What should we do with our money?

October 30, 2007 12:52 PM

My husband and I are 29 and we have approx $750k worth of equity tied up in real estate, but we're not sure how we should plan for the future.

Prior to being married, we both owned properties in the San Francisco bay area. We currently live in one and rent out the other. We have been saving money for a down payment to purchase a new house next year and have enough money to cover a 20% down payment without selling any of our existing properties. However, since we have been living in our current house for 4 years, we can cash out the money tax free. We're not sure if we should keep most of our money tied up in real estate because of the stories I hear on the news about the housing market crashing. Yet, the SF real estate market isn't reflective of what's going on nationwide. I guess my main question is...where should we concentrate our goals financially? My husband and I don't know much about the stock market and we really just lucked out in the last few years with real estate and company stock options. I know our plans might change in a few years after we have children, but for now, we aren't sure if we should try to pay down the houses, trade up for bigger properties like duplex/triplex, or concentrate our finances elsewhere. Any advice would be much appreciated!

posted by kyam58 to work & money (17 comments total)

This is probably not the answer you want, but your situation is complicated enough that the only good advice you could get on a forum like this is to meet with a financial planner.

The problem with trying to give you advice is that there are so many variables to take into account, that it is virtually impossible that you will get great advice here.

My other piece of advice is to start getting yourself educated. You say that you don't know much about the stock market, etc. Well, now is the time to learn.
posted by bove at 1:16 PM on October 30, 2007

If you have $750K in assets, you should have been working with a financial planner long ago. Now is a good time to start.
posted by chundo at 1:18 PM on October 30, 2007

Get a planner. Find out about diversifying. These questions are too complex to answer without specifics. Also you need wills and advance care directives/living wills. See an attorney for those.

Planning ahead now helps tons in the future.
posted by Ironmouth at 1:22 PM on October 30, 2007

Any financial adviser would tell you to diversify. You appear to be underdiversified (concentrated on a very narrow asset class of Bay Area residential property) and considering getting even less diverse -- plowing your cash into yet a third Bay Area residential property.

It is very important to recognize that the Bay Area real estate market is exactly like all other markets: prices reflect ability to pay (income and assets, availability of financing) and willingness to stretch (pushing the edge of ability to pay based upon confidence of appreciation).

Prices are doing better in some Bay Area neighborhoods than national averages because they benefit from ability to pay factors (a strong tech market, a weak dollar making houses cheaper to foreigners) which don't affect most US markets. Whether we'll see another year or two of double digit gains in those ultra-prime neighborhoods is anyone's guess.
posted by MattD at 1:24 PM on October 30, 2007

Your question is too big.

First, you really, really need professional advice. Get thee to a financial planner.

Second, a crashing housing market doesn't compare to a crashing stock market. It's much, much slower-moving. This is good for you because you can more easily get out if it drops below your comfort level.

Third, almost every "expert" will encourage you to diversify your investments. I use "expert" in quotes because diversification is the easiest advice to give, and not necessarily bad, but not always optimal for everyone.

Fourth, knowing these two things up front should help you make slow, careful decisions as you educate yourself with professional help. You have time. Don't put off getting information, but don't be hasty in making decisions either.
posted by nedpwolf at 1:26 PM on October 30, 2007

I agree with what's said above: Assuming you don't have similar levels of stock and cash assets, you really should get some of your money out of real estate and find ways to diversify into a broad range of investments.
posted by croutonsupafreak at 1:31 PM on October 30, 2007

I don't agree that you should necessarily rush to a financial planner. First of all, your money and its safeguarding will never be as important to your financial planner as it is to you. Second of all, your financial planner may not be as smart as you are. Third of all, you're probably worth more money than any financial planner you could get to sit still long enough to hear your story, and that ought to tell you something. That said, if you really feel uncomfortable or uncertain in this area, a fee-based (not a percentage based) financial planner can really clarify your options for you.

In terms of real estate, I am not so sure that diversification is the way to look at it. It really matters where and what you own, and where and what you are intending to buy, and why. "The San Francisco Bay Area" is not enough to predict what your real estate is going to do; "the part of Downey Street north of Cole, just before it cul-de-sacs" is the kind of description an experienced person needs to understand what kind of real estate you have and what to expect in terms of appreciation.

For your RE questions, I would solicit advice from at least five, preferably ten Realtors who are familiar with both the areas you currently own and the area you're planning to buy. In hearing what the Realtor has to say you must try to sort the "this is my understanding of the state of your markets now" stuff from the "I would love to make a commission on transacting your properties." Most Realtors are professionals and they will give you the former for free in the hope of obtaining the latter some time in the future.

where should we concentrate our goals financially?

What are your life goals? How would you like your wealth to help serve these goals? Until you answer these questions you can't answer the one you posed. I suspect that were you to visit a financial planner these are the questions you would end up spending a lot of time talking about.
posted by ikkyu2 at 1:48 PM on October 30, 2007

If you go the financial planner route (and I side with ikkyu2 above; it's not a sure thing that you need one, until we understand your goals)

If you want a financial planner, I suggest a fee only financial planner: http://www.napfa.org

If you want to learn something about stocks and investing, try the Vangurd Direhards forum. http://www.diehards.org/.

Terrific resources there and extremely knowledgeable people who are happy to help.
posted by dudeman at 2:20 PM on October 30, 2007

First of all, your money and its safeguarding will never be as important to your financial planner as it is to you.

No, instead the financial planner's reputation is important to them and, coupled with a good planner's experience and specialized knowledge, that's more than enough reason.

Second of all, your financial planner may not be as smart as you are.

But what are the odds a licensed planner who you've done your research on is going to be less knowledgeable in their area of specialization? This is nonsense. 750k is a big chunk of change to risk on such fears.
posted by yerfatma at 2:21 PM on October 30, 2007

I don't agree that you should necessarily rush to a financial planner. First of all, your money and its safeguarding will never be as important to your financial planner as it is to you. Second of all, your financial planner may not be as smart as you are. Third of all, you're probably worth more money than any financial planner you could get to sit still long enough to hear your story, and that ought to tell you something. That said, if you really feel uncomfortable or uncertain in this area, a fee-based (not a percentage based) financial planner can really clarify your options for you.

Oddly enough I just addressed financial planner compensation in a different AskMe question.

Yes, some financial planners are not that good. Some plumbers are not that good either, but that doesn't mean I'm going to fix that broken sewer pipe myself. Just as you would with any business arrangement, you have to select one carefully, interviewing them thoroughly and getting references.

Once you've found a good financial planner, it's YOUR job to make your money important to them. This means letting them share in your success. Paying a good money manager 1.5-2% of your account value every year will more than pay for itself.

A fee-based planner has no real incentive to grow your account, which still leaves you to make most of the decisions - and you will never be as knowledgeable about investing as a good financial planner, unless you decide right now to start managing your money full-time.
posted by chundo at 2:25 PM on October 30, 2007

Third of all, you're probably worth more money than any financial planner you could get to sit still long enough to hear your story, and that ought to tell you something.

This is pretty condescending here, and lacks some serious insight. Some of the most successful hedge funds are run by analysts and managers who aren't worth anything even close to the investors whose money they're investing, and some of the most successful funds are those who offer a % of earned income in addition to a manager's fee. Ultimately, smart people who are personally invested in your future is a great combination to make you money.

Personally, I think that getting a financial advisor is completely dependent upon your own ability to invest. Considering the fact that you have ALL your money in a couple of houses, it tells me that you would do extremely well to have some outside counsel, be it friends with great experience, or a paid advisor.

Shop around, talk to friends, interview some prospective advisors and check out their track records and investment policies.

In addition, do some homework on the early to mid 90s run-up and subsequent crash in California real estate prices. You're in for a rude, rude awakening if you think that any market is immune to what's going on right now. We've had plenty of discussions here in the green and in the Blue on this matter; do a search to find a few.
posted by SeizeTheDay at 3:12 PM on October 30, 2007

Good comments so far.

One thing: be careful about your use of the word "equity" -- in real estate it refers to the amount of mortgage principal that has been paid off. If you look at the relevant amortization schedule relevant, you'll see that in the first several years that amount is painfully small. It can get confusing if people are using jargon differently.
posted by randomstriker at 3:44 PM on October 30, 2007

Actually, for real estate, equity = value of property - any liens or mortgages against the property. If you got a 100% mortgage, and the value of the property hasn't changed in that time, equity would be the amount of mortgage principal that has been paid off -- but that's probably not the case.

In deciding how to allocate your investment funds, you should take into account your retirement plans, income, where you would live in the future, plans for care of children or parents, your feelings about risk, investing, and money, and probably a few other things. Where should you concentrate your goals? Well, what do you want to do with the money, and when? Start with that, and read some books on the stock market.

For most people, investing all of their funds in real estate, particularly in only one part of the country, would not be what they would choose to do -- but a few people do this, and are happy with it. I suggest you find a fee-only (not all fee-based planners are fee-only) planner, who will probably charge you an hourly rate. Avoid planners who charge a portion of the value of an account you hold with their company -- you need someone who can give you an unbiased opinion concerning all of your investments.
posted by yohko at 6:16 PM on October 30, 2007

Some of the most successful hedge funds are run by analysts and managers who aren't worth anything even close to the investors whose money they're investing

You shouldn't compare the poster to an actual wealthy person whose assets command the time and attention of people who manage multi-billion-dollar hedge funds. The two situations have nothing in common.
posted by ikkyu2 at 1:11 PM on November 1, 2007

First of all, I have no advice for the OP about what they should do with their investments. I don't have enough information and no one else here does, either.

Regarding ikkyu2's disparagement of financial planners, however...

A good financial planner will tell you what your options are and what the likely outcomes will be. They will not necessarily want to manage your assets. You do not necessarily need them to make growing your assets their biggest priority. (A financial planner CAN help you find an investment advisor who will make that their biggest goal.) Financial planners are better educators, clarifiers, and prioritizers than dictators.

Financial planners are particularly good at coordinating the other professionals in your life. As an example, a tax planner tends to let taxes determine way too many decisions. An estate planner will let estate considerations determine way too many things. This is as it should be, in my opinion. It's a financial planner's job to figure out, using your priorities, time horizons, risk tolerances, etc., how much weight each one of these viewpoints should get in your current investing picture.

I do not believe the financial situation of your financial planner is relevant to your hiring of him or her, unless he or she is regularly declaring bancruptcy or something egregious.

If your situation is as simple as you make it sound (no complicated family trusts, split families, non-traditional relationships, litigious heirs/exes, etc etc.) I'm not even sure your financial planner needs to be brilliant, any more than your CPA does. The basic financial planner toolbox should do the trick. The more complex your situation is, though, the more you want an experienced, intelligent, and creative planner.

Apologies to the realtors out there, but the ones I've run into have what I consider to be an unrealistically optimistic view of the real estate market- no matter what market they're in. I don't think they're bullshitting, but I do think optimism is a useful trait for a realtor to have if they're to succeed.

Full disclosure: I am going into financial planning as a career, so I do indeed have a dog in this fight.
posted by small_ruminant at 3:24 PM on November 1, 2007

Regarding ikkyu2's disparagement of financial planners, however...

Was this disparagement the part where I said they could really help uncertain people clarify their options, or do you mean the part where I suggested the financial planner would ask them about their life goals?

I've met you, s_r, and I've chatted with you enough to be pretty sure you'll make a good financial planner. Not all of them out there are so great. Some are frankly unscrupulous, and woe betide who falls into their clutches.
posted by ikkyu2 at 6:30 PM on November 1, 2007

It's ironic that I have the same reservations about medical professionals.
posted by small_ruminant at 5:12 PM on November 2, 2007