Stocks, rental property, or upgrade house?

[Anonymous]

TIA. In 2019, our HHI was just over 200k. We max out our 401ks and put 8k/yr into DC's 529. Due to some job changes in the past couple years, we are now making 350K. But we haven't spent more, so this extra money is just sitting there. What's the best way to invest this money for ~10years? Our known options are putting it into an ETF and hoping that we are near the bottom of the bear market, buying a condo/townhouse and renting it out, or selling our house and buying something about ~500k more. For the last option, our house was bought for 700k in 2017 @3% interest and is now worth $1M+. If we upgrade now, our 500k capital tax deduction would reset, so that is a plus.

Any opinions on those three options (or other ones I'm not thinking of?) TIA

[Anonymous]

Investing in an appropriately diversified portfolio suitable for your risk tolerance and aligned with your tax situation is going to provide a higher ROI, greater liquidity, and less risk than undiversified real estate. Further, buying rental property is buying a job. If you outsource the management of the rental, your return will be reduced accordingly.

[Anonymous]

Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

[Anonymous]

Anonymous wrote:Investing in an appropriately diversified portfolio suitable for your risk tolerance and aligned with your tax situation is going to provide a higher ROI, greater liquidity, and less risk than undiversified real estate. Further, buying rental property is buying a job. If you outsource the management of the rental, your return will be reduced accordingly.

+1
I would focus on keeping things simple and spend your time doing things that make you happy. Rentals is just not something I would recommend to most people, especially in the current DC area market. If you are handy and willing to accept losses for 10-20 yrs, then maybe it's something worth considering.

[Anonymous]

Anonymous wrote:Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

Keep in mind that owning a rental property is likely to increase your taxes. I have three properties and my taxes increased by approx 9k. The rent gets added to your AGI, so even after depreciation, you usually come out on the losing end.

[Anonymous]

Anonymous wrote:

Anonymous wrote:Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

Keep in mind that owning a rental property is likely to increase your taxes. I have three properties and my taxes increased by approx 9k. The rent gets added to your AGI, so even after depreciation, you usually come out on the losing end.

You’re being taxed… because your property is producing actual income, correct? I’m not quite sure why this is a negative, exactly…

[Anonymous]

Anonymous wrote:Investing in an appropriately diversified portfolio suitable for your risk tolerance and aligned with your tax situation is going to provide a higher ROI, greater liquidity, and less risk than undiversified real estate. Further, buying rental property is buying a job. If you outsource the management of the rental, your return will be reduced accordingly.

Everything this person said. The only thing I'd add is I would probably dollar-cost average into the market over the next six months or so. I don't trust that this is the bottom yet. I'd also make sure I had a robust emergency fund. Keep some powder dry.

[Anonymous]

You’re wrong about option 3. The IRS changed that ruling sometime around 2017, the capital gains tax is no liner waived if you buy a new house. You have to pay it.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

Keep in mind that owning a rental property is likely to increase your taxes. I have three properties and my taxes increased by approx 9k. The rent gets added to your AGI, so even after depreciation, you usually come out on the losing end.

You’re being taxed… because your property is producing actual income, correct? I’m not quite sure why this is a negative, exactly…

Good question. No, I basically break even. But it can vary based on many things that come up like vacancies, maintenance, etc. I'm not saying you will get hammered on your taxes, but the idea that owning a rental property is great for tax purposes is a gross exaggeration and just not true for many people.

[Anonymous]

So is everyone leaning towards "just put your extra salaries into the stock market... It'll turn out for the better over the long run."?

One issue about having liquid funds is lifestyle creep. That's something I see a lot in folks that move from MC to UMC, which is where we're at, imo.

[Anonymous]

We had a similar trajectory. I’d start by doing two Backdoor Roths ($13k) and increasing your 529 contributions

[Anonymous]

PP here. We had a rental but decided it wasn’t worth the hassle or liability as our income increased.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

Keep in mind that owning a rental property is likely to increase your taxes. I have three properties and my taxes increased by approx 9k. The rent gets added to your AGI, so even after depreciation, you usually come out on the losing end.

You’re being taxed… because your property is producing actual income, correct? I’m not quite sure why this is a negative, exactly…

Good question. No, I basically break even. But it can vary based on many things that come up like vacancies, maintenance, etc. I'm not saying you will get hammered on your taxes, but the idea that owning a rental property is great for tax purposes is a gross exaggeration and just not true for many people.

You “break even” but the property is appreciating and the renters are paying the mortgage, if there is one, correct?

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:Good reasons for option 1. Is the "greater ROI" true on a post-tax basis though? We would be paying the highest marginal tax rate on any income from a stock market account source. Income from real estate or from primary home capital gains would be deductible. Interest from real estate is also tax deductible.

Keep in mind that owning a rental property is likely to increase your taxes. I have three properties and my taxes increased by approx 9k. The rent gets added to your AGI, so even after depreciation, you usually come out on the losing end.

You’re being taxed… because your property is producing actual income, correct? I’m not quite sure why this is a negative, exactly…

Principal payments are not included as an expense on your taxes. So on your taxes it shows that you are turning a profit, and you are being taxed on that "profit." But you are likely operating at a loss.

[Anonymous]

Anonymous wrote:TIA. In 2019, our HHI was just over 200k. We max out our 401ks and put 8k/yr into DC's 529. Due to some job changes in the past couple years, we are now making 350K. But we haven't spent more, so this extra money is just sitting there. What's the best way to invest this money for ~10years? Our known options are putting it into an ETF and hoping that we are near the bottom of the bear market, buying a condo/townhouse and renting it out, or selling our house and buying something about ~500k more. For the last option, our house was bought for 700k in 2017 @3% interest and is now worth $1M+. If we upgrade now, our 500k capital tax deduction would reset, so that is a plus.

Any opinions on those three options (or other ones I'm not thinking of?) TIA

The advice I've read is after you've checked all the boxes (retirement, college, etc...) and you have money you don't see needing to spend, then a low cost SP500 type fund is where it goes.