Retirement thread

[cycloneworld]

How much of your portfolio should be in real estate (excluding your primary residence)? Down the road I would like to buy an investment property or two, but would hire a property management company as I have no desire to deal with tenants.

For me, I fund my 401(k) at 10% (which includes employer match), have a good chunk of emergency savings, and then the majority of the rest goes into investment properties. Like I mentioned before, I know I'm not balanced well but we are trying to really build up our real estate portfolio so it works for me in the short term. I don't think there is a good answer to your question and its person specific.

But most, if not all, of your profit is going to be eaten up by your property management fees FYI (unless you are putting 25%+ down).

 

[Stormin]

For me, I fund my 401(k) at 10% (which includes employer match), have a good chunk of emergency savings, and then the majority of the rest goes into investment properties. Like I mentioned before, I know I'm not balanced well but we are trying to really build up our real estate portfolio so it works for me in the short term. I don't think there is a good answer to your question and its person specific.

But most, if not all, of your profit is going to be eaten up by your property management fees FYI (unless you are putting 25%+ down).

Having good renters is the key concerning investment properties

 

[GoCubsGo]

Sounds like we should not eliminate the Federal Estate Tax. $5.45 million exemption is more than enough. Plus the government needs the revenue.

There is spousal portability, so for a married couple, it's really $11 million before any estate tax applies. And that number is indexed for inflation, so it will continue to increase in future years.

 

[CprE84]

I've never owned an investment property in my life.

With that in mind, why not just invest in REIT's instead?

I think it's similar to the question of why not buy bond funds / ETFs instead of buying individual bonds.

The key advantage to owning individual properties is that a REIT might be forced to sell some of the property at a very bad time because of redemptions. i.e., if there is market turmoil (either general or specific in the RE space), a large number of investors may sell, which depending on the level of reserves that the REIT maintains, may force them to sell some of their properties. In this situation, they would be selling at the worst time, but since investors can sell their REIT shares at any time, this would be expected in a crash situation. As a shareholder of the REIT, you would take a share of any losses from such inopportune selling.

On the other hand, if you held individual property during a crash, there is no reason you would be subject to losses during such a crash, unless you yourself panicked and sold. Actually, I think during the 2008-2010 collapse, landlords generally did fine as there were more renters in the market.

Going back to my comparison with individual bonds vs bond funds, there is the same redemption risk in bond funds. One key difference it that in a crash, investors might actually flock to bonds for perceived safety, so maybe there is not as much risk?

One additional point : you also have better control of the timing of taking capital gains with individual properties, and can roll those gains over via 1031 exchange - so you can defer gains for many years. REITs will trigger taxes almost every year via dividends mostly, plus the capital gains when you sell.

 

[Ms3r4ISU]

No need to get out of journalism; just need to practice it in the right arena. I retired three years ago at 59 after a 37 year career in Marketing Communications at John Deere. You can actually make pretty good money working for a Fortune 500 company.

Well now you tell me. After I've been working for the people of Iowa at ISU for nearly 20 years....

 

[cycloneworld]

Having good renters is the key concerning investment properties

Most definitely. But that's MUCH easier said than done. We've found it very difficult to know if a renter is going to be good or bad. And we do credit, background, and reference checks. Spending more time upfront analyzing potential renters is definitely key.

 

[cycloneworld]

What questions do you ask? Do you look to see how they keep their car? Do you visit their current residence? What questions do you ask their references?

We rely heavily on a background and credit check. We ask for past landlord contact information and call to see what kind of renter they were (ie did they pay on time) and what condition they left the property. We've found those to be the best ways to screen.

Also, it sounds harsh but setting the tone early on on-time rent payments is key. It's in our nature to want to help them when they are late and a tenant says they had an emergency come up - you still need to be firm and demand on time rent. Give an inch, take a mile for most people. Unless we have a good payment history from one of our tenants, we charge late fees allowed by Iowa law and are not afraid to start an eviction process sooner rather than later.

 

[JY07]

i.e., if there is market turmoil (either general or specific in the RE space), a large number of investors may sell, which depending on the level of reserves that the REIT maintains, may force them to sell some of their properties. In this situation, they would be selling at the worst time, but since investors can sell their REIT shares at any time, this would be expected in a crash situation. As a shareholder of the REIT, you would take a share of any losses from such inopportune selling.

Unless the REIT was voluntarily buying back my shares, why would it matter to them if I sold it on the exchange to another investor?

 

[steveocy]

The retirement calculators do a good job of ball parking what the population should have for retirement, but really are not good for an individuals retirement needs. Kind of like BMI is a decent stat for comparing the population, but is meaningless at the individual level.

For instance, if I had a gross salary of $100k the retirement calculators would say I need 80% of that in retirement which is $80k or $2 million needed to live on 4% a year. That doesn't take into consideration the biggest factor of retirement which is what your planned expenses are.

(Round number example, but close enough to my situation) If I had a gross salary of $60k the retirement calculators would say I need 80% of that in retirement which is $48k or $1.2 million needed to live on 4% a year. My current yearly expenses are $36k, which includes my mortgage, car payment, extra post tax savings, and a 529 account and equates to needing $900k saved. I figure my retirement expenses at $40k a year (more travel, golf club membership, athletics donation, etc.) so I need an even mil for that to happen. I also plan my retirement so that I will have my mortgage paid off. So I need $1 million in accounts and a paid off house. I don't call that retirement, but that is my Financial Independence number.

At 7% annual return and my current yearly retirement contribution I will hit that number sometime in my mid-50's (I'm 41 now and had a really late start). At 5% I will hit it around 60. Every year I am adding more to accounts so that number can come down a bit. At 59 1/2 I can pull money out with no penalty. Before that I will need to plan to save more in post-tax accounts and work backdoor roth options.

As far as traditional retirement at 65, I am coasting there. I will have a enough money with a 7% return and adding zero in or 1% return adding what I currently do. The second of which will require a little bit leaner retirement to make sure my money lasts 25 years (even though I won't), but I wouldn't have to work. Neither of those options includes anything from SS.

My plan is to be out of the office by 55. That won't mean that I am retired but I can go and mow lawns to cover my expenses. The biggest thing right now is health care. If that isn't figured out I won't be able to do anything.

 

[dmclone]

If you have time to listen, freakanomics has a good podcast this week with Jack Bogle describing how he came up with index funds. Great guy and extremely sharp for an 88 year old.

http://freakonomics.com/podcast/stupidest-money/

 

[CprE84]

I think it's similar to the question of why not buy bond funds / ETFs instead of buying individual bonds.

The key advantage to owning individual properties is that a REIT might be forced to sell some of the property at a very bad time because of redemptions. i.e., if there is market turmoil (either general or specific in the RE space), a large number of investors may sell, which depending on the level of reserves that the REIT maintains, may force them to sell some of their properties. In this situation, they would be selling at the worst time, but since investors can sell their REIT shares at any time, this would be expected in a crash situation. As a shareholder of the REIT, you would take a share of any losses from such inopportune selling.

On the other hand, if you held individual property during a crash, there is no reason you would be subject to losses during such a crash, unless you yourself panicked and sold. Actually, I think during the 2008-2010 collapse, landlords generally did fine as there were more renters in the market.

Going back to my comparison with individual bonds vs bond funds, there is the same redemption risk in bond funds. One key difference it that in a crash, investors might actually flock to bonds for perceived safety, so maybe there is not as much risk?

This is right out of the Dave Ramsey playbook. It's his go-to for 3rd and short.

And of course his answer is almost always "no", but I think it can be "yes" for people that are in reasonable financial health. I have done exactly this for some investments. For example, in 2009, we almost had our house paid off and we did a cash-out refi in order to buy investment property. This allowed us to pay cash for that property which was very helpful at that time (getting loans on investment properties at the time was very difficult). It was a very ugly house; we did a major remodel, rented for a while, then sold about 2 years later for almost $200K more than we paid.

 

[CprE84]

Unless the REIT was voluntarily buying back my shares, why would it matter to them if I sold it on the exchange to another investor?

I think your question is a very good one and you may have spotted an error in my redemption argument. However, I will still argue that individual property does give you more control. During the last financial collapse, most REITs did deleverage at least to some extent, which involved selling properties at a very bad time. This may not have been for redemption reasons, but it was still out of the control of the REIT investors.

 

[CysRage]

Bump. Question for you investment gurus. I got a bonus from work and I want to use it to max out my Roth IRA for 2017 (I am already making monthly contributions for 2018). Would I be wise to do a lump investment to max out my 2017 Roth IRA or should I space it out until April 15th (previous year Roth IRA deadline). Thanks!

 

[DurangoCy]

Bump. Question for you investment gurus. I got a bonus from work and I want to use it to max out my Roth IRA for 2017 (I am already making monthly contributions for 2018). Would I be wise to do a lump investment to max out my 2017 Roth IRA or should I space it out until April 15th (previous year Roth IRA deadline). Thanks!

My 2 cents: just throw it in, it won't matter.

 

[CysRage]

My 2 cents: just throw it in, it won't matter.

Everything I have read says there is no need to time the market to get the best deal so I am leaning towards throwing it all in as well. I just wanted to make sure I am making the best decision since the market has been up and down the last couple months. Thanks for your help.

 

[Mtowncyclone13]

Bump. Question for you investment gurus. I got a bonus from work and I want to use it to max out my Roth IRA for 2017 (I am already making monthly contributions for 2018). Would I be wise to do a lump investment to max out my 2017 Roth IRA or should I space it out until April 15th (previous year Roth IRA deadline). Thanks!

the gain/loss from the 6 week difference is going to be meaningless in the span of the next 30 years (or whenever you retire). I'd say put in the lump sum to maximize your 2017 contribution and then put in the rest into 2018. I dollar-cost average for my accounts because i get paid every month. If I had a lump sum come in it's easier to just put it in at once and forget about it. Again, if we were talking about contributing all throughout 2018 I'd wait, but trying to average out over 6 weeks is too much work for what will amount to little reward.

 

[CysRage]

the gain/loss from the 6 week difference is going to be meaningless in the span of the next 30 years (or whenever you retire). I'd say put in the lump sum to maximize your 2017 contribution and then put in the rest into 2018. I dollar-cost average for my accounts because i get paid every month. If I had a lump sum come in it's easier to just put it in at once and forget about it. Again, if we were talking about contributing all throughout 2018 I'd wait, but trying to average out over 6 weeks is too much work for what will amount to little reward.

Good info. I appreciate your help.