What to do with 100k?
September 1, 2010 7:54 AM   Subscribe

What to do with 100k? My wife and I together have been able to save just over 100k over the last couple of years, which is nominally reserved for the purchase of a house. I am looking at potential alternatives that may be a better short/medium term investment. We already have another 100k reserved for an emergency fund.

My wife has no debt other than a $400/mo car payment her company takes care of. I have about 15k left in student loans, and another 4k in CC debt which should be balanced by 2011.

Before you guys tell me that I should be paying off the student and cc debt with the balance -- we operate on the idea that these debts are mine and not ours. We have everything budgeted out such that payments are being made to shared savings and I take care of my debts myself. I'm fine with that. We're both maxing out our 401k to employer match and each of us is maxing our roth iras.

Here's the deal.
We have 100k sitting in a saving's account making no money for us. ING or HSBC used to be good choices, until the economy dropped out and we were left with very bad rates. We want to keep the money liquid, but also in a place where it can get a decent return medium term.

Here's what I'm thinking:

- Buy/sell luxury cars. I have access to non-public wholesale auction data and know what the margins are. On the face of it it looks like 5k can be brought off the top for any 20-30k+ car at auction. I'm also aware of the 'N registrations limit per year."

- Purchase a rental/renovation properties. Renovations shouldn't be a major issue, I've already contracted major renovations for other properties.

- We are in a position to take advantage of a franchise opportunity we believe in, where a venue that is is statewide is looking to expand nationally.

My question is this: If you had this scenario, what would you do? Play it safe and pay off the existing debts, flip cars, or start looking at real estate?
posted by anonymous to Work & Money (21 answers total) 6 users marked this as a favorite
You should pay off the credit card debt first. Yes, I know what you said, but carrying credit card debt is a bad idea if you can avoid it. What are you paying on that, 15%? That's money flushed down the toilet every month.

I don't think that any of your options can be classified as methods to keep the money liquid and safe, while getting a decent return. House flipping? Really? In this market? What if you can't sell the finished property? A franchise is going to take quite some time to get off the ground and start generating money, if it ever does. I don't know about the luxury car business but having your money tied up in luxury autos is almost the exact opposite of "liquid".

I'd pay off the debts and shove the rest into Vanguard in a mixture of money market accounts and intermediate term bond funds. If you are looking longer term then I'd add an index stock fund to the mix.

This is not financial advice, btw.
posted by It's Never Lurgi at 8:07 AM on September 1, 2010 [2 favorites]

Pay off the debt first.

I don't think either luxury cars or real estate are good businesses to be in, especially with capital of only $200,000.

As for franchises, it depends, obviously, on the terms. Many franchises impose onerous terms on franchisees and franchisees often significantly underestimate both the amount of hours and capital requires to turn a profit.

You don't mention your age or your location, but if you are in the US and less than 50 years old I would suggest that you put your capital in a broadly diversified portfolio of stocks and bonds.
posted by dfriedman at 8:10 AM on September 1, 2010 [1 favorite]

About the credit card debt: why not "borrow" money from your joint account to pay that off, and then pay it back over time with interest? If you make the interest partway between what you would pay to the credit card company and what you would get from ING, then it's a win-win situation.

In other words:

You borrow $4K from your joint account now, and promise to pay it back within the year at (say) 7% interest. You win, because you are only paying 7% instead of 15%, and you AND your wife win, because you are getting 7% instead of 2%. Only the credit card company loses....
posted by cider at 8:16 AM on September 1, 2010 [12 favorites]

Pay off the debt for sure. Take out a "loan" from your wife with a 3% return to pay back into the 100k if you have to, but get rid of the debt!
posted by Grither at 8:18 AM on September 1, 2010 [1 favorite]

I'd pay off debt (optionally repaying the "us" money to cover the debt), and then look for very low risk things to do with the money.

Most of the things you're looking at aren't particularly safe, nor do they keep the money particularly liquid. (If you have to rely on someone buying your real estate or cars or franchise, that's not liquid.)

If you are in a heavy rental market area, you might be okay with a rental property, iff the current market rents fully cover a mortgage on the property. But I think of that as more of a very long term investment, so you may not want it as a short term holding.

On the other hand, this might be a good time, in terms of where you guys are with your finances and your life, to look at doing something risky with a portion of the money.
posted by rmd1023 at 8:28 AM on September 1, 2010

Pay off your debt. I can't imagine any of those "investment" ideas will work out. Flipping luxury cars in this economy seems like a terrible idea. Flipping properties, likewise. Franchise stuff sometimes works, sometimes doesn't. I'm sure other folks will have some financial ideas, but frankly, I think cash or some sort of government bonds or whatever are the safest investment vehicle now.
posted by Slinga at 8:34 AM on September 1, 2010

If my wife had CC debt, I'd pay it regardless of previous budget setups. We are a single economic unit; any such divisions are pure fictions. We do keep separate accounts and a joint budget, but if push came to shove, everything would be 100% 'ours'. Keeping that in mind, come up with a rationale (those suggested above are good) and pay it.

To deal with your extra $81k, see a financial adviser whose fee is a flat amount for advice and not a commission. There are almost certainly complications with a) minimizing tax liability b) long range plans which need to take into account your specific circumstances, such as how wages are split between you, your ages until retirement, and plans (or contingencies) for children and college. You might want to start a small business or invest in real estate, but those are both a fair amount of work and involve substantial risk. They may or may not fit your goals and needs.
posted by a robot made out of meat at 8:35 AM on September 1, 2010

"Flipping" anything is not sustainable as an income stream, and is a large part of what got the economy in the mess it's currently in. Luxury cars? Vacation properties? Those things are pretty low on most people's priority lists these days, I would think. If I were lucky enough to save $100K, the first thing I would do was pay off that debt - and yes, make sure you have a plan to repay the "us" money from your salary. But that interest is just wasted money.

I would then explore the franchise idea - a stable business will generate much more cash flow than will a business that depends on buying and selling things that only a few people can afford. Franchises are expensive up front, but run well they become nice income streams in a few years.
posted by pdb at 8:37 AM on September 1, 2010 [1 favorite]

Debt first. It's ridiculous to pay interest rates above 4% when they are only paying you less than 1%.

Flipping cars: bad idea. Flipping houses: even worse idea. Keep in mind that even stellar credit risks are having a very hard time getting funding, so multiple mortgages would be difficult with less than a million dollar portfolio.

Franchise: I dunno. Some are good, some are bad. Primrose schools seem to be a a huge money maker, sandwich shops...not so much.

But pay off your debts first. That's a stupid amount of money to pay in penalties just so you're not sharing debts. Also; if you're looking into to loans, they will calculate your debt to income ratio, so why not eliminate it?
posted by SecretAgentSockpuppet at 8:43 AM on September 1, 2010 [1 favorite]

posted by jasondigitized at 8:56 AM on September 1, 2010

Flipping cars successfully takes a certain type of skill that they definitely don't teach you in school. My cousin does it, and does it quite well. I always ask him how he does it but he just shrugs and smirks- it's something a little innate he has. Granted, you have a slight advantage in being able to secure cars at a low cost (my cousin has to work for getting the low cost, and then finding the buyer for the much higher cost), but you also need to be well versed in what you're getting yourself into in terms of what makes it to auction, the condition of the vehicle and what the demand would be for it. If you're mechanically inclined and are considering this, then the two go a bit hand in hand.

Recognize that not as many people looking to buy a used car will be able to front that much cash, so people often get some sort of financing by going to a dealership. On the other hand, fewer people can afford new cars so the used car market is blooming depending on your area.
posted by liquoredonlife at 9:11 AM on September 1, 2010

Pay off the debt (obviously)

Keep the rest of it liquid, as a store of value. This means a mix of cash and precious metals.

There is a small, but non-zero chance that the US will borrow its way into disaster, that's why you want to have a small, but non-zero amount of precious metals or other things that can store value, as insurance against that possibility.

Don't invest in anything that you cant eat or use yourself if the market collapses.

My Grandfather who lived through the First Great Depression predicted another one... a BIGGER one.... it's coming down the tracks with a full head of steam, but I do hope I'm wrong about that.
posted by MikeWarot at 9:13 AM on September 1, 2010

n'thing financial planner.

That being said, why on earth do you want to keep the money liquid if you already have an emergency fund that's just as large? An emergency fund should of course be easily accessible, but 100k is a decent yearly salary in NYC.
Unless you have some wildly unusual life circumstance I'd be surprised if you need that much.

Standard questions:
1) What is short/medium term to you? 6-12 months?
2) How averse are you to risk?
These are things a decent financial planner help you navigate.

A note on being a Franchisee:
Are you both willing to put the time in for this? For a franchise to be profitable, you have to run the business yourself for a minimum of 2-3 years. Unless you're planning on hiring management away from an existing franchise. And have you actually looked at the franchisee requirements? Between Burger King, McDonalds, and Dairy Queen - before you can begin the process you have to have a minimum net worth of 250,000. Initial total investment starts realistically at 500,000. And those are the lowest!
posted by handle_unknown at 9:28 AM on September 1, 2010

You have too much debt and not nearly enough savings to play around with property flipping or luxury cars (franchising, it depends on how much time you have and which franchise you want; a tiny ice cream stand might work.) Seriously. It took you how many years to get the 100k saved up? You can't afford for the house (one at a time) not sell for at least your investment, or any three cars to be stuck in inventory for a while - I mean, your opportunity cost is too large relative to your total available funds. You shouldn't be risking even 30% of your $100k in this manner. Especially since you might need to pay off her car if things go badly at her job.

I would hunt down a high-yield CD. My credit union is paying a bit over inflation on those - heck, they pay me 3.2% on my checking account. Set aside, say, 15k to risk on crazy misadventures - that's not quite 10% of your liquid funds, counting the emergency fund.

And do what everyone else said with the credit card debt.
posted by SMPA at 9:32 AM on September 1, 2010

SMPA, can I join your credit union? 3.2% on a liquid account.........really? Show me please.
posted by jasondigitized at 10:20 AM on September 1, 2010 [1 favorite]

Rentals are a tricky market, but one that could have a long-term pay-off. You can find markets where there is a significant discrepancy between the selling price of rental properties and the going rate for renting, but you'll need to factor in where things are going. Is the market in favor of renters or the landlords? Is there the chance that a large rental development could change that ratio? You'll need to talk to rental agencies, getting a feel for their costs and the average annual costs for upkeep.

Then, if you're still interested, figure out where you want to be in the market: someone who is trying to get the most from their property, even if it means higher renter turn-over, or someone who is willing to receive less per month, but maintain a positive relationship with the same renters for years. You can be pickier with renters if you're asking for less per month, but that could also mean less headaches with maintenance for higher turn-over.
posted by filthy light thief at 10:30 AM on September 1, 2010

Rentals. We’ve had a loss of income and it’s killing me that I can’t pick up additional rental property. Housing prices and interest rates are low and it just seems like a good time to invest. You may not see much return early on, but down the road, I think you would be pleased. Oh, I would use a property manger so you don’t have to do anything.

I don’t know your market, but around here, 100K would make nice down payments on a couple of houses.
posted by iscavenger at 11:57 AM on September 1, 2010

Caveat: This advice is not given in any capacity as a financial advisor. Purely hypothetical.

In today's volatile market, there are very few havens that offer liquidity, minimal risk and decent returns. It is a byproduct of ZIRP.

There are plenty of excellent suggestions with regards to servicing your debt. You can form an entity and borrow from the pool of savings at a less onerous rate than what you are likely paying for your cc and student loan debts. That is a win/win for you and your family.

Your ideas of buying luxury vehicles are to me pipedreams that require substantial appetite for investment (time, knowledge, capital) as well as risk, the two things you seem to eschew in the topic question.

If the seed money is substantially more than your debts, then I'd suggest a diversified investment approach: 25% equity, 25% cash, 25% bonds, 25% inflation hedge (look at a gold etf). Rebalance periodically to realize profits and minimize risk.
posted by Hurst at 12:24 PM on September 1, 2010

I've been lead to understand that bonds aren't a good idea in a ZIRP environment, because the present value can decrease rapidly if long term interest rates go up. You won't lose principal, but you will have a huge opportunity cost waiting for them to mature.

I pulled my 401k out of bonds a few months ago as a hedge against this eventuality. Unfortunately, the only choices I have left are money markets or stocks... money markets are more liquid and more risk adverse... what I wouldn't give to be able to park some of it in precious metals. (About 10% of it)
posted by MikeWarot at 3:19 PM on September 1, 2010

Mike, again not financial advice but your 401k is likely through a mutual fund that invests in bonds (e.g. pimco total return) so you will not ever hold actual bonds that need to mature. Accordingly, you have more flexibility to reduce or transfer your position in bond-heavy MFs.
posted by Hurst at 7:53 PM on September 1, 2010

Weird. Last night I suggested you should look into buying a sailboat, but my post disappeared. Sailboats are pretty affordable right now. You could buy a pretty sweet yacht for around $30-50k, live on it and cruise around the world on air power. Of course you'd need to know how to sail or be willing to learn.
posted by wherever, whatever at 1:51 PM on September 2, 2010

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