am i crazy or what?
April 20, 2011 6:31 PM Subscribe
Should I sell a settlement annuity to buy a second house for an investment?
I am interested in buying a second home as an investment property in downtown. I have owned a home in this neighborhood for six years so I am familar with the fabric of the neighborhood and the historic charm that goes with it. I am in SLC UT.
There is a house that has come up for sale at a killer price (I have been monitoring it) on a sweet little one way street that hasd a fabulous community feel. (Iowa Street for anyone interested in looking it up).
Now- I already own a home (with a small mortgage) but could potentially tap into this annuity by selling it and using it as a down payment. Were talking about 90k.
The house is the ugliest house on the nicest street. It needs some tlc but I could do it.it also has the largest lot and a second story. It is a block from my current house. The plan would be to renovate it and rent it - I have been a landlord with my current house for four years before I moved back into it.
Am I crazy to be thinking about this?? I just see it as a good investment and a way to really grab hold of the buyers market (they have already come down several times on the price).
Is selling my annuity (from a settlement) totally nuts? I know I may have to lawyer up.
I am 26 and single and am impulsive but reasonable.
Thanks.
I am interested in buying a second home as an investment property in downtown. I have owned a home in this neighborhood for six years so I am familar with the fabric of the neighborhood and the historic charm that goes with it. I am in SLC UT.
There is a house that has come up for sale at a killer price (I have been monitoring it) on a sweet little one way street that hasd a fabulous community feel. (Iowa Street for anyone interested in looking it up).
Now- I already own a home (with a small mortgage) but could potentially tap into this annuity by selling it and using it as a down payment. Were talking about 90k.
The house is the ugliest house on the nicest street. It needs some tlc but I could do it.it also has the largest lot and a second story. It is a block from my current house. The plan would be to renovate it and rent it - I have been a landlord with my current house for four years before I moved back into it.
Am I crazy to be thinking about this?? I just see it as a good investment and a way to really grab hold of the buyers market (they have already come down several times on the price).
Is selling my annuity (from a settlement) totally nuts? I know I may have to lawyer up.
I am 26 and single and am impulsive but reasonable.
Thanks.
It's not crazy but I don't know if it's a good idea (iana real estate investor). I'd say: add up all the costs of all options in detail, find a real estate investor's group in your area and ask a few experienced people there to check your work. You say things like "tlc" and "second story" instead of "$X0,000 for renovations" and "will rent for $X,000 per month", which makes me worried you haven't thought this through with hard numbers or really understood enough deals other people have done. So get thee to a meeting with experienced real estate investors!
There are 2 questions here:
1. take out a big loan to buy this property and pay for the renovations OR don't
2. sell the annuity to reinvest it OR don't
Make these decisions separately.
1. Will the renovated property make enough money in rent and appreciation to pay for a loan for the full amount, your time, maintenance, fees, your extra risk, etc.? If yes, buy; if no, don't.
2. Will the stock market do better than currently expected? If yes, sell; if no, don't. Actually, you don't know this, so sell if it gets you a better interest rate AND if you can risk losing it all.
Selling the annuity will get you the present value of the annuity-- that is, selling the annuity now and investing the lump sum in an index fund gets you the same amount of money in 20 years as investing each annuity payment in an index fund as you get it. Banks know as well as anyone what the stock market will do, so if you avoid scammy deals you'll only lose a little value by selling (to pay for peoples' time to do the sale). Good luck!
posted by sninctown at 9:20 PM on April 20, 2011
There are 2 questions here:
1. take out a big loan to buy this property and pay for the renovations OR don't
2. sell the annuity to reinvest it OR don't
Make these decisions separately.
1. Will the renovated property make enough money in rent and appreciation to pay for a loan for the full amount, your time, maintenance, fees, your extra risk, etc.? If yes, buy; if no, don't.
2. Will the stock market do better than currently expected? If yes, sell; if no, don't. Actually, you don't know this, so sell if it gets you a better interest rate AND if you can risk losing it all.
Selling the annuity will get you the present value of the annuity-- that is, selling the annuity now and investing the lump sum in an index fund gets you the same amount of money in 20 years as investing each annuity payment in an index fund as you get it. Banks know as well as anyone what the stock market will do, so if you avoid scammy deals you'll only lose a little value by selling (to pay for peoples' time to do the sale). Good luck!
posted by sninctown at 9:20 PM on April 20, 2011
I own a few pieces of real estate as investments. Real estate can be a great investment.
However, there is one very important thing to note - it is a self-directed investment. It is not like an annuity or mutual fund, where you just sit back and someone else does the work.
If you have real estate investments, then you are a property manager / land-lord. That takes work. Sometimes hard work. It never ends. It can require your time and attention at any time - while you are on vacation or at a family wedding.
Even if you get a property manager to help and pay him 10% - there will still be work for you as the land-lord.
If you are willing to do the work, then I would say make the investment. There will never be a better time to buy real estate in your life. But, think carefully about the work first.
posted by Flood at 5:05 AM on April 21, 2011 [1 favorite]
However, there is one very important thing to note - it is a self-directed investment. It is not like an annuity or mutual fund, where you just sit back and someone else does the work.
If you have real estate investments, then you are a property manager / land-lord. That takes work. Sometimes hard work. It never ends. It can require your time and attention at any time - while you are on vacation or at a family wedding.
Even if you get a property manager to help and pay him 10% - there will still be work for you as the land-lord.
If you are willing to do the work, then I would say make the investment. There will never be a better time to buy real estate in your life. But, think carefully about the work first.
posted by Flood at 5:05 AM on April 21, 2011 [1 favorite]
Danger! You need to look at your tax posture with regards to the annuity. If you sell it you may be responsible for all of the taxes on the value of the annuity (it depends upon how the annuity is structured). This is something the buyer won't tell you...you get a lump sum and then spend a large portion of it paying taxes on money you will never see.
posted by jeporter99 at 9:25 AM on April 21, 2011
posted by jeporter99 at 9:25 AM on April 21, 2011
If you sell the annuity, negotiate hard. I swear there was a comment on MeFi by somebody who made offers on annuities, and lots of people accept lowball offers. You need a mathematician/financial planner who can assess the value of the annuity against the potential value of the house. I would also look into borrowing with the annuity as collateral. Whenever I have had a decision to make that involved money, a good workout with spreadsheets has always guided me to the answer.
There's a lot of good advice in this thread.
posted by theora55 at 3:28 PM on April 21, 2011
There's a lot of good advice in this thread.
posted by theora55 at 3:28 PM on April 21, 2011
Response by poster: Theora- can you link to the thread you're talking about? Thanks for all the great advice. Keep it coming...
posted by timpanogos at 4:52 PM on April 21, 2011
posted by timpanogos at 4:52 PM on April 21, 2011
Conceptually, I have a hard time understanding why this would be a good idea. Presumably, you're looking to invest in real estate because you think it'll make you money, through renters or through the sale or both. But you're trading a guarenteed income through the annunity with a very risky income through rent/sale of the house. The prospective house stream of income is more volitile, less diversified, and requires infinately more effort, time, and expense to keep up.
If it were me, the expected income from the house would have to be HUGE compared to the expected income from the annuity in order for me to trade the two.
posted by craven_morhead at 3:09 PM on May 4, 2011
If it were me, the expected income from the house would have to be HUGE compared to the expected income from the annuity in order for me to trade the two.
posted by craven_morhead at 3:09 PM on May 4, 2011
This thread is closed to new comments.
posted by Mr. Yuck at 6:56 PM on April 20, 2011