Financial situation/Health checkup - Stocks vs. Real Estate?

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m@ver1ck
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Joined: Fri Sep 14, 2018 2:18 pm

Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Fri Sep 14, 2018 5:43 pm

Hey guys,

Just discovered this forum a couple of days ago - and couldn't stop reading. I've been on the index fund bandwagon since several years - mostly S&P 500 stuff - but moved to total stock market index when I learnt that Vanguard is suggesting that to it's employees over the sp500.

Just thought I'll throw my general financial position out there - see if I can get any advice - something I haven't thought about yet.

Age: 42
Health: Need to lose 40 pounds.
Spouse: Stay at home mom.
Kids: 7yr, 1yr old.

Yearly Income: 200 + 20% bonus + ~80K in stocks that vest over 4 years.
Previous Income: 180K + 20% bonus + ~40K in stock that vest over 4 years.

Current:

401K:
Fidelity Growth fund: .35% 360K
PIMCO Total Bond Index: .35% 40K

Roth IRA:
Vanguard Total Stock Market Index: 110K

Rollover IRA:
Vanguard Total Stock Market Index: 130K
Vanguard Total Bond Market Index: 35K
Vanguard International Bond Market Index: 20K
Vanguard REIT: 10K

Kids Education Funds:
(Didn't know what to make of it so far).
7yr old: Vanguard education Fund (age appropriate): 5K
1yr old: Vanguard education Fund (age appropriate): 5K

Taxable:
Apple: $100K
Microsoft: $200K
Vanguard Total Stock Market: $35K
Cash (1.85% interest rate): $55K

Current Home:
Worth 1,000,000 - but market has started getting softer. Still, primary residence so price doesn't matter. around 2000 sqft in Seattle suburbs.
First home, bought for $550K in 2010. Got lucky in that I couldn't afford anything before the market crashed.
Still owe $270K on it. 15 yr loan (ends in 8 yrs). 2.75% interest rate. I could write a check and pay it off, but have been made 30-40% on microsoft stock over the last few years. Been investing 15% of my salary into it (and getting it at a 10% discount). Still, nervous that it's had a good run, so maybe best to sell all of it off and pay the home off. However, 2.75% interest rate feels like free money, so no point paying it off. And it's a 15yr loan vs a 30yr - which might have been a mistake in itself. Investing the $1000/month extra in the stock market would have had been better(15yr load made interest rate go down from 3.75% to 2.75%, but payment went up by about a 1000). Still, I like the idea that I;m paying the bank a rent of only 800/month this year.

Car payments: 510/month. 10K outstanding. 0% interest rate.

Looking into getting a bigger place. Stuff is super expensive though. And I do hope housing market crashes some - will make it cheaper to upgrade. (Or am I thinking about it wrong?)
I could've pulled the trigger a few times over the last few years, however, I guess greed kept me back:
a) I really wanted to hold on to my current home. 2.75% felt like free money. And renter could have paid off the rest of my mortgage.
b) However, it was hard for me to qualify for a new loan for overpriced properties in the area - (> 1.4Million). For debt to income calculations, lenders would not take potential rental income into consideration.

The primary reason for considering a move at this point:
Home is nice, and it's hard to find something better, but I figured kids need a little more diversity than this neighborhood offers.
Plus it's next to an industrial area, so sometimes I smell contaminants in the air. The EPA did 0 for us because the industry was there first.

Anyway, if the housing market softens further, I'll consider buying a second home and holding on to this one. What do bogleheads think about that? Or is it better to invest in stocks/bonds rather than in real estate? The leveraged investment + having someone else pay your mortgage seems too good to be true - what's the catch? I would prefer stocks/bonds over real estate, but real estate seems to be a good way to grow wealth even if the home is negative-geared.

If I let go of the idea of a second home, I can invest all of my salary for the next two months into a backdoor IRA - it would be great to get some advice that would push my thinking one way or the other. And yes, I don't have much time to deal with a rental property - so I would be letting someone else manage that for me.

I don't have life insurance - looking to lose 10-20 pounds before I go shopping for it. Got a few hundred thousand in life insurance from my employer. Quotes are coming in at 3K a year. Is that normal?
Last edited by m@ver1ck on Fri Sep 14, 2018 7:34 pm, edited 1 time in total.

m@ver1ck
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Joined: Fri Sep 14, 2018 2:18 pm

Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Fri Sep 14, 2018 7:31 pm

bump.

delamer
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by delamer » Fri Sep 14, 2018 8:33 pm

The catch is that your have to be a landlord and deal with tenants, maintenance and repairs, vacanies, tax filings, etc. Mutual funds don’t need new roofs. If you have an 3rd party manage it, you lose some of the hassles but you lose some of your return.

Another downside is that you could eventually end up with a big portion of your net worth tied up in 2 residential properties in the same metro area — not very diversified.

You should get the life insurance now even with the extra weight. All other things bring equal, the odds that your family will need it are higher when you are heavier. Once you lose the weight, you can reapply to get lower rates.

And you need term life for your wife too.

chicagoan23
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by chicagoan23 » Fri Sep 14, 2018 9:01 pm

It seems like you are on a good path. $1 million for an average sized suburban house next to an industrial area that’s doubled in value over eight years makes me think you are in bubble territory and should consider moving on before a property crash, to get settled into your forever home.

I would not make a move into becoming a landlord until you learn a lot more about it; it’s never as easy as it seems. You are basically adding a part time job.

Sell the house, use some of the Apple and Microsoft for the down payment on the new house (down payment should be around $1 million?) and keep plugging away.

m@ver1ck
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Sat Sep 15, 2018 3:16 pm

Thanks. I guess I'll keep looking passively for a new place. Once I find it, sell. I have enough for the down payment, so funds can go into kids education savings.

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unclescrooge
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by unclescrooge » Sat Sep 15, 2018 5:38 pm

m@ver1ck wrote:
Sat Sep 15, 2018 3:16 pm
Thanks. I guess I'll keep looking passively for a new place. Once I find it, sell. I have enough for the down payment, so funds can go into kids education savings.
In order for your rental income to count towards your income, you need to show 2 years worth of tax returns.

Move into a rental now, rent your current home, start looking for your new home in two years. Pray we are in a recession by then 😁

MotoTrojan
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by MotoTrojan » Sat Sep 15, 2018 5:59 pm

I’d consider a more broad equity index in 401k, if available.

runner540
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by runner540 » Sat Sep 15, 2018 6:30 pm

You have a $1MM home, a job, and a lot of stock in a major company in your city: all highly correlated assets! I would derisk by taking appreciated stock and paying off the mortgage, or investing in a diversified portfolio.

You need life insurance, now! You have a mortgage, a spouse with no income, and two kids who need care and probably college. $3k is 1.5% of your income. In your budget, I'm sure your family spends at least $3k on discretionary items. Paying off the mortgage will also save more than $3k per year in just interest.

FYI, I learned that life insurance applications ask not only for current weight, but if your weight has fluctuated >10lbs in the last year.

m@ver1ck
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Sun Sep 16, 2018 9:14 am

The aapl and Microsoft stock has gone up to a point whereIve made gains if over 40-80%. Maybe it's prudent to just think of it as risk having paid off, and if nothing else, use the profits to pay loan off and invest the rest in a savings account (1.8%) and vanguard total stock fund

I don't see Microsoft to beat the market in appreciation any more, plus I have 300K more of Microsoft RSUs...

Will look at life insurance this week. I have also started CrossFit classes - just 3 classes in and I feel way healthier than I did the last 6 months.

I figure If I can pay $1000 to ensure my car worth 40K, life insurance is way cheaper. :-)

Intuitively the following make.sense to me to hedge my bets -
Sell stock worth 40K a month over the next few months.
20K goes towards loan repayment, 20K towards 3 month CDs.

Just focus more on work than on becoming a landlord - the next level at work pays 30% cash bonus and 150K in stock (stocks twice as much as now).

m@ver1ck
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Sun Sep 16, 2018 9:25 am

Aapl stock is interesting - I went out and got an Android phone last year. In fact, I used three devices at various price points. Net net - I'm going back to my iPhone after a year - and holding on to Apple stock.

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Sandtrap
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by Sandtrap » Sun Sep 16, 2018 9:30 am

Stay on course.
Keep it simple.
Purchase new home.
Sell old home.
Stick with what is working.
Great job so far!
j

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unclescrooge
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by unclescrooge » Sun Sep 16, 2018 10:51 pm

m@ver1ck wrote:
Sun Sep 16, 2018 9:25 am
Aapl stock is interesting - I went out and got an Android phone last year. In fact, I used three devices at various price points. Net net - I'm going back to my iPhone after a year - and holding on to Apple stock.
You probably got a low end phone, or are so used to the interface that you couldn't get accustomed to the new one.

I had to use a relatives new iPhone for two weeks last year when traveling abroad, and I hated the experience.
Was very happy to get back to my Samsung.

Couldn't figure simple setting changes, and the layout seemed inefficient... Mainly due to the lack of a back button.

msk
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by msk » Mon Sep 17, 2018 12:12 am

Just an observation on housing. No clue about building costs around Seattle but I have often heard that building a new house costs under $200 a sq ft. Hence a 2000 sq ft brand new house ought to cost $400k. Of course it does depend on the materials used in finishing, but that ought to be enough for a very nice standard. Hence the OP's building lot is worth at least $600k to make up to $1 million. Want a bigger house? Have you considered just extending it? Grow it into a 3000 sq ft house for only $200k. Just a thought...

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Strayshot
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by Strayshot » Mon Sep 17, 2018 8:32 am

You are doing great!

Is there an index alternative to fidelity growth in your 401k with a lower expense ratio? If so I would move to that.

I would start selling Microsoft stock, perhaps at the 50k/year level (whatever is in long term capital gains) and buying more total stock market. You have a lot of money in single tech stocks which is a risk.

You absolutely need term life insurance ASAP regardless of weight. I would price out 20 year policies from an independent agent (term4sale is a great site) and originate something at the 1-2M level. You have good assets but are not yet in what I would consider “self insured” territory. If you lose weight, you can always reprice and replace a term policy. In another 10 years or so you might be self insured and can let the policy lapse.

m@ver1ck
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Mon Sep 17, 2018 4:49 pm

unclescrooge wrote:
Sun Sep 16, 2018 10:51 pm
m@ver1ck wrote:
Sun Sep 16, 2018 9:25 am
Aapl stock is interesting - I went out and got an Android phone last year. In fact, I used three devices at various price points. Net net - I'm going back to my iPhone after a year - and holding on to Apple stock.
You probably got a low end phone, or are so used to the interface that you couldn't get accustomed to the new one.

I had to use a relatives new iPhone for two weeks last year when traveling abroad, and I hated the experience.
Was very happy to get back to my Samsung.

Couldn't figure simple setting changes, and the layout seemed inefficient... Mainly due to the lack of a back button.
I got three - a low end motorola, followed by Google Pixel 2, followed by a high end samsung that my brother let me have. Motorola sitting around, google pixel 2 ebayed yesterday (still need to ship it), High End Samsung will sit around the home since it was my brother's test device given to him by his company and they might want it back.

m@ver1ck
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by m@ver1ck » Fri Oct 12, 2018 10:16 am

[Thread merged into here, see below. --admin LadyGeek]

If I want to have say a 85/15 stocks to bond ratio, should I include all funds - retirement, taxable, emergency funds (60K cash/CDs) in that ratio, or is that 85/15 just for funds earmarked towards retirement?

Not including assets - 1M house, 265K outstanding mortgage at 2.75% - 15yr term, maybe 9 more yrs to go.

All Up Ratios:
Cash/Bonds: 16%
Stocks: 84%

Split Ratios:
Retirement (401K/Roth etc.)
Bonds: 13%
Stocks: 87%

Non-Retirement:
Stocks: 80% (Mostly AAPL, MSFT) (About 270K total)
Cash/Bonds: 20% (66K), out of which 30K is 'emergency funds' - hence CDs, Cash.

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ruralavalon
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Re: The Three-Fund Portfolio

Post by ruralavalon » Fri Oct 12, 2018 10:24 am

m@ver1ck wrote:
Fri Oct 12, 2018 10:16 am
If I want to have say a 85/15 stocks to bond ratio, should I include all funds - retirement, taxable, emergency funds (60K cash/CDs) in that ratio, or is that 85/15 just for funds earmarked towards retirement?

Not including assets - 1M house, 265K outstanding mortgage at 2.75% - 15yr term, maybe 9 more yrs to go.

All Up Ratios:
Cash/Bonds: 16%
Stocks: 84%

Split Ratios:
Retirement (401K/Roth etc.)
Bonds: 13%
Stocks: 87%

Non-Retirement:
Stocks: 80% (Mostly AAPL, MSFT) (About 270K total)
Cash/Bonds: 20% (66K), out of which 30K is 'emergency funds' - hence CDs, Cash.
Asset allocation usually refers to long-term/retirement investing, so don't include the emergency fund or any account intended for a specific purpose in a few years.

The "bond" part of the asset allocation would better be called "fixed income" to include the safer investments which can be bond funds, CDs, individual Treasury bonds, I-bonds, and even money market funds.
Last edited by ruralavalon on Fri Oct 12, 2018 10:26 am, edited 1 time in total.
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Re: Financial situation/Health checkup - Stocks vs. Real Estate?

Post by LadyGeek » Sat Oct 13, 2018 10:36 am

m@ver1ck - In order to give appropriate advice, it's best to keep all the information in one spot. I merged your question into your original thread.
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