Diversify Florida Real Estate Investments With Other Funds To Maximize Cash Flow
If you have some extra money, should you put it into an investment property, or think about investing in more traditional equities or stocks?
Like millions of other young couples, Tom and Nicole are planning for their financial future and wondering whether they should focus their investing on stocks or real estate.
The couple, whose names have been altered, according to the The Newark Star-Ledger, wants to use investment real estate as one way to build wealth for their retirement and for the children they may have. They own one piece of Florida real estate, which they use as an investment property. They have managed to save $16,400 in 401(k) plans, $7,000 in IRAs, $13,000 in mutual funds, $2,400 in bonds, and $50,000 in money market funds.
The question is what to do next, especially when it comes to real estate.
“Should we sell our current primary residence to purchase another or should we rent the current one and purchase another from our savings?” asks the 31-year old Tom. “Our goal, however, is to have properties as investments and, if possible, hold them for next 10 years or so.”
The Star-Ledger asked Steve Gallo of U.S. Financial Services in Fairfield to help the couple establish a plan to reach their goals.
“Based upon their income and expense items listed within their plan, they are expected to have significant cash flow surplus in 2006. The analysis indicates their cash flow surplus after retirement funding will be around $5,000 a month,” Gallo said.
That would be good news for any family, of course. Gallo advises that a couple that does not feel as if they much extra cash around should take a very close look at their expenses to make sure money isn’t flying out the window. Tom and Nicole describe their tolerance for risk as moderate, because they have a long time until retirement. But an examination of their holdings outside of real estate and an emergency fund shows a rather aggressive stance.
“They appear to favor real estate over securities as their principal investment, as illustrated by their goal of purchasing a new residence and making their current residence into a second rental property,” Gallo said.
While the choice is up to the individual, Gallo advises that long-term rates of return of various asset classes mitigate keeping your portfolio diversified, rather than relying predominantly on one “asset class.” Even if there’s one class that has recently performed well, like real estate. In this case, South Florida real estate. Assuming the couple’s cash flow surplus of $5,000 every month, Tom and Nicole could afford to take on an additional property, even if it does not provide a break-even cash flow.
For instance, let’s say they buy a home for $300,000, with a down payment of 20 percent (the funds for which are available from their savings), a fixed-rate, 30-year Florida home loan of $240,000 at 6.75 percent would have a payment of $1,556.64 per month. The couple would be able to support this additional expense, if necessary. As far as retirement goes, the estimates above were based on lifestyle expenses of $53,545 per year plus 3 percent inflation.
“The analysis shows capital increasing to $3.1 million by the time they retire. This will produce a return of $201,500 per year at the assumed rate of return of 6.5 percent. This is more than sufficient to cover anticipated expenses, even before the commencement of Social Security and required IRA income. This allows your asset base to continue to grow,” Gallo said.
That would put them in pretty good shape, but as far as their plans go, many circumstances, such as the potential of starting a family, will intervene to change. Rising Florida home loan rates will also make the cost of purchasing more than one property more expensive. In the end, it’s good to diversify assets as much as possible and to combine investment risks with capital preservation.
