Non-retirement investing

maple2 · February 2015

We are in the fortunate position of maxing out our tax advantaged retirement savings options (IRA, 401K) and we are comfortable with our emergency fund level and savings towards other specific goals. We have some additional money that we would like to invest rather than just keep in savings or cds. At this point we don't have a particular goal for the money--additional retirement? fantastic vacation? vacation home? In other words, we don't need it in the short term, but we don't want to tie it up in a retirement annuity or something similar. Does anyone have any experience or advice? I'm a bit overwhelmed by the number of investment options and the tradeoffs between potential returns, ease of access, and current vs future tax liability.

hoffse · February 2015

Agreed. Look at mutual funds and ETFs. Those are good places to grow wealth if you're willing to take on a little risk.

Wulfgar · February 2015

I will be the third vote for mutual funds or EFTs. This way you don' end up throwing away your money on a "professional" that keeps buying and selling stocks for you. MW's one retirement was managed this way until I pointed out that she was paying roughly 5% towards transaction fees and other expenses. That was also why she kept on getting financial information in the mail.

maple2 · February 2015

I am definitely sold on the ease and benefits of mutual funds for our 401K and IRA accounts, but I've heard that it can be worthwhile to consider options like municipal and other gov't bonds for non-retirement investments to help minimize the tax liability on any growth. On the other hand, they aren't likely go grow as much as a mutual fund, so maybe it ends up being a wash? My sense is that there are investment strategies to try and balance the tax obligations (current and future) against the potential growth of the investment. I'm not sure at what income or investment level that becomes important. Can I can just focus on getting a good return at the risk level I'm comfortable with (probably using mutual funds) or should I invest the time in learning more about alternative investment options like gov't bonds, special annuities, etc.

Sisugal · February 2015

Anything in the stock market is not a guaranteed return. You need to be comfortable to also lose money.
Have you considered paying off your mortgage?

Sisugal · February 2015

Also increase your charitable giving and help those less fortunate.

maple2 · February 2015

We have thought about paying down the mortgage, but we have a fairly low interest rate and would prefer to take on the risk and potentially higher growth of investing in the market. There is a risk in putting money in the market and a risk in not putting it in. In the first instance we might lose principle, which would admittedly be awful. In the second case, the rate of growth on our principle might not keep up with inflation, which effectively means we are losing money even if the principle is intact because we won't be able to buy as much with that money in the future. Given how low our mortgage is, the cushion we have, and historical market performance, we feel comfortable investing in the market in some form.

We are working towards increasing our charitable giving as well. This is a fairly new financial situation for us (that's what happens when you spend 23+ years in school before getting a real paycheck), and we are looking into additional charities that we want to support instead of just bumping up the contributions to the ones we currently support.

short+sassy · February 2015

In your first post, you mentioned a vacation home. It's certainly a whole lot more involved than something like buying mutual funds but, if you buy right, could be a great investment. Benefits:

1) Great savings for your own vacation, use a property management company to rent it out to other vacationers when you are not using it.

2) Can really appreciate over time for the right area. I'd specifically recommend an area that is a popular vacation spot, but has a good amount of permanent residents also. During recessions, areas that are pretty much JUST vacation homes are the first to take a gigantic nose dive in value.

purplesky001 · February 2015

Depending on how much you have, I would say split it down the middle and pay off your mortgage with one half and use a mutual fund with the rest. At least with your mortgage, the debt is very cheap right now. Building up your equity could lead to savings when the rates start to climb again. And you would have a guaranteed 'return' by reducing the amount of interest you pay in the future (both by reducing the capital owed and by reducing the loan-to-value).

This way you are reducing your liability at little risk, ensuring that you make savings in the future. Then if you make a loss of say 10% on the other bit of your money (which can happen), you've only lost it on half? After all, reducing a debt is like paying yourself the interest.

I am presuming that you have no other debt (I think you probably don't, based on your financial savvy above). Anything more expensive than your mortgage should obviously be cleared first.

hoffse · February 2015

If her mortgage interest rate is less than 5% (which it probably is), it makes no sense to pay that down early, especially if the rate is fixed and her interest is deductible.

She is likely to earn far more in the market than she will save in interest by paying down the mortgage early. Short-term losses on "extra" money feel painful, but realistically they are less of a big deal because you can simply ride it out until you're net positive. If you aren't relying on that money for anything in particular, you can afford to take a few more risks with it.

Re: vacation homes.... From what I have seen with the people I know who have vacation homes (mostly beach houses on the Gulf), they tend to be either a great idea or a terrible idea. One family I know rents their house out for $6,000-$8,000/week depending on the season. BUT it's beach-front, and it sleeps 10. On the flip side, that same family has been trying to sell this house for years. It's gorgeous, and the location is killer, but it's also very very expensive. The maintenance and insurance costs have been huge over the years, and what they have found is that most buyers who are willing to spend that much on a vacation home want to build instead of buy.

The people with the lake houses seem to do ok. Most of those are less than an hour or so away, so they get plenty of use on the weekend. Now they don't really provide rental income, but they also aren't nearly as expensive as the beach houses and the insurance/maintenance is much lower. These houses also seem to sell rather slowly - but they do sell eventually. And the flip side to it is that if you are the buyer you might be able to get a deal on a house that somebody really REALLY needs to get rid of or that needs some updating and keeps getting passed over. H and I have casually discussed the lake house idea, and that is the approach we would probably take if we ever do it.

If you like to travel, one other idea is a foreign property. American property owners can make an absolute killing in Europe because Americans who travel over there tend to want to rent from other Americans. H and I are renting from an American couple for our trip to France coming up, and something about that just makes us feel better. On the other hand, it would be expensive to visit for yourself, and you may not want to feel like you always have to go back to the same place whenever you go over there.

short+sassy · February 2015

@hoffse, those are great points about vacation homes. My favorite weekend getaway is Ft. Walton Beach and, as I'm sure you know, most of those high rise condos are individually owned specifically to be vacation rentals...with the property management and advertising built right in. Those kind of places are where I usually stay. However, I've heard they tend to be terrible investments, though I personally have never looked into it. Even if you are the owner, you still need to pay the same cleaning fee and PM fee for the time you want to spend in your own condo. At least that is how most of those work.

However, where I live in NOLA, there are people making a killing on AirBnB and VRSBO (sp?) with homes here. Some have bought as vacation homes, some have bought purely as a vacation rental investment. But the positive is, these are still homes in residential neighborhoods that residents buy in also, so they are as easy/hard to sell as any other homes in the area.

I personally rented out my duplex on AirBnB a few times last year when I was in between permanent tenants. I usually rent it for $1200/month, but was able to command $400/night! But I can only get that during "crazy" times like Mardi Gras and Jazz Fest...which happened to be occurring right after my previous tenants had moved out. So I tried it out.

I thought about keeping it a vacation rental permanently, but most of the year I'd only be able to get about $150/night. I'd probably make slightly more money, but it is more uncertainty, so I decided not to go that route.

I have, however, considered buying another property just as a vacation rental closer to the French Quarter that I could buy cheaper and rent out more consistently. But, bad news on NOLA specifically, the insurance rates are crazy high because this area is susceptible to hurricanes and flooding. Plus the city hasn't quite figured out what to do with the sudden proliferation of these set-ups so there is uncertainty as to what laws will be put in place to control them. Which means it will probably just stay in the limbo it is now for years, lol. But, you never know, so it is another concern for me that laws could be put in place making the vacation rental business model very ugly.

Of course, all of that is talking about NOLA because it is the market I am familiar with, but some of these same lessons can be applied for other areas of the country that have a strong tourist industry as well as a robust residential population.

hoffse · February 2015

@short+sassy, yep Ft. Walton is exactly where I am thinking of... That 10-person beach house I mentioned is located there. Stunning area, and the rental income is good, but they just can't get out from underneath that house.

I've read that the AirBnB and VRBO models are starting to get a crack down in places like NYC and San Francisco. I can see why - it's easy to get burned with them, and I'm sure most full-time neighbors don't really want random people coming and going every week. If I lived in NOLA now though, I would be super inclined to visit family over Mardi Gras and rent out my place during that time!

I think the vacation property thing only makes sense if it's going to get lots of use on the weekends or else it's being used primarily for rental income. Otherwise, it ends up costing way more to own the house than it would cost to just vacation in that location a few times a year.

H and I have talked about retiring somewhere with rental potential in Florida and also buying an apartment overseas... the idea being we could live in each for about half the year and rent the other one out while we weren't there to recoup our costs. We'll see. I may not be able to stand it.

Xstatic3333 · February 2015

It's interesting to hear about the vacation home markets in other parts of the country. I think we have a somewhat opposite situation in New England. A home on Cape Cod seems to be an all-around solid investment (based on informal survey of my friends and family who own them) as long as you get a soundly-built house. They're no trouble to sell, no trouble to rent, and go up in value over time. The only issue seems to be that some oceanfront homes are at risk because the whole area is basically a big sandbar that moves and shifts, especially with sea level rise. I don't think that lake houses my area tend to be as sound of an investment, but many people do have them just to go to on the weekend. Often they are simple "camps" without full amenities.

We would love to have a vacation home on either the Cape or in Maine, way, way down the line after all this debt is behind us, but primarily for our own use. I love visiting beach towns in the off season. The fact that we could rent it out in the summer would be purely a bonus.

@short + sassy I just went to a conference in NOLA and now am determined to go back with my H when we can actually explore. I'll have to remember to get some Air BnB recommendations if we do that anytime soon (a big if at this point).

short+sassy · February 2015

@hoffse, yep, there is an already an area in town called the Marigny that locals are starting to call "AirBnB Town". It's a neighborhood JUST outside the Quarter, but still walking distance. Most of the pushback for enacting stricter laws on these types of rentals are neighbors there who are annoyed with 2-4 houses on their street suddenly turning into vacation rentals.

And haha, yes...while I can't kick out and disrupt my permanent tenants for MG, Jazz Fest, and NYE...there is no reason I can't rent out my own side as a vacation rental . My DH and I have too much going on the first part of this year...we are in the middle of building a deck...to get organized and put that plan into action, but we've already talked about putting our side up on AirBnB once that project is done and we do some spring cleaning. Hmmm...maybe if we hustle we can still make Jazz Fest for this year.

And go stay in someone else's vacation rental, who is renting just a room in their Marigny house, for a substantially lower rate than what I can charge for my 3-bedroom house rental, lol. Oh, now the wheels are turning!

@Xstatic3333, Fun! I hope you had a good time! If you do come back out, I'd be happy to help you pick out a good AirBnB location. I helped someone from TK on that a few months ago. The neighborhoods in NOLA can change on a dime and there were definitely some locations she had picked out that were in scary places.

Cape Cod vacation homes do sound like a win-win. My friend's aunt owns a condo in Palm Springs that is a vacation rental. With the exception of a week here or there in the summer, it is booked solid all year long.

brij2006 · February 2015

Not sure on where you stand as far as debt, but I personally would chuck it toward paying off any consumer debt (student loans, cars, credit cards, etc), then the mortgage last.

If all of those are paid off, then a mutual fund is going to be your best bet. Understand that it isn't guaranteed increase on your investment, but history shows that it always outdoes a regular savings account.

maple2 · February 2015

Thanks everyone! I should have clarified that our mortgage is our only debt, which is why we are looking towards investing rather than debt payoff. I don't think we are quite ready to dive into a vacation home as an investment opportunity since we don't know a lot about those markets, but it sounds like something to think about at a different point in our lives. I could never understand why people would want to keep going on vacation to the same place over and over again until I had kids, but now I can definitely see the allure of a vacation home for our own use and possible income. I had definitely never thought about international property before.

We are going to meet with a professional next week, and I'll let you know if he suggests anything other than mutual funds.

brij2006 · February 2015

If you still have the mortgage left, then I would throw the extra money toward that rather than a non-retirement investment. Just because it greatly reduces your risk. 100% of foreclosures happen on a house with a mortgage. Not saying that you would be anywhere near that risk with how you have set yourself up (which is great, by the way), but it's just one less risk.

hoffse · February 2015

brij2006 said:

If you still have the mortgage left, then I would throw the extra money toward that rather than a non-retirement investment. Just because it greatly reduces your risk. 100% of foreclosures happen on a house with a mortgage. Not saying that you would be anywhere near that risk with how you have set yourself up (which is great, by the way), but it's just one less risk.

Eh you are always at risk for something. You're at risk for a tax sale if you don't pay your property taxes and/or the county doesn't process them correctly, whether you have a mortgage or not. You may be at risk for liens whenever you have work done on your property, even if you pay the contractor. You're at risk for being sued if the UPS guy slips and falls on your driveway when delivering a package.... There's no way to 100% minimize risk when you are a property owner.

Fun fact: Each of these things I mentioned actually happened to at least one person in my office in the last 12 months. In fact, when one of the clerks at the courthouse got lazy and didn't process a whole bunch of property taxes, virtually every homeowner in my office got a notice that their house was being sold at a tax sale. Those were fun times.

The likelihood of foreclosure for OP is super low. Her circumstances would need to change entirely - and then stay there for an extended period of time - before that really became a concern. If I were her, I'd be more worried about the UPS guy.

brij2006 · February 2015

hoffse said:

brij2006 said:

If you still have the mortgage left, then I would throw the extra money toward that rather than a non-retirement investment. Just because it greatly reduces your risk. 100% of foreclosures happen on a house with a mortgage. Not saying that you would be anywhere near that risk with how you have set yourself up (which is great, by the way), but it's just one less risk.

Eh you are always at risk for something. You're at risk for a tax sale if you don't pay your property taxes and/or the county doesn't process them correctly, whether you have a mortgage or not. You may be at risk for liens whenever you have work done on your property, even if you pay the contractor. You're at risk for being sued if the UPS guy slips and falls on your driveway when delivering a package.... There's no way to 100% minimize risk when you are a property owner.

Fun fact: Each of these things I mentioned actually happened to at least one person in my office in the last 12 months. In fact, when one of the clerks at the courthouse got lazy and didn't process a whole bunch of property taxes, virtually every homeowner in my office got a notice that their house was being sold at a tax sale. Those were fun times.

The likelihood of foreclosure for OP is super low. Her circumstances would need to change entirely - and then stay there for an extended period of time - before that really became a concern. If I were her, I'd be more worried about the UPS guy.

Well yes, there's risk with everything. But may as well have a paid for home that you know a bank can't take away if something tragic were to happen, than have a vacation home you also owe money on (just throwing that out since it was mentioned above). Also, without having that mortgage payment then it gives you that much more money to put toward paying cash for larger goals, like a vacation home somewhere.

But dang, all of those scenarios stink. Especially the property taxes laziness. My goodness! I would have been furious.

Xstatic3333 · February 2015

@hoffse did the property tax thing get rectified? That sounds like such a nightmare, yet I could totally see it happening in my city.

hoffse · February 2015

Xstatic3333 said:

@hoffse did the property tax thing get rectified? That sounds like such a nightmare, yet I could totally see it happening in my city.

Yeah and apparently the person got fired.... but I mean, it was like the businesses downtown emptied out that day so people could go stand in line at the courthouse and demand an explanation. Thankfully, we weren't homeowners then.

The list of tax sales comes out on March 1 each year. You had better believe I will be scouring the list for our house...

vlagrl29 · February 2015

I would say pay the house off too as long as you can still max out retirement contributions. But it looks like the OP wants to invest instead of pay off the house.

short+sassy · February 2015

hoffse said:

brij2006 said:

If you still have the mortgage left, then I would throw the extra money toward that rather than a non-retirement investment. Just because it greatly reduces your risk. 100% of foreclosures happen on a house with a mortgage. Not saying that you would be anywhere near that risk with how you have set yourself up (which is great, by the way), but it's just one less risk.

Eh you are always at risk for something. You're at risk for a tax sale if you don't pay your property taxes and/or the county doesn't process them correctly, whether you have a mortgage or not. You may be at risk for liens whenever you have work done on your property, even if you pay the contractor. You're at risk for being sued if the UPS guy slips and falls on your driveway when delivering a package.... There's no way to 100% minimize risk when you are a property owner.

Fun fact: Each of these things I mentioned actually happened to at least one person in my office in the last 12 months. In fact, when one of the clerks at the courthouse got lazy and didn't process a whole bunch of property taxes, virtually every homeowner in my office got a notice that their house was being sold at a tax sale. Those were fun times.

The likelihood of foreclosure for OP is super low. Her circumstances would need to change entirely - and then stay there for an extended period of time - before that really became a concern. If I were her, I'd be more worried about the UPS guy.

Good points. A year ago, I was dreaming of the day when I would pay my house off and had planned to do it in 5 years. But then I realized that half...yes HALF...my mortgage payment is taxes and insurance anyway. Which I will never be able to escape from. That made it a lot less enticing, lol. Plus my interest rate is low, so now I have rerouted and focused my efforts on saving that money to buy a second rental home and increase my income, instead.

Here in my area, a lot of sidewalks are in terrible shape. Increasingly, homeowner's insurance companies are turning down homes if the sidewalks in front are broken up. Because, if someone falls, the homeowner and ins. co. get dragged in, even though sidewalks are CITY property. And although these cases almost never result in the homeowner/ins. co. having to pay anything, it is still costly for the ins. to fight them so they just choose not to insure houses with bad sidewalks.

And geez! You'd think that UPS guy's injury would fall under workman's comp. It reminds me of a comment my Business Law professor made when I was in college (for my undergrad, not law school). He joked that slip/fall lawsuits are a terrible way to "make money" because there is almost always some degree of partial negligence. As in, people walk all the time and DON'T fall...so there is often something the person walking was doing "wrong" as well, ie looking at their cell phone, carrying boxes and blocking their vision, untied shoe, etc. Of course, he was referring to scammers (not saying UPS guy is a scammer), but it always made me laugh because...yeah...scammer or not, people are more likely to slip/fall if they are not paying attention to their surroundings.

hoffse · February 2015

short+sassy said:

hoffse said:

brij2006 said:

If you still have the mortgage left, then I would throw the extra money toward that rather than a non-retirement investment. Just because it greatly reduces your risk. 100% of foreclosures happen on a house with a mortgage. Not saying that you would be anywhere near that risk with how you have set yourself up (which is great, by the way), but it's just one less risk.

Eh you are always at risk for something. You're at risk for a tax sale if you don't pay your property taxes and/or the county doesn't process them correctly, whether you have a mortgage or not. You may be at risk for liens whenever you have work done on your property, even if you pay the contractor. You're at risk for being sued if the UPS guy slips and falls on your driveway when delivering a package.... There's no way to 100% minimize risk when you are a property owner.

Fun fact: Each of these things I mentioned actually happened to at least one person in my office in the last 12 months. In fact, when one of the clerks at the courthouse got lazy and didn't process a whole bunch of property taxes, virtually every homeowner in my office got a notice that their house was being sold at a tax sale. Those were fun times.

The likelihood of foreclosure for OP is super low. Her circumstances would need to change entirely - and then stay there for an extended period of time - before that really became a concern. If I were her, I'd be more worried about the UPS guy.

Good points. A year ago, I was dreaming of the day when I would pay my house off and had planned to do it in 5 years. But then I realized that half...yes HALF...my mortgage payment is taxes and insurance anyway. Which I will never be able to escape from. That made it a lot less enticing, lol. Plus my interest rate is low, so now I have rerouted and focused my efforts on saving that money to buy a second rental home and increase my income, instead.
Here in my area, a lot of sidewalks are in terrible shape. Increasingly, homeowner's insurance companies are turning down homes if the sidewalks in front are broken up. Because, if someone falls, the homeowner and ins. co. get dragged in, even though sidewalks are CITY property. And although these cases almost never result in the homeowner/ins. co. having to pay anything, it is still costly for the ins. to fight them so they just choose not to insure houses with bad sidewalks.
And geez! You'd think that UPS guy's injury would fall under workman's comp. It reminds me of a comment my Business Law professor made when I was in college (for my undergrad, not law school). He joked that slip/fall lawsuits are a terrible way to "make money" because there is almost always some degree of partial negligence. As in, people walk all the time and DON'T fall...so there is often something the person walking was doing "wrong" as well, ie looking at their cell phone, carrying boxes and blocking their vision, untied shoe, etc. Of course, he was referring to scammers (not saying UPS guy is a scammer), but it always made me laugh because...yeah...scammer or not, people are more likely to slip/fall if they are not paying attention to their surroundings.

Yeah the UPS guy is just lawsuit hungry. He sued her 2 days before the statute of limitations ran out on it. So now this poor woman is trying to defend herself from a "fall" that happened on her property years ago, entirely without her knowledge. She just got served papers claiming it happened. I don't think he will get very far with it because the litigators are helping her out with it (she does corporate work), but it's still incredibly stressful for her.

maple2 · March 2015

Just in case anyone is interested, after meeting with a financial advisor we decided to go the mutual fund route. There are other investment options that help delay or reduce current taxes, but they typically have some restrictions that makes them most appropriate for true retirement savings rather than just extra money that you may or may not want to use before retirement.

One point he did make that I have never considered while investing in mutual funds for IRAs and 401ks is that it makes sense to look for investments that don't pay much in the way of dividends. We automatically reinvest dividends, which means we don't actually see any of that money now. We do, however, have to pay taxes on that income now when it is not part of a 401k or IRA. Growth in the value of the fund we don't pay any taxes on until we sell.

Non-retirement investing

Re: Non-retirement investing

Choose Another Board

Search Boards