stocks to real estate

[windsurf]

I am going to take @ 150k (@10% of net worth not including our home) which is now in a taxable account and spend it on a condo for my grown-up but single working child.* She works hard for a not for profit and we want to do this to free her from rent and, hopefully, to further diversify our holdings and to stop my penchant for playing with stocks in this taxable account.* We would probably be selling in three or four years.* The condo will be in NE Ohio and real estate values here are relatively stable (read that stagnant if you wish).* Good idea/bad idea??

[charlie]

I gather that you want to subsidize her rent without being so crass
as to just send her a check. I suggest you talk to a good CPA
to check the tax angles on doing this. There might be a way of
"renting" the condo to her and subsidizing her some other way
at the same time without incurring the wrath of the IRS.

Cheers,

Charlie

[cute fuzzy bunny]

I dont like condo's in the first place as real estate investments, although they do work out ok in some markets at some periods of time. A condo in a stagnant RE market? I'd just pay the rent for her and call it even.

Or do something dopey and put the $150k into vanguards high yield fund and pay the rent out of the 7% yield...that'd be something in the vicinity of $10,500 a year...that should cover an apartment rental in your neck of the woods...?

[windsurf]

Captain Vanguard advises: the V. High Yield fund will give 7% per year.

Please save me the trouble of looking it up. Cannot be guaranteed, right? What's the historical return over the last 20 years??

[MRGALT2U]

Quote:

Originally Posted by windsurf Captain Vanguard advises:* the V. High Yield fund will give 7% per year. Please save me the trouble of looking it up.* Cannot be guaranteed, right?* What's the historical return over the last 20 years??

I don't know the history. But, of course there are no guarantees.
I make at least 7% on all junk or near-junk/HY.

JG

[Nords]

Quote:

Originally Posted by windsurf I am going to take @ 150k (@10% of net worth not including our home) which is now in a taxable account and spend it on a condo for my grown-up but single working child. She works hard for a not for profit and we want to do this to free her from rent and, hopefully, to further diversify our holdings and to stop my penchant for playing with stocks in this taxable account. We would probably be selling in three or four years. The condo will be in NE Ohio and real estate values here are relatively stable (read that stagnant if you wish). Good idea/bad idea??

I'm ambivalent. I can only imagine Martha's opinion!

Here's some things to consider:
1. How's your spouse feel about this? If there's anything less than complete agreement then it'd be all too possible to have to deal with smoldering resentment, especially if that spouse isn't the child's mother.
2. Do you have any other kids who might be expecting parity? Sibling rivalry, even if they're as close as the Olsen twins, could make it difficult to get them to appreciate the "works hard for a non-profit" part.
3. "The Millionaire Next Door" has many bad things to say about Economic Outpatient Care and its damaging effects on motivation & initiative. "Teach a child to buy a house" is a skill, "buy a child a house" is a subsidy.
4. You might have to pay taxes when you liquidate the investment to withdraw $150K. So this could be more expensive than originally expected, and you might have to pay estimated taxes if there's not sufficient withholding.
5. Unless this purchase is done as an investment, with a signed rental agreement and Schedule E filed on the rent receipts, the IRS might decide that this $150K is a gift. This would affect your gift tax exclusion and might require paperwork to be filed. This isn't necessarily a problem but it'll play havoc with probate if you die without filing the form.
6. Closing costs are generally not earned back from rising home equity for five years or more. If you sell after 3-4 years then you'll almost certainly lose money, especially if you pay a realtor's commission at either the purchase or the sale. And it's hard to imagine a RE runup in that part of the country, especially after reading this article on shaming absentee owners.
7. Is this hard-working kid going to be expected to handle maintenance & repairs, or is that an additional cost to you or to her?
8. What happens when the hard-working child loses the job? Gets a live-in roommate or gets married? Has a kid and decides to be the stay-at-home parent? Gets sued? Files bankruptcy? I'm not claiming that any of those things are going to happen, but living rent-free in assets owned by others can imply that some legal or tax maneuvering is at hand. Life changes could get messy.

Other considerations:
1. You could charge rent (and file Schedule E) and then return it under the table as a cash gift to the child. I'm sure the IRS has many bad things to say about this but it appears unenforceable (unless you brag about it on this board and get turned in for the 10% recovery reward).
2. You could deed the property to the child over several years in increments (under the $11K annual gift limit) of about $22K (gifting from both you and your spouse). In 8-10 years the child would be a homeowner and you'll still have your full inheritance-tax exclusion.

[cute fuzzy bunny]

Quote:

Originally Posted by windsurf Captain Vanguard advises: the V. High Yield fund will give 7% per year. Please save me the trouble of looking it up. Cannot be guaranteed, right? What's the historical return over the last 20 years??

Of course not, its a high yield/low credit rating corporate bond fund. The danger is the companies issuing the bonds will default and take part of the funds principal with it. According to ESRBob there have been no defaults lately. Should the economy drive into a large hole, there could be some fairly decent defaults. Vanguards fund tends to be 'less junky' than the usual high yield fund.

The vanguard fund launched in 1986. If you had invested $10k in it then and reinvested dividends, it would be worth about $37k now.

But basically if you never sell it, and there arent severe defaults, you should see something in the 7-10% range for yields. The current 7% is sort of piss poor for high yield by historic standards.

[windsurf]

Thank you for all of the responses.* In answer to some of Nords' questions (but first, I assume from reading this list for awhile that you not a real estate/tax attorney, so how did you learn all of this stuff??!!)* My wife is on board 100%* My daughter is an only child and has been a great kid, through school and distinguishing herself in her field in our state.* However, as I said it is not for profit work and she works for half of what she would make doing the same type of work for a corp.* My wife and I plan on keeping the digs in our name specifically b/c of potential marriage, etc and my duaghter understands that this is a bridge for her. I look at it as a hedge since this is a taxable account and I have no confidence that the market is going anywhere but sideways over a very long run (if not down). As to the stocks and* tax on gains I will liquidate the losers along with some winners and that will be a wash (unless the market soars or tanks over the next couple of months).* Our motivation is to do something for our kid while whe needs it.* I have a younger brother who was just diagnosed with advanced Ca a couple of weeks ago.* Life can be too short to plan on doing favors at some advanced point in the future.* Nords, I am going to go to school on your suggestions and really appreciate the heads up.* As to Cap'n Mystery's suggestion,I am planning to Vanguardize a substantial portion of my 401k which I can now rescue from the firm's offerings as I retired nearly one whole month ago!*

[charlie]

Windsurf,

You and your wife could give her up to $22,000 per year with
no gift taxes. Surely that would be simpler than buying a condo.

It sounds to me like you are convinced that buying a condo is
a good investment. If it were me, I would go ahead and cash
out the $150k in individual stocks (you don't need no stinking
individual stocks) and invest the proceeds in:

1) A ladder of CD's that matches the length of time you plan to
subsidize her rent. Just send her a check each year when
the CD matures. Penfed is a good CD source.

2) Put the rest of your money in a diversified mix of low cost
stock and bond funds according to your long term AA plan.
You do have one, I hope.

Cheers,

Charlie

[P.S.]

You asked for opinions - bad idea. Personally consider myself and husband in "the kid" category, and think that in the long run, your gift would do more harm than help for your daughter.

JMO, but at a certain point in life, a person needs to learn that there is a cost for everything, and a price to pay for everything.

My early, early childhood was spent in NE OH, but then parents moved to east coast, then SoCal . But I've followed the economy and real estate in NE OH. Not a pretty picture. Barely keeping pace with inflation/maybe 3%, over 20 years, and that just for the most desirable neighborhoods. People talk about falling prices in local bubbles in the best of economic situations, but what about in the OH locales where the main industry is manufacturing, and jobs are fleeing elsewhere? Vibrant is not a word to describe NE OH.

But if you feel very strongly in buying property, how about helping her to do it herself? A very low rate loan? She does the leg work to scope out properties, etc. Or charge her a token rent, which wouldn't much make a difference to you , but would to her?

Quote:

Originally Posted by Nords 6.* Closing costs are generally not earned back from rising home equity for five years or more.* If you sell after 3-4 years then you'll almost certainly lose money, especially if you pay a realtor's commission at either the purchase or the sale.* And it's hard to imagine a RE runup in that part of the country, especially after reading this article on shaming absentee owners.

For $150K, you could get a house easily in NE OH. But if she has trouble with rent, house upkeep might be too expensive. Would ditto Captain M that condo, unless it's in a >55yo community, might not be a good choice. If you pay cash (which $150k should be plenty), closing costs would just be a few hundred dollars, but because of the dismal rate of OH RE appreciation, you'd probably make more money by just plunking it in a CD.

[tryan]

If you think of this as an investment, you need to charge her rent. Otherwise this will the "gift that keeps (you) giving": insurance, condo fees, water/sewage, maintenance.

Point being, without rent this is bottomless pit - not an investment.

[ShokWaveRider]

Quote:

Originally Posted by Captain Mystery The vanguard fund launched in 1986. If you had invested $10k in it then and reinvested dividends, it would be worth about $37k now.

CM (Almost TH?)

Which fund is this? The ones I found on Vanguard's site staarted in 1978? Not 1986 there are 2 listed VWEHX and VWAHX (Tax Exempt) Am I mistaken? The former has a YTD Return 0f -.96, not good for your first year of rent payments?

SWR

[MRGALT2U]

Quote:

Originally Posted by tryan If you think of this as an investment, you need to charge her rent.* Otherwise this will the "gift that keeps (you) giving": insurance, condo fees, water/sewage, maintenance.* Point being, without rent this is bottomless pit - not an investment.

That was my first thought.

JG

[MRGALT2U]

Quote:

Originally Posted by windsurf Thank you for all of the responses.* In answer to some of Nords' questions (but first, I assume from reading this list for awhile that you not a real estate/tax attorney, so how did you learn all of this stuff??!!)* *

I ask myself that same question all the time......

JG

[Nords]

Quote:

Originally Posted by windsurf Thank you for all of the responses. *In answer to some of Nords' questions (but first, I assume from reading this list for awhile that you not a real estate/tax attorney, so how did you learn all of this stuff??!!) *My wife is on board 100% *My daughter is an only child and has been a great kid, through school and distinguishing herself in her field in our state. *However, as I said it is not for profit work and she works for half of what she would make doing the same type of work for a corp. *My wife and I plan on keeping the digs in our *name specifically b/c of potential marriage, etc and my duaghter understands that this is a bridge for her. *I look at it as a hedge since this is a taxable account and I have no confidence that the market is going anywhere but sideways over a very long run (if not down). * As to the stocks and *tax on gains I will liquidate the losers along with some winners and that will be a wash (unless the market soars or tanks over the next couple of months). *Our motivation is to do something for our kid while whe needs it. *I have a younger brother who was just diagnosed with advanced Ca a couple of weeks ago. *Life can be too short to plan on doing favors at some advanced point in the future. *Nords, I am going to go to school on your suggestions and really appreciate the heads up. *As to Cap'n Mystery's suggestion,I am planning to Vanguardize a substantial portion of my 401k which I can now rescue from the firm's offerings as I retired nearly one whole month ago! *

Well, good, family harmony won't be an issue.

I do our own taxes and I read obsessively. *It's interesting to me. *But while I'm an inch wide and a mile deep on our own situation, yours may be different. *You'll want to do your own research on how to own/rent real estate and do the taxes, especially since I know nothing about the Ohio version of them. *(I grew up near Pittsburgh, I have relatives in Cincinnati, but I ran away from all of that as fast as I could.)

I'm not sure that any RE is a good short-term investment (less than 10 years). *There may be some appreciation but it'd be wiped out by buying/closing costs. *And if there's no appreciation, how long are you willing to wait for it? *

I guess the core of the issue is what you want to do for your daughter. *If you want to do something nice for her (while putting your money out of your hot hands) then you're doing a very nice thing. *If you want to foster her personal growth & independence, then buying her a condo is not helping.

I remember being in your daughter's situation 20 years ago. *We called my Dad and asked for a little down-payment help on a condo that we really couldn't afford, and his reply was "Gee, I'd like to help, but my money's all tied up in my investments and I can't liquidate it without taking a bunch of losses & taxes." *It was very nicely done (I had no idea what he was doing other than the "Sorry, no" part) and it forced us to take responsibility for ourselves. *My wife & I went back to our budget to buy a cheaper place that worked out even better for us. *We also took the time to learn a heckuva lot about alternate home-buying methods that helped a lot on our next purchase. *In retrospect I'm a little ashamed that I called my Dad in the first place, and I'm glad that he had the guts to tell me "No."

I can't help you with your testosterone-fueled stock-picking problem because I have the same one. *However here are some compromise growth & independence suggestions:
- Tell her that you're gifting her the $150K over the next 7-8 years ($22K/year). *She can save some of it in her 401(k)/Roth so that at least she won't be missing out on her yearly tax-deferral limits, and spend the rest on rent. *And when she's ready to buy a house (wherever she settles down) she might have saved enough for the down payment, or she could tap the Roth for it.
- If she has the time, consider partnering with her on a duplex. *You buy it and she manages the rental of one unit while paying a reduced rent in the other. *But I doubt this would make any money in less than 10 years.
- Offer to gift her the 20% down payment on her first home. *That'll get her a better mortgage rate (without PMI) and start her thinking about owning instead of renting.

[MRGALT2U]

Good thoughtful post Nords. I must take issue with your statement
about holding RE for 10 years to make any money. That is simply not true. Surely (yeah, I am setting you up here) you have heard of "flippers".
I'm not talking dolphins here folks. If you know what you are doing,
you can make huge profits in months, not years. And, you have some personal control. And, you don't need any cash to start. And, if any
one is wondering..................No, I do not sell any tapes or books
on this stuff. Carlton Sheets speaks the truth, however.

JG

[Nords]

Quote:

Originally Posted by MRGALT2U Good thoughtful post Nords.* I must take issue with your statement about holding RE for 10 years to make any money.* That is simply not true.* Surely (yeah, I am setting you up here)* *you have* heard of "flippers". I'm not talking dolphins here folks.* If you know what you are doing, you can make huge profits in months, not years.* And, you have some personal control.* And, you don't need any cash to start.* And, if any one is wondering..................No, I do not sell any tapes or books on this stuff.* Carlton Sheets speaks the truth, however. JG

He sure doesn't practice it, though. In John T. Reed's opinion he's right up there with Kiyosaki.

While I agree that flippers can make money, I think claiming that a guy can help his daughter and make short-term profits is misleading at best and foolhardy at worst. But lemme rephrase my original statement: "I'm not sure that any RE is a good short-term investment-- unless you're an egotistical, brilliant, opinionated, hard-working, big-talking investor speculator who's often uninformed but seldom undecided." That may apply to me but it may also apply to you, too, John.

[unclemick]

It's probably like a lot of commercial fishermen I know - good seasons, bad seasons, and so so seasons - not to mention location, location, location.

Come to think of it - I know a fix and flipper - been at it thirty years or more. He also claims to make money betting horses. He WON'T be retiring soon - at least that's my guess.

[cute fuzzy bunny]

Quote:

Originally Posted by ShokWaveRider CM (Almost TH?) Which fund is this? The ones I found on Vanguard's site staarted in 1978? Not 1986 there are 2 listed VWEHX and VWAHX (Tax Exempt) Am I mistaken? The former has a YTD Return 0f -.96, not good for your first year of rent payments? SWR

You can call me "Grand" today.

You're right, the fund goes back further than that. OP was looking for last 20 years data, and thats what I pulled up, then misspoke that that was the inception date.

As I mentioned, this would probably be money I wouldnt be taking out anytime soon. I'm presuming if they're buying a condo that this isnt a flighty 1-3 year event, but something they're planning on doing for 7-10 years plus. Sub 1% NAV fluctuations here and there look pretty good compared to the closing costs on a new home plus the realtor fees they'd pay when they finally exit, not to mention the tax implications.

If/When the arrangement to pay rent from the high yields yield, it becomes monthly income to them instead of rent money. As I mentioned, yields are probably only going to go up, and excepting a very bad patch in the economy, defaults taking more principal away are improbable in this 'not very junky' junk fund.

For diversity, junk moves quite differently from other bonds, although there is some correlation with stocks.

If I recall correctly, our old friend Ted liked this fund and had some money in it, finding the risk/reward ratio pretty good. That 'nearly nobody' in the investment pundit land wants to own junk right now also tickles my contrarian nerve.

I have a chunk of it, which throws off my monthly "toy money" to buy a few things for myself, the wife or the baby. Its thrown off ~6,000 since I bought it, and the nav has dropped about $1500. Not bad for a year and a half or so worth of investing.

Its had a bit of a drop lately, which makes it look a little like a 'buy' to me.