Where to invest?

[67walkon]

We're getting about $400k from the sale of a piece of property. The way we've got things set up, we shouldn't really need any income from it for probably another 7 years. Right now, we are pretty heavily allocated in bonds, and largely tax free bonds, but have been buying some dividend paying stocks.

What do you guys think would be some good places to put that kind of money? If we could get 4% or 5% annualized growth, it should be up to a little over $550k by then.

 

[Gatordoc50]

Too little info to give you any advice. In my personal situation, I would want to protect my investment and would likely invest in short term bonds or CDs and invest the proceeds in stocks. You won't end up with 550k after 7 years most likely, but you will definitely make money.

 

[Nords]

We're getting about $400k from the sale of a piece of property. The way we've got things set up, we shouldn't really need any income from it for probably another 7 years. Right now, we are pretty heavily allocated in bonds, and largely tax free bonds, but have been buying some dividend paying stocks.
What do you guys think would be some good places to put that kind of money? If we could get 4% or 5% annualized growth, it should be up to a little over $550k by then.

Two questions:
1. Is that after-tax $400K? If it's a piece of rental property (as opposed to a piece of land) then you'd be paying depreciation recapture on the rental structure. And your $400K might also be a huge enough chunk of income to be subject to AMT. That much income this early in the year will certainly make you eligible to pay estimated taxes for the rest of the year (and in Jan 2013).

2. What's your asset allocation? You're asking a trick question about where to put the money (whether it's $400K or less), because the answer is "wherever your asset allocation says you should put it". So either you don't have an asset allocation or you're thinking about changing it.

Until you've answered both questions, I don't think you're ready to put anything anywhere.

So perhaps you should park the money in a couple of insured accounts until you figure out your taxes and your asset allocation.

If we sold our rental property tomorrow then I'd run TurboTax to come up with the tax numbers, throw an extra 10-20% after that to be sure I could pay our taxes, and put the rest of it into the asset allocation I have listed in my user profile. Heck, at those numbers I might even pay an accountant $500 to tell me what I think about the taxes.

After that I'd want to know where you can be so confident of obtaining 4-5% annual growth...

 

[obgyn65]

Same as Gaterdoc. I would put most of the proceeds in laddered CDs, then possibly annuitize little by little as they reach expiration dates and as I get older.

You won't end up with 550k after 7 years most likely, but you will definitely make money.

 

[Bestwifeever]

I believe I heard someone whisper "pssst.... Wellesley"

 

[eytonxav]

Given your bond tilt, you might want to consider at least putting a portion of it in emerging markets which have taken a hit since last summer, as the growth prospects there remain favorable over the long term.

 

[Gatordoc50]

If you've won the game, stop playing. If you want to take risk, do it with something you have more control over. Like blackjack.

 

[67walkon]

It's now vacant rental property but being sold at a loss, so no tax. It was inherited property with a high basis and even after depreciation, there will still be a paper loss. Nords, our asset allocation is mostly bonds, but because of what I've read here, we've shifted some to equities. The allocation is 80% bonds, 10% equities and 10% cash, although we have about 6 months worth of living expenses in cash not included in the investment accounts. The bonds are roughly 80% tax exempt and 20% non tax exempt. The goal has been to create tax free income, but we've started shifting a little bit to equities because of long term concerns with inflation.

We don't need to gamble with this money, nor do we care to, and would be very happy with a relatively secure 5% growth until we need it. I'm just wondering where we might get that. Despite having a pretty good net worth, we've never had a big chunk of cash come in before--after we do a couple of things around the house, we'll still have that $400,000 to invest.

 

[Gatordoc50]

It's now vacant rental property but being sold at a loss, so no tax. It was inherited property with a high basis and even after depreciation, there will still be a paper loss. Nords, our asset allocation is mostly bonds, but because of what I've read here, we've shifted some to equities. The allocation is 80% bonds, 10% equities and 10% cash, although we have about 6 months worth of living expenses in cash not included in the investment accounts. The bonds are roughly 80% tax exempt and 20% non tax exempt. The goal has been to create tax free income, but we've started shifting a little bit to equities because of long term concerns with inflation.

We don't need to gamble with this money, nor do we care to, and would be very happy with a relatively secure 5% growth until we need it. I'm just wondering where we might get that. Despite having a pretty good net worth, we've never had a big chunk of cash come in before--after we do a couple of things around the house, we'll still have that $400,000 to invest.

Nords is right in that finding a secure 5% doesn't exist as far as I know. Sounds like you are comfortable with your allocation, which is the most important thing. I have nothing against equities, in fact I am about 85% equities. But it's not money I need for a very long time, if ever. One thing not mentioned much is that the bottom is easy to envision.We pretty much saw it in 08. No one knows what the top looks like, maybe we have already seen it for our lifetime.

 

[Nords]

It's now vacant rental property but being sold at a loss, so no tax. It was inherited property with a high basis and even after depreciation, there will still be a paper loss.

I'm not a tax accountant, and I could be wrong, but in your situation I would be very careful to clarify my understanding of depreciation recapture. Whether or not you've actually been depreciating that structure, the IRS has been assuming that you've been doing so. Now they want their money back (depreciation recapture) and that might be a totally separate tax question from the basis of a capital loss. The IRS has seen this situation far more frequently than either of us, and they will not be gentle or merciful. I may be wrong, but I'm definitely paranoid.

We don't need to gamble with this money, nor do we care to, and would be very happy with a relatively secure 5% growth until we need it. I'm just wondering where we might get that.

I think that the phrase "relatively secure 5% growth" is oxymoronic, especially in the hands of an unscrupulous financial advisor.

To achieve a 5% APY you'd have pretty significant swings in volatility and you'd have to be in it for at least 10 and probably 20 years. Small-cap value, maybe large-cap dividend stocks (including the dividend as part of the total return). Maybe junk bonds, although you might come across a few defaults as you chase yield.

Or, if you want security, you'd have to accept ~3% with much lower volatility.

If you've won the game, stop playing. If you want to take risk, do it with something you have more control over. Like blackjack.

I wrestle with that question every day. If you've won the game and have leftovers, then you could either bury them in a coffee can in the back yard or invest them even more aggressively. Either way you don't need them, so what's the difference between the two approaches?

But I suspect that I'm going to return from Vegas in agreement with you about blackjack.

 

[web_diva]

The asset allocation in the Harry Browne Permanent Portfolio supports a 4% drawdown while preserving the portfolio from wide fluctuations in value. If interested, see crawlingroad.com and gyroscopicinvesting.com.

 

[HpRyder]

If you going into equities and can handle K-1s, try MLPs like GEL, MMP, BPL,SXL LINE, EPD, KMR, KMI,.. They can easily get you 5%.

 

[FinanceDude]

I would look at income funds with consistently high payouts........

 

[nun]

With the Fed announcing low rates through 2014 today what about looking at mortgage REITS. If you are ok with leverage and a bit of price risk you can get dividends well above 10%

 

[Wrirya]

Why not 1031 exchange and get back into some properties? It sounds like you did well on this property, again it is hard to answer without knowing the percentage this money is to your overall net worth. You may want to look in purchasing notes secured against real estate we have done that with much success and would help you get to a higher retune you are looking for

 

[Nords]

Why not 1031 exchange and get back into some properties? It sounds like you did well on this property, again it is hard to answer without knowing the percentage this money is to your overall net worth. You may want to look in purchasing notes secured against real estate we have done that with much success and would help you get to a higher retune you are looking for

He says he's getting $400K from the sale of the rental property, but its inherited basis is high enough that he's not going to recognize any capital gains on the sale.

If there are no cap gains then I'm not sure what purpose or benefit a 1031 would serve.

When you say "notes secured against real estate", are you referring to loaning money to real estate buyers or to tax liens? Got a link?

 

[Wrirya]

He says he's getting $400K from the sale of the rental property, but its inherited basis is high enough that he's not going to recognize any capital gains on the sale.

If there are no cap gains then I'm not sure what purpose or benefit a 1031 would serve.

When you say "notes secured against real estate", are you referring to loaning money to real estate buyers or to tax liens? Got a link?

Thanks Nords. I missed the details on the inherited basis.

I mean lending money to real estate investors short term secured first position in real estate. Take a look at ww.loansmls.com or www.DoHardMoney.com in full disco sure the second is a company I have ownership of. The first is a posting board for loans. I like the short term loans at lower loan to value much better. I have not done anything with tax Liens,

 

[Nords]

Oh, yuck. Well, sorry about that, mods. I guess I asked the question, but I felt like I was led into it!

Getting back to the original subject, I think the OP should pick an asset allocation first. And I'm pretty sure that "hard money lending" is not a suitable asset allocation for any but the most experienced and risk-tolerant investors.

 

[Chuckanut]

Take some time and make sure you don't end up investing this one time opportunity in the Capital Depreciation Fund or some other scheme you don't understand well. Back in the 70's a friend's wife inherited $100,000. They went to an adviser who put them in a number of limited partnerships. By the mid 80's they had torn up the last one and tossed the paper work into the trash. The guy was an accountant but he did not understand how these partnerships were setup and how they depended upon dubious tax loopholes that the Feds did not agree with.

 

[sunsnow]

Not sure about the details of your circumstances, but if you have any outstanding debt, you may want to pay it off with the proceeds from the sale.