Q. I am 62 and retired. My husband is 57 and still working. Not counting our house and a rental house (both paid off), we have a little over $1.5 million, mostly in stocks and bonds. We have $225,000 in cash, earning around 2 percent or less. We have an opportunity to buy a duplex for $125,000. Rents in the area are currently running around $850 a month per unit.
Would it make sense to buy this? We would want to pay cash, since we don't like owing money. Would this be smart? —C.P., by email
A. The answer depends on two things. The first is the condition of the property, its location, the odds that you will be able to find good tenants who will accept leases of a year or more, and the out of pocket expenses for the property such as insurance, taxes, and general maintenance. With a gross income equal to about 16 percent of the cash purchase price, you can afford significant operating expenses before your investment return drops below attractive levels.
The second is entirely personal. For you it is familiar, since you already own rental property. Owning small rental properties is not like owning a stock, bond or CD. It will be necessary to manage it personally. Odds are you’ll also have to do some of the maintenance personally. Some people like this because it is direct and hands-on. Others don’t. Some people simply aren’t handy. Some don’t have the stomach to evict a tenant who can’t, or won’t, pay rent. This is not an investment to make merely because CD yields are unattractive.
If you are thinking of this as a pre and early retirement vocation that you would like and are prepared to accept the limitations ownership will put on your travel, etc. you’re probably a “go” for this. But if you are starting to think about long visits to distant beaches, this probably isn’t for you.
One major advantage you have over other investors in small real estate is that you have substantial financial assets, so you won’t be done in by the inevitable monster tenant. Most investors in small real estate properties don’t have the cash resources to deal with rent losses or significant property damage.
Q. I have never been in the income bracket that would require financial advice— until lately. Some years ago, my grandfather passed away. He left his farm and a substantial amount of Exxon stock to my two sisters and me. Over the last 5 years, I have bought my two sisters out of the farm. I borrowed money ($250,000) to purchase their share of the farm. I want to leave the farm to my two boys. It has been in the family since the 1940s.
I always assumed that if I needed to, I could sell my Exxon stock to pay off the note. Recently, my business has been struggling. We have had to withdraw money from our savings several times to make the payments. Our accountant reminded me that even though the Exxon stock was inherited, I would still have to pay taxes on it should I decide to sell it. If I sell my 3,700 shares of stock at around $78 share, the $288,600 would more than pay off the note— but would not cover the tax bill. Is there any type of investment vehicle to alleviate the tax burden on the stock sell? —D.H., by email
A. There is no such tax avoidance vehicle that I know of, or trust. Your tax situation, however, may not be as bad as you anticipate. Any gains will be taxed at capital gains rates— only 15 percent. This is not a tax rate anyone should jump through hoops to avoid. In addition, the cost basis for these shares was reset at the date of death of your grandfather, so your unrealized capital gains would only be the amount the shares have appreciated since you inherited them.
Going back to 2001 it is unlikely that the shares have more than doubled in value from their estate value. So the current value would pay the debt and any tax obligation. You can check the price history of XOM shares on Yahoo, among other places.