Advice on what to do with proceeds from second home sale

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Topic Author
Grahamsdad
Posts: 67
Joined: Mon Feb 20, 2012 7:48 am

Advice on what to do with proceeds from second home sale

Post by Grahamsdad »

Hello, I am selling my vacation home (condo) and closing on 4/24/14. I will net about 1,075,000.00. I am 46 years old. I have 5 kids. My current debt consists of:

325,000 first mortgage on primary residence. 15 year fixed at 3.75%. Payment without taxes and insurance is about 3500.00 per month

520,000 commercial loan for my professional office building. Loan amortized at 30 years (24 1/2 years remaining at 6.00%). Payment is about 5000.00 per month.

415,000 interest only loan, prime plus .50%, current interest rate is 2.75%. Payment is 1,650 per month. I borrowed this money to purchase a new condo for 544,000 (I am paying cash for the balance), intending to pay it off as soon as my condo sold. I close on this new condo on 4/21/14 (I know, why I am buying a new condo).

My assets include:

My primary house has equity of about 1.5 million

My taxable account is worth about 600,000. I add to this account at the rate of 20,000 per month and the account consists of 100% Vanguard index stock funds.

My 401(k) is worth about 600,000. This consists of 40% Vanguard bond funds and 60% Vanguard index stock funds.

I have 529s to each child. ages: 9 mos, 9 mos, 4, 13 and 15. The youngest 3 are on path for adequate 529 accounts by college age. The 2 oldest have about 50,000 each in their respective 529s.


I feel like my savings for retirement needs to be better accelerated.

How should I allocate the condo proceeds? Thanks.
bkslainte
Posts: 173
Joined: Tue Aug 21, 2012 6:37 pm

Re: Advice on what to do with proceeds from second home sale

Post by bkslainte »

Hello,

You seem to be doing very well, we should be asking you for help :)

However, here are a few things that would go into my thought process on the situation.

Does the net amount of 1,075,000 account for taxes? You don't mention if this includes a gain on the property or not. However, I would make sure you set aside enough for taxes as taxes like the 3.8% ACA surcharge might come into play with this transaction.

You are saving 20,000 into taxable each month. That is amazing, congrats on that. What is the plan for this money? You mention that you feel you need to accelerate retirement savings but if this 20,000 per month is earmarked towards retirement savings then I think you are doing very well in this category. Of course, I would advise to take advantage of any tax deferred retirement accounts as I assume you are in the higher tax brackets. You do not mention your monthly expenses so it is difficult to advise on whether you are saving enough for retirement or not.

You mentioned the children's 529 plans so it sounds like you plan to pay for your children's education. My thoughts on this are that I would want to treat my children as equally as possibly when it comes to college. If it were me, I would try to equalize the 529 plans as much as possible or set aside some of the condo proceeds in anticipation of the upcoming college costs for the older 2 children.

Thanks,
Brian
Topic Author
Grahamsdad
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Joined: Mon Feb 20, 2012 7:48 am

Re: Advice on what to do with proceeds from second home sale

Post by Grahamsdad »

Thank you, Brian. The condo proceeds does not account for taxes, so my net will be lower than 1,075,000 and I will show a capital gain on the same. I bought the condo in 2009 for 817,000.

My 20,000 per month savings is funded mostly from money that I've saved over the years and am DCA into the market.

I was looking for some thoughts on which loans, if any, to payoff versus putting more into my taxable account and/or 529's. Thanks for your time and thoughts.
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grabiner
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Re: Advice on what to do with proceeds from second home sale

Post by grabiner »

rklezmer wrote:Hello, I am selling my vacation home (condo) and closing on 4/24/14. I will net about 1,075,000.00. I am 46 years old. I have 5 kids. My current debt consists of:

325,000 first mortgage on primary residence. 15 year fixed at 3.75%. Payment without taxes and insurance is about 3500.00 per month
It's a marginal decision whether to pay this off rather than make taxable investments.; you are in a high tax bracket, so the after-tax cost isn't that great. But you have better uses for the money:
520,000 commercial loan for my professional office building. Loan amortized at 30 years (24 1/2 years remaining at 6.00%). Payment is about 5000.00 per month.
Even if you are in a 33% tax bracket, this is a 4% risk-free return, so paying it off is a good deal.
415,000 interest only loan, prime plus .50%, current interest rate is 2.75%. Payment is 1,650 per month. I borrowed this money to purchase a new condo for 544,000 (I am paying cash for the balance), intending to pay it off as soon as my condo sold. I close on this new condo on 4/21/14 (I know, why I am buying a new condo).
This is probably also worth paying off, at least in part. (I am assuming it is a second mortgage/home-equity loan) on your primary home, so you cannot refinance it at current first-mortgage rate.) While the current rate is low, it is a short-term rate, so you have interest-rate risk.
Wiki David Grabiner
Topic Author
Grahamsdad
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Joined: Mon Feb 20, 2012 7:48 am

Re: Advice on what to do with proceeds from second home sale

Post by Grahamsdad »

Thank you very much.
MGBGTV8
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Re: Advice on what to do with proceeds from second home sale

Post by MGBGTV8 »

Are you personally liable for the loan on the office building, or are you insulated via a LLP or something? Before taking personal money to pay off the business loan, you may want to consider paying that loan off last. Sounds like you should get through your 2014 tax filing before committing all the proceeds to the paying down loans.
Topic Author
Grahamsdad
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Re: Advice on what to do with proceeds from second home sale

Post by Grahamsdad »

I am personally liable, but it's owned by a LLC. Thanks. My accountant's advice is to pay the highest interest rate loan off first--that would be the office loan.
NoVa Lurker
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Re: Advice on what to do with proceeds from second home sale

Post by NoVa Lurker »

I am probably more risk-averse than you are. If I were in your shoes, all that debt would scare me, and the interest-only loan would particularly scare me.

For the reasons suggested by grabiner, I would pay off the office loan entirely, and then pay off about half of the new condo loan.

Then I would make sure to effectively defease the balance of the condo loan (i.e., maintain enough liquid assets in taxable so that I could always pay off the condo loan quickly if the interest rate jumped).
Topic Author
Grahamsdad
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Joined: Mon Feb 20, 2012 7:48 am

Re: Advice on what to do with proceeds from second home sale

Post by Grahamsdad »

Thank you all.
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