New risk averse HENRYs... critique

[Hank]

hatton1 wrote:

Be careful about over investing in the company you work for.  Remember Enron

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They're saving over $120K per year. The company stock purchase plan is limited to only $11K per year, or 9% of their annual savings.

 

I'm perfectly okay with tying up less than 10% of my savings in my company's stock, especially if i they're running a "buy two, get one free" deal on shares after the three year vesting period.

[East coast]

Medica8ed wrote:

 

We keep the condo as it’s easy to rent, nearby and we think we’ll move back there in 15yrs when our youngest hits college. We’ll be 55/60 by then an most likely still working so the location works. The 4% return is net all costs, after taxes, not including appreciation (rental was negative when we had a mortgage).

 

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Wanted to zero in on this one piece of your overall picture and point out that, if I'm understanding the situation correctly, you are using some convoluted math when you are saying that you are getting 4% return on this condo if you were negative when you had a mortgage. When evaluating a real estate deal (at least residential), it's common to evaluate the numbers as though you are completely financing the deal. Once you pay off the mortgage, you don't just magically start 'making money'.  It 'costs' something to have that money sitting there.

As an example - at $480k, you'd be making 2.46% return at the moment ($11,808/year) in Vanguard's Total Bond Market Fund. Let's just say that your place is renting for $2500/month. At 4% you are only making $100 a month or $1200 a year. As you can see, to say you are making 4% a year (not even counting 'paying yourself' for the management) isn't really a true statement when you compare the two. Your rent would have to be tens of thousands of dollars more a month to truly get that 4% a year.

Finally, you said you purchased at the bottom of the RE market, yet you've gotten only a .65% yearly rate (nominal - definitely a significant negative real rate) on the appreciation on that real estate, so that's not in your favor either.

Now, you may still want to keep it for personal reasons - that's a totally good answer - but just wanted to point out a common misconception I see when people post on real estate returns. As long as you are aware that this condo isn't a business decision, but a personal one, you're fine.

[Donnie]

East coast wrote:

Medica8ed wrote:

 

We keep the condo as it’s easy to rent, nearby and we think we’ll move back there in 15yrs when our youngest hits college. We’ll be 55/60 by then an most likely still working so the location works. The 4% return is net all costs, after taxes, not including appreciation (rental was negative when we had a mortgage).

 

Click to expand…

Wanted to zero in on this one piece of your overall picture and point out that, if I’m understanding the situation correctly, you are using some convoluted math when you are saying that you are getting 4% return on this condo if you were negative when you had a mortgage. When evaluating a real estate deal (at least residential), it’s common to evaluate the numbers as though you are completely financing the deal. Once you pay off the mortgage, you don’t just magically start ‘making money’.  It ‘costs’ something to have that money sitting there.

As an example – at $480k, you’d be making 2.46% return at the moment ($11,808/year) in Vanguard’s Total Bond Market Fund. Let’s just say that your place is renting for $2500/month. At 4% you are only making $100 a month or $1200 a year. As you can see, to say you are making 4% a year (not even counting ‘paying yourself’ for the management) isn’t really a true statement when you compare the two. Your rent would have to be tens of thousands of dollars more a month to truly get that 4% a year.

Finally, you said you purchased at the bottom of the RE market, yet you’ve gotten only a .65% yearly rate (nominal – definitely a significant negative real rate) on the appreciation on that real estate, so that’s not in your favor either.

Now, you may still want to keep it for personal reasons – that’s a totally good answer – but just wanted to point out a common misconception I see when people post on real estate returns. As long as you are aware that this condo isn’t a business decision, but a personal one, you’re fine.

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Not sure what you mean here.  A 4% return is a 4% return.  In this case OP is earning a 4% unlevered return on the condo investment.  Maybe OP didn’t factor in all maintenance, taxes, or other costs, but hypothetical interest costs shouldn’t be deducted.

You can lever up investments in a bond fund too.  The interest rate on those borrowings might be above the 2.46% bond yield, but that doesn’t mean you are earning a negative return on the bonds.

Whatever happened in the past with the mortgage is irrelevant to OP’s current return.

[Medica8ed]

What Donnie said: 4% is net profit/condo market value. I'd need get at least that after tax on another asset (market value would also be reduced by selling costs to liberate the cash for another investment).

Company shares plan is 3 bought 1 free (typo). putting 11k in every year would work like a CD ladder, selling after vest. It's a decent return which provides downside protection but company stock could still get hammered over that time period.

Will invest the money one way or another. Just need to decide if I join the 401K club or keep our funds in things/people we can touch.

[East coast]

I think you guys are agreeing with me, but there's an important distinction to be made - you are making 4% on your yearly expenditures, that i am not questioning. But that's not the point. That's chump change relative to the overall $ amount you've got tied up in this investment. Using the given information, you definitely aren't making 4% overall on this deal. That's the only thing i'm clarifying in this conversation.

Also, using some rough estimates, you've got a -1.32% yearly real return when considering just appreciation of the house.

I guess the overall point of my comment is that money is going out the door when you consider opportunity cost on this one property.

[Donnie]

East coast wrote:

I think you guys are agreeing with me, but there’s an important distinction to be made – you are making 4% on your yearly expenditures, that i am not questioning. But that’s not the point. That’s chump change relative to the overall $ amount you’ve got tied up in this investment. Using the given information, you definitely aren’t making 4% overall on this deal. That’s the only thing i’m clarifying in this conversation.

Also, using some rough estimates, you’ve got a -1.32% yearly real return when considering just appreciation of the house.

I guess the overall point of my comment is that money is going out the door when you consider opportunity cost on this one property.

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I’m still not sure what you are saying, but I am pretty sure that I don’t agree with it.

• 4% is 4%.  It’s 4% whether you have $1 or $1M invested.  4% can be a great, a terrible, or a fair return depending on the risk, but it doesn’t depend on the amount invested.


• Really not sure how you came up with a -1.32% real return.  That’s almost certainly incorrect unless you have specific knowledge of OPs real estate market.


• Not sure what you mean by “4% on your yearly expenditures.”  The calculation should be income after expenses / FMV of condo.


• Assuming you mean opportunity cost because OP is not borrowing against the condo, the opportunity cost point is incorrect. You should always borrow as much as possible against all assets using that logic.

[Medica8ed]

I'm with Donnie. It's 4%. Possible more with appreciation, unlikely less assuming my long term solid tenant stays on.
If you can get better than that after tax with minimal risk I'm all ears???

[q-school]

my sister had a long term solid tenant and then that person lost their job.  terrible situation.

eventually had to evict her but that process took a year.  she would send a little money and make promises and then break them.  she didn't have money to pay the rent but had money for a lawyer.  it was a three thousand a month rental apartment/ hcol.

then they had to repaint and do a bunch of crap to fix the place up, so it was almost two months before it was rented again.

i'm not sure how to figure the expected rate of return for stuff like that  if only i had an actuary on call.

anyhoo to medica8ed, i think you have returned to fixating on the real estate market.  it sounds like you are willing to take advantage of the company match as that seems like free money to you, but still haven't committed to the 401/tax benefit.  is that an accurate summary of where you are after 3 pages of posts?

 

 

[East coast]

gotcha - i had misread the original post, so am now on the same page.

as for the appreciation piece - I used the numbers posted. He/she gave enough info to calculate that, but let me know if you get a different number.

[Marko-ER]

Invest it all in bitcoin... ha, right.

Agree with statement above, at the very least enroll into 401K, 403(b) and get the match ... it's free money (!)  In fact, I would go back to your residencies and see if maybe you already have something saved, a lot of placed auto-enroll you.

Last & minor point:  you mention you are both foreign born, though I presume you have US citizens (deduction, based on your MD/PhD status).  But would you consider retiring abroad at all (perhaps going back to home country, or central America or Europe)?  Then be careful with ROTH contributions.