short notice, and the reset of it in a couple days.

[BillyOblivion]

No, I will have a mortgage on my primary with some down payment between the conventional loan minimum (I think 3% == ~$15,000) and 20% (== ~$75000).
With a full 20% down I'll have enough leftover cash to do some new-home maintenance (carpet, appliances, etc...) and put a 3 month reserve in the bank.
With the minimum down payment I will have enough cash to do that, plus something else (real estate? stocks and bonds? I lean towards real estate / rentals). But as a consequence I have PMI and higher principal + interest that just about balances out any rental income.
I think I'd rather put the larger down payment on my house, have more monthly cash flow, and save for rentals or whatever I want to invest in. But I'm no expert and I'm asking for opinions from people that might have more experience than me.


My opinion: I wouldn't pay PMI. I would try to get the lowest down I could without paying PMI, but PMI is money that is going away every month, that doesn't protect ME at all, and that I'll never get back or see any benefit from.

You could put that same money in either a tax deferred vehicle (401k, etc.) for retirement, or put it into some sort of non-retirement oriented investment until it grows enough to be a down payment.

Also, of you're putting 20 percent down you're knocking down your interest rate a bit (IIRC), AND your monthly mortgage payment. This might get you into a place where a 15 year note is within your payment schedule.

Be careful with financial advisers, some of them are Pirates, and not in a good way. Lots of them have some sort of magic investment that beats the stock market without any of the risk. Ask them how many mutual fund managers are invested in their product.