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Old 02-16-2009, 11:02 AM
 
Location: San Jose, CA
7,688 posts, read 29,078,818 times
Reputation: 3630

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I currently make about $40,000 a year, and with the high cost of living in California, I can currently only set aside about $2,000 in savings per year. My marginal tax rate is higher than it would normally be, because I have a significant amount of income from self-employment, but I still wound up only paying about 10 cents on the dollar last year, so I use a Roth IRA for now. Unfortunately, it has done nothing but lose money for the past year so I am rethinking my approach.

I have some $37,000 in debt, all at very low interest rates (<5%), and $6,000 cash reserves at any given time. My local real estate market is now in line with incomes, and homeownership is less expensive than renting. Should I be buying real estate within the next couple of years, or should I stick to my guns for now?

Second issue: if I do stick to my guns and slowly build up my retirement savings, then how do I make sure that whatever I invest into will last through the recession and emerge stronger? What should I be looking for?
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Old 02-16-2009, 11:06 AM
 
14,249 posts, read 17,866,292 times
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Long-term, I have never lost money on real estate and you will always need somewhere to live. Short term, I would stay in cash and then looik to buy real-estate in about 6-12 months time.
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Old 02-16-2009, 11:22 AM
 
28,455 posts, read 85,055,031 times
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IRAs lose money if they are invested in the broad market and the broad market declines. If you want to limit your exposures to sectors that are still not in favor there are ways to do this. ETFs are one way, as are 'old fashioned' sector funds. This administration is likely to "play favorites" as evidenced by the failed nomination of the guy that was suppose to shepherd in a new era of healthcare regulation after having made millions as their consultant...

I have done well investing in real estate, but in hindsight I probably could have done equally good in purely financial markets IF I devoted as much time to understanding the forces that move them.

To me, it has been easier to understand what drives real estate prices. The near term and mid range outlook for most investments is NOT GOOD, and cash is the thing to preserve. Even in your IRA or other retirement accounts it makes sense to evaluate returns /losses and decide if capital preservation is the best one can hope for until a less volatile environment takes root.

Last edited by chet everett; 02-16-2009 at 11:41 AM..
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Old 02-16-2009, 12:48 PM
 
22,768 posts, read 30,635,191 times
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I'm 25 as well, and I'm in a similar financial situation as you, facing similar questions. I'm not really in a position to offer advice, but I could probably use some just like you; so far I'm doing something like this:
15% goes to rent
25% goes to savings
less than half a percent goes to debt servicing
the remaining 60% or so goes to general consumption
plus my employer throws in a 4% fixed contribution into my 401(k), which is split 50% 401(k), and 50% Roth 401(k).

Of my 25% savings, I have about 2/3 in a tax-free municipal bond fund, and about 1/3 into U.S. stocks. I currently hold stock in two companies, ideally I'd have 5 or 6, diversified across different sectors and different countries. I generally look for companies with low debt and low price-to-book ratios. I don't trust earnings. I go around looking for companies I like, and then I wait for them to fall below a price threshold I like. I have a brokerage account where I can have it e-mail me when the price per share falls below whatever threshold I set. My future goals are: (a) More exposure to foreign currencies and markets, and (b) More dividend stocks.

Amazon.com: The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition): Benjamin Graham, Jason Zweig, Warren E. Buffett: Books
^ This is a good book on value investing that outlines many different ways an investor can get burned in the market. If you plan on self-directed investing, it teaches sound methodologies, not just gambling. Its strategies might not get you rich, but I think they could prevent you from losing a lot of money.


I'm looking at real estate, too. I am extremely careful; I'm shocked at how much bad advice is floating around out there, particularly from "professionals." In a market where asset prices are inflated by excessive amounts of borrowed money, renting can easily be a smarter short-term or mid-term strategy than buying. If you can find a property whose price doesn't seem to be inflated from the bubble, it stands to reason that you should go for it while interest rates are low. I can't find anything priced like this in my market, though.

Also, if I had more $$ to work with, and I felt confident in my abilities, I would probably invest in multi-family real estate. I hear it is an unbeatable tax shelter.

Last edited by le roi; 02-16-2009 at 01:28 PM..
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Old 02-16-2009, 12:53 PM
 
Location: Downtown Orlando, FL
573 posts, read 1,686,021 times
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I hate to rain on your investment parade, but if I were you, I'd try to edge that debt out before throwing extra money at investments. Just my two cents.
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Old 02-16-2009, 02:08 PM
 
Location: Houston, TX
17,029 posts, read 30,814,563 times
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You may want to work down that debt (student loans?), as it may be tough to qualify for a mortgage with that much. I'd keep adding to your Roth...it grows tax free.
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Old 02-16-2009, 02:48 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
34,632 posts, read 57,639,315 times
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I'd live as cheap as possible.
Keep ROTH funded (in cash holdings (VFIIX for me))
consider multi family for future RE investment (duplex, 4 plex)

If you find investment property that cash flows, and you have a good job, you may be able to get owner finance (with a good % down, or even bank finance if buying 'under market')

I have a different thought on home ownership now, tho have always owned my own since I was age 19. I feel you want minimal equity in your own home, and have $$ working for you on the investment front. (Preferably real estate). The equity $$ I have in my primary real estate COULD be providing me with INCOME if it was holding the right property. Instead it is costing me Taxes, Utilities, Insurance... i.e. a significant "OPPORTUNITY COST"

If I was 25 again...get $$ working for you

don't buy a farm, which I did at age 28... (too much work for positioning yourself for future)
instead ALWAYS be conscious of how to get your $$ working FOR you, so by age 40-50, you will be free to 'work at will'.

The ROTH is good, as you can remove your principle after 4 yrs if necessary, and sooner for housing / medical needs.

I wouldn't get hung up at all on personal residence ownership. When real estate is cheap and investment props 'cash flow', buy them. When they are positive flowing they can make your payments on a personal residence if you feel the need to have one. When they are paid off (20 yrs), they will replace your employment income.

Optional / complimentary strategy is to buy and sell primary residence every 2 yrs (tax free income). But you must buy 30% BELOW current market pricing, and get something that you can afford, and re-sell VERY EASILY. (never buy a tract home / or cookie cutter, or luxury home with this strategy)

Be patient, be wise. In the long term be diversified.... (30% in Real estate, 30% in equities, 20 % cash equivalents, 20% specialty investments (collectibles, precious metals, personal business)

I personally would not be in a hurry to pay off a fixed rate student loan. (if it doesn't shackle other opportunities)
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Old 02-16-2009, 03:27 PM
 
Location: Virginia
931 posts, read 3,794,370 times
Reputation: 447
Stay out of the stock market.

You need to focus on a savings account, where you have easy access to money. Some online banks offer rates around 2.50% APY
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Old 02-16-2009, 03:36 PM
 
Location: We_tside PNW (Columbia Gorge) / CO / SA TX / Thailand
34,632 posts, read 57,639,315 times
Reputation: 46069
my VFIIX did 7% last yr, I use it for my Cash investments (Gov RE loans... 100%...not Fannie or Freddie).

But that means I'm 'in the market'. Granted, there is some serious blood to be shed after the stimulus plan unveils (Nothing). This will make VFIIX go up again...

everything in moderation ESPECIALLY 2.5% taxable yields
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Old 02-16-2009, 04:10 PM
 
Location: San Jose, CA
7,688 posts, read 29,078,818 times
Reputation: 3630
Quote:
Originally Posted by janb View Post
I'd live as cheap as possible.
Keep ROTH funded (in cash holdings (VFIIX for me))
consider multi family for future RE investment (duplex, 4 plex)

If you find investment property that cash flows, and you have a good job, you may be able to get owner finance (with a good % down, or even bank finance if buying 'under market')

I have a different thought on home ownership now, tho have always owned my own since I was age 19. I feel you want minimal equity in your own home, and have $$ working for you on the investment front. (Preferably real estate). The equity $$ I have in my primary real estate COULD be providing me with INCOME if it was holding the right property. Instead it is costing me Taxes, Utilities, Insurance... i.e. a significant "OPPORTUNITY COST"

If I was 25 again...get $$ working for you

don't buy a farm, which I did at age 28... (too much work for positioning yourself for future)
instead ALWAYS be conscious of how to get your $$ working FOR you, so by age 40-50, you will be free to 'work at will'.

The ROTH is good, as you can remove your principle after 4 yrs if necessary, and sooner for housing / medical needs.

I wouldn't get hung up at all on personal residence ownership. When real estate is cheap and investment props 'cash flow', buy them. When they are positive flowing they can make your payments on a personal residence if you feel the need to have one. When they are paid off (20 yrs), they will replace your employment income.

Optional / complimentary strategy is to buy and sell primary residence every 2 yrs (tax free income). But you must buy 30% BELOW current market pricing, and get something that you can afford, and re-sell VERY EASILY. (never buy a tract home / or cookie cutter, or luxury home with this strategy)

Be patient, be wise. In the long term be diversified.... (30% in Real estate, 30% in equities, 20 % cash equivalents, 20% specialty investments (collectibles, precious metals, personal business)

I personally would not be in a hurry to pay off a fixed rate student loan. (if it doesn't shackle other opportunities)
Thanks for the perspective. One idea I have is to buy a duplex and rent half to my sister, who just had a baby. That way I get twice the property, but my sister is paying at least half of the mortgage note. I don't have any real interest in SFR's unless they're zoned for multi.

As for the debt, $17K is a car, so the debt will disappear on its own in 3 1/2 years. The rest was a piano and random expenses associated with moving, which I transferred onto a CC using a balance transfer for a fixed 4.99% interest rate. I think that inflation and increased wages will make it much less of a factor, if I don't go crazy and write myself into a corner trying to tackle it all at once.
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