Sold our rental! What to do with the proceeds? (mortgage vs invest)

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sunny_socal
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Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by sunny_socal » Fri Jul 31, 2020 9:50 am

We moved to TX a couple years ago, now sold our CA home. Expecting some tax-free proceeds from the sale but I have no idea what to do with it!

The TX Home
- Home value 600k
- Mortgage $460k, 30-year, 3.125%

Finances
- 24% Tax bracket
- 700k combined 401k balance
- 30k emergency fund, cash
- No debt other than mortgage
- $140 cash from CA home sale

I don't see us staying in the current house for very long. Our kids are 16 & 18 and we're here only because of the school district. At some convenient time we'll downsize to a 'forever' home (3BR/2BA with some land), this is likely to be ~5 years from now. This way our kids can attend a local community college while living at home. We're in early 50s, expect to work 10-15 years more.

Pay down the mortgage?
- Then loan balance immediately drops to $320k, my wife is likely to push for this option
- But then we're not very liquid, we'd need to get a HELOC to pull money out of the house if planning a move

Or invest the cash? (I'm fuzzy here)
- We live in TX, apparently municipal bonds aren't that attractive since we have no state tax
- Looking at a bond fund, eg Vanguard VTEB only has 1.25% real yield at the moment
- OR could dump it in a Taxable account and accept some risk, hope for 7% before-tax yield (I don't have a taxable account right now)
- We'd be liquid in case we want to make a move

Or Split the money? (Half toward mortgage, invest the rest)
- Paying down the mortgage is easy for me to understand, use $70k of the cash
- Not sure what investment option to pick here. Put half in the 'safe' but boring bond fund, rest in stocks?

Stumped!

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by DarkHelmetII » Fri Jul 31, 2020 10:03 am

1) Identify what portion of the $140k you need to be "agile" in making your next move. Hard to answer this for you.
2) Put $140k - #1 into VFIAX just let it ride in a low cost, tax-efficient, diversified index fund.

By the way municipal funds *are* attractive because while they are exempt from Federal you pay state tax which in your case is 0%. US Treasuries are the opposite, you pay federal but are exempt from state tax. But don't let the tax wag the dag, first answer question on risk tolerance manifested in form of equity vs. bond allocation and go from there.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by mortfree » Fri Jul 31, 2020 10:07 am

Putting all the money on the mortgage could be a good idea. But you basically will be saving on interest but will have tied up all your money and will still have a monthly mortgage payment.

The one thing to consider is a recast of the mortgage if you put any money towards the mortgage.

I’d save some and invest the rest

Smarter people will be along.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by EnjoyIt » Fri Jul 31, 2020 10:12 am

Investing in just bonds that give you a lower return than the mortgage makes little sense. Personally I would invest all that money as per your desired AA into a taxable brokerage account. This gives you the highest expected return on your investments over your 30 year mortgage. This will keep you relatively liquid in case you need the money as well as not shove a large chunk of your wealth into a single asset class (your home.)

There will be debt averse people here who will recommend just paying down the debt. If this is your personality also, then that is what you should do.

There will be people here who will try and convince you that a mortgage is a negative bond and you should add that into your AA. Although mathematically correct, I do not think you should confuse your investing strategy with this stuff as following this advice will give you a lower expected return over the next 30 years. Maybe when you have a net worth of $2million you can start thinking like that.

Lastly, splitting the cash 50/50 between debt and investing although sounds like a good option, I think it is a poor choice as the very little debt payment will not change your monthly expenses and simply decrease how much liquid cash you had available. It would be a different story if you were aggressively paying down debt to get rid of the monthly payment. That is not your case which is why I don’t particularly like that idea.

To reiterate. If you are very debt averse then start paying down debt. If not, invest it in a taxable account according to your desired asset allocation.
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by bloom2708 » Fri Jul 31, 2020 10:16 am

Beefed up Emergency Fund, College (coming fast), Mortgage. Set aside $12k $14k for 2021 January Roth lump.

Even if you only stay for 3 more years in your current house, that is 3 years of interest at a much lower amount.
Last edited by bloom2708 on Fri Jul 31, 2020 10:26 am, edited 1 time in total.
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eye.surgeon
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by eye.surgeon » Fri Jul 31, 2020 10:19 am

bloom2708 wrote:
Fri Jul 31, 2020 10:16 am
Beefed up Emergency Fund, College (coming fast), Mortgage. Set aside $12k for 2021 January Roth lump.
Good suggestion but it would be $14k because they're 50+, and as someone suggested here, there is nothing stopping them from putting that $14k into the market in a taxable account now rather than parking it, and selling it to lump sum their Roths in January. If there's a gain they will happily pay regular income tax on it, if there's a loss they can tax loss harvest the loss.
Last edited by eye.surgeon on Fri Jul 31, 2020 10:23 am, edited 2 times in total.
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by KlangFool » Fri Jul 31, 2020 10:19 am

OP,

Whatever you do, please make sure that you do not pay down/pay off the low-interest mortgage and then take a high-interest student loan for your kids.

Do you plan to pay for your kids' college education?

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by gr7070 » Fri Jul 31, 2020 10:29 am

I'd send the taxable cash to the mortgage.
sunny_socal wrote:
Fri Jul 31, 2020 9:50 am
Pay down the mortgage?
- But then we're not very liquid, we'd need to get a HELOC to pull money out of the house if planning a move
Why would you need a HELOC? Can't fathom the logic here.

If you move would you not sell, too? Even if no, s HELOC certainly isn't a need, and there are likely better ways to borrow from that equity than a HELOC.
sunny_socal wrote:
Fri Jul 31, 2020 9:50 am
Or invest the cash? (I'm fuzzy here)
- OR could dump it in a Taxable account and accept some risk, hope for 7% before-tax yield (I don't have a taxable account right now)
- We'd be liquid in case we want to make a move
Again, unsure what the liquidity has to do with moving, presuming you'd sell. This is done everyday by folks all across the country. The liquidity isn't necessary. It might be helpful, depending upon the scenario you prefer; but it's absolutely unnecessary.
sunny_socal wrote:
Fri Jul 31, 2020 9:50 am
Or Split the money? (Half toward mortgage, invest the rest)
- Paying down the mortgage is easy for me to understand, use $70k of the cash
- Not sure what investment option to pick here. Put half in the 'safe' but boring bond fund, rest in stocks?
Splitting it is fine, too.

I would not invest in bonds when you can get a guaranteed and tax-free return on paying down your mortgage.

Make sure you have a 3-6 month emergency fund.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by ScubaHogg » Fri Jul 31, 2020 10:35 am

gr7070 wrote:
Fri Jul 31, 2020 10:29 am

Again, unsure what the liquidity has to do with moving, presuming you'd sell. This is done everyday by folks all across the country. The liquidity isn't necessary. It might be helpful, depending upon the scenario you prefer; but it's absolutely unnecessary.

One has a lot more flexibility in buying if they don’t have to synchronize it with a sale. If the right place appears you can just offer without having to make it contingent (and then find a buyer in the right timeframe).
“There is no problem so bad you can’t make it worse.” - Chris Hatfield, Astronaut mantra

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by sunny_socal » Fri Jul 31, 2020 10:47 am

Thanks all!

I'll try to address your points below
- Yes, we plan on paying for college for our kids. Likely to be Community College followed by a State school, nothing fancy. We have $35k in a 529 plan.
- Ok, will consider beefing up the emergency fund as part of this, possibly double it to 60k. And if I keep contributing to this fund, perhaps this could also serve as my "Hey we want to move! Let's use this as a down payment" fund. This won't be invested, it will sit in a Money Market account.
- I'm not stuck on the HELOC if/when moving, I just don't like playing the game of making a contingent offer on a house, IME it's cleaner to just show up with some money down when shopping for the new home
- I don't have much experience with the ROTH IRA. I made too much money when in CA to qualify, uncertain if I'd qualify now. (Combined before-tax income between the two of us is about $250k.) Why January? I haven't been doing Roth.


Leaning toward a larger emergency cash fund and investing the rest in taxable.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by tashnewbie » Fri Jul 31, 2020 10:53 am

sunny_socal wrote:
Fri Jul 31, 2020 10:47 am
Thanks all!

I'll try to address your points below
- Yes, we plan on paying for college for our kids. Likely to be Community College followed by a State school, nothing fancy. We have $35k in a 529 plan.
Are you planning to just cash flow the rest of the amount needed for college? Might be worth setting aside some of the rental proceeds for education expenses.

You can still contribute to a Roth IRA via the backdoor conversion method (first contribute to a Traditional IRA then convert soon thereafter into a Roth IRA), even if your modified adjusted gross income is too high to contribute directly (looks as if yours is). There's a wiki about the backdoor method.

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gr7070
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by gr7070 » Fri Jul 31, 2020 10:53 am

ScubaHogg wrote:
Fri Jul 31, 2020 10:35 am
gr7070 wrote:
Fri Jul 31, 2020 10:29 am

Again, unsure what the liquidity has to do with moving, presuming you'd sell. This is done everyday by folks all across the country. The liquidity isn't necessary. It might be helpful, depending upon the scenario you prefer; but it's absolutely unnecessary.

One has a lot more flexibility in buying if they don’t have to synchronize it with a sale. If the right place appears you can just offer without having to make it contingent (and then find a buyer in the right timeframe).
Understood - it's why I recognized it as potentially helpful, but that's not a necessity. And depending upon where (read how much) they'd buy in the future 70k or even 130k might not be that helpful.

It's a common "problem" overcome by the absurd majority who do not have much extra cash - most have none.

Additionally, most here probably wouldn't be inclined to take the cap gains hit a few years from now either and would do the contingent sale anyway.

It's not a significant issue and I wouldn't account for it.

I find it funny that so many here love liquidity, but I doubt any of us are quick to eat that cap gains when they could opt for a different solution - like a continent sale.
Last edited by gr7070 on Fri Jul 31, 2020 10:56 am, edited 1 time in total.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by Toons » Fri Jul 31, 2020 10:55 am

140k towards home.
:mrgreen:
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by jtdavid » Fri Jul 31, 2020 10:56 am

How about the option of keeping/investing the cash, and doing a no cost refinance right now to get your rate down to the 2.75% range? That should be the baseline case.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by KlangFool » Fri Jul 31, 2020 10:59 am

sunny_socal wrote:
Fri Jul 31, 2020 10:47 am
Thanks all!

I'll try to address your points below
- Yes, we plan on paying for college for our kids. Likely to be Community College followed by a State school, nothing fancy. We have $35k in a 529 plan.
- Ok, will consider beefing up the emergency fund as part of this, possibly double it to 60k. And if I keep contributing to this fund, perhaps this could also serve as my "Hey we want to move! Let's use this as a down payment" fund. This won't be invested, it will sit in a Money Market account.
- I'm not stuck on the HELOC if/when moving, I just don't like playing the game of making a contingent offer on a house, IME it's cleaner to just show up with some money down when shopping for the new home
- I don't have much experience with the ROTH IRA. I made too much money when in CA to qualify, uncertain if I'd qualify now. (Combined before-tax income between the two of us is about $250k.) Why January? I haven't been doing Roth.


Leaning toward a larger emergency cash fund and investing the rest in taxable.
sunny_socal,

I do not know about your annual savings and so on. And, whether you max up your tax-advantaged account and so on.

But, you have kids at 16 and 18 years old.

So, you should work out a cash flow plan for college education. I do not think 35K in the 529 would be enough. Let's assume 15K for the first 2 years and 30K for the last 2 years.

You could be looking at

1) 15K

2) 15K

3) 45K

4) 45K

5) 30K

6) 30K

Then, you could use your money at your taxable to pay for the college education while continuing to max up your tax-advantaged account.

In summary, do not pay down/pay off your mortgage. Increase your emergency fund to account for paying for college education. And, invest in 100% stock at your taxable account. Adjust your invest in your tax-advantage with more fixed income to maintain your asset allocation.

KlangFool

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by Meg77 » Fri Jul 31, 2020 11:03 am

I would definitely not invest the windfall in bonds. Paying down the mortgage is a much better use of that from an expected return perspective. Bonds are likely to earn 1-2% after fees and taxes, which is less than your mortgage rate. Plus there's still some risk of loss there. A mortgage is a negative bond (literally - mortgages are packaged and sold as bonds). So paying down a loan is almost always a better idea than investing in bonds - again from a purely financial perspective, not taking into account personal goals etc.

If I were you I would beef up the emergency fund to at least $50K. Then on top of that keep any additional funds set aside that you may need for a big purchase in the next couple of years - new car? college tuition? big anniversary trip?

THEN with the remaining $100K or so, I would
1. Max an HSA if you are eligible and if you aren't already
2. Max two Roth IRAs if you aren't already
3. Max your 401ks if you aren't already.

Then EITHER dump the rest against the house OR set up an automatic monthly investment into VTSAX for, say $5K a month and stop when your EF gets down to your comfort level. Given the market volatility and valuation currently I personally would DCA into any new investment rather than lump sum invest right now. Obviously you could split the difference too and pay down the house a bit and invest the rest, or start automatic mortgage reductions and investments simultaneously to give you the opportunity to course correct later (say, if the market drops 30% again maybe you quit paying extra on the debt and invest it all at once at that point). I would err on the side of having more liquidity than paying down that cheap mortgage though, personally.
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by sunny_socal » Fri Jul 31, 2020 12:42 pm

Ok so doing a refi on the mortgage is a good step. I need to wait for the smoke to clear on my home sale first (I already did a refi once this year and it took 4 months due to the covid) I will consider that as a completely separate activity.

Yes, planning on paying for college through cashflow. In addition to the 35k 529 plan we can probably afford $1k/month toward college when the time comes. But I'll make sure to pencil in something like the 15k/30k/45k progression between the 529, regular cash and my taxable account. (The prospect of college sure makes me feel poor :| Maybe the kids will pursue a 'dirty jobs' type trade instead? Neither of them are the academic type.)

The DCA option sounds like a great way to approach this! Summary:
- Don't pay down the mortgage at all right now
- Instead, keep the money in a common pot and from there invest in a taxable account monthly
- Stop when Emergency Fund is at desired level (eg. 60k)

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by EnjoyIt » Fri Jul 31, 2020 10:24 pm

sunny_socal wrote:
Fri Jul 31, 2020 12:42 pm
Ok so doing a refi on the mortgage is a good step. I need to wait for the smoke to clear on my home sale first (I already did a refi once this year and it took 4 months due to the covid) I will consider that as a completely separate activity.

Yes, planning on paying for college through cashflow. In addition to the 35k 529 plan we can probably afford $1k/month toward college when the time comes. But I'll make sure to pencil in something like the 15k/30k/45k progression between the 529, regular cash and my taxable account. (The prospect of college sure makes me feel poor :| Maybe the kids will pursue a 'dirty jobs' type trade instead? Neither of them are the academic type.)

The DCA option sounds like a great way to approach this! Summary:
- Don't pay down the mortgage at all right now
- Instead, keep the money in a common pot and from there invest in a taxable account monthly
- Stop when Emergency Fund is at desired level (eg. 60k)
Love it.
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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by Watty » Sat Aug 01, 2020 8:32 am

mortfree wrote:
Fri Jul 31, 2020 10:07 am

The one thing to consider is a recast of the mortgage if you put any money towards the mortgage.
+1

Google this. They way this works is that if you pay down 25%(or whatever makes sense) of the mortgage then your required mortgage payment would be reduced by the same percentage. Lenders are not required to do this but most will for a couple of hundred dollar processing fee or even for free.

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Re: Sold our rental! What to do with the proceeds? (mortgage vs invest)

Post by xerxes101 » Sat Aug 01, 2020 9:06 pm

I like this option > > > split the money: half toward mortgage, invest the rest

After paying down the mortgage by 70K, then refi your mortgage and bring down the rate down to 2.625% (no cost) ...your mortgage should qualify as conforming at that point. You may want to consider even a 15 year mortgage at a lower rate...more like 2.25% rate (this is perfect time to do the refi)

With the remaining 70K, I would purchase index funds: us total stock, international stock, and bond... allocations depend on your risk tolerance (do this only after making sure that both you and your wife have maxed out your Roth IRAs)...In fact, you should try to gradually transition all of this 70K into Roth IRA in my opinion...happy investing :beer

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