Forward Planning: returning to the US

[Papoo]

I have a hypothetical question, for those more dialled-in with finance matters.

I'm currently flying overseas, and running the numbers for a possible scenario in a couple of years. Of course, I know a lot can change in two years, but I'd like to hear your opinions and ideas on what you would do in the our situation - so let's treat it as if it were happening right now.

There's a possibility of returning to an LAX based position with my employer in two years time. What I'd like to gauge is people's opinions on what they would do with their war chest when they arrived back.

We will have around $350,000 in cash. Also, my provident fund (B fund, if you like) will be liquidated, and I anticipate it being around $150,000-$180,000. So, all told, somewhere around $500k, maybe a shade more.

We have no debts, aside from our two credit cards which we use for our monthly expenditure.

This is EVERYTHING we have at our disposal. We'll likely get a bit of cash from selling our stuff here, but for the purposes of this discussion, let's ignore that.

My income will be about $135,000 for a year, then a jump to $165,000, and it'll creep up about 3k a year from there until I upgrade a few years down the line.

My retirement fund is going to be in cash when I arrive, as mentioned above. I will receive a further 15.5% company contribution into a 401(k) from when this position starts. Healthcare is covered.

We are a family of two. No kids. Wife may work, with good earning potential, but I'd rather have our obligations based on just my income. So, let's pretend she isn't working.

Scottsdale AZ is where we would likely reside. San Diego is close to both of our hearts, but I'm not sure it justifies the substantially higher cost of living in terms of accommodation and tax.

Moving costs will be zero, as we'll be showing up with suitcases and ship a few things back for minimal cost.

So, armed with the following information, what would you do?

I figure 10k to furnish a place (likely a decent two bed condo - 1200sqft - no idea if this is a viable figure), 20k to put down on two cars, and let's have a 10k buffer for incidentals. so, 40k set to one side.

$410,000 remaining.

The condos we are looking at are in the 350-450k range. Let's eyeball it at 400k, which is eerily close to what is left in our cash pile.

So, do we buy a place outright? That would obviously provide security, as all I need if it goes horribly wrong is a job as a Walmart door greeter to put food on the table.

Do we go with a large deposit, say 50% (200k) and invest in other property - say 2 places in the PHX metro area with 100k down, or 3 places with 65k down?

Do we spread ourselves out thinly - with minimal down-payments and try to acquire more with heavy leverage?

Invest elsewhere?

In terms of incomings, I mentioned my income in my first year at $135k. Loose maths and an assumed 30% tax rate would be about 7.8k net per month. In year two, the $165 figure loosely equates to 9.6k net per month.

I think it would be wise to have a few months living costs stashed away to start with, too. That amount would likely vary with whichever idea we went with.

By the time we'd purchased our main residence, and got our lives figured out, I'd likely be on the year two salary figure - so I'm happy to use 9.6k net as a yardstick of my take-home pay regarding affordability of rental homes/investments etc.

For other stuff, I've factored 1k a month to run two cars (finance payment, insurance, tax & fuel). Groceries and household bills (AC, water, cable, wifi, cell phones) another 1k. These are mentioned, so you have an idea of what I have to work with, and to scrutinize my figures if you think they're off. I mention them because I'd value your opinions - I'm coming from Hong Kong where the cost structure of our existence is very different. Some things cheaper, some far more expensive, so I'm really shooting in the dark and hoping for feedback.

So, the remaining cash (call it 7.5k) is what's usable to repay finance, invest further for the future, and discretionary spending. Let's ignore the future pay rises as I'd like to 'feel the benefit' of them.

We are in our mid 30's. So, we have some time on our side, but also of an age where our decisions need to be made with respect to our future; so, I open the floor to the financial-minded to share their opinions on what they would do.

Cheers all, I appreciate your help and ideas.

 

[zippy]

Obviously max out 401k/IRA/HSA where applicable.

If you're looking to buy property consider an FHA loan for your primary residence... low money down, mortgage interest and PMI is a tax deduction- which will help at that salary. Or go with a traditional 20% down... don't pay cash since that will kill your nest egg... That way you keep the cash to invest in either the market, or other real estate, and have adequate cash reserves to maintain that warm and fuzzy feeling.

Investment properties will require 25-30% down depending on the type of property and your finances/ other property holdings. If you're looking for immediate cash flow, target multi-family properties (2-4 unit) in the area you're looking. If you're actively involved in property managing you can get up to a separate $25k deduction for mortgage interest, repairs, depreciation etc.

The more money you put down the better chance of higher/ positive cash flow... my cash flow neutral properties I put 0% and 5% down respectively so rents cover the mortgage and I get the appreciation, equity and the write offs. my cash flow positive properties put 30% down so I get a decent cash flow with all the other benefits.

I'm more comfortable investing with real estate than I am stock market because I can leverage the banks money into a tangible, income producing asset for pennies on the dollar (0-30% out of my pocket, 70-100% bank money). Stock Market I fund 100% of the share price.

I'm in my mid 30s now and if I don't purchase anymore property, In today's dollars, I'll have a retirement income of about $70-80k/ year from the ones I currently own once they're paid off and they'll be worth $1.3-1.5m. Two are single family residences that I purchased to live in then rented out 1-3 years later (much less money down required if it's a primary residence) that are cash flow neutral and the other properties are 2 and 4 unit buildings that provide positive cash flow. I'll likely purchase another another property in the next 24 months after the vehicle I bought last year is paid off...

If wifey doesn't work, buy a single cheap vehicle to meet your transportation needs and pay cash so you don't have an auto loan counting against your debt to income ratio if you're looking to buy property... once you've started to establish your realestsre empire you can put money down on a second newer vehicle that will give you a monthly payment...

When it comes to the stock market, I found I suck at picking individual stocks... my stocks didn't lose but were greatly trailing the market rates of return... mutual funds are a good fire and forget option OR you could hookup with a financial advisor/ wealth management firm... I still max an IRA and my 401k yearly using low cost mutual funds.

 

[Roger Roger]

Boats n hoes.

 

[Papoo]

Zippy,

Thanks very much for taking the time to answer. It's plenty of food for thought at this stage. I need to learn the nuances and tax advantages/disadvantages over the next few months, to make better informed decisions.

Like you, I prefer property to stocks. I've had a little luck with stocks, but for the most part, I'm not confident of that continuing.

For me, cash flow neutral would be adequate. It's more a retirement scheme for 30 years down the track. Interesting that you pointed out a 25k deduction for active management on my part. That's something to look into, as if it knocks 8k off my tax bill and I'm not paying a management firm, that becomes substantial. It's something I could discuss with my wife, and she could perhaps take an active role with it. Perhaps learn the ropes while a management firm is used initially.

Max leverage is a nice idea for some, but to be honest, I'd be more comfortable with 20-30% down at this stage. If I return to the US with the figure stated, I'd like to use that to get 'set up', with a primary residence, and likely two investments for retirement. I think it's sufficient at this juncture. I'm not trying to be a Rockefeller, but to give myself a nice retirement boost with what I have. Once my feet are in the water, I can look to purchase further, at higher gearing with income savings.

Thanks for pointing out the car debt/income stuff. This is more great info, as I'm ignorant to US lending practices. Over here, they don't care too much about other outgoings, as the house is security. Credit scoring is much less of a factor. They lend primary residence mortgages based on repayments being 50% or less of your income. Secondary/investment homes they just want to see 30% down.

Anyhow, I thank you for your time. I'll be sure to come up with questions from time to time, if you'd be so kind. At this stage, I think a good entry point is perhaps along the lines of my second idea - 50% on my primary, and 30% down on another two to rent out. In my position, it's probably more viable to get financing that way. Once I'm in and comfortable, I can purchase further from my income.

Again, cheers.

Roger Roger - Copy that. If you lived in HK for 5 years, you'd probably have had your fill of both!

 

[rjmore]

With that kind of cash I would skip the small properties all together. Go with something that is at least 16 units depending on where it is. My second business is real estate and we work at the same shop. Shoot me a pm if you want to discuss further and we can meet up next time I'm in HKG.

 

[typhoonpilot]

If you're actively involved in property managing you can get up to a separate $25k deduction for mortgage interest, repairs, depreciation etc.

All pretty solid advice.

I quoted the above because once he is over $150,000 adjusted gross income (line 37 and 38 of the 1040) the deductions for investment properties go away. Something to keep in mind when deciding how to structure and treat the investment properties. I don't know the best answer for that, but would recommend consulting a tax professional.

Also mentioned the Provident B fund being liquidated. There is most certainly a tax consequence to that. Nobody knows the right answer for these foreign retirement savings plans, not even the IRS. There are a variety of options depending how that B fund was funded. Did you fund it with a percentage of your salary? That is the best case scenario because then all you would owe is tax on the capital gains. Did the company fund it? If so, did you declare that money as income in prior years? If yes to that question, then again you would only owe tax on the capital gain; if no then you owe tax on the entire distribution as ordinary income. Some, braver than I, have rolled similar plans into an IRA without paying tax on it. Again, consult a tax advisor but make sure to find one who is somewhat familiar with foreign retirement plans because the answers will vary widely.

Cars in the US have gone up drastically in price, at least from when I left in 2002. Many of those run of the mill SUVs you see running around that used to cost $25,000 are now $50,000 and up. $30,000 for a new car is doing pretty well nowadays. So two of those will take a huge bite out of your nest egg. I would shop for a good second hand car since you have cash. Let some other sucker take the depreciation hit of the new car. You can swoop in with cash to buy a good second hand car with no financing. If you're the kind of guy that keeps a car for more than 5 years then you would come out way ahead in the long run.

One thing I did not see mentioned was health insurance. Does your employer have a good program in the States for that? Since Obamacare went into effect insurance has doubled and even tripled in price and that's for policies with high deductibles as well. Look very closely at that in your budgeting.

Lastly, I would not put 50% down on your primary home. At your income level and for the price range you indicated you would be looking..........and with very low interest rates I would only put 20-30% down. If you think you can make better than 4% return on your remaining cash you are well ahead since you would be paying less than 4% interest on the loan (and getting a tax deduction on that as well).


Typhoonpilot

 

[BEEF SUPREME]

So if I got to be you... I'd take my time a bit. In whatever city/state you wind up, pick a super nice neighborhood or a spot that interests you and Air BnB it for a month. This way you can see traffic patterns. What is in the area. For me it is open space and trail access that makes a huge difference.

If I were to move to a new area I'd find that neat neighborhood that had great recreation access that was still relatively affordable and a reasonable commute to work. Once I found this spot. I'd either choose a single family home or a condo (if that works for you.)

Condo's are rough because of the HOA fees and issues. You could buy a place and find you can't rent it out later, for example because of the HOA. Anyway I chose to buy a single family home. Just don't buy one with a pool! Trust me. Now that I have owned it for a couple of years I moved and rented it out. I'm renting but working on my next property purchase. I'm guessing my home will be making up to 2K a month in about 3-5 years or less. I'm already up to 500$ or so cash flow but this is all being re-invested into the house or saved for a crisis fund for crap renters or whatever.

Anyway I'm saying find a cool spot. Buy in and wait. I have a feeling we will be seeing a massive real estate crisis in about 2 years. At least here in the SF Bay. At that point I would buy my second property.

I would NOT go full in right now. It is close to the top of the market, at least where I am familiar. Do not buy a bunch of properties and call it a day. If there is any trouble with your job, you are screwed.

Also look into 15 year loans. I was quoted rates at close to 2% recently. At these rates there is no reason to go in more than 20$ on the down payment. As you can find any reasonable investment vehicle to make a 2% return.

At some point in the future I'd like to get up to 3 properties all generating income. Ideally I'd like my first home to be the only one that was not purchased and fixed up when there wasn't an absolute economic melt down going on. In 2008 there were amazing deals on homes that would be making bank on rent right now. Also many contractors are desperate for work and don't have other work. So jobs can be done for less and finish quickly so guys can get paid.

DO NOT do the big remodel in anything other than a total housing crisis.


Sent from my iPad using Tapatalk

 

[Papoo]

rjmore,

Appreciate then extended arm - I'll be sure to reach out to you and buy you dinner and a few scoops in exchange for a barrage of questions.. Like I hinted at somewhat, I'm completely amateurish at this stage, so wouldn't know where to even begin looking at the multi unit porperties you mention. Keen to learn more about it. I'll be in touch, gratefully..

Typhoonpilot,

Thanks for chiming in. Appreciate your insight.

Regarding my p-fund, I'm comfortable with the tax implications, though I'm thankful you brought it up. I'm not currently a US Person, nor have I been since I began at my current shop. This simplifies things greatly, because, as you know, it's a mine field!!

Regarding healthcare, it's another MAJOR factor. Previously while in the US, my wife was an independent contractor, so we were funding an 80/20 PPO ourselves, so we're acutely aware of how substantially healthcare can impact our financial situation. And this was before Obamacare hit the shelves...


Regarding cars, you're quite right - we are 'used car people'. Back in a previous life, my sweet spot was 2.5 years old, so I'll look to make a decision as to age nearer the time in the states. I'd be after something akin to a rabbit as a runaround, and get something a little more substantial as the main donkey. However, this is all secondary in the plan. I'll tailor the car situation around our key investments.

Regarding downpayment - the consensus appears to be higher gearing for easily visible reasons.

BEEF,

Thanks too for your insight. I agree with everything you say. HOA fees are a killer in many ways. Perhaps less so on your primary residence, but you're slaughtering cash flow on a rental.

For a while, I've been wondering about the market, and the heat-level. PHX metro got a good bumming in the downturn, and seems to be rebounding strongly. I'm wondering if it's a bit inflated as it currently stands. My situation at this stage is hypothetical, and a couple of yards down the track, so I think it warrants close observation between now and then. In spite of my plans, I also appreciate that realistically, this will all take time to put into motion, which is more time for observation and analysis.

It's probably worth pointing out that I will possibly be building credit from scratch. My bank and account type will transfer my history to their US operations, but I'm not sure how that will equate to a FICO score. That factor may determine an increased downpayment, I don't know. I'll put some wheels in motion there, to gather information. On the other hand, my wife has good credit (high 700s), but also has Some student debt. There are pluses and minuses to buying jointly or just in my name, so professional advise will be sought to determine how to broach that subject.

Thanks all for your input. It's a massive help. I've got time to think about all suggestions and put research in.

If anyone makes it to HK, let me know, and I'll have a table booked.

 

[WAFlyBoy]

For a while, I've been wondering about the market, and the heat-level. PHX metro got a good bumming in the downturn, and seems to be rebounding strongly. I'm wondering if it's a bit inflated as it currently stands. My situation at this stage is hypothetical, and a couple of yards down the track, so I think it warrants close observation between now and then. In spite of my plans, I also appreciate that realistically, this will all take time to put into motion, which is more time for observation and analysis.

My thoughts exactly. The housing marketing has been heating up rapidly in certain areas. I can't speak for Phoenix, but where I'm at the asset price trend is somewhat reminiscent of 2006. Albeit with different drivers in the current environment. Anyhow, information on demographic trends in areas of interest might help you identify opportunities and risks.

It's probably worth pointing out that I will possibly be building credit from scratch. My bank and account type will transfer my history to their US operations, but I'm not sure how that will equate to a FICO score. That factor may determine an increased downpayment,

This is not a bad thing. Here's some food for thought regarding the use of a small (<20%) down payment: First, I don't believe PMI will be tax deductible at your income level - at least not entirely deductible, as the phase out begins at $100,000 AGI. Second, if you are married, the tax benefit of the mortgage interest deduction may be very small. Consider that the standard deduction is $12,600, approximately the amount of interest you'd pay in a year on a mortgage balance of $250,000.

Also, to me, the prospect of levering up on a home (to live in) seems rather risky when most of my income comes from flying airplanes.

 

[SpiraMirabilis]

Check the 6 month housing trend neighborhood by neighborhood. Theres plenty of value still to be had if you are a little bit flexible.

 

[drunkenbeagle]

So, do we buy a place outright? That would obviously provide security, as all I need if it goes horribly wrong is a job as a Walmart door greeter to put food on the table.

Do we go with a large deposit, say 50% (200k) and invest in other property - say 2 places in the PHX metro area with 100k down, or 3 places with 65k down?

US Tax Law doesn't really justify paying cash for a house. You get to deduct mortgage interest, and rates are cheap. Essentially free money right now. Put no more than 20% down on a house, and take the interest deduction of $15k/year or so. At your tax rate, that is like a $5,000 gift from uncle sam every year. Plus, you have the return on the $250k you don't have stuck in the house, which in the S&P500 is paying about 2.2% or $5,500/year.

Houses have a negative carry cost - you are paying maintenance taxes and insurance whether they return a dime in rent or not. An S&P 500 Index is going to send you cash every quarter for doing exactly nothing. Over time, stocks are going to beat returns on real estate substantially. Unless personal incomes start rising materially, there is no structural way that housing prices will outperform stocks in the medium to long term.