Greetings fellow Financial Samurai. Bruce here. I recently dropped a note to Sam about a financial conundrum that I was working through as I appreciate the analytical approach on this blog. Sam suggested that I write it up and engage the Samurai community to help with the alternatives analysis.
Background
My wife and I are in our early 30s, are currently child-free, and live in the suburbs of Atlanta, Georgia. About three years ago we sold the condo we had purchased as our first marital home and bought a suburban house northeast of Atlanta in an area with the best public schools in the city called Marietta.
The house was the cheapest house in the best school district and definitely on the low end of the neighborhood as well. We paid 167K and there were only one or two other homes less than 200K in the high school district at that time. As luck would have it, we just happened to be buying within 30 days of the market bottom in January 2012 for the suburban Atlanta area.
We invested a decent chunk of change (~50K) in renovating the finishes of the home to give in a semblance of the style we like from watching exorbitant hours of “Property Brothers” and other similar shows on HGTV.
After living in this area for the last two and half years, my wife came to me with a proposal that we look into moving further south from the suburbs of Marietta closer to the urban center of Atlanta. She laid out the logic including the following:
She works closer to downtown Atlanta and her commute would go from 45 mins to an hour each way to around 20 minutes each way
The neighborhood/area we currently live in is dominated by families and children with very few single couples. This affects making friendships and means we will always be driving somewhere else if we are going out with our fellow child-free friends. Basically, why don’t we live in the city of Atlanta and enjoy the more active community while we have the opportunity? We can always move back to the suburbs if and when we do have a kid and they don’t start into public schools until they are six or so years old anyway.
The restaurants and bars in the suburbs are typically chain restaurants and sports bars. All the music venues, hip restaurants and bars are in Atlanta
I heard my wife’s impassioned appeal and decided to get on board with her plan to move to the City of Atlanta. I think the part that excites me the most is the opportunity to live in a walkable community. Everything in the suburbs involves getting in a car, but the area we are moving to allows for a ten minute walk to one of the most popular bar and restaurant districts in the city.
When we purchased our suburban house, we had pictured being there for the long haul (probably ten years or so), but with the renovations adding value and the market appreciation we felt confident with the numbers and changing our plans to move in-town.
However, we both agreed that because we have never lived in-town before, we would rent for the first year as opposed to buying a home in the city. The houses in the area we are going to be renting are almost twice as expensive as the suburbs we currently live in, and we want to make sure we are buying in the right area where we will want to settle in for at least 4-5 years so that we don’t repeat the same mistake of moving to an area that doesn’t end up being our cup of tea. By renting a home in the city, I think we will be able to figure out what makes the most sense to buy when we are ready after our 12 month lease is up.
Selling Our House
We listed our house ourselves with a realtor firm that allows you to get the home on the MLS listing system but does not involve a listing broker commission outside of a small fee. We hired a professional photographer to take the listing photos and had the house under contract within a week.
After closing costs (we offered 3K to the buyer) we will be walking away with just over $90,000 in appreciation from our cost basis when accounting for the money we put in to renovations (around 50K on top of the 167K purchase price). If my math is correct that is around a 16% average annual return based on our investment and the approximate two and a half years we lived in the home.
The closing is scheduled to go down in approximately two weeks if we don’t hit any snags (already have had appraisal and inspection). While living in the house we also aggressively paid the mortgage down. When you add on the appreciation in the housing market since the bottom, our large downpayment, and our mortgage pay downwe are going to be receiving a check for just over $280K at closing.
What To Do For A One Year Investment Window?
While this influx of cash is extremely exciting, it has left me wondering. What investment would make the most sense for a one year time period? If we decide to buy a home in Atlanta after our lease is up, we may want to put a large down payment down to facilitate a monthly payment that would be comfortable allowing the flexibility in our monthly budget that we have grown accustomed to. As such, we are focused on the 12 month window while we figure out the future holds. Remember, homes downtown are roughly twice as expensive as where we used to be living.
To give some perspective, if we do end up buying in the in-town neighborhood we are renting after our lease is up, the home price we would likely be buying would be around 450K to 550K for a house that needs some work. We like to put our own touch, so we would likely buy and renovate again. As such, we will probably need around 100K for the 20% down payment if we decide to buy in this area and IF prices are similar to the current market values in a year.
Here’s an example of what a house we would be interested in that is for sale at 465K in the new in-town neighborhood:
My wife and I have always directed the bulk of our retirement investments to be in index ETF funds as we like the dollar cost averaging, low-fee approach to long term investments. I do not think we are particularly risk-adverse as neither of us holds any bonds or CDs in our portfolios. However, I have historically bought into the theory that you do not put the money in to the stock market if you don’t intend to leave it there for at least five years. This is just gambling if you don’t have the five year window is how the theory goes.
So What Short-Term Investment Choices Do I Have?
I began my search as I always do with a Google search. Some of the short term investments ideas that I came across include the following (cheers to investopedia):
Treasury (T) bills
Certificates of Deposit (CD)
Commercial Paper
I already knew that T-bills and CDs are currently paying next to nothing (2-2.4%) for a 5-year CD, so that didn’t particularly turn me on. (Related: CD Investment Alternatives) The commercial paper option was something I had not heard of , but reportedly consists of a short-term loan issued by a corporation, typically for financing accounts receivable and inventories. I dug a little deeper and it looks like they really don’t pay much more than a CD so I don’t think that is for me.
So I thought of some other investments.
Saving Money In An Overseas Bank
Fixed deposits in Indian banks pay out average annual returns of around 9%. I found this really hard to believe, so I checked with an Indian colleague of mine to see if he knew anything about this. He confirmed that this is the rate of return, but that you have to convert your money to Indian Rupees to make the fixed deposit. This will involve whatever fees are tied to the conversion and subject your money to the currency and inflationary fluctuations in the Indian Rupee during the length of investment.
Also, there are probably tax implications as you will have to likely pay tax on the earnings in India and may or may not have to pay additional tax in the States. Historical inflation rates have been very high in India (~7%), which appears to negate any interest rate advantages. I suppose the only reason that this would make sense is if I thought I had some reason to believe the inflation rate would be dropping over the next 12 months in India.
My Indian colleague (a very bright guy) does believe that the Indian government is committed to mitigating inflation to spur investment/development but I don’t think his opinion is enough to push be into currency plays on a market I have very little knowledge of.
More Real Estate Investments
Another thing I began to think about was real estate. If we had not sold the house we would have had the money effectively invested in residential real estate for the next 12 months. By this logic, if we were to invest the money back into real estate for the next 12 months while we rent, we would effectively be in the same position as we would have been had we not sold the house.
This begs the question: What is a good real estate investment for 12 months?
I thought maybe it would make sense to put the money into a Real Estate Investment Trust (REIT)? This would expose us to a high quality portfolio of properties across the US (or the World). There are many REITs focused on different real estate investment objectives. In my eyes, this would actually be a more conservative approach than the position we had been if we had kept the money invested in the suburban house in Marietta for a year. Instead of being invested in one specific house, our money would be spread across several locations and different real estate markets. REITs pay healthy dividends as well that are tax advantageous.
Another potential real estate investment would be paying off the rental home that we currently have a 50% interest in. We partnered up with my Dad back in 2008 to buy a rental home in a different suburb of Atlanta. The house was financed with a home equity loan against my parent’s home which is currently fixed just under 6%. I believe this rate is fixed for at least for a few more years, but I need to confirm the terms.
This rental house is worth around 110K and the current cost basis is approximately 90K for all parties. The original plan was to fix and flip the house for a quick profit, but deteriorating market conditions at that time led us to make it a rental. It has been steadily rented for six years and currently rents at $950 a month.
My wife and I’s 50% ownership interest in this house represents the last remaining debt on our balance sheet. Since we are already committed to 50% of the debt on this home, we will get an immediate 6% return on investment by paying off our half (around 45K). My dad recently retired and he may actually want to sell his half of the investment as well. We could offer to pay the full 90K off and give my parents the additional 10K that represents their return on investment (assuming the 110K Zillow estimate is accurate).
The taxes and insurance are relatively low for this rental house and we have had no trouble keeping it rented with high quality tenants as it is also in a very good school district. The more I think about it, this is probably a no-brainer but will only represent a portion of our investment.
Other Short-Term Savings Ideas
Other ideas that probably deserve some consideration include P2P, structured notes, or an online savings bank. The online bank would likely be a paltry ~1% return, but perhaps that is the price to pay for liquidity.
Perhaps I need to give up on trying to get too cute with what may be just a 12 month investment window. Times are good and everybody seems to be making money everywhere you look. But if we’re serious about buying another home in 12 months, then it’s probably best to be more on the conservative side.
I’d love to get some ideas from the community on what to do with the $280,000 in cash in the short-term considering we likely will be using at least $100,000 to buy another house in Atlanta. What am I missing out on that we should be looking in to?
Thanks!
Brian