How would you invest?

[GregT]

All,

A random question for my TUGging friends. I have a good friend who's company was just purchased. He made a lot of money and will end up with ~$500,000 after taxes. He asked me how I would invest the money, understanding that I am a conservative guy.

Personally, I like real estate alot and suggested he think about buying rental properties, and if possible, he look at multi-family apartment buildings (4-8 units). But upon reflection, I realize I'm probably too narrowly focused on that market segment and ignore other viable options. He is willing to take some reasonable risk and doesn't need steady cash flow, but if it was an option, would probably like that.

He is married with two young children, I think they are 5 and 9, and hopes whatever investment he selects will pay for their college education. He lives in San Diego and will work again and may even be able to work for another technology company that gets acquired (and he could make money again).

Any suggestions on what could be done with a $500K windfall? Thank you!

Best,

Greg

 

[easyrider]

Real estate is what I would invest in. I like duplexes and single family homes built after 1979. If the lead check is good I have no problems with pre-1979 dwellings. You already know the benefits of real estate.

Start a business maybe.

Bill

 

[WinniWoman]

I think you need to know a lot more about his finances to determine what he should do with that money. Is his home paid off? Does he have fully funded retirement accounts? Does his spouse work? What is his income level? Health Insurance? Does he have an emergency reserve? How old is he? What is the value of his current assets? See where I am going with this? Finances are holistic. I assume if he had a business he is a risk taker so we can assume he is not afraid of certain types of investments...If he is concerned with funding his children's future college education, and if all else is in place- especially for his retirement- then he should look at the 529 plans for that and fully fund them.

 

[epcmart]

Im too heavily invested in RE as well but even running it like a business only requires minimum involvement if right properties are selected (read not slum lord).
Only if I could somehow get around passive activity clause on the tax file! Any ideas other than getting a RE licence, even then it may not count I've heard if not working actively more than certain number of hours yearly.
Any ideas?

 

[geekette]

Dividends! A fat stack of blue chips, divs reinvested until cash flow needed, could not only finance college for the kiddies, but retirement for parents and kids. Reasonably passive, reasonably safe, very simple. My own retirement is on track to be financed by dividends which will replace job income. Half a mil is a major jump start.

Many divs are increased each year, so not only will the $ per sh increase, but if you reinvest the divs, you have more shares upon which the div is paid (the beauty of compounding). Simple example, I bought about $5k of LMT in mid 2011. My first div was $45. Having reinvested all divs, and LMT granting very generous raises, my most recent pmt was $125. Meanwhile, the position value is $17-18k. What will it be paying me quarterly in 8 years (retirement)? Hard to say, but I would expect at least one more dbl, to maybe $250 per quarter. Note, divs can also be lowered or stopped. Buy quality and that's a rare event. Buy quality and monitoring isn't scary nor onerous.

Best of both worlds. Pocket the cash while you hold (or reinvest), sell if you feel like it. At the very least, there would be a lot more shs to sell in 10-15 years than the original buy.

I determined a long time ago that while real estate might be a great investment, it is not for me. Landlording isn't my thing. Unexpected vacancies can be devastating. Closest I get is REITs, but I have them only in tax-deferred accounts. I figure my home is enough exposure to real estate.

Be sure to convey that he needs to keep an eye on taxation on whatever assets he deploys to. It would be a shame to get caught up in an MLP and get large unexpected tax bills. I strongly believe that no one should invest in something they don't understand fully. If you can't figure out how they make their money, and share it with you, and what it means in tax, probably best to steer clear. I also agree on the holistic nature of finances. One's financial picture is a sum of the parts, each playing a different role.

Please do convey my congratulations on what I assume was a goal achieved.

 

[bnoble]

He asked me how I would invest the money, understanding that I am a conservative guy.

If this is found money, meant to be invested relatively conservatively, and to pay for the kids' education, I would dollar-cost-average it into a low-fee 529 plan, half for one kid, half for the other, over the course of a year or two. Which plan doesn't matter, because California does not provide deductions for contributions to its state plan. So, pick one with low fees and a fund mix you like. If he really wants it to be set-and-forget, pick one that offers age-based allocations that automatically rebalance as the kids get older. (And, he probably does want this. Most of us say we will pay attention to our investments. Most of us don't.)

You might get a better pre-tax earnings rate outside a 529, but you probably won't beat it post-tax, because any earnings inside of the 529 can be used for educational purposes tax-free.

$500K in the context of two kids' college expenses is not a lot of money. Most private (or top-tier out-of-state public) schools have a four-year total cost of attendance pushing $250K. If you started as an out-of-state student here at Michigan, paying list price, you'd spend at least $245K, and that's based on paying this year's tuition for all four years, so it will almost certainly be more.

 

[elaine]

Certainly depends on what he has now. Assuming he has a decent 401K, etc., I woujld add some Div stocks to their Roths, at least partial 529 (we did enough to pay for 2 years of in-state college). A home mortgage for someone who has income at a low rate is not necessarily a bad thing, and many now think you should put the $ to use elsewhere. I would also have a chunk of $ put into some large cap funds at a well-run place, IMHO-T Rowe Price, Vanguard, etc. RE would be OK, if he is willing to be a landlord and knows all the ins/outs.

 

[Ty1on]

All,

A random question for my TUGging friends. I have a good friend who's company was just purchased. He made a lot of money and will end up with ~$500,000 after taxes. He asked me how I would invest the money, understanding that I am a conservative guy.

Personally, I like real estate alot and suggested he think about buying rental properties, and if possible, he look at multi-family apartment buildings (4-8 units). But upon reflection, I realize I'm probably too narrowly focused on that market segment and ignore other viable options. He is willing to take some reasonable risk and doesn't need steady cash flow, but if it was an option, would probably like that.

He is married with two young children, I think they are 5 and 9, and hopes whatever investment he selects will pay for their college education. He lives in San Diego and will work again and may even be able to work for another technology company that gets acquired (and he could make money again).

Any suggestions on what could be done with a $500K windfall? Thank you!

Best,

Greg

In San Diego, a $500K SFR will be hard enough, I don't think he's going to find multi-fam for $500K.

Does Cali have an education savings plan? He could fully fund that for the kids and have money to spare to tide his family over until the next job is stable.

 

[bnoble]

$500K in the context of two kids' college expenses is not a lot of money.

One more thought about this: it's possible to spend less than this on a good education. For example, if the kids both get into one of the better UC campuses, you'd have about half leftover. But, that can come in handy if someone later decides they want an MBA, or whatever. Either way, having the financial resources to pay for more or less any college the kids can get into makes the search process a lot less stressful.

 

[am1]

I would suggest he consider investing it outside of the US. Returns will be higher. 500 000 is a good starting amount to make it worth while and short of selling real estate that one owns he may never have the chance again.

Or $500 000 would pay a good down payment on some investment property. Same thinking again. Stocks and contributions to education plans can happen a fee thousand dollars at a time but putting a deposit down on real estate offers a better return.

 

[GregT]

All,

Thank you for the thoughtful responses, these are very interesting. I know he is familiar with 529s and I think he already has one (or two). The dividends concept also makes sense, and I will pass that along.

Further color, he is dual-income and has been saving on a 401(k) as per normal. I don't know his home situation and I know he was considering buying a bigger home. That's when I suggested he consider putting this as a down payment on a 4-8 unit multi-family property (because his existing home is already nice).

Lots to think about here -- thanks again for the advice and suggestions!

Best,

Greg

 

[VegasBella]

What would I do?

- max out investments in existing accounts
- pay down current debts
- meet with my CPA to discuss strategies to reduce tax liability
- buy something fun

I would NOT invest in real estate. I would ONLY buy what I planned to actually use. I would not buy into anything that requires future work.

 

[Patri]

How about commercial real estate? Tenants are businesses instead of people, and may stay longer and take better care of the property.

 

[Passepartout]

No particular advice here, just that observation that it may well be a very nice problem to have.

Now, the advice part. Have a fee-only advisor look over the family's entire investment picture. 529's, retirement accounts, health savings accounts, then real estate and taxable investments, with an eye towards balancing under-funded areas and ensuring financial stability going forward.

 

[Icc5]

I agree 100% with Passepartout. I believe what he is saying is it isn't an investment decision but more a financial planning decision. You have to know when,how and why you are going somewhere before you get there. Putting money in the wrong place at the wrong time would not only be a bad investment but could keep him lost forever. A good financial person could help him stear in the right direction for the rest of his and his families life.

 

[dioxide45]

How about getting in to the timeshare rental business. Buy up a bunch of prime Marriott and Westin prime weeks and get to renting. I would think the return could be close to 10% if done right.

 

[Talent312]

In my 20's (a former lifetime), when I started investing, I read a book at my local library entitled "One Up on Wall Street" by the legendary Peter Lynch. It may be a bit dated now, but I apply advice from that book today. I suggest reading, not only that book, but any book on investing.

.

 

[zinger1457]

What would I do?

I wouldn't go to a timeshare forum for financial advice.

 

[VacationForever]

Go to a wealth management firm and ask them to manage the 500K.

 

[dioxide45]

What would I do?

I wouldn't go to a timeshare forum for financial advice.

Why not? We were all smart enough to buy timeshare.

 

[Talent312]

Why not? We were all smart enough to buy timeshare.

... and some even understood that TS's are not an investment, but a lifestyle choice.

.

 

[clotheshorse]

Dividends! A fat stack of blue chips, divs reinvested until cash flow needed, could not only finance college for the kiddies, but retirement for parents and kids. Reasonably passive, reasonably safe, very simple. My own retirement is on track to be financed by dividends which will replace job income. Half a mil is a major jump start.

Many divs are increased each year, so not only will the $ per sh increase, but if you reinvest the divs, you have more shares upon which the div is paid (the beauty of compounding). Simple example, I bought about $5k of LMT in mid 2011. My first div was $45. Having reinvested all divs, and LMT granting very generous raises, my most recent pmt was $125. Meanwhile, the position value is $17-18k. What will it be paying me quarterly in 8 years (retirement)? Hard to say, but I would expect at least one more dbl, to maybe $250 per quarter. Note, divs can also be lowered or stopped. Buy quality and that's a rare event. Buy quality and monitoring isn't scary nor onerous.

Best of both worlds. Pocket the cash while you hold (or reinvest), sell if you feel like it. At the very least, there would be a lot more shs to sell in 10-15 years than the original buy.

I determined a long time ago that while real estate might be a great investment, it is not for me. Landlording isn't my thing. Unexpected vacancies can be devastating. Closest I get is REITs, but I have them only in tax-deferred accounts. I figure my home is enough exposure to real estate.

Be sure to convey that he needs to keep an eye on taxation on whatever assets he deploys to. It would be a shame to get caught up in an MLP and get large unexpected tax bills. I strongly believe that no one should invest in something they don't understand fully. If you can't figure out how they make their money, and share it with you, and what it means in tax, probably best to steer clear. I also agree on the holistic nature of finances. One's financial picture is a sum of the parts, each playing a different role.

Please do convey my congratulations on what I assume was a goal achieved.

I agree, I would run to Div Stocks if I had 500K (pay off my student loans first). Tried the RE game, we found out that it is not for us. We sold our multi-family units a few years ago and only have one more condo to put on the market - never again.

 

[pedro47]

I like blue chips stock and real estate. They are not making anymore land. Good luck, this is not the forum to seek sound financial advice.

 

[capjak]

I would dollar cost average over 1 year period 50:50 into Vanguard Wellesely and Wellington or an equivalent in an ETF.

 

[Rjbeach2003]

This isn't a bad place to get general ideas. Many times the "professionals" will advise you to invest in what they sell.

I think the main thing to decide is what is the money for. Retirement, kids education, recreation etc. Knowing what your goals are will help.
Also how much risk are you willing to take.