Is it dumb of me to not have any money in taxable?

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Dulocracy
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Re: Is it dumb of me to not have any money in taxable?

Post by Dulocracy »

An emergency fund sits there doing nothing, but I had one. When it was actually needed (something I did not expect), I was glad to have it. Having a small amount in taxable made me feel safer simply because I had money to fall back on if more money was needed than was in my emergency fund. The way that I have built that money is to slowly put a bit aside as I go. I have an investment strategy that automatically invests in tax-advantaged space. If I have a little extra each month, I throw it in taxable. Those bits add up, and I would highly recommend having a little to backup the emergency fund.
I'm not a financial professional. Post is info only & not legal advice. No attorney-client relationship exists with reader. Scrutinize my ideas as if you spoke with a guy at a bar. I may be wrong.
inbox788
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Re: Is it dumb of me to not have any money in taxable?

Post by inbox788 »

leonard wrote:I would add one thing after reviewing your info above - I understand you have 2 HELOC's for emergencies. However, there is nothing like cash, especially when one of those unpredictable rental problems happens over a weekend - roof, hotwater heater, sewer-septic system, and who knows what else. I personally would feel better having some cash as a business emergency fund in those instances - in case you can't access either HELOC for some reason. For me the "drag" on performance would be worth the piece of mind.
From what I can tell, OP has several properties that are cash flow positive, so on a monthly basis, there's excess cash that's being reinvested in the business. Unless that positive cash flow suddenly stops (i.e. many concurrent vacancies that go unfilled), there's little worry. Also, if the mortgage is paid off, the major part of the expense is removed. In tough times, OP can sell properties, although possibly at fire sale prices, or offer sweetheart leases to tenants. A lot depends on the diversification of the properties and how likely they'd be simultaneously impacted by the same disasters (i.e. great recession, hurricane Sandy, etc.).
inbox788
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Re: Is it dumb of me to not have any money in taxable?

Post by inbox788 »

travellight wrote:
I don't know if I am leveraged..... my total mortgage debt is about 1 million, net value of real estate holdings is over 5 million. That would seem not leveraged to me. Real estate is about 90% of my portfolio so some may think I need diversification. I see it as being diversified in 3 buckets: pension, real estate, and equities (all of which are in tax advantaged retirement funds). I am capable of living on only one bucket if two should fail.
I have been thinking about my response to inbox on this issue of whether I am leveraged or not. I think in a sense, I am leveraged but I think in a good way. From the current perspective that I have about 20% debt and 80% equity in real estate, it seems not leveraged to me. However, my total cash in was $239K to purchase $1,743,000 (purchase price of all rental real estate) which is now worth $2,369,000 (up 626k or 32%). This investment of 239K of my money is earning me yearly income of 120-142K per year. To get equivalent earnings without touching principal using 4% withdrawal rate would require about/over 3 million of my money in a liquid fund. My real estate activity has been over a 3-6 year period to realize those gains. I think it is favorable to tie up 239k of my money to get the same or better yearly income as 3 million.
The question should have been more clearly asked is, are you heavily leveraged? The question of leverage isn't so much a yes/no question, but what is your leverage ratio (debt/equity) and how burdensome is it to you or your business.
When you bought the property, (1,743k-239k)/239k=1504k/239k=6.3.
Today, after the cash you paid, and all the cash you made and accelerated mortgage payments/paid down principal, your leverage ratio is (1m/(2.369m-1m))=0.73

When you started, you were leveraged to what many people who put down 10-20% down on a property, which is reasonable. Currently, you are very little leverage, so if you were a REIT business, you'd likely underperform other businesses with higher leverage. Leverage is a two edge sword, and while you could double your investments and double your returns, any downturn is also doubled, so keep that in mind and your risk going into retirement. If you think about it, the winding down of leverage/deleveraging over 30 years investing in a rental property is actually a nice automatic glidepath toward more conservative portfolio.

Leverage is the reason real estate investments appear to outperform stocks. People forget that when they put $50k down on a house and it appreciates by $50k in just a few years making a 100% return is that they borrowed $300k paying interest to make the profit. You can buy stocks on margin, but much more limited leverage. However, your current leverage situation isn't going to return the same as when you were levered up. Going from 239k to 1.369m is a 573% return in X years. Your rents will go up a little and property value go up some, but you might only see 100% in the next X years. It's possible you might see 100% returns in X years in the stock market.

4% of $2,369,000 = $94,760 (you could do this on margin, minus interest paid for margin, and assuming you don't get margin calls if things go south).

You're not just tying up your original investment, but also all the earnings/profits that you've reinvested. If you cashed out today, you'd have $1.369m after paying off your bank notes, minus any taxes.

Are you compensating yourself for your work as landlord? Attaining tenants? Fixing things like broken plumbing? Collecting rent from deadbeats? Evicting poor tenants? If you've hired out a property manager and the cash you receive includes their expenses, then it's been a great investment. If you paid yourself for all your work, you're probably still beating 4% return on investment, but not by so much.
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Meg77
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Re: Is it dumb of me to not have any money in taxable?

Post by Meg77 »

travellight wrote:
Where is your excess cash going today? What did the last 100k that you had go towards? If you paid down mortgages, what are your interest rates? Basically loan to self RE business is same as bonds in my book. Did you buy more property? Leveraged? That's equivalent to non-diversified REIT. Do you need diversification? I assume your tax-advantaged accounts are in a diversified low fee index, or should be. What's your AA? What percentage of your future income will come from retirement accounts vs. pension vs. RE business? Will you need estate planning? A good question to ask would be what is more tax-advantaged for beneficiaries inheriting RE property/business vs getting a step-up basis on appreciated stock. I do not know the answer, but would be interested in hearing thoughts if anyone knows.
Terrific questions, inbox.... thanks. Really makes me think. Here are some of the answers:

I think of my path as a rocket in propulsion trying to get out of the gravitational field so I can cruise. I am in major power out mode, i.e. extreme savings. All of my funds left over after paying mortgages and essentials went to paying down my mortgage. My discretionary spending is about $500/month. I am driven to get these mortgages paid off in 4 years, then I will relax. My interest rates are great; 2.55%, 1.99% (penfed's 5 year program) and 2.75% 15 year fixed on one rental house.

I don't know if I am leveraged..... my total mortgage debt is about 1 million, net value of real estate holdings is over 5 million. That would seem not leveraged to me. Real estate is about 90% of my portfolio so some may think I need diversification. I see it as being diversified in 3 buckets: pension, real estate, and equities (all of which are in tax advantaged retirement funds). I am capable of living on only one bucket if two should fail.

Future income: about 200k/year pension, 120-132+k per year real estate, and investments are whatever current 660K turns into and yields. Yes, they are all in Vanguard low fee index funds. My AA was 60/40 stocks/bonds but I changed future allocations (didn't sell what I have) to 100% stocks due to my feeling that I have a very secure situation with the other buckets and can take the risk.

I don't have the answer to your last two questions. Clearly, I do need estate planning and need to get answers to these. I do have a living trust. I am a single mom with one child and I have distribution of his funds/inheritance in the case of premature death to be graduated until age 30.
This all sounds fantastic to me! I am about 20 years behind you, but my plan is similar. I'm maxing out retirement accounts in diversified cheap index funds, and accumulating rental properties for passive income as well. I'll never have a pension, but I hope that between those 2 buckets at least one will generate a nice retirement income for me one day. I really would like a third bucket and may one day look into starting a business or writing for royalties or something, but I love your analagy of the rocket trying to escape gravity. I have a feeling you've read some Robert G Allen... :sharebeer
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Artsdoctor
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

VictoriaF wrote:
Artsdoctor wrote:
travellight wrote:
Municipals will be essential, given your tax bracket. Victoria's point is well-taken; there are two CA muni bond funds but you are tying things up in one state. But you can easily diversify: some in a CA muni fund and some in a national fund. The state tax benefit for you will be worth it. And there will probably be a role for individual munis as well.

I wish I could tell you that you don't need to learn about tax rules, but your situation is complicated that it is really important.
Thanks, artsdoctor. I think I need to study munis! I can probably invest in them within my tax-advantaged accounts unless there is particular reason to do it within a taxable account? I do think about state taxes quite a bit; I paid about 35K last year in state taxes. When I retire, I plan to downsize in California and make my primary residence (6 months+ per year) in a tax free state since it will be worth 35K/year for me to do so.
Travellight,

Municipal bond are usually NOT taxed at the federal level and MAY not be taxed at the state level is you buy a state municipal bond. They are ONLY suitable for a taxable account. They should NOT be placed in a Roth or 401, etc.

Spend some time with the Wiki here before you get pulled in different directions. "The Bogleheads' Guide to Investing" is not a bad place to start either.

Best wishes.
If Travellight retires in four years and moves out of California, does it still make sense for him to hold California municipal bonds for four years?

Victoria
In my opinion, yes. Most municipal bonds would be free of federal income tax so if he moved to Utah, he may have to pay Utah income tax on the California bonds but he would still avoid federal income tax. If he has individual CA munis, he could just hold them until maturity; if he has a fund, it would be easy to liquidate (either gradually or all at once, depending on the costg basis). The current yields on CA munis are particularly attractive because of the state's "lower" rating (it's only an "A" for GO bonds) but I would be hard-pressed to imagine a scenario where the state itself would default on a GO bond.

Hope that's helpful.
leonard
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Re: Is it dumb of me to not have any money in taxable?

Post by leonard »

inbox788 wrote:
leonard wrote:I would add one thing after reviewing your info above - I understand you have 2 HELOC's for emergencies. However, there is nothing like cash, especially when one of those unpredictable rental problems happens over a weekend - roof, hotwater heater, sewer-septic system, and who knows what else. I personally would feel better having some cash as a business emergency fund in those instances - in case you can't access either HELOC for some reason. For me the "drag" on performance would be worth the piece of mind.
From what I can tell, OP has several properties that are cash flow positive, so on a monthly basis, there's excess cash that's being reinvested in the business. Unless that positive cash flow suddenly stops (i.e. many concurrent vacancies that go unfilled), there's little worry. Also, if the mortgage is paid off, the major part of the expense is removed. In tough times, OP can sell properties, although possibly at fire sale prices, or offer sweetheart leases to tenants. A lot depends on the diversification of the properties and how likely they'd be simultaneously impacted by the same disasters (i.e. great recession, hurricane Sandy, etc.).
What I am thinking is a Sunday afternoon - you have an emergency at a rental property that needs to be dealt with ASAP. All other payment methods may be difficult to use other than cash.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.
robertalpert
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Re: Is it dumb of me to not have any money in taxable?

Post by robertalpert »

travellight wrote:Yes, I don't keep any money in cash because I want maximum work efficiency from my money. My access to funds is 2 helocs (just in case there is a problem with one): one with Wells Fargo for 250k and another with a local regional bank for about 500k.

Good to have the helocs but keep at zero borrowed even during emergency (especially during emergency). Reason is the bank may ask for repayment of helocs at a most inconvenient time, while still in emergency situation. Imagine loss of employment, use the heloc, bank ask for pmt. Result: loss of job AND loss of home.

Better to have a supply of several zero-balance (unsecured) credit cards for emergency. If unemployed, fill up your credit cards to pay your way till find the new job. When new job is stable, then and only then, use the helocs to repay the credit card debt. And use earning from that new job to pay down the helocs.
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Artsdoctor
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

HELOCs can be cancelled or the limit decreased at the whim of the bank. They are under no obligation to renew your HELOC at all. If you have to go elsewhere, and you've taken a hit with employment, you might not qualify. I really don't think HELOCs can be thought of as a true emergency back-up.
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grabiner
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Re: Is it dumb of me to not have any money in taxable?

Post by grabiner »

VictoriaF wrote:If Travellight retires in four years and moves out of California, does it still make sense for him to hold California municipal bonds for four years?
Yes, because he gets the tax benefit, and can switch at little or no cost since municipal-bond funds rarely have large capital gains or losses. If he moves from CA to NY, he can sell the CA fund and buy a NY fund when he moves, and will keep the same state tax advantage as if he lived in one state all the time. If he moves from CA to FL (with no state tax) or to GA (with a state tax but no low-cost state fund), he can sell the CA fund and buy a national fund when he moves, regaining the full diversification when the state tax benefit goes away.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

by tadamsmar » Mon Dec 02, 2013 11:10 am

One reason to have money in taxable investments rather than real estate is that it's more passive so you can perhaps better manage it for the rest of your life so that your heirs inherit it and get the stepped up basis.
I feel that the ROI is so much better for me in real estate that it is worth the work rather than doing a passive investment, tadamsmar.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »


The question should have been more clearly asked is, are you heavily leveraged? The question of leverage isn't so much a yes/no question, but what is your leverage ratio (debt/equity) and how burdensome is it to you or your business.
When you bought the property, (1,743k-239k)/239k=1504k/239k=6.3.
Today, after the cash you paid, and all the cash you made and accelerated mortgage payments/paid down principal, your leverage ratio is (1m/(2.369m-1m))=0.73

When you started, you were leveraged to what many people who put down 10-20% down on a property, which is reasonable. Currently, you are very little leverage, so if you were a REIT business, you'd likely underperform other businesses with higher leverage. Leverage is a two edge sword, and while you could double your investments and double your returns, any downturn is also doubled, so keep that in mind and your risk going into retirement. If you think about it, the winding down of leverage/deleveraging over 30 years investing in a rental property is actually a nice automatic glidepath toward more conservative portfolio.

Leverage is the reason real estate investments appear to outperform stocks. People forget that when they put $50k down on a house and it appreciates by $50k in just a few years making a 100% return is that they borrowed $300k paying interest to make the profit. You can buy stocks on margin, but much more limited leverage. However, your current leverage situation isn't going to return the same as when you were levered up. Going from 239k to 1.369m is a 573% return in X years. Your rents will go up a little and property value go up some, but you might only see 100% in the next X years. It's possible you might see 100% returns in X years in the stock market.

4% of $2,369,000 = $94,760 (you could do this on margin, minus interest paid for margin, and assuming you don't get margin calls if things go south).

You're not just tying up your original investment, but also all the earnings/profits that you've reinvested. If you cashed out today, you'd have $1.369m after paying off your bank notes, minus any taxes.

Are you compensating yourself for your work as landlord? Attaining tenants? Fixing things like broken plumbing? Collecting rent from deadbeats? Evicting poor tenants? If you've hired out a property manager and the cash you receive includes their expenses, then it's been a great investment. If you paid yourself for all your work, you're probably still beating 4% return on investment, but not by so much.
This is a fascinating analysis, inbox. I have been away for the past day attending to landlording activities. I manage it myself and there are periodic brief periods of intense demand but also long periods of cruising. I feel that I am being paid well to do it though. My real estate appreciation was over 400K just in the past 12 months.

I agree that one can make the most money if you maximize your leverage but the risk does go up. I consider myself an aggressive conservative investor. I went into real estate with a plan to purchase as much property as I could and cover 100% vacancy. I ended up quitting purchasing before I got to that point because 6-7 properties was my comfort range in managing myself and I don't want to use property management. I am not comfortable with the risks associated with greater leverage.

You stated that leverage is the real reason that real estate seems to outperform stocks. Do you invest in real estate yourself?
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Thanks grabiner, artsdoctor and Victoria for the information about munis. I will study this further.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

robertalpert, leonard, and dulocracy: It is an interesting discussion about safe ways to keep EF. I understand the points that you bring up; I think I have read of others who use their heloc as their EF. Not that I should simply follow them like sheep but I do have other back up plan/sources. I am able to borrow 50K from work if needed, I do have many credit cards I can tap as well....and, the second heloc is really a mortgage and it is a unique product that allows me to lever up or pay down at my whim (up to a million dollars). They are unlikely to cancel this as it is a mortgage and not a pure heloc and they can't change the inherent structure of this. I feel pretty safe with it; in fact, the original bank just sold and got taken over by another but all the terms of the account are being kept unchanged.
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btenny
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Re: Is it dumb of me to not have any money in taxable?

Post by btenny »

Travel. You are heading for a tax collision of epic proportions IMO when you retire with your current plan. Everything you have will be taxed as ordinary income at the maximum rate, your pension, your IRA withdrawals, SS and your real estate incomes. You need to find a tax planner and do some what if's and change your glide path IMO. I suspect you should be saving a lot of your cash at this time and investing it in muni bonds and taxable securities instead of paying off your mortgages so fast. That way you have a good amount of real cash that is NOT taxable to spend when you retire. This also fixes the emergency fund issues as well. Then it's your cash and you can do what you want as needed. No bank calling your HELOC at the wrong time....

Do some calcuations to see if you have your pensions and no other income if that is adequate for your desired lifestle? Or maybe your pensions and some taxable monies? I suspect the answer to these question is yes. So my suggestion is for you to spend some of your saved cash in retirement and live much better but pay way less taxes. And let your real estate holdings pay for themselves over a longer period of time and provide you more money later in retirement as inflation fighters.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

This all sounds fantastic to me! I am about 20 years behind you, but my plan is similar. I'm maxing out retirement accounts in diversified cheap index funds, and accumulating rental properties for passive income as well. I'll never have a pension, but I hope that between those 2 buckets at least one will generate a nice retirement income for me one day. I really would like a third bucket and may one day look into starting a business or writing for royalties or something, but I love your analagy of the rocket trying to escape gravity. I have a feeling you've read some Robert G Allen... :sharebeer
"An investment in knowledge pays the best interest." - Benjamin Franklin
Thanks Meg! I have never read Robert Allen; actually, I never read anything in doing this. I just developed certain ideas/constructs in my own mind (some of which I have posted here) and then did it. My key concept was that I analyzed each property based on a 15 year mortgage. If I felt that I could get rents to cover a 15 year no money down mortgage, I was interested in acquiring it. It was just a financial construct I made up. My net worth was negative 25K when I finished my education in 1989 (1976-89, long education, lol). I didn't get into investment real estate until 2007 but I spent 18 years building up equity so that I could fund it myself.

I wish you all the best in pursuing this path. Feel free to ask if you need any advice. I think it is very financially rewarding IF you can do it well (safely/smartly) and you are willing to be tough and do the work. It is not without risk but usually rewards are commensurate with risk. For me, it was important to find the sweet spot on the risk/reward curve. As inbox pointed out, I could have leveraged much more and achieved greater reward but it would involve risk beyond my comfort.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

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by btenny » Tue Dec 03, 2013 10:39 am

Travel. You are heading for a tax collision of epic proportions IMO when you retire with your current plan. Everything you have will be taxed as ordinary income at the maximum rate, your pension, your IRA withdrawals, SS and your real estate incomes. You need to find a tax planner and do some what if's and change your glide path IMO. I suspect you should be saving a lot of your cash at this time and investing it in muni bonds and taxable securities instead of paying off your mortgages so fast. That way you have a good amount of real cash that is NOT taxable to spend when you retire. This also fixes the emergency fund issues as well. Then it's your cash and you can do what you want as needed. No bank calling your HELOC at the wrong time....

Do some calcuations to see if you have your pensions and no other income if that is adequate for your desired lifestle? Or maybe your pensions and some taxable monies? I suspect the answer to these question is yes. So my suggestion is for you to spend some of your saved cash in retirement and live much better but pay way less taxes. And let your real estate holdings pay for themselves over a longer period of time and provide you more money later in retirement as inflation fighters.
Thanks for the warning, btenny! It is alarming. This is how I see it though and correct me if I am wrong.... I am already paying the max rate in taxes and I have it set up so my income once retired is about the same so I will still pay the max rate in taxes. I described a plan to minimize my taxes due upon sale of the homes so at least I can pursue that. My ROTH Ira withdrawals should be tax free but, yes, my real estate income and 401k and pension and SS will be at max tax rate. I don't know how having a taxable investment account will help with that though, although I am understanding some of the things I need to study further like munis. Thanks for your concern.
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Re: Is it dumb of me to not have any money in taxable?

Post by Artsdoctor »

Travel,

Think of it this way. You really just want as many options as possible. We all make decisions based on what is currently available to us, but no one can forecast tax law decades into the future. For this reason, "tax diversification" seems to make sense. The more money you make, the more taxes you pay; having several types of accounts allows you the opportunity to pick and choose which assets you want to liquidate in the future to your best advantage. A taxable account gives you liquidity, the ability to tax-loss harvest, and equities sold at a profit will be taxed at a capital gains rate that will hopefully continue to be less than the personal income tax rate.

All that said, the sequence of events when it comes to investing remains pretty much constant. Try to fill up all of your tax-advantaged accounts first, and then go after your taxable account. In reality, if your assets are large, you will inevitably find that there is not enough space in your tax-advantaged accounts and you will be forced to save more in a taxable account to meet your goals. Your real estate currently could be considered your "taxable account" but real estate is inherently illiquid.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Thanks artdoctor, solid great advice.
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inbox788
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Re: Is it dumb of me to not have any money in taxable?

Post by inbox788 »

travellight wrote:This is a fascinating analysis, inbox. I have been away for the past day attending to landlording activities. I manage it myself and there are periodic brief periods of intense demand but also long periods of cruising. I feel that I am being paid well to do it though. My real estate appreciation was over 400K just in the past 12 months.

I agree that one can make the most money if you maximize your leverage but the risk does go up. I consider myself an aggressive conservative investor. I went into real estate with a plan to purchase as much property as I could and cover 100% vacancy. I ended up quitting purchasing before I got to that point because 6-7 properties was my comfort range in managing myself and I don't want to use property management. I am not comfortable with the risks associated with greater leverage.

You stated that leverage is the real reason that real estate seems to outperform stocks. Do you invest in real estate yourself?
No. Never liked the landlording activities, like attaining and evicting tenants, collecting rent, getting calls to repair things, etc. After accounting for these or hiring out a management company (which is work in and of it self), the ROI just wasn't worth it. Around here (SoCal), it's been hard to justify renting out $500,000 home/condo for $2500/month. Aside from landlording activities, money is made via either capital appreciation or rent increases, and neither has been that high. Going forward, things look a little more rosy on both fronts, so maybe it's time to revisit. Alternatives have been to invest in lower cost neighborhoods or going to another state, both increasing the undesirable landlording activities. If you enjoy or don't mind it as much as work, then it's a very lucrative part of the business. REITS (i.e. SPG) make decent returns after all the expenses, and if you look at how much management makes ( http://finance.yahoo.com/q/pr?s=SPG+Profile ), it's surprising. REIT (VNW) funds diversify risk. Both are reasonable real estate investment options/alternatives without having to deal with (or be compensated for) landlording activities. I've never looked into their level of leverage, but trust the management to figure out their optimal allocation.

Getting back to optimal leverage, I was thinking about the tax implications. Early on, high leverage usually means cash flow negative to near break even. Between interest expense and others, the amount of income taxed is minor, and over time there is capital appreciation. After you own the property outright, the biggest expense of interest is gone, so the income is high, and the amount taxed at income level vs. capital gains is now the major contributor, basically moving from lower capital gains to higher income. So optimal leverage might mean that it's worth taking out mortgages on properties and investing the cash in the market to make capital gains on both real estate and equities capital gains.
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Thanks for the input, inbox. I also live in Socal and looked into real estate here in San Diego and did not like the numbers. In contrast, in Utah (SLC), I was able to buy a beautiful SFR for 270k and get $2150 in rent, another for 256K and get $2200 in rent, another for 238K and get $1775 in rent, etc. Granted, these deals were at the low point in the market in 2009-10. It would be difficult to get such favorable proportions in today's market. The 270k house is now zillowed at 505k, etc.

REITs are definitely less work but lower yield as expected. I don't like contributing to those 12 million+ executives salaries; it is a drag on my performance. As you pointed out, my investment in real estate has grown almost 600%; period of time is 6 years for 2 of the homes but only 3 years for the other 4 homes. I think it would be hard to get that with REITs because those executives and middle managers all have to be paid. The shopping for real estate is much more challenging now though, so it is not as easy to make this kind of growth as the market has recovered.

I can understand not wanting to do the work involved with real estate. Sometimes though, the perception of the amount of work is overblown imo. As a personal point of reference, I have had 1 eviction out of 27 tenants. That one was in my first year in an earlier house in a bad neighborhood. I have sold that property and am now in great neighborhoods with a more upscale tenant base and have had only minor problems to manage. My vacancy rate has been less than 1% in the past year. I have each house as its own LLC for asset protection and I have property insurance on each house with high liability coverage. The work is more self imposed stress than actual stress. The amount of actual time the property management requires is not that much; probably 2 hours per week. My net worth grew by about 7 figures from last year to this year and over 800k of that growth was in real estate (appreciation and paying down mortgage/increasing equity). I was shocked and do not expect to see this level of appreciation again.
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lazyday
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Re: Is it dumb of me to not have any money in taxable?

Post by lazyday »

my bold:
grabiner wrote:If you retire before 59-1/2, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA tax-free and penalty-free.
:!: :?: :!:

If true, :sharebeer

Link Please!!
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Bengineer
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Re: Is it dumb of me to not have any money in taxable?

Post by Bengineer »

TL, I'm in the diversification camp, both in terms of assets and taxes. As noted, you have a large taxable portfolio, but it's all in real estate. If it were me, I wouldn't want that much of my net worth in one asset and particularly in real estate, which is illiquid and yours is largely located in a single area. Over time, I think I'd seek to divest some of the real estate and build a taxable equity/(muni) bond portfolio to go with your tax-deferred so you're more diversified.
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travellight
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Re: Is it dumb of me to not have any money in taxable?

Post by travellight »

Thanks, Bengineer. I know it seems like 80+% of my net worth is in real estate. I manage to put a spin on it by thinking of my pension as equivalent to 5 million (to yield 200k/year based on 4% withdrawal rate) and then the real estate does not seem as huge a percentage. I will plan to research the munis; thanks for the advice.
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HawaiiBrewer
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Re: Is it dumb of me to not have any money in taxable?

Post by HawaiiBrewer »

travellight wrote:
This is a fascinating analysis, inbox. I have been away for the past day attending to landlording activities. I manage it myself and there are periodic brief periods of intense demand but also long periods of cruising. I feel that I am being paid well to do it though. My real estate appreciation was over 400K just in the past 12 months.
I made that amount in my 401K since January thanks to the roaring market and didn't have to fix any plumbing leaks or listen to any moaning tenants, but then I didn't get to ski at Park City or Alta...so there are trade-offs I suppose. Others on here are also big into real estate so a quick search might land you some good info regarding your questions. As I've read here many times....."there are many roads to Dublin"

:beer
If you don't know where you are going, any road will get you there
inbox788
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Re: Is it dumb of me to not have any money in taxable?

Post by inbox788 »

HawaiiBrewer wrote:I made that amount in my 401K since January thanks to the roaring market and didn't have to fix any plumbing leaks or listen to any moaning tenants, but then I didn't get to ski at Park City or Alta...so there are trade-offs I suppose. Others on here are also big into real estate so a quick search might land you some good info regarding your questions. As I've read here many times....."there are many roads to Dublin"

:beer
It's getting cold, and I was just called out on a heat emergency. And I'm not even a landlord (pesky relatives). No wonder I'm averse to landlording. Like you, I'm content with market returns sitting on my behind.

:sharebeer
lazyday
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Re: Is it dumb of me to not have any money in taxable?

Post by lazyday »

EDIT:
This post is wrong, seems grabiner is correct. See posts below.
---------------------------------------------------------------


my bold:
grabiner wrote:If you retire before 59-1/2, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA tax-free and penalty-free.
This is incorrect.

Roth conversions from Traditional IRA cannot generally be taken out before 59.5 while avoiding both income taxes and penalty.

Even with a 72T, which as I recall avoids the penalty.

Exceptions might include first home purchase, medical emergency, etc; I'm not up on the current exceptions.

Deja Vu on this topic. Seem to recall someone posting this before, redoing my own research on IRS publications, and confirming it false.

This is my challenge to prove me wrong! (anyone)

The prize: admitting you are better than me and/or virtual Boglehead beer. Your choice.
Last edited by lazyday on Fri Dec 13, 2013 4:30 am, edited 1 time in total.
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Re: Is it dumb of me to not have any money in taxable?

Post by grabiner »

lazyday wrote:my bold:
grabiner wrote:If you retire before 59-1/2, you can withdraw contributions, and conversions made at least five years ago, from a Roth IRA tax-free and penalty-free.
This is incorrect.

Roth conversions from Traditional IRA cannot generally be taken out before 59.5 while avoiding both income taxes and penalty.
I looked this up.
IRS Publication 590 wrote:Distributions of conversion and certain rollover contributions within 5-year period. If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). A separate 5-year period applies to each conversion and rollover.
...
Order the distributions as follows.
1. Regular contributions.
2. Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). See Aggregation (grouping and adding) rules, later. Take these conversion and rollover contributions into account as follows:
a. Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the
b. Nontaxable portion.
3. Earnings on contributions.
Contributions, conversions, and rollovers are never taxed when withdrawn from the Roth IRA because they were already taxed; earnings are taxed if withdrawn and an exception does not apply. The 10% penalty applies to the taxable portion of conversions withdrawn within five years. (The purpose of the 10% penalty is to prevent you from converting a traditional IRA to a Roth before age 59-1/2 and then withdrawing the money immediately tax-free; if you withdrew directly from the traditional IRA, you would owe a 10% penalty.)
Wiki David Grabiner
lazyday
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Re: Is it dumb of me to not have any money in taxable?

Post by lazyday »

grabiner,

It seems you are right, and there is no income tax on a nonqualified distribution before 59.5 of assets excluding earnings, converted to Roth and taxed over 5 years ago.

Your 590 quote seems to address the penalty but not tax, and I've still never found a place in 590 stating that there is no tax.

As you say, the amount was previously taxed, but the IRS has done stranger things than double tax. I believe others have said it will be taxed again, though I didn't come across that now.

Pub 590 Fig. 2-1 implies that it is not taxed, by not saying that it is taxed:
The distribution from the Roth IRA is not a qualified distribution. The portion of the distribution allocable to earnings may be subject to tax and it may be subject to the 10% additional tax.
flowchart pic
text version

A tax writer at Fool agrees with you:
Example #4
Rick converted $15,000 from his traditional IRA to a Roth IRA in 1999 ....
These conversions were all taxable to Rick when they occurred because he had made no non-deductible contributions to his traditional IRAs....
In 2006, when Rick is still under age 59 1/2, he takes a distribution of $15,000. Is this distribution subject to tax?
Nope, since the taxes were paid on these funds at the time of the conversion from the traditional IRA to the Roth IRA.
I don't know how I messed this up multiple times. Every few years I'd read a hint that it might not be taxable, and sometimes "reconfirmed" it is, by reading both 590 and opinions on websites. I grew skeptical and didn't read 590 anymore.

I may have misread bits like this, which with a quick read sounds like it would be taxable:
Nonqualified distributions are taxable to the extent the amount of the distributions, added to all prior distributions less prior amounts that were includible in income, exceed the direct Roth contributions.
reading more carefully, I see the important bit:
less prior amounts that were includible in income,
which if preceeded by a comma I may have understood properly. I probably ignored the clause between commas, using simple case of one distribution.

In one post, Alan S suggested running through form 8606. I intend to do this, ideally before year end, and hope to remember to post result.

Until then, for your patience with me, posting back, making my planning easier, and possibly saving me tax money, have a beer:

:beer
Oh, you prefer Boglehead Porter II?
Here, take it from my hand --> :sharebeer <-- Good, I see you got it in the second panel. :)
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