What Would You Do With $650,000?

[outtarentals]

I've been following this forum for some time with great interest - but now have a big decision to make about what to do with money coming to me next month from the sale of a rental I've owned for 30 years. It'll be about $650K after capital gains taxes and expenses.

Some background - I'm a widow in my late 60's in Southern California. I have pensions - $1500 a month - and another 3 rentals I own free and clear bring me about $5000 a month. The taxes and insurance on these three cost about $500 a month for all three (I've owned them for 20-30 years - so taxes are low) plus I allow about $1000 a month maintenance on all 3 combined. So - say $3500 a month from these. I still have good depreciation on these as I got 100% step up basis on them when my husband died. ( California is one of the 9 Community property states that allow 100% step up basis when a spouse dies).
I pay about $900 a month on the mortgage of my home (at 5.25%) and I have very good health care and long term health care insurance. I don't owe anything else. I'm in good health and have a very busy life with quite a bit of travelling but have simple needs so am looking at another 20 years or so. I don't have children but want to leave something to my friends and some charities.

I sold another rental last year and received $400K from that. $100K is invested in an annuity, and I have put the rest with a financial company who has earned me about 12 - 13% on the remaining 300k over the past year in a fairly conservative mix of mutual funds. They've been paying me another $1500 a month from this and they pay themselves 1% as their fee - which is not included in the 12-13% they've made for me. I know NOTHING about the stock market and have always been in rentals. Now, I don't know what to do and am afraid if I put the rest of the money with this firm that there could be a big stock market downturn even though they are reputable and have done well this year in this good market. I am also concerned about the taxes I'll pay with no shelters to speak of if I get rid of my other 3 rentals that are getting older. If I sold them outright - before the 15% capital gain rate sunsets in 2010, I'd have perhaps another $1.2 million to invest. Any advice? What would you do?

Incidentally, my late husband & I started with nothing but retired at 40 with rentals we worked on ourselves. I'm a firm believer in Early Retirement! Outtarentals.

 

[Nords]

I am also concerned about the taxes I'll pay with no shelters to speak of if I get rid of my other 3 rentals that are getting older. If I sold them outright - before the 15% capital gain rate sunsets in 2010, I'd have perhaps another $1.2 million to invest. Any advice? What would you do?

It sounds like you're diversified among income sources-- a pension, an annuity, cash-flowing rentals, mutual funds (admittedly high-cost but doing well). You don't explicitly say so but it sounds like your current income is higher than your expenses.

How well are you protected against inflation? If you stay with the same asset classes you have now for another 20-30 years (of course maintaining the properties, raising the rents, and so forth) will your income still exceed your expenses? Are you drawing Social Security yet? Stepping back from the details, if your current income streams (and your future SS) keep you ahead of inflation then it really doesn't matter what you do with the $650K. You're bullet-proof. Maybe you could gift your friends or establish a college scholarship or endow a hospital wing or buy a charitable remainder trust.

If you choose to remain blissfully ignorant of the stock market (which is not necessarily a bad idea considering your impressive rental-property accomplishments) then you could save a lot of your income by moving the mutual-fund money to a Fidelity or Vanguard lifestyle fund or a balanced income fund like Wellesley. (Search the board for CFB's Wellesley posts on their performance record.) "One percent" doesn't sound like much when it's expressed as a percentage. Convert that 1% to dollars and see how much of your annual income it represents. You will probably pay taxes on moving the mutual funds to the new investments but as you've said the 15% cap gains tax rate won't be around forever.

As for the rest of the real estate, if you feel it's necessary to stay invested in RE, there's a big trend toward moving landlords from individual properties to TIC partnerships via 1031 exchanges. The idea is that you remain a real estate owner, with monthly income, but you're a step removed from the process and you're now behind a property-management company. There are many fine title-transfer companies willing to [-]collect a commission[/-] help facilitate your goals.

But you're letting a 15% tax situation drive your decision on what to do with the other 85%. You've already benefited from a basis step-up and from years of LBYM. You could just liquidate, pay the taxes, and put the profits in Treasuries or Wellesley or- or- or anything. You've already won the game, and you're just running up the score!

 

[haha]

If I sold them outright - before the 15% capital gain rate sunsets in 2010, I'd have perhaps another $1.2 million to invest. Any advice? What would you do?

Congratulations to you and your husband for doing such a fine job. I am sure you and your accountant can come up with the best techniques to do whatever you want to do.

You say you are in your late 60s and in good health. If being a landlord pleases you it would be easy for you to continue on that path. OTOH, if you would like to take some cruises, travel on tours or with a companion or companions that is also right there for the taking.

How do you want to spend this period in your life?

Ha

 

[kcowan]

I agree with Nords and Ha that you might just get a property manager to take over the remaining properties so you can really retire.

For the $650k, a low MER index fund could present a low cost alternative to the 1% fee you have paid in order to just get average performance. The DJIA was up 16.3% in 2006, for example.

 

[Darryl]

Sounds like your income is higher than your expenses. I think Nords captured it very nicely with "you've already won the game, now you're just running up the score".

I have a very boring suggestion. Consider paying off the mortgage. You do have a great rate at 5.25% and you can "probably" do better in the market but we won't know that until after the fact and it doesn't sound like you need ready access to this cash.

You have a nice diversified portfolio with multiple income streams. You can do index funds, lifestyle funds, really whatever you want. Just don't put all the eggs in one basket, try not get clobbered with fee's and work only with the most reputable companies.

Great job starting with nothing and making it something.

 

[outtarentals]

What would you do with $650,000?

Thanks for all these really good replies. After reading them carefully, I see that my immediate problem IS what to do with this new $650K. I have to decide if I'm going to stay with the same firm even for the $300K I have with them now. I guess the 12-13% is not such a good deal. I thought it was because it is better than the 5+% I would get in CD's but of course not as secure. So I need to learn more about the world of mutual funds and am a bit nervous about managing my own money. I am more than comfortable with my current income - just want to be sure I have enough for a good retirement home - about $6000 a month - if I need it. My goal too, is to simplify my holdings to make it easier for my successor trustees.

As far as the 3 rentals are concerned - I am considering a charitable remainder trust in a few years for at least one of the rentals. I believe I could get about 7% return when I'm 70. I could decide to move into one for 2 years as my principal residence and take a $250K deduction when I sell it. Not too thrilled about that really and even if I exchanged it into another house I could live in - I'd have to keep it for 5 years under these new IRS rules, and the property taxes - which are now $650 a year would probably be $8500 a year for the replacement property for 5 years - that's $40K down the drain even without double selling expenses, so - not a good option. Also, who can predict what our unpredictable Government will do with capital gains by then??!!
Paying off the mortgage isn't an option just yet - I have a half interest in my principal residence which I share with my partner. I am looking at the TIC's - have to do more research about those.
Thanks again for all these suggestions. I'll welcome any more - especially about how to manage my own money.

 

[FIREd]

outtarentals,

if managing your own money looks daunting why not consider a fund like vanguard Wellesley or even the Vanguard target retirement income fund (more diversification with the latter + it is an index fund). They are geared towards people who have an immediate need for income while still offering the potential for growth (they keep about 30-35% in stocks to try keeping up with inflation). They are professionally managed and therefore there is no need for you to deal with technical issues such as asset allocation and rebalancing. Also they are cheap investments. Your 300K would cost you about $750 a year in fees with either wellesley or the target retirement income fund whereas right now it is costing you 1% in advisor fee + probably another 1.5% in fund expenses, so about $7500 a year in fees and expenses. So really you could save about $6750 a year by moving your money to a low cost mutual fund company.

 

[FIREd]

Oh and by the way, if you add the 650K to the 300K you have already invested, the savings would top $21,000 a year...

 

[outtarentals]

What would you do with $650,000?

When you put it like that, FireDreamer - I definitely will look into the funds you suggested. I guess I can research them on the internet? Those figures are very persuasive. Thanks mucho for your help and interest. outtarentals

 

[FIREd]

outtarentals,

you can research them at www.vanguard.com or Morningstar: Stocks, Mutual Funds, and Investing. As Nords pointed out earlier Wellesley has a great track record and you can find quite a bit of information about that fund on these boards.

 

[FIREd]

Also Wellesley currently pays a 4.28% dividend yield (not all of it qualifies for the 15% tax rate on dividends). It means that if you invested your 300K + 650K in wellesley you could receive annual dividends in the order of $40,660, or about $3,400 a month (and that's without touching the principal which should continue to grow). When you add your rentals' income, the money you get from your pensions and SS, you should be able to easily reach your $6,000 a month income target. The dividend yield on the target retirement income fund is slightly lower at 3.82%, still very respectable.

 

[yona]

I think you will be better if you put the 650K in Berkshire Hathaway rather than buying mutual fund. Berkshire is managed by Warren Buffett, which is one of the best investors and CEOs ever. It is very safe - as it is one of the only companies in the world with AAA rating. For sure it will outperform the S&P 500 and probably will outperform any other fund you will chose.

You also don't need to worry about diversify, since Berkshire already holds a big bunch of businesses. To name a few - Gaico, Fruit of the Loom & Dairy Queen (more you can find here http://www.berkshirehathaway.com/subs/sublinks.html)
It also holds stocks in great companies such as Coca Cola, P&G, GE and many more.

Berkshire doesn’t pay dividends, so you don't need to meet the tax man until you really needs the money.

 

[kcowan]

I have to comment that I did some DD on BRK-B and concluded that the management succession change combined with the large cash position caused me to hold back. Down 2.4% YTD versus DJIA up 7.2% and even since Dec 2005 up 21.8% versus DJIA up 24.7% so not in my picks.

I also heard that Buffett might do a reality show to select his successor.

 

[yona]

I also heard that Buffett might do a reality show to select his successor.

No way. He is not Trump.

Succession - it is well defined. There are few candidates that can replace him. All of them are managing one of the subsidiaries of BRK. The CEO will have CIO (Chief investor officer). Buffett is now in the process of finding one (or more than one). But there is no reason to worry about it that much. Buffett can still leave 20 years or so.

large cash - 30-40 billions look like a lot. But it is not such a big % part if you include all the subsidiaries and investments. Also, Buffett said he is making some big investments now, so this amount will be smaller by year end.

BRK-b VS DJIA - The past performance depends a lot on the starting date that you chose. And in any case you should look trough the wind shield and not the rearview mirror. BRK-b is undervalued while DJIA is fair valued. And BRK is a better business than the average in the DJIA. I have no doubt that it will outperform the DJIA in the next 5 & 10 year.

Disclosure - I don't own any BRK share. I used to own some, but now I am concentrating on smaller companies where you can find more bargains. But I do follow BRK for years now, I read all the financial reports and understand the business quite well.

 

[jIMOh]

I've been following this forum for some time with great interest - but now have a big decision to make about what to do with money coming to me next month from the sale of a rental I've owned for 30 years. It'll be about $650K after capital gains taxes and expenses.

Some background - I'm a widow in my late 60's in Southern California. I have pensions - $1500 a month - and another 3 rentals I own free and clear bring me about $5000 a month. The taxes and insurance on these three cost about $500 a month for all three (I've owned them for 20-30 years - so taxes are low) plus I allow about $1000 a month maintenance on all 3 combined. So - say $3500 a month from these. I still have good depreciation on these as I got 100% step up basis on them when my husband died. ( California is one of the 9 Community property states that allow 100% step up basis when a spouse dies).
I pay about $900 a month on the mortgage of my home (at 5.25%) and I have very good health care and long term health care insurance. I don't owe anything else. I'm in good health and have a very busy life with quite a bit of travelling but have simple needs so am looking at another 20 years or so. I don't have children but want to leave something to my friends and some charities.

I sold another rental last year and received $400K from that. $100K is invested in an annuity, and I have put the rest with a financial company who has earned me about 12 - 13% on the remaining 300k over the past year in a fairly conservative mix of mutual funds. They've been paying me another $1500 a month from this and they pay themselves 1% as their fee - which is not included in the 12-13% they've made for me. I know NOTHING about the stock market and have always been in rentals. Now, I don't know what to do and am afraid if I put the rest of the money with this firm that there could be a big stock market downturn even though they are reputable and have done well this year in this good market. I am also concerned about the taxes I'll pay with no shelters to speak of if I get rid of my other 3 rentals that are getting older. If I sold them outright - before the 15% capital gain rate sunsets in 2010, I'd have perhaps another $1.2 million to invest. Any advice? What would you do?

Incidentally, my late husband & I started with nothing but retired at 40 with rentals we worked on ourselves. I'm a firm believer in Early Retirement! Outtarentals.

I would call T Rowe Price, Fidelity or Vanguard and ask the same question (what do I do with $650k?).

More than likely you would qualify for their instituitional help.

Whoever you choose (I like T Rowe Price), be comfortable with them. They should ask you lots of questions (goals, expenses, income). They will then suggest a mix which should meet the goals at a cost much lower than 1%, IMO.

 

[kcowan]

Disclosure - I don't own any BRK share. I used to own some, but now I am concentrating on smaller companies where you can find more bargains. But I do follow BRK for years now, I read all the financial reports and understand the business quite well.

If you want a smaller company with a better approach than Berkshire (i.e. more hands on like BRK used to be), have a look at CKI.TO on the TSX. In four years it has gone from $2.50 to $10 (split adjusted) and they also offer convertible debentures in Canadian $.

 

[outtarentals]

What would you do with $650K?

After talking to my CPA, I am going to temporarily park my $650K - the proceeds of sale from a rental property - in a PAR -(Periodic Auction Rate ) with Schwab. It is tax free and AMT free which I need this year because of a large capital gain. Currently earning 3.4-3.6%. CPA says I'll come out ahead this way compared to putting it in a regular money market fund at around 5.1% and paying all the taxes and AMT on the interest. It might only be for a month or so while I decide what to do with it.

I spent time on the phone with Vanguard - they are very helpful, but I don't speak the language yet and I found that Schwab was able to more quickly size up my situation and tie up all the loose ends - including an appt with a local advisor to open an account (well - of course!!).

It was a bit of a struggle for me with Vanguard - at least till I educate myself a bit more. In other words, I'm not quite ready to jump in at the deep end yet - so still need an interpreter to help me - though I know I'll pay for that out of my pocket for a while.

I am looking at Vanguard and Fidelity etc down the line a bit, though. I won't be ignorant forever!! I'll keep reading this forum. Thanks for all the advice - if you think of something else -please keep it coming.

 

[clifp]

Outa sounds like an excellent short-term solution. I didn't even know Schwab offered Periodic Auction Rates (I had to Google to make sure I understood them.)

Vanguard index funds are sort of the default choice for most of us and they definitely have the lowest expenses.

That being said my Mom had a similar experience when dealing with Schwab vs Vanguard, the Vanguard people were nice but the Schwab folks actually were better at talking her language.

My experience with Schwab advisor (both for myself, and my mom and her boyfriend) is they are quite competent, albeit a bit pricey for their hand holding.

At this stage of your life, given your lack of understanding of the stock market, along with your significant assets, you'll definitely want to avoid purchasing individual stocks (even great ones like Berkshire) and stick to mutual funds or there close cousins ETFS (exchange traded funds).

The good news is you don't have to become an expert at the stock market. What you should become educated on the characteristics of various assets classes stocks, bond, real estate, CDs, foreign stocks etc. The most important two questions to ask about any investment are "what is the expected rate of return", and "what is the historical worse case performance over a 2-5 year period."

 

[ats5g]

Along with Clifp's questions, a very good question to ask is "how much does it cost?" and to the broker/advisor "how much do you make from X vs Y?"

For example, if the person at Schwab makes a large commission from the PAR's, versus say a Schwab municipal AMT free money market fund, which one do you think he/she is going to recommend??

Another question is "Do I have to pay any money to sell the investment?" "If so, to whom does the money go?" Brokers are notorious for "forgetting to mention these."

Another very good rule of thumb is "if you don't understand how the investment works don't buy it."

Perhaps Brewer or someone can give a quick pros and cons of the PARs. For example, do you buy the PARs at auction? what kinds of fees are involved? How would you sell these? On the secondary market? How much interest rate risk is there? How much call risk? How much income risk? Why are these better or worse than a tax free money market fund? etc.

fyi - Widows with a huge chunk of cash is like chum in the water for brokers?

[edited to add] Schwab is one of the better brokers so I really shouldn't be so harsh, but you should definitely know your options before going in.

- Alec

 

[outtarentals]

What would you do with $650K?

Dear Clifp & ats5g,

Thanks for raising these points and playing devil's advocate -the kind of advice I was hoping for.

A little more info - my CPA told me to look for a CA tax exempt fund which DOES NOT INVEST IN PRIVATE ACTIVITY BONDS in order to avoid AMT on the proceeds. A few of his clients ran afoul of these last year and discovered that their tax exempt money market funds did not qualify for all the exemptions they had expected because they were invested in these bonds. So... that was the criteria I told Schwab I needed. I was told that there would be no fees entailed when I took the money out - but it would be tied up for 7 day periods. Also, it is insured - I will find out more on Fri when I have my appt with the local office. You can bet I will be asking all these questions! Thanks again.

 

[Bill T]

Wow

I love to hear stories like yours. You and your late husband did well. I can't give you any advice because I should be asking you for advice.

Thanks

 

[outtarentals]

What would you do with $650K?

Thank you Bill - you made my day! Speaking of that - a happy 4th to you and yours.

 

[ats5g]

Dear Clifp & ats5g,

Thanks for raising these points and playing devil's advocate -the kind of advice I was hoping for.

A little more info - my CPA told me to look for a CA tax exempt fund which DOES NOT INVEST IN PRIVATE ACTIVITY BONDS in order to avoid AMT on the proceeds. A few of his clients ran afoul of these last year and discovered that their tax exempt money market funds did not qualify for all the exemptions they had expected because they were invested in these bonds. So... that was the criteria I told Schwab I needed. I was told that there would be no fees entailed when I took the money out - but it would be tied up for 7 day periods. Also, it is insured - I will find out more on Fri when I have my appt with the local office. You can bet I will be asking all these questions! Thanks again.

Unfortunately, Vanguard and T Rowe Price don't offer MM funds that all together avoid AMT bonds. However, all [or at least most] of Vanguard's tax exempt bond funds don't include any AMT bonds. In addition, Fidelity has a plethora of state specific MM funds that don't include AMT bonds, including Fidelity California AMT Tax-Free Money Market Fund.

- Alec

 

[cute fuzzy bunny]

Hmmm...650,000...

You could go to the dollar tree and buy EVERYTHING.

 

[Doubledoc]

Tax Free Munis

Hi Outta,

Look at VCAIX and VCITX for CA Muni funds with exceptionally low expense ratios and virtually no AMT impact.

Glad to hear you're moving forward.