Should We Sell Stocks to Make a Large Purchase?
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- Опубліковано 13 чер 2024
- Should you sell long-term stocks for a real estate investment?
I walk through one listener’s question and explain what you need to consider before making such a decision.
Aside from the obvious-is it a good financial investment-you also need to consider if it's a good emotional decision.
Learn:
➡ The tax implications: how are capital gains taxed differently?
➡ How to compare the dividends of a bond to those of a property investment
➡ What important factors and questions need to be carefully accounted for
Questions Answered:
When does it make sense to sell long-term stocks for real estate investments?
How can you determine the “dividends” of a real estate investment?
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⏱Timestamps:⏱
0:00 - Trade stock for real estate?
2:55 - Calculate yield
6:39 - Consider net operating income
9:15 - Other considerations
12:36 - Calculate taxes
18:57 - Quick summary
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Good points are made in this video. I'm all in favor of real estate as an investment and own a lot of it.
But:
The US average net return on rental property (long term or Airbnb) is less than 6%. Costs approximately 55% of rent.
The factors reducing income are:
1. Property taxes
2. Repairs, maintenance
3. Vacancy: assume (20%) of the year on average
4. Management fees assume (10% - 12%) unless you're managing it yourself, in which case add to 10% vacancy percent.
5. Misc: legal fees, eviction fees, marketing fees.
The factors affecting the purchase:
1. Agent fees
2. Taxes on selling stock, or real estate loan payments if not paying cash
3. Opportunity cost (what else could you be investing in that exceeds a 6% net return)
4. Cash paid is not liquid (you can't sell the property if you need cash, unlike stocks you can sell at will)
5. Property value risk. Although it's true that historical returns are 4 - 4.5%, prices and interest rates are very high now. There's a reasonable chance home prices will fall.
On average, stocks (S&P 500 EFT like VOO) will make better (and truly passive) returns. Real estate is a hedge against inflation.
Stocks don’t call you in the middle of the night with a water leak
Totally agree with you.... peace of mind is worth A LOT for me, and I will forgo income to have it...
There are way more things to consider...1. make sure the numbers work as a regular long term rental 2. you'll need to furnish this house for $30,000 to $50,000...3. property managers charge 20 to 26% here in coastal Georgia, but they do everything...4.Legally you must be permitted and pay local hotel fees too. You are basically buying a small hotel with an outside staff and I'm pretty sure its taxed as ordinary income....Still want to try it, put 20% down and make sure it works before going all in....I think there are REITS with vacation rentals that could be better ... Thanks James, Great topic
The yearly income of the vacation home is a cause of concern for me. At $60,000 a year, the weekly rental would have to be $1,154 or over depending on if the 60k includes expenses at 100% occupancy
All well and good except it's a vacation home. It's almost definitely going to have stretches of vacancy. We'll be positive and give it a 75% occupancy rate. Now to generate 60k it would need $1,539/week. More if maintenance and expenses need to be included. Would they be able to get those kinds of rental rates for a house that's only 450,000? That value normally either gets you a good house or a good location but not both. I don't know the local, the house, or the market for the area but this scenario has me wondering
The key is the assumption of generating $60,000 annual income on a $450,000 home anywhere in the country. It’s impossible unless you buy 3-4 rundown homes in the “student ghetto” area and rent out to college students. But this insures more troubles than benefits for someone who doesn’t fix up things or capable of doing DIY., or young and physically strong. You also may do this in an ares where people cannot afford a home and rental needs higher. But, this is not a vacation home in a desirable community.
Short answer is NO.
This is outstanding.... simple, logical and very helpful
Very useful and very clearly presented, thank you
Great Video!
This was great and insightful. I think people in general think buying a home is automatically a good investment but it's often not when considering the maintenance costs and all other expenses. On a side note, James can you please make a video on your arm workout routine? Your biceps are ridiculous and are slaying the internet 💪💌
Thank you, James! That was clear and very well-presented!
At first, I thought buying a home is a good choice to sell the stock but the way you break it down, it makes sense to hold on to the stock instead. This way, he have less expense cost to deal with because of on the second home. This is why YOU are a financial advisor.
Great point about the personal vs financial...
As for the investment side, I always question vacation rental opportunities...
We live in an area of vacation rentals/homes...
The house to the south of us is a rental...
It's had 6 owners in the 18 years we've been here...
People keep buying it assuming it will make XX amount to cover the mortgage +... And that apparently rarely happens...
Now, the current owner has been the same for the last 4 years, so maybe they are doing better and/or just have a more realistic view (i.e. aren't requiring it to make XX amount)...
I think people are told by property management companies that it will be gushing cash!!!
The way I look at it tho, if it were making that much money easily, why would the owner be selling?
Great video considering all the unknowns in the case. A big factor that you didn't mention is the tax on the income from the rental vs stock/bond portfolio. Depreciation on the rental property could significantly reduce, if not eliminate, taxes on the real estate income. Income from the traditional stock/bond portfolio would be added to their SS and pension income, and may put them in a higher tax bracket. If they hold the property until they pass, they could pass on the property with a step up value without realizing the recapture of the depreciation, which may occur if they sell the property prior to death (the delay, delay, delay, die strategy!). Also, many studies have shown that although the long term return on stocks is around 10%, few investors actually come close to this due to poor market timing. Thanks!
I own rentals and stocks, and agree with what James said in that you get a benefit with real estate when you leverage correctly. I'm no longer leveraged but like to keep a fair chunk of my net worth in real estate just as a way to diverisfy. If stocks go down 30% I would not need to sell in a down market as I plan to be able to live in the rental income and scale back until the stocks are back up. For me, owning rentals is a way to diversify. That said, James is correct in that rentals are not as passive as the IRS would like to think, it takes a fair amount of time and labor unless you hire it all out (and if you hire it all out typically the return is very POOR).
My question is on the the long term gains not having a capital gains tax if your income is below the 12% tax bracket. That is what I was expecting to see when I sold a house recently (no capital gains tax as income was below the 12%). However I still ended up with a large tax liability. When I asked my CPA they replied "You are experiencing political talk and how they fool people by making them believe they are getting rid of tax. In your instance, the capital gains tax is 0% but it gets put on the bottom and the income that can be taxed is at the top. Meaning your standard deduction offsets the income that was taxed at 0 and made your other income taxable".
In other words, I was not taxed at the capital gains rate of 15%, but I was taxed as ordinary income. To say there is no tax liability if you avoid the capital gains tax feels misleading. I'm not referring to James as he stated talk to your CPA. Any further clarification on this would be helpful. It was the 2023 tax year and I have not submitted the tax forms yet.
Also, costs associated with acquiring and selling that property, as well as income taxes on rental income that all need to be considered.
Regularl depreciation of the property can offset income which may also be a tax benefit
Great podcast!
So, the rental could bring in a solid 13.3% cash return, beating historical stock market returns. But, when you consider expenses like property taxes and maintenance, it's more like 10.2%, which is still good.
The right piece of rental real estate is usually a better decision financially until you factor in time, stress and liquidity. It’s either a young man’s game or a very wealthy old man’s game who’s at the level of paying a manager to manage his managers.
Doing it right, with above average stock market returns, is more akin to a job than a passive investment.
Very good information. As we age, how much involvement do we or can we participate in. Personally, I’m finding out that at 51, I want as much passive income as possible and want to be free mentally as well as physically to enjoy the outdoors and my free time.
Also consider the property if it is a leasehold or freehold. As there is a risk on Leaseholds as the value today is decreasing as you get closer to the lease renewal, which may not be renewed. Therefor property is virtually worthless.
Aside from the liquidity issue, the overriding problem that I see is the lack of diversification with a vacation rental. The principles of diversification apply equally. What happens to income in the case of a disaster such as flood, fire, hurricane, or vandalism?
Insurance?
stick with residential properties, average size like 3 br, 2 ba, high rent areas and aim for 12% gross rent to value numbers. after expenses, you will NET 9-10% cash flow and 1-2% growth. good diversification for an equity portfolio.
i combine my real estate portfolio (all paid off) with high yield stock MO (9.5%), and ETF QYLD (11.6%). the rest is in S&P 500 index and a few individual growth stocks and FZDXX money market (yld 5%)
My total portfolio (over 1M) , incl RE, provides me over $7,000/mo NET cash flow, pure passive income.
good luck.
so, selling all stocks and after tax, Jim will not have enough to buy that property.
Another great presentation. I think your back of the envelope figures are way, way too low. I owned a house which cost $115,000 and the annual property taxes were $8000. I owned a house which cost $320,000 and the taxes were $12,000. Maybe I lived in high property tax states? The projected rental income of $60,000 per annum seems high. $5000 per month? Really. Sure there are high cost vacation destinations, but this seems out of the league for the questioner. Lastly, vacancy? Fully rented 52 weeks a year (or minus the owners's usage)? A primo property might be rented 52 weeks a year, but I'd run the numbers with 50% vacancy, at least for the first three years. Just my 2¢.
First, ask yourself "Do I want to be a landlord?"
The scenario's financial details are unrealistic.
Where can you purchase property for only $450k that generate rental income of $60k annually?
Typically, properties generating $60k annual income are well over $1mm
It depends if a bunch of homeless tents pop up around your proposed property in the future. Is the government going to put a cap on your rents? Also what are the laws regarding squatters and evictions.
Most likely he’s basing his revenue estimate on garbage data from sites like AirDNA. Ask me how I know.