Saving for investment property...muni bonds vs. ETF's?

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Emt1581
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Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Sun Jun 18, 2017 10:08 am

I'm saving up to buy an investment property using the profit from one of my jobs. My goal is, in 2-3 years I want to have enough to put a large down payment on a property in a specific part of my town that has 1-2 rental units (apartments) up top and then office space I can use on the ground floor for my practice.

Each month I figure I can dedicate $2k-$3k to the down payment but I'd like to earn money while it sits rather than it doing nothing. I was at the bank today and they suggested a money market account yielding around .1% or an 18 month cd that yielded more but they said they couldn't quote the rate until ready to invest which sounded a little odd.

In the past people have suggested index funds. I did some homework on it but the buying/selling fees and taxes on stocks, unless you have 6-figures to work with, eats up a ton of the potential profit.

However, to account for inflation I'd like to safely be making at least 5% annually.

On another forum municipal bonds and ETF's were suggested. After some homework it seems like the municipal bonds are great because they are tax free but you have to pay someone a fee to buy them. Not sure if people buy municipal bonds in other communities or just their own but I have to look into what those fees would be.

ETF's sound like an amazing option, especially traded on Robinhood without any fees for buying/selling! However, unlike municipal bonds, I'd have taxes to pay on gains.

So I guess what I have to figure out is...

Are the fees I'd have to pay with municipal bond purchase/selling less than the tax savings I'd get when compared against the taxes I'd pay without fees if buying ETF's?

In other words, activity aside....are ETF's or Municipal bonds cheaper to buy/sell when looking at taxes vs. fees?

Any thoughts?

Thanks

-Emt1581

jb1
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by jb1 » Sun Jun 18, 2017 11:07 am

Im in the same boat. Except my time frame is only a year. Ive decided to open a Goldman Sachs bank that earns 1.2%. Beats sitting in the regular bank itself at .03 and I can pull it out whenever.

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Sun Jun 18, 2017 11:14 am

Right, I saw that. But ultimately I'm looking to beat taxes, inflation, and fees.

Robinhood is amazing in that I can (and do) trade on my phone for free! But my portfolio on their is really just an experiment over the past 1.5yrs to see how it works/does. I've done pretty well.

However, the taxman will definitely be dipping his hand in the pot if/when I sell.

Again, that's not the case with muni bonds. I also can't buy muni bonds for free...which I can do with ETF's.

Thanks

-Emt1581

greybus
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by greybus » Sun Jun 18, 2017 11:43 am

Emt1581 wrote:However, to account for inflation I'd like to safely be making at least 5% annually.


There is nothing you can invest in that gives 5% annually guaranteed. You may want to read more about the concept of higher risk for potential higher reward. That is, if you want the possibility of 5% annual returns, you also need to be able to (potentially) take a loss of 10-20% or more of your total account. If the "deadline" when these funds are needed is flexible (for example, retirement in 30 years) the conventional wisdom is you can take more risk now and the account could lose money when you don't need the money, and later on when your deadline is approaching and you know you'll need the money and cannot tolerate a large downturn, to become more conservative.

You have to ask yourself how much risk are you willing to take with this money, and is there a timeframe you definitely need it by. That is more important than the commissions and will inform what you should be buying. For example, an investment that makes 8% per year for 5 years but loses 50% of your total right when you need it would probably not work (reference the 2008-2009 crash). If you are flexible with your 2-3 year timeframe, yoiu have a lot of options but if you need to preserve capital, then you are looking at bank account/money msrket , CD, bonds, then bond stock mix, in that order.

By the way, you should list your marginal fed and state tax rate. Munis only make sense for high brackets, and long term capital gains can often be lower than you realize. Don't let taxes be the main decider.

aristotelian
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by aristotelian » Sun Jun 18, 2017 11:52 am

You do not want to get in the business of buying and selling individual bonds. Muni bonds have very high minimums, and the market is not as transparent as the stock market. If you go with munis, you are better off buying a muni bond ETF or mutual fund such as VTEB or VWIUX. Because the fund is purchasing in very large quantities, the expenses are minimal compared to what you would pay as an individual investor.

Fyi...Vanguard's Prime Money Market fund offers 1% interest right now. That would be a very safe way to get some return.

I would recommend reading the Bogleheads Guide to Investing - sounds like you need an introduction to investing in general.

greybus
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by greybus » Sun Jun 18, 2017 12:00 pm

Also ETFs are just an investment vehicle. They are agnostic as a group, but what's inside the ETF can vary dramatically, from mimicking an extremely cheap efficient diversified stock index fund, to being an expensive leveraged nondiversified gold miner or Bitcoin fund. You have to read the prospectus and get educated

livesoft
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by livesoft » Sun Jun 18, 2017 12:09 pm

One can buy many ETFs (the kind that one would want to buy) at many brokers without commission, so Robinhood has no special advantages in that regard.
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Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Sun Jun 18, 2017 12:21 pm

livesoft wrote:One can buy many ETFs (the kind that one would want to buy) at many brokers without commission, so Robinhood has no special advantages in that regard.


I've never heard that before. What are some examples of brokers (online) that charge 0 startup fees, 0 monthly fees, and 0 fees for buying/selling?

Thanks

-Emt1581

livesoft
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by livesoft » Sun Jun 18, 2017 12:23 pm

Vanguard, Schwab, TDAmeritrade, Fidelity, ....
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Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Sun Jun 18, 2017 12:23 pm

aristotelian wrote:
Fyi...Vanguard's Prime Money Market fund offers 1% interest right now. That would be a very safe way to get some return.


Wouldn't the GS Savings at a rate of 1.2% be better?

I do have a money market fund which basically gets fed all the dividends for one part of my portfolio. I'd actually prefer they get re-invested but from time to time I dip in and take some out.

Thanks

-Emt1581

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Sun Jun 18, 2017 12:27 pm

greybus wrote:
Emt1581 wrote:
By the way, you should list your marginal fed and state tax rate. Munis only make sense for high brackets, and long term capital gains can often be lower than you realize. Don't let taxes be the main decider.


We pay 30% in taxes.

Between the both of us, 3 employers take out taxes automatically and then for my business I write checks to federal, state, and local for a hair under (but right around) 30%.

I was told we wouldn't be in the next tax bracket until making $450k but that was back in April so I might have that number lower than it needs to be.

Thanks

-Emt1581

aristotelian
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by aristotelian » Sun Jun 18, 2017 1:05 pm

Emt1581 wrote:
aristotelian wrote:
Fyi...Vanguard's Prime Money Market fund offers 1% interest right now. That would be a very safe way to get some return.


Wouldn't the GS Savings at a rate of 1.2% be better?

I do have a money market fund which basically gets fed all the dividends for one part of my portfolio. I'd actually prefer they get re-invested but from time to time I dip in and take some out.

Thanks

-Emt1581


For me, 0.2% would not be enough to go through the hassle of creating a separate account. Just making the point that MM rates have been normalizing lately.

In view of your tax bracket, a muni bond fund would be a good choice--intermediate duration if your time horizon is more than a couple years and you can tolerate some year to year risk.

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Mon Jun 19, 2017 9:24 am

aristotelian wrote:For me, 0.2% would not be enough to go through the hassle of creating a separate account. Just making the point that MM rates have been normalizing lately.

In view of your tax bracket, a muni bond fund would be a good choice--intermediate duration if your time horizon is more than a couple years and you can tolerate some year to year risk.


But no matter what I go with I'll be opening something new. Unless I just start buying ETF's or stocks on Robinhood as that's already established.

So the extra .2% would be welcome.

Still not near what I'd like to be making though.

-Emt1581

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njboater74
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by njboater74 » Mon Jun 19, 2017 10:06 am

There are many muni bond ETFs that you can buy. It's not an "either or" situation. Vanguard Tax-Exempt Bond Fund (VTEB) is a very low cost ETF that gives broad exposure to the national muni bond market.
When the mob and the press and the whole world tell you to move, your job is to plant yourself like a tree beside the river of truth and tell the whole world - 'No, YOU move'--Captain America, Boglehead

Sluggo
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Sluggo » Mon Jun 19, 2017 10:11 am

Emt1581 wrote:
greybus wrote:
Emt1581 wrote:
By the way, you should list your marginal fed and state tax rate. Munis only make sense for high brackets, and long term capital gains can often be lower than you realize. Don't let taxes be the main decider.


We pay 30% in taxes.

Between the both of us, 3 employers take out taxes automatically and then for my business I write checks to federal, state, and local for a hair under (but right around) 30%.

I was told we wouldn't be in the next tax bracket until making $450k but that was back in April so I might have that number lower than it needs to be.

Thanks

-Emt1581


I'm assuming you are in the US. There is no marginal bracket of 30%. Do you mean your effective rate, including state and payroll taxes, is 30%? Your comment on the next bracket is confusing because there's no filing state with a marginal cutoff of $450. If you are MFJ starting brackets at the higher end for 2017 are:

$233,351 33%
$416,700 35%
$470,700 39.6%

Remember those are marginal rates that tax income in a ladder from the bottom, i.e. when you have a MAGI of $470,700 you don't pay 39.6% on all of it, just the amount over $470,700.

You need to calculate your effective rate, which includes any state, local, and payroll taxes, to truly get a handle on what investments make the most sense for you. If you've done this and it is 30% than my apologies.

Muni's don't make sense for a 2-3 year time horizon. If you are in a high bracket, in a high-tax state, and you can buy Muni's from that state (or one your state has a reciprocal agreement with) than Muni's may make sense as a longer term investment.

I think the other posters advice is on point - you need the money in 2-3 years, put it in something that will earn you around 1% that is safe and forget about it. You might make more if you put it in a Mutual Index Fund, sure. You might also lose a lot of it and not have time to recover.

For example in 2007, 10k invested in VTSAX, the total stock market index fund, would have been $5,000 by the end of 2008. Today 10 years later that same initial investment would be worth $20k. People who took it out at the bottom (either out of panic or because like you they needed the money) got completely creamed. And lots of people did. People who didn't did just fine.

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Mon Jun 19, 2017 10:40 am

Sluggo wrote:
I'm assuming you are in the US. There is no marginal bracket of 30%. Do you mean your effective rate, including state and payroll taxes, is 30%? Your comment on the next bracket is confusing because there's no filing state with a marginal cutoff of $450. If you are MFJ starting brackets at the higher end for 2017 are:

$233,351 33%
$416,700 35%
$470,700 39.6%

Remember those are marginal rates that tax income in a ladder from the bottom, i.e. when you have a MAGI of $470,700 you don't pay 39.6% on all of it, just the amount over $470,700.

You need to calculate your effective rate, which includes any state, local, and payroll taxes, to truly get a handle on what investments make the most sense for you. If you've done this and it is 30% than my apologies.

Muni's don't make sense for a 2-3 year time horizon. If you are in a high bracket, in a high-tax state, and you can buy Muni's from that state (or one your state has a reciprocal agreement with) than Muni's may make sense as a longer term investment.

I think the other posters advice is on point - you need the money in 2-3 years, put it in something that will earn you around 1% that is safe and forget about it. You might make more if you put it in a Mutual Index Fund, sure. You might also lose a lot of it and not have time to recover.

For example in 2007, 10k invested in VTSAX, the total stock market index fund, would have been $5,000 by the end of 2008. Today 10 years later that same initial investment would be worth $20k. People who took it out at the bottom (either out of panic or because like you they needed the money) got completely creamed. And lots of people did. People who didn't did just fine.


Yes I'm in the US (Pennsylvania).

Yes, I've calculated all my tax rates and it's ~30% that I pay quarterly. To be exact... 25% federal (crooks!!), 3.07% state, 1% local...so 29.07% total.

As you mentioned the time frame is important. It's just too short to do most of the traditional investing. But there still seems to be some decent options so it's not losing value (due to inflation).

I just spoke to my dad who's owned his own brokerage firm since the 80's and he suggested CD's, didn't believe the 1.20% apy GS savings, and also suggested Nuveen stock of some sort (he's looking up a PA version to eliminate federal and state taxing from my understanding).

However, the CD rates around here don't begin to touch the GS savings rate of 1.2% apy and I just got off the phone with GS and it does seem totally legit! The ONLY limitation is a $250k max balance (which I won't come close to) and that the rate could go up or down with the market. She said from 14-17 it was at 1.05% and then in June of 17 it just went up to 1.20%... can only withdraw 6 times per month but again, this is going to sit. So that's fine.

My dad and I did talk about diversifying, so maybe some in the GS account, some in this NUV stock (or some other investment, etc. That way not all my eggs are in the same basket even though it's all going toward the down payment on the investment property in 2-3 years.

Thanks!

-Emt1581

aristotelian
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by aristotelian » Mon Jun 19, 2017 11:17 am

^You did not answer the question. The question is, what is your marginal tax rate? That is, how much will you be taxed on any additional dollars above your current income? That is what you need to know to determine the tax hit of a new investment or the value of an additional deduction. Your overall (effective) tax rate is irrelevant. Even if you decide to move forward with the GS savings account, this is useful information that you will want to know. See this chart and compare to the AGI on your tax return:

https://taxfoundation.org/2017-tax-brackets/

Please make sure to do your own research on the Nuveen fund. As you can tell by his reaction to the GS account, your father despite owning his own firm does not appear to have complete information.

Sluggo
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Sluggo » Mon Jun 19, 2017 11:28 am

I'm guessing he's in the 33% bracket based on what he posted re: his effective rate.

For the amount of time he has to invest (2-3 years max) and amount (at $2.5k/month he's looking at $90k max at the end of 36 months) taxes are more or less irrelevant anyway. Find a safe place to get 1%-1.2% - there are many - and don't obsess/take more risk just to get a little more. On 90k over 36 months that is nothing. 1% is barely anything on that. Anything out of an FDIC savings account means you are risking 90k in principle for what, a few hundred bucks extra? 2.5k invested monthly for 36 months will get you around $3.8 in interest on top of your principle at the end at 1% annual. Finding somewhere that pays 1.4 instead will get you a whole $600 more in return for possible additional risk. An investment that pays 5% would get you over 9k in interest in return for putting your entire principal at greater risk. None of this adds up. Put it in a decent savings account. Ally bank pays 1.2% I believe.

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Mon Jun 19, 2017 11:37 am

aristotelian wrote:^You did not answer the question. The question is, what is your marginal tax rate? That is, how much will you be taxed on any additional dollars above your current income? That is what you need to know to determine the tax hit of a new investment or the value of an additional deduction. Your overall (effective) tax rate is irrelevant. Even if you decide to move forward with the GS savings account, this is useful information that you will want to know. See this chart and compare to the AGI on your tax return:

https://taxfoundation.org/2017-tax-brackets/

Please make sure to do your own research on the Nuveen fund. As you can tell by his reaction to the GS account, your father despite owning his own firm does not appear to have complete information.


From what I could tell in the married filing jointly chart we'd be in the 25% range.

-Emt1581

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Mon Jun 19, 2017 11:40 am

Sluggo wrote:I'm guessing he's in the 33% bracket based on what he posted re: his effective rate.

For the amount of time he has to invest (2-3 years max) and amount (at $2.5k/month he's looking at $90k max at the end of 36 months) taxes are more or less irrelevant anyway. Find a safe place to get 1%-1.2% - there are many - and don't obsess/take more risk just to get a little more. On 90k over 36 months that is nothing. 1% is barely anything on that. Anything out of an FDIC savings account means you are risking 90k in principle for what, a few hundred bucks extra? 2.5k invested monthly for 36 months will get you around $3.8 in interest on top of your principle at the end at 1% annual. Finding somewhere that pays 1.4 instead will get you a whole $600 more in return for possible additional risk. An investment that pays 5% would get you over 9k in interest in return for putting your entire principal at greater risk. None of this adds up. Put it in a decent savings account. Ally bank pays 1.2% I believe.


Right. For now I think I'll open a GS account at the 1.2% rate and just start doing deposits monthly. Then if I learn more and am willing to gamble with some, I'll go from there but at least it can start earning now while I educate myself with minimal risk.

Thanks

-Emt1581

Sluggo
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Sluggo » Mon Jun 19, 2017 11:47 am

Emt1581 wrote:
From what I could tell in the married filing jointly chart we'd be in the 25% range.

-Emt1581


As we've pointed out your effective rate doesn't matter as much for this particular investment however knowing what it is overall is important. If your MFJ MAGI income puts you in the 25% marginal rate, that means two things:

As aristotelian pointed out, it means dollars you make in addition to what you already make are taxed at that marginal rate. Important to know when considering new investments, though again for at most 90k over 36 months it's not that big a concern.

and

25% isn't your effective federal rate. Research marginal rates and how they work. If you have a marginal fed rate of 25% your actual effective federal rate is probably several points lower depending on a number of factors.

No one claims the US tax code is easy :) Knowing where you stand every year, ideally every quarter, is important though.

CantPassAgain
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by CantPassAgain » Mon Jun 19, 2017 1:09 pm

EMT1581: Do you do your taxes or have them available? Look for your form 1040 and look at line 43. That is your taxable income. Wherever that number falls in the below chart is your marginal tax bracket.

Married filing jointly or qualifying widow

10% $0 to $18,550
15% $18,551 to $75,300
25% $75,301 to $151,900
28% $151,901 to $231,450
33% $231,451 to $413,350
35% $413,351 to $466,950
39.6% $466,951

Emt1581
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Re: Saving for investment property...muni bonds vs. ETF's?

Post by Emt1581 » Mon Jun 19, 2017 1:46 pm

CantPassAgain wrote:EMT1581: Do you do your taxes or have them available? Look for your form 1040 and look at line 43. That is your taxable income. Wherever that number falls in the below chart is your marginal tax bracket.

Married filing jointly or qualifying widow

10% $0 to $18,550
15% $18,551 to $75,300
25% $75,301 to $151,900
28% $151,901 to $231,450
33% $231,451 to $413,350
35% $413,351 to $466,950
39.6% $466,951


Oh ok...well based on line 43 we'd have been in the 15% rate for last year. But this year will be significantly different due to opening my practice which is doing well.

Thanks

-Emt1581

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