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Ask Money

Sell property to invest in stocks?

Chris Farrell Feb 19, 2009

Question: We are both 44 years old. Single income, Clay is in the military, we will probably be living overseas for another 7 years (until 2016) before starting our next life. We’ve been thinking about selling properties to free up money to invest in the stock market now that it is low. We own a modest fixer upper in a great location (near Whitman College and downtown) in Walla Walla WA and a piece of land at the Oregon Coast. We have no kids and will continue to work after leaving the military until financially independent. We are not tied to living in Walla Walla, but bought the house with the idea of giving it a try when we return. We have no debts other than the one mortgage, and put 12% of base pay into TSP. If we return to Walla Walla in 6 years, we need a minimum of 50K to update the home. Here’s how it breaks down: Walla Walla house: 190K remaining to pay, worth around 240K Mortgage is 30 yr. fixed at 6.5 with total monthly payment of around 1600 Rent income after management fee and costs around 800 per month 2 acres of land at the coast was purchase for 102K in 2006 (cash), it may be worth 150k today. Taxes are 1200/yr. Take home income today is about 50K (not counting housing allowance). Will retire at around 26 years of service. Sell and invest the cash in stocks, (willing to hold long term-15 years)? Or hold onto the house and land? Or some other combination? Clay and Lori, Beijing

Answer: You’re in a good financial position. My main reaction is more along the lines of a question or series of questions. First, do you want to have so much of your wealth tied up in real estate far from where you live? What could go wrong, and what is your downside risk? Second, what kind of return do you think you can get from the land if you do hold on to it? The home in Walla Walla is an income producing rental property for now, and you’re earning a decent cash flow from it. But the land is probably costing you money every year. That doesn’t mean it isn’t worth it, but what is a realistic expectation on a rate of return over time.

The reason I wonder about the land is that, like you, I’m intrigued by the stock market and whether it offers a better money making opportunity. These are unnerving times, with talk of a recession replaced by growing fears of a Depression. A first glance at market history during deeply unsettled times isn’t pretty-you see numbers like the Dow’s 89% plunge from its 1929 high to its 1932 low, followed by its partial recovery and subsequent 52% tumble from 1937 to 1942. But keep looking, though, and you can find lessons more valuable than the fact that the Dow’s volatility is nothing new. There is a discernable rhythm over the long history of the markets, and it offers glimmers of hope to harried investors. Specifically, the despair and low prices that mark financial catastrophes set the stage for higher prices and loftier returns later on. “Markets tend to overshoot in both directions,” the late financier Leon Levy wrote in his memoir, The Mind of Wall Street. “Just as we saw stock prices rise far above the value of the companies, we are likely to see the reverse. Stocks will then be undervalued, and there will be new opportunities for investors.”

Here’s the rub: The timing of the recovery is uncertain. Timing aside, stock market data support the notion that it’s smart to own riskier assets after a long stretch of poor performance, and the S&P 500 has had an average annual return of 0.9% over the past decade.

So, my main recommendation is to think through the downside, and then take a close look at the land. But no matter what you two are in a good financial situation.

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