I am contemplating the unthinkable. I am thinking about selling the stocks in my dividend portfolio to buy a condo. What’s more, is that I might just be crazy enough to do it.
I’m keeping all options on the table. These include: waiting longer to save for a down payment, liquidate my dividend portfolio, or buy less of a condo. This is an important decision, so let’s explore.
The Problem
If you’ve paid any attention to any of my recent posts, you’d realize that I want to buy a house. In case you missed it, here are two of my recent posts on the subject:
a. Should I Buy A Vacation Rental?
b. Panama City Beach Vacation Rental
So, I want to buy a beach condo as a vacation rental in Florida. To do this, I’m even contemplating starting a business.
A few weeks ago, I saw a condo that was near perfect. It had great views and the asking price was $420,000. The maximum that I am willing to spend on this adventure is $400,000. I also qualify for that amount with the bank.
For purposes of this post, I will assume that I will purchase a condo for $400,000.
Because this would be an investment property, I would be required to put down 20%. At a $400,000 purchase price, I would need to come up with $80,000 down payment.
Funding The Down Payment
Unfortunately, I don’t have $80,000 lying around. By the time I’m ready to buy the condo, I will have $40,000 in cash. But that still leaves me trying to find another $40,000.
One possibility that I quickly rejected was to tap into my retirement accounts to fund the down payment. Specifically, I have an old 401k that I hadn’t rolled over yet to my IRA (just lazy). This is an account I keep forgetting about and I don’t even factor it into my retirement plan. But withdrawing funds would subject me to taxes and penalties and that’s not a good thing.
I was even considering withdrawing funds from my Roth IRA, but I figure I would leave that in place for now. I have no plans to tap into my Roth 401k account. So, that leaves my dividend portfolio which is outside my retirement accounts.
Alternate Solutions
The obvious thing to do is simply wait longer before I purchase a condo. If I know that I’m short $40,000, then why not spend the next year or two trying to save that amount of money? Indeed, as one of my close friends asked, “what’s the rush?”
Truth be told, there really is no rush, so to speak. But there is a plan. That is, my goal of retiring in about 15 years. As I work towards that goal, it’s important to figure out what my life is going to be like then. Presumably, I won’t have an income coming in, because I would no longer be working. Again, I think in terms of worst case scenarios. So, in 15 years, I want to be financially independent without the need to rely on my investment accounts, social security and the like. Those are all plan-A.
My plan-B is to rely on rental income from real estate. So, my goal is to buy income-producing properties and have them paid off (or mostly paid off) in 15 years. That way, the properties are going to be free and clear and I just live off the rental income that comes in.
So, the sooner I start buying properties, the sooner I can start to pay them off early. It is, for this reason, I decided to pay off my mortgage early on my current house. Therefore, I’m choosing not to wait longer.
What About Dividend Portfolio?
I love blogging, and I will continue to blog. I plan to maintain at least one share in each of the stocks in my portfolio. And, if this model works, then the purpose of building my dividend stocks might very well be to use the money as a cash outlay for future real estate purchases in the future.
I realize, given my age, that I don’t have a lot of time to build a huge dividend portfolio where I can solely live off the dividends. To that extent, the dividends were always meant to supplement my income at retirement.
Because I like blogging, there is the possibility that if I do indeed start a real estate investment business, I might start blogging as part of the business. So that would either be in addition to dividend portfolio or instead of it (doubtful). Or, perhaps even more likely is that I will keep blogging about dividends, and ignore blogging about my business. It’s all under considerations right now.
Regardless, I don’t think Dividend Portfolio is going anywhere anytime soon – even if I liquidate 98% or so of my portfolio.
When Will This Happen?
The soonest this will happen is in August of 2019. I still have to come up with $40,000 cash, and that hasn’t happened yet. Another thought is that I might just save up a lot of money over the course of the next year and purchase a condo sometime in August of 2020.
$80,000 is a lot of money and I want to ensure that my investment is a good one, no matter when I mkae the purchase.
I’ll make one final point. I keep hearing that the real estate market is high and may likely drop within two years. Honestly, I have no idea what the market is going to do and I suspect no one else knows for sure. The good news is that I intend on investing for the long haul and will try to ensure that I can weather the storm of a down market.
What About Closing Costs?
That’s a great question. According to a local realtor I spoke to, closing costs in my market can run about 4% of the purchase price. So, that’s an additional $16,000 I would have to come up with. So, my plan is to roll the closing costs into the mortgage. If that doesn’t work, then I would potentially spend the year saving up for the closing costs.
Why $400,000?
I’m only using $400,000 as the maximum. Clearly, if I get a condo for $200,000 then I won’t need as much for the down payment, and the numbers would work greatly in my favor. While I could qualify for more money, $400,000 is the maximum I’m willing to spend at this time.
What About Cash For Repairs or Emergency?
This is a fair point! After all, if I use all my cash in my bank account and all my cash in my taxable stock account to purchase a condo, then how am I going to deal with repairs, vacancies, or an emergency if it arises.
Here is my thought process. I still have a stable job. So, as soon as I buy the condo, I would immediately begin to replenish my emergency fund and house fund.
Also, if I’m super unlucky and experience these expenses the day after I purchase the property, then I also still have my credit cards that I can use. It would take some time to repay the cards, but I believe that I would eventually come out ahead.
In addition, I currently live my lifestyle by maxing out my Roth 401k and Roth IRA accounts by contributing a set amount on a monthly basis. I could simply put those on pause thereby increasing the discretionary amount of income I have coming in.
There are friends and family that I hope won’t abandon me and if all else fails, I guess there’s always bankruptcy! Wow, all this for one condo? Yup.
Conclusion
I have a very big decision to make in the next couple of months. That is, do I liquidate my dividend portfolio to fund the down payment to buy a condo?
While I fantasize about the idea of having my own beach condo (thanks HGTV), this decision is strictly for investment purposes. However, it’s also investing in a strategy that I have no experience in, using a lot of money to start.
Eager to hear your thoughts on this one. Let me know by commenting below.
Its a simple alternative income comparison 🙂 How much you are getting dividends and how much you will get on the rent calculating 1/10. There is a leverage 1/5 ofcourse, but it comes with a risk so I would calculate on how much that 40$ earns on dividends and how much on the rental. Rental should be something around 2x higher as it takes much more risk and is much less pasive income then dividends.
That’s part of why I was even considering using retirement funds initially – the thought being that I could make more in real estate. I’m teamed up with an investor-friendly realtor and any property I buy, I will be able to see the track record of the rents, so It’ll be easy to make that comparison.
Yes but how much you estimate to earn from RE. As I made quick calculation your dividend yield is 3,3% or something ~1.3k$. So do you estimate to ear 13k$ from your rental at least? 20k$ would ok i suppose.
Another comparison is net income. If you invest 80k$ you will get 2,6k$. How much you will get from your rental post tax and post mortgage payments.
That all in stuff is a bit on the edge, but will the rental make you happy. If it does, just go for it 🙂
P2035 recently posted…Y2019 Net worth update
great points p2035. After all, if the math works out better for RE, then it makes sense to invest in RE, otherwise, then what’s the point? I will definitely do a comparison once I find a property I’m interested in. I will ensure I include the cash on cash return, thus comparing apples to apples.
Hmmm that’s quite the decision you are contemplating. For myself I would always try to diversify my assets all the time to weather any storm. So my money is spread out over savings, mortgage repayments, shares, dividend stocks, crypto’s and maybe some P2P in the future. I would never pool all my resources into one asset. But then again I am quite risk averse so that works for me. I would save more and buy a year later without touching your portfolio.
Good luck on your calculations and decision!
Thanks Mr. Robot. I think diversification is important for long term investing. So, although I’m going to be purchasing a condo as a short term rental, I still have a house as a long term rental and I’m still invested in stocks and bonds in my retirement accounts (for now). Good point.
First, I’d avoid tapping into any retirement accounts. What’s the argument over using money from your retirement acct over your dividend account (self directed)? Other than your self directed acct is your “dividend baby”…there is none.
I love the model of using stock investments to fund real estate investments. It’s my opinion that if done right, real estate will build your wealth significantly faster than stock market investing.
With that said, I’m not actively looking at real estate right now… simply because I can’t find any deals. The deals that do exist, I do not have the capacity to find quicker than the hawks. It’s too competitive. I assume you’ve ran some numbers and expect to be cashflow positive after factoring mortgage, taxes, insurance, maintenance, vacancy, property management, etc.. Hopefully you also looked at condo association dues, those are usually a cashflow killer. The association can also hit you with assessments out of the blue….in case they feel like putting in a new pool or shuffle board court for the seniors.
If you’ve made it this far and are still committed…you might consider buying and moving into the condo for a year. That way you can finance for 3 to 5 percent down and then turn it into a rental after a year.
Feel free to contact me if you want to discuss more. I love real estate.
Passive Cash recently posted…Goals – 2019
interesting points PC. I agree that real estate can grow my investments faster than stocks, which is why I’m considering diverting some of my funds over to real estate. I haven’t run the numbers yet to see if the condo I purchase will cover ALL the expected costs. It’s very possible that I just can’t make the numbers work, in which case I’ll just walk away. I suspect it’s going to be much harder than I think to find a good deal that works, but that’s no reason not to try.
I’ve definitely considered the myriad of costs associated with getting a condo including a surprise assessment. One realtor recounted a story of one of his clients who had a $45000 assessment placed on him soon after he purchased the condo. That was not a fun day.
Absolutely, definitely keep looking. I live in FL by the way. I got burned out looking for deals. Even tried a direct marketing campaign to get a fixer upper for cheap. I’m looking forward to the day when the real estate market cools off so I can jump in. For now my rental is working well for me while I focus on dividend stocks.
A lot of real estate investors won’t touch anything with a condo or homeowners association. They’re unpredictable and steal your cashflow!
Passive Cash recently posted…May 2019 Stock Purchases
Ya, I’m slightly concerned about the HOA fees, but I will definitely factor that in before I decide to purchase anything.
I think there’s a bigger question here about your long-term preferred investment vehicle. If it’s property, then go for it, as soon as you can, and make it work. If its shares (which it is for me), then forget about it. I know most people are focused on getting to a $ amount whichever way they can, but I’m a big believer in sticking to what you know / are most comfortable with / are good at.
I personally prefer the simplicity of stocks, and would never invest in property, but I have plenty of friends who are the complete opposite! (Property Pete being one of them!).
Good luck either way you decide.
Cheers, Frankie
Frankie @ Fully Franked Finance recently posted…Fund Update May 2019 – Fighting to keep aFloat
Thanks Frankie. Quite frankly, irrespective of my preferred investment vehicle, I do think it’s important to have diversity in sources of income. So, for me, that means stocks AND real estate. I still have to make sure that the property I’m buying works mathematically. Still, I see what you’re saying. I think, realistically, my ‘preferred’ investment vehicle is indeed real estate. When I run retirement scenarios, it’s easier for me to contemplate living off rental income than it would be dividend stocks. Specifically, because of leverage, I can own an adequate amount of rental properties producing rental income faster than I can invest a large enough money in dividend stocks to solely fund my retirement.
So, for example, I can really see myself buying a third and fourth property within the next 3-4 years after I buy a condo this year and pay them all off in about 15-20 years from now. So, at retirement, I would have at least 4 properties paid for, free and clear, bringing in rental income sufficient enough for me to live on. While I’m not sure I’m just going to have dead equity in my properties, I do think that real estate can be lucrative enough to retire off of.
Stocks are lucrative as well, but I would have to save (and earn through sufficient ROI) substantial more to be able to completely live off my stock portfolio. Still, as of right now, I’m maintaining my traditional retirement accounts that are invested in index funds, but I’m also actively considering establishing a self directed IRA to buy more real estate. Oh, the possibilities! I just don’t want to be penny wise and pound foolish.
I started dying laughing when I read “quite frankly”.
Well said by both, good points. If you don’t have passion for an investment vehicle, you shouldn’t be investing in it (self directed anyway). Sounds like Glen is really interested in RE and ready to dive in, I like the plan. Financing 3 to 4 properties might be tough, pesky debt to income ratio.
Passive Cash recently posted…May 2019 Stock Purchases
Hey PC. The thing I’ve noticed is that if the property is cash flowing, then the debt-to-income is going to be a net positive. While banks put a limit on how many properties they are willing to finance to a single person, I shouldn’t have a problem getting financing for the 4 properties, if they each are cash flowing.
Unfortunately it has to cash flow quite a bit. If I remember correctly, I think the banks look for around 0.4 debt to income. So if your mortgage (principal, interest, taxes, insurance) is $1k, you’d have to get $2500 a month in rent. That kind of cashflow is tough to get without a substantial down payment. So you can see why you’ll generally have to count on other income or a co-signer.
Passive Cash recently posted…May 2019 Stock Purchases
Fair point PC. Qualifying for the mortgage is not the problem, but whether the property cash flows might be. I have no intention of buying a property that doesn’t cash flow no matter how much I like the views or how much the bank wants to loan me. So, I will definitely be looking at only those properties that cash flows. That being said, because it’s very tough to even find a property that cash flows, I might accept starting off with a lower cash flowing property given the fact that I’m investing for the long-term and eventually the property will be paid for (and therefore generate sufficient cash flow to help fund my retirement). I hope that makes sense. I don’t disagree with you, just expanding on where I am on the cash flow issue.
Interesting post. I know the feeling as I just purchased a condo in May. Although my situation is a little different as I plan to live in it for the time being. However, if I end up upgrading to a larger house down the road, i plan to hold it and rent it out for some extra income. That is why I have been so quiet in the market this year and haven’t been able to make any buys. I have been saving every dollar I had for the down payment and such. Hope it works out for you.
Dividend Daze recently posted…Dividend Update – May 2019
Thanks Daze. That’s my plan going forward actually. After I buy this condo, the next real estate I buy (possibly as early as next year) will be in a place that I reside in as my primary residence. And, when I leave that building, I’ll rent it out as well. I’ll also have roommates to help me with the mortgage. It’s going to be interesting times and I also hope it works out. Nice to hear from you as always.
Hi Glen,
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Hey Henry,
It’s an intriguing prospect, but respectfully, I’m going to pass on it right now, as I have a lot of other things going on in my life at the moment. Perhaps a future time may be in the works but not right now. Welcome to the site and I hope you continue to read and contribute.
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We bought a condo last year. No regrets!
I’m hoping to have the exact same feeling next year Wolfe. Thanks and congrats to you as well.
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