We Sold a Condo. Here’s the Investment Plan.

Sometimes I think this blog is too often a reflection of my money journey. I should focus on things that other people can relate to more. However, that will have to wait for another day. Remember a couple of months ago when I wrote We’re Selling a Condo!

Well…

WE SOLD A CONDO

Ever had a day where there are a couple hundred thousand dollars changed hands? That’s what we had last week. I have to write about a big financial move like that, right?

We had sold a condo a couple of years ago, but we did a 1031 exchange and bought a new investment property. A 1031 exchange is a tax code sale where we avoid paying taxes because the money is going to a new property. We had decided to get out of landlording in Massachusetts – it’s easier to be a landlord in Rhode Island.

I initially thought of doing a 1031 exchange again, but my wife changed my mind. She usually doesn’t weigh in on the financial decisions, but I’m so happy she did. We had an opportunity to sell at the market highs. It was rare timing that the tenant’s lease had ended in the window where prices were high, and everyone was trying to buy because they wanted to lock in a low mortgage.

If we wanted to do a 1031 exchange, it meant buying at market highs. That’s not something that makes me comfortable. Why not cash out, pay the taxes, and see where life takes us for a bit? Perhaps there will be a crash like in 2010, and we’ll buy in low. If not, that’s okay too.

For years we’ve lived almost paycheck-to-paycheck. We were saving money but in retirement accounts. A small part of our income went into the investment properties because they had 15-year mortgages, and the rents weren’t covering expenses. All of this was great for our net worth, but at the end of the month, I’d look and see that we had 90% of our money in retirement and real estate accounts – not very liquid. In fact, among other investments, only about 3% of our money was liquid. It can be dangerous not to have enough liquid cash, but my wife’s government job is relatively secure, and all my income streams are diverse enough to withstand a lot.

Suddenly we have a couple of years of expenses in cash. Finally, we have a true emergency fund.

Where Do We Go From Here?

Having that cash is great, but my wife and I are afraid of spending it. After we pay off the taxes, we’ll invest the money. I hope that the investments throw off enough cash to supplement what we make from our jobs. Perhaps we reinvest that money. Perhaps we use it for fun. Perhaps it goes into home improvements or something like that.

I wasn’t sure how to invest this, so I went back through my archives and found my income investing article. There are some good ideas in that article, but this is how I am planning to invest the money:

Income $250,000    
Investment Percentage Yield Total
VYM (High Dividend) 25% 3.04% $1,900.00
VNQ (REIT) 25% 3.00% $1,875.00
BND (Bonds) 25% 3.32% $2,075.00
VTI (Total Market Index) 25% 1.56% $975.00
Annual 100% 2.73% $6,825.00
Monthly $568.75

These are all Vanguard ETFs. We have enough money to get Admiral shares of the mutual funds, but I’m more comfortable with the ETFs. From what I read, it doesn’t seem like it would make a big difference. If you think otherwise, please let me know in the comments.

The dollar amounts are a reasonable sample. I’m not sure if we’ll have $250,000 exactly, but I found it helpful to put in an estimate. We have to pay some taxes, but we also have some existing money to contribute to this.

We’ve got two goals that we’re working on:

  1. Preserve the Money

    The hope is that these asset classes are diverse enough to do well in a recession. Here’s how they did in the 2009 crash:
    VYM dropped about 50%
    VNQ dropped about 66%
    BND dropped about 10%
    VTI dropped about 40%

    In total, they combined to drop 40%. That’s… not great. That recession hit real estate and banks hard. Banks usually pay good dividends, so it’s understandable why VYM was hurt badly. In some down markets, like the 20% drop in the broad indexes this year, VYM has done well. Bonds haven’t done well in this environment, but they are only down about 12% compared to those broad markets.

    Since the markets are already down, hopefully, we won’t see anything like 2009. If we do, we’ll try not to sell anything until it recovers. We’ll also try to reinvest at those lower prices.

  2. Getting a Check
    Most of these pay dividends every three months, so the “monthly” number in the chart above isn’t accurate. However, it’s an average. We’ll get more money in some months and less money in others. After the first few months, we’ll have cash in there that we can start to use.

    It’s disappointing that we wouldn’t even get $7,000 in cash. However, the ETFs prices have also gone up over time. There’s a lot more value than just the dividends.

I was curious to see how this portfolio of investments would perform over an extended period. However, I didn’t know of a good tool to help me model and backtest it. Fortunately, the awesome Mike Piper had an answer – the just-as-awesome PortfolioVisualizer.com.

Here’s what it looks like:

(Click for larger version in a new tab.)

I could only model this portfolio back to 2008, as not all these ETFs were around before that. Looking at the bottom of the image, it seems this portfolio has returned 7.60% since the start of 2008. So with a $250,000 portfolio, I could expect average returns of $19,000 per year. I’d have to sell a few shares, but that’s the kind of return that I’m happy with, especially while I try to reduce risk.

I’m still exploring this Portfolio Performance tool and coming across some great information. For example, they publish the maximum negative periods so that you can get an idea of the worst-case scenario (historically):

As you can see, the worst it did was that 40% I estimated above. After that, there was a brief period when COVID first started spreading, and there are the last six months where inflation has been high. That’s not too many downturns of 10%, and that’s still very safe. To put it another way, if it had an average year of making 7.6%, we would be in the positive almost always after that first year.

Lazy Man

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