Question: “I am 57, single, with two adult children and these revenue streams: 1) rental income in a stable, pricey market, 2) a consulting business, and 3) a salary as a professor at a public university. I have a primary home worth about $1,500,000 with a 2.87% fixed mortgage that I owe $459,000 on — and a condo worth about $400,000 with a 7.4% fixed rate, which I owe $169,000 on. Between IRAs, an HSA that I use as an investment account and two 403 accounts, I have $462,000 in tax-deferred accounts. I have another $410,000 in taxable accounts, most of which is managed by a financial adviser. I have no other debts.
I have a roughly $375,000 payment coming to me by the end of the year; I’ll be able to keep about $248,000 of that. My financial adviser suggests putting much of this money into a mix of ETFs, mutual funds and money market accounts. I asked about the idea of paying off the condo loan of $169,000, and he said to keep that loan. I am not 100% convinced of this strategy. I am also toying with purchasing another rental unit at about $400,000 — which is outside the country and would require a full cash payment. I could tap a previously untouched HELOC that has a $140,000 reserve at 9.5% for this. What’s the right move?”
Answer: This is a situation where you’ll want to sit down with a trusted financial adviser and walk through the scenario, pros say. And your current adviser may not be the right fit, as you don’t seem to fully trust their advice. (You can use this free tool from our partner SmartAsset to match you with vetted financial advisers, as well as sites like CFP Board and NAPFA.)
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Broadly, the decision of how to allocate your $248,000 should align with your long-term goals, risk tolerance and liquidity needs. “There are a lot of moving parts with the information you’ve provided, so I would weigh the pros and cons of each strategy before coming up with your decision. If you pay off the condo loan, your guaranteed return is equivalent to the interest rate, which reduces debt obligations and improves cash flow. On the flip side, it ties up your liquidity in real estate, limiting flexibility,” says certified financial planner Joey Casolaro at Highland Financial Advisors.
Generally speaking, certified financial planner Rebecca Palmer at Fruitful says you’re in a great spot with lots of options, which is both awesome and overwhelming. “Instead of jumping straight to a decision, take a step back and think about your financial choices in order of priority which will bring a lot of clarity as you decide how to allocate the incoming money,” says Palmer.
Here’s more detail on each element:
Paying off the condo: The mortgage at 7.4% is pretty high. “To justify keeping that debt, you’d need to achieve a consistently higher rate of return over time, which introduces more risk … If your goal is to maximize long-term growth and you’re comfortable with market risk, investing a portion of the $248,000 windfall in a diversified portfolio could potentially generate higher returns over time,” says certified financial planner Ryan Haiss at Flynn Zito Capital Management. “By comparison, the 2.87% fixed rate on your primary home is much more manageable and not worth rushing to pay off,” Haiss says.
While it’s not unrealistic that you can earn better than 7.4% in the market with a well-diversified portfolio, there’s no guarantee you’ll outperform that rate. That said, “if you pay off the condo, you will still see any future market appreciation in the property. Plus the increased cash flow from the rent without a mortgage liability will mean more discretionary income, which you can still redirect back into the market if you’d like by dollar cost averaging each month,” says Joe Favorito, certified financial planner at Landmark Wealth Management.
Another thing to consider: “The high interest on the condo right now is attractive to pay off, but if there are other needs like [additional] properties, you may have other uses for this cash. It’s important to understand what your goals are [as well as] the risks of foreign properties and the market,” says certified financial planner Andrew Feldman at AJ Feldman Financial.
Investing the funds in ETFs, mutual funds and money market accounts: For his part, certified financial planner Bill Nugent at Convey Wealth says he likes the idea of investing those funds into the ETF lineup. “These are liquid investments allowing you to pull those funds out and change course any time. Your low mortgage rate means that investing in a treasury money market fund like SNOXX would give you more interest than you’re paying out currently,” says Nugent.
Buying a condo abroad: The rental abroad is great in the abstract but the reality may not be as rosy, says Nugent. “Rentals are a lot of work and when you add the complexities of foreign currency, language barriers and tax compliance, it’s too much work,” says Nugent.
Perhaps you’d benefit from working with a mortgage broker to run some numbers on down payments and qualifications for a rental property in the United States. “A domestic rental can provide better numbers when you factor in the depreciation and other deductions and you’ll avoid the language and other cross-border issues,” says Nugent. Consider, too, that a move like this might overexpose you to real estate and adding another property to your portfolio may not give you the diversification you need.
If you invest in the market, you have the potential for higher long-term growth, diversification and liquidity but you’re not immune to market volatility, there won’t be a guaranteed return and there are potential tax implications. “Purchasing another rental property abroad allows for the potential of additional passive income and real estate appreciation but involves currency risk, foreign tax and legal complexities and a lack of diversification if too much capital is tied up in real estate. Ultimately, the right move depends on your risk tolerance and priorities,” says Casolaro.
Other considerations: There are some other considerations that should be addressed. “Do you have a retirement plan set up for your self-employment income? If not, you may be missing the opportunity to put away some really significant dollars pre-tax. A solo 401(k) or defined benefit plan could be a game changer for you as a solo would allow you to put away as much as $77,500 pre-tax and the defined benefit even more,” says certified financial planner Jim Hemphill at TGS Financial Advisors.
Where to find an adviser – and what kind of look for: To begin your search for an adviser, consider asking friends, family or colleagues for trusted recommendations and use the National Association of Personal Financial Advisors (NAPFA) or the CFP Board’s Let’s Make a Plan site to find fee-only CFPs in your area. You can also use this free tool from our partner SmartAsset to match you with vetted financial advisers
Working with a CFP ensures that the professional has completed rigorous education requirements, passed exams, performed thousands of hours of work-related experience and adheres to a fiduciary duty, meaning they’re required to put your best interests ahead of their own. Additionally, fee-only advisers are only paid by the client for service and don’t earn commissions for the sale or recommendation of a financial product.
Bottom line: At the end of the day, it’s all about what matters most to you. “Keep it simple. The goal isn’t to create the most complicated plan or chase maximum wealth at the expense of your everyday life, your sanity, or your personal goals, it’s to build a plan that actually works for you and gets you closer to what you want,” says Palmer.
