Just sold one of my houses, debating on what to do with the money

19 Replies

I had lived in the house for 2 years. I put down about 100K and am walking away with about 300K, 100K of which is my down payment, give or take (rounded numbers for ease of discussion).

I just moved into one of my cheapest rentals and have three other rental properties, two of them still seasoning since purchased last year via 1031 exchange. The other one is ripe for the picking this year or next. So I have 4 houses and 3 rentals now.

Question is, what to do with the 300K? I have more money besides that sitting liquid but for now, just thinking about the 300K. Options are:

-I could buy 3 more houses with the money from the above noted sale and make cash flow and appreciation like I was from the house I just sold. Keep growing the portfolio. In about 4-5 years I plan on taking all but one house here in Seattle and 1031 exchanging for more properties in Las Vegas to formally retire.

-I could diversify and keep the 300K to further pad my funds for the next crash.

-I could do a combination of the two and buy just two houses instead of three with the proceeds and keep the 100K left over.

-I could buy two houses and use what's left to pay off my primary residence. Hesitant to pay it off since it would only save me $250 a month in interest payments and is not tax advantaged if I turn it back into a rental again. But perhaps from a qualitative perspective paying the house off is the best thing to do.

-I could put the 300K into the stock market (VTI index fund tracking the S&P 500).

-I could take my pool of cash and pay off my portfolio and have nearly 5K a month cash flow, buy an RV and travel the US like I would love to, still able to save 75% of my income at that point even in retirement.  :-) Though right now I'm still working to add funds for the next crash; I'm saving my six figure take home pay now that I am living in my el cheapo house and living off my rental income. Just good to know I have that option. :-)

Note:

In a few years I plan to move to Las Vegas. I am not sure about buying property there right now because it's difficult to manage from here and not enough cash flow to justify property management. It's something I've thought about but I think I'm better off buying locally for now still. If I keep buying houses in the area now via 1031's, I'd have 7 houses to 1031 (keep one house here as a base) into 14+/- properties in Las Vegas before I retire.

Whether I put they money into index funds or more rentals, I am now officially FI (again)! I was buying bigger and better deals so as my expenses pushed me out of the FI column for a few years but it all came together full circle. Now living in the second house I ever purchased and am enjoying not having a crushing mortgage anymore...

Updated 20 days ago

Note: If I kept the money I'd have a 50% cash position. I expect there to be 5-7 more years of upside in real estate. I buy primarily for cash flow, but with an eye to appreciation since that's where the real money is made. If I keep working for the next 4 years which I intend to, I will have a significant amount of cash to invest for a market correction anyways, even without keeping this 300K liquid (reinvesting it now).

If I were you I would save 30-50% of that cash for when the market corrects.

Then I would buy rental properties out of state. Put $15k down on each one and cash flow $200-300/mo. You can get 10 homes and make an extra $2,000/mo with just over $100k of your cash and still have $200k left in the bank.

Bump. One thing I decided to do is pay off the whopping 4.5K I had left on my student loans from undergrad (no debt from grad school since I paid up front for that). I had slowly been paying off the higher interest loans last few months anyways to get it paid down faster, and decided with 4.5K left one smart use of the money was to at least pay off student loans. I could have paid it off without this sale, but with this much cash sitting now, I decided it was an unquestionably good move to do so.

Now the only debt I have is real estate related. No student loans, car loans, credit cards, etc.

If it were me, I'd probably do a combination of a purchase and index funds, but I think there might be better buying opportunities when (if) the economy slows down somewhat. Right now everything seems to be on fire - not that you can't still find houses, just that the deals are harder to come by, and I don't see anything wrong with having a healthy cash position for down the road. Actually, what you are doing is kind of what I am doing right now, except that I really need to keep buying at least 1-2 homes per year just for the tax deductions, at least until I stop working. 

vegas is moving north and i think has some room to run.. I bought a year ago  and actually here right now enjoying the sun.. and my prop already went up 100k this last year.

Not that it matters as i intend it to be my retirement home..

and you may want to consider getting on the debt side of the real estate equation. 

I have the same issue.  Glad you paid off your student loan.  I paid mine off when down to a balance of $7500. No biggie, right? It was 13 pages on my credit report! Every individual loan every quarter or semester listed individually.  Back when I was borrowing, lenders couldn't figure out how much it was and it was messing me up.

I am also paying down some RE debt. I have some old commercial (now private) loans at 6% & 6.5%. Easy decision when RE is frothy.

I moved my excess excess (above reserves and principal paydowns) into Vanguard and am safely earning a ton more in their s-t govt bond mm fund than I was in the bank.  Index funds to me are just buy and hope, especially at these levels.  I want specific stars at specific support levels, but that's just me. I have been doing well and don't miss getting more rentals at all. 

No stock has yet moved out, call with drama or repairs, needed maintenance, etc.  I like me some truly passive gains and will stick with paper equities I think unless an RE deal falls in my lap.

 Congrats, Jack! Good problem to have!

Glad you paid off your student loans. I'd probably pay off your primary residence loan. I'm not sure what you mean by "that loan is not tax advantaged" though. Ever since I bought a foreclosure for cash in '87 and realized the simplicity, increased cash flow and control that being mortgage free brought me I've gone that way on all my purchases. 

When I was younger I too thought that paying interest was a way to save on taxes. It's not!  What you're doing is paying the lender $1.00 to keep from paying the Federal government $0.15!*

You're buying FIFTEEN CENTS, but you're PAYING ONE DOLLAR FOR IT. 

*I'm basing this on my last 3 years tax rate. For 2015-2017 I had gross income of between $104,000 and $142,000 my tax rate on my TAXABLE income (standard deduction, two dependents) ranged between 9.2% and 11.4%. Why would I want to keep the "going out" kind of mortgages on my books? 

Originally posted by @Frank Adams :

Glad you paid off your student loans. I'd probably pay off your primary residence loan. I'm not sure what you mean by "that loan is not tax advantaged" though. Ever since I bought a foreclosure for cash in '87 and realized the simplicity, increased cash flow and control that being mortgage free brought me I've gone that way on all my purchases. 

When I was younger I too thought that paying interest was a way to save on taxes. It's not!  What you're doing is paying the lender $1.00 to keep from paying the Federal government $0.15!*

You're buying FIFTEEN CENTS, but you're PAYING ONE DOLLAR FOR IT. 

*I'm basing this on my last 3 years tax rate. For 2015-2017 I had gross income of between $104,000 and $142,000 my tax rate on my TAXABLE income (standard deduction, two dependents) ranged between 9.2% and 11.4%. Why would I want to keep the "going out" kind of mortgages on my books? 

 Paying interest shouldn't be looked at that way. It should be compared against the opportunity for redeploying that money as well, and also considered a cost of doing business for having your principal accessible. The tax savings are just icing on the cake, not the cake. If you were just going to sit on the money, then of course you'd pay off interest. Ideally, if you were paying 5% interest, you'd make 10% return on the cash you were going to use to eliminate that, and make both the spread and the interest deduction. 

Example: 100k loan, 5% interest, $5,000 annual cost.

                 100k in cash in my pocket - pay off the loan or invest?

Pay off the loan = 5% return year one, diminishing each year. 

Invest the money at 10% = 10% return year one, increasing each year. PLUS the tax benefit. 

When you pay off the loan, on a house, you are essentially locking that money up in a vault until you sell the house (or take a loan on the new value of the house). There are advantages but from a purely financial point of view, less than investing the money. 

@Jack B.

You are in an excellent position to be in. Choices but good choices either one you make. Also, you are in the #1 RE market and position yourself in the #2 market (LV). I believe Seattle median home is $775k, while LV median is $275k. So what you sell in Seattle, and buy in Las Vegas is almost 3 to 1 ratio.

Seems like your strategy was cashflow in Seattle. Why don't you apply same strategy in Las Vegas? If it is good enough for @Jay Hinrichs , then can't be a bad decision.

Terry

Originally posted by @Frank Adams :

Glad you paid off your student loans. I'd probably pay off your primary residence loan. I'm not sure what you mean by "that loan is not tax advantaged" though. Ever since I bought a foreclosure for cash in '87 and realized the simplicity, increased cash flow and control that being mortgage free brought me I've gone that way on all my purchases. 

When I was younger I too thought that paying interest was a way to save on taxes. It's not!  What you're doing is paying the lender $1.00 to keep from paying the Federal government $0.15!*

You're buying FIFTEEN CENTS, but you're PAYING ONE DOLLAR FOR IT. 

*I'm basing this on my last 3 years tax rate. For 2015-2017 I had gross income of between $104,000 and $142,000 my tax rate on my TAXABLE income (standard deduction, two dependents) ranged between 9.2% and 11.4%. Why would I want to keep the "going out" kind of mortgages on my books? 

In regards to your question about what I meant about "that loan is not tax advantaged"

You misquoted the sentence, there is more to it in that sentence. Here is what I said:

"is not tax advantaged if I turn it back into a rental again"

What I'm saying here is that if I pay the house off, I will not show a loss on paper if I ever rent it back out (likely). It will show a taxable income like my other paid off property did when I had it. With a loan on the house if I rent it out, I'd still be cash flowing $700 a month after expenses but it would be tax advantaged due to the mortgage, so that it shows up as a loss.

Originally posted by @Terry Lao :

@Jack B.

You are in an excellent position to be in. Choices but good choices either one you make. Also, you are in the #1 RE market and position yourself in the #2 market (LV). I believe Seattle median home is $775k, while LV median is $275k. So what you sell in Seattle, and buy in Las Vegas is almost 3 to 1 ratio.

Seems like your strategy was cashflow in Seattle. Why don't you apply same strategy in Las Vegas? If it is good enough for @Jay Hinrichs , then can't be a bad decision.

Terry

Maybe I should go down there and see what I can find. My only concern is that I don't want to speculate in a market I'm not that familiar with yet and manage from out of state. I have yet to find a deal in Vegas that cash flows with a PM, and I can't PM from Seattle.

if your going to retire in it why does it have to cash flow.. even if your a little negative you get the place you want to live you wait a few more years it could be 100 k or more on the purchase price..

Just my feeling I have nothing to base it on other than I have been pretty lucky in my day getting in ahead of the crowd.

Like when I went to Charleston SC 5 years ago.. or bought subdivision ground in Portland 3 to 5 years ago when no one one was buying..

I mean just a gut feeling about NV... but this is not the reason I am here.

the reason I am here is

1. Weather

2. Grand kids

3. No state income tax and I earn money in other non income tax states and Oregon is sky high.

so last on the list was what the values would do.. but I am glad I jumped in 12 months ago..

Originally posted by @JD Martin :

If it were me, I'd probably do a combination of a purchase and index funds, but I think there might be better buying opportunities when (if) the economy slows down somewhat. Right now everything seems to be on fire - not that you can't still find houses, just that the deals are harder to come by, and I don't see anything wrong with having a healthy cash position for down the road. Actually, what you are doing is kind of what I am doing right now, except that I really need to keep buying at least 1-2 homes per year just for the tax deductions, at least until I stop working. 

That's PROBABLY what I'll end up doing. I'll split the difference. Buy 2 houses to replace the dollar value of the one I just sold, reduce my vacancy risk as a result, and keep 100K to pool cash for the next crash and "life options".

Another consideration is whether to buy in Las Vegas or greater Seattle now. Or perhaps I can drive to Aberdeen and buy 2-3 paid off cash flow houses that I can manage locally. I'm leaning toward appreciation prone properties in Seattle though. I have to figure out a way to sell/1031 all of these houses into 2-3 for each one I sell when I move to Vegas. With the 45 day timeline, it's really hard to do that. I barely made it last time buying two houses locally...

Originally posted by @JD Martin :
Originally posted by @Frank Adams:

Glad you paid off your student loans. I'd probably pay off your primary residence loan. I'm not sure what you mean by "that loan is not tax advantaged" though. Ever since I bought a foreclosure for cash in '87 and realized the simplicity, increased cash flow and control that being mortgage free brought me I've gone that way on all my purchases. 

When I was younger I too thought that paying interest was a way to save on taxes. It's not!  What you're doing is paying the lender $1.00 to keep from paying the Federal government $0.15!*

You're buying FIFTEEN CENTS, but you're PAYING ONE DOLLAR FOR IT. 

*I'm basing this on my last 3 years tax rate. For 2015-2017 I had gross income of between $104,000 and $142,000 my tax rate on my TAXABLE income (standard deduction, two dependents) ranged between 9.2% and 11.4%. Why would I want to keep the "going out" kind of mortgages on my books? 

 Paying interest shouldn't be looked at that way. It should be compared against the opportunity for redeploying that money as well, and also considered a cost of doing business for having your principal accessible. The tax savings are just icing on the cake, not the cake. If you were just going to sit on the money, then of course you'd pay off interest. Ideally, if you were paying 5% interest, you'd make 10% return on the cash you were going to use to eliminate that, and make both the spread and the interest deduction. 

Example: 100k loan, 5% interest, $5,000 annual cost.

                 100k in cash in my pocket - pay off the loan or invest?

Pay off the loan = 5% return year one, diminishing each year. 

Invest the money at 10% = 10% return year one, increasing each year. PLUS the tax benefit. 

When you pay off the loan, on a house, you are essentially locking that money up in a vault until you sell the house (or take a loan on the new value of the house). There are advantages but from a purely financial point of view, less than investing the money. 

I had another thread a month or two ago on here when I first went to list my house. I crunched the numbers and determined paying off the mortgage would save me $250 a month but would cost me more than $700 a month in opportunity costs, all things considered. I thought to myself that the paying off of a house is just for security. I could buy ANOTHER house in a cheaper area like Aberdeen if I fell on hard times and still have money left over with what I would have used to pay this house off. Plus by buying in Aberdeen I can manage my portfolio until I decide to cash out and move to Vegas. Of course this is just a fall back plan in case of job loss, etc. Nice thing is living in the house near Seattle I'm FI so I don't HAVE to work (purely saving money at this point, six figure take home pay...) plus I have a newer car paid for, as well as a Masters degree paid for as well as a TON of certifications in IT and decades of experience. I shouldn't have too hard a time finding a new job. Heck, I changed jobs three times in the last 9 months after having worked at the same place for many years. Kept taking better IT Management gigs as they came along. I know I will pay for it next time I apply for a loan though. :-)

In any case, that's my reasoning behind not really paying off the house. I have much more options and other means to the same end (security) if it ever comes to it. And who knows, by that point I may very well just say screw it and buy acreage outside of Vegas with a ranch house on it. I saw a couple places recently for 100-140K that were on 5 acres and had 1-3 houses on them. Honestly I could buy ONE of those listings and live off the rents from the extra houses on the property alone, not counting my other investments. But want to get money while I still can.

Originally posted by @Jack B. :
 I have to figure out a way to sell/1031 all of these houses into 2-3 for each one I sell when I move to Vegas. With the 45 day timeline, it's really hard to do that. I barely made it last time buying two houses locally...

 This is a problem I have as well. I have a couple of houses that I would like to translate into something else, but making that timeline is likely going to end up getting me into a mediocre deal since everything is so hot & high right now. My problem (if this can ever be considered a problem!) is that everything I have I bought at fantastic prices, and everything's gone up, so if I take my cash I have to buy back into the market at not such a great time. 

@Jack B.

The only was a property would cashflow negative with PM, is if you are buying SFR. I have multi's and I manage on my own from southern california. Scary at first thought, but not that bad actually.

You have the advantage of almost 3 to 1 ratio in median home prices, Seattle vs. LV. Here's a thought, buy multi's, you can get PM, and would still cashflow positive. When you finally retire in LV, do 1031 exchange to SFR. If by chance you realize multi's are the way to go, then you got in on good price and take advantage of Seattle's appreciation and apply to LV.

Terry

Originally posted by @Jack B. :

I had another thread a month or two ago on here when I first went to list my house. I crunched the numbers and determined paying off the mortgage would save me $250 a month but would cost me more than $700 a month in opportunity costs, all things considered. I thought to myself that the paying off of a house is just for security. I could buy ANOTHER house in a cheaper area like Aberdeen if I fell on hard times and still have money left over with what I would have used to pay this house off. Plus by buying in Aberdeen I can manage my portfolio until I decide to cash out and move to Vegas. Of course this is just a fall back plan in case of job loss, etc. Nice thing is living in the house near Seattle I'm FI so I don't HAVE to work (purely saving money at this point, six figure take home pay...) plus I have a newer car paid for, as well as a Masters degree paid for as well as a TON of certifications in IT and decades of experience. I shouldn't have too hard a time finding a new job. Heck, I changed jobs three times in the last 9 months after having worked at the same place for many years. Kept taking better IT Management gigs as they came along. I know I will pay for it next time I apply for a loan though. :-)

In any case, that's my reasoning behind not really paying off the house. I have much more options and other means to the same end (security) if it ever comes to it. And who knows, by that point I may very well just say screw it and buy acreage outside of Vegas with a ranch house on it. I saw a couple places recently for 100-140K that were on 5 acres and had 1-3 houses on them. Honestly I could buy ONE of those listings and live off the rents from the extra houses on the property alone, not counting my other investments. But want to get money while I still can.

 EXACTLY! I used to come from the same mindset. It's really a lower/middle-class mindset, i.e. the idea of one day owning everything and not owing anything - though the truth is you always owe, even if it's just taxes and insurance. I don't discount the value of that - as you age, and return becomes less important than security, I think it can make sense just paying down what you have, ala @Steve Vaughan (hey, I'm not calling you old bud :) ). It's really just determining what stage of life you are and what level of return makes the most sense, with the concurrent amount of risk. Early on, most people need to make healthy return if they're ever going to have any critical mass of assets. Later on, when you're tired of doing 1031s and constantly hunting deals, you might pay down what you have and accept the smaller return and smaller hassle. 

And, of course, there have been times when the economic situation was such that paying down debt was absolutely the smartest thing you could do. Not too many people remember 15-20% interest rates in the late 1970s/early 1980s but they did exist. That's a hard spread to beat, no matter what you're investing in. Even my first mortgage in 1994 was almost 9%. Today? Money is so cheap that you'd have to really try hard not to beat the rates. 

@jack b.  Maybe you should try to find some guys trying get a group together to build a “fourplex neighborhood” in Vegas and invest in that. Not that I know anyone. :-)

Originally posted by @JD Martin :
Originally posted by @Jack B.:
 I have to figure out a way to sell/1031 all of these houses into 2-3 for each one I sell when I move to Vegas. With the 45 day timeline, it's really hard to do that. I barely made it last time buying two houses locally...

 This is a problem I have as well. I have a couple of houses that I would like to translate into something else, but making that timeline is likely going to end up getting me into a mediocre deal since everything is so hot & high right now. My problem (if this can ever be considered a problem!) is that everything I have I bought at fantastic prices, and everything's gone up, so if I take my cash I have to buy back into the market at not such a great time. 

Which brings me back full circle to index funds. Built in diversification. Low transaction costs buying and selling. No tenant, insurance or other headaches. Yes the returns are lower, but it may be worth the tradeoff. Perhaps buy one house with 100K down, put another 100K into index funds, then pool the other 100K in cash for buying opportunities that may arise, such as a stock market dip or real estate dip.

I read on a blog from financial samurai the other day NOT to make a decision for the first month. That's probably the best advice. That and I think I can rule out paying off my currently primary residence for now.

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