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jonacpa
jonacpa, Certified Public Accountant (CPA)
Category: Finance
Satisfied Customers: 3118
Experience:  Helpful answers to economic and financial questions.
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financial security

Customer Question

I am 51, will gain about $200,000 in equity when I sell my condo this spring. I have a small Ira worth about $47,000 at maturity. I will have a small pension if I buy out some old retirement, but not much... probably less then $10,000. I have about $7,000 in the bank and I am currently unemployed. My life is in transition and I’m not sure what my employment options are. I suspect my earning potential at this point is only about $40,000 or so, at least for now. Should I invest the majority of my equity in a new house. I don’t think I will be able to get much of, if any, mortgage until I get a job. I would hate to throw out money on rent. What shoud I do?

Submitted: 11 years ago.
Category: Finance
Expert:  jonacpa replied 11 years ago.

While it is generally a good idea to not "throw out money on rent", many times that one is in a transitional stage, it is the best idea.


For someone in your particular situation, it would be difficult to recommend putting a significant amount of your personal net worth into an illiquid asset such as a house.


I would recommend that you keep that money in relatively liquid assets until such time as you have a clearer picture of your future including location, employment, and other related issues.


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Customer: replied 11 years ago.
Reply to jonacpa's Post: Thank you very much for responding so quickly.
I can't accept your answer because it is too general. Perhaps it is my fault for giving too little information. I was trying not to be long winded.

First of all, I have been a licensed Realtor for 13 years so I am familiar with the real estate market and issues. As a savvy buyer, I was looking to buy in an area with increasing property values resulting from a healthy job market and a sound school system. I have also considered buying income porperty.

I am not familiar with most other financial options and I am not a good number cruncher - so my thinking is the following.....

By putting all or most of my money in real estate with a strong potential for dramatic price increases (and perhaps income producing as well), I would be assuring a roof over my head while engaging in a relatively safe investment. The growth potential could be as much as 18% annually in some communities here in Massachusetts. That is probably ambitious for the areas where I am looking, but even at 8% I would not know how to beat it on the stock or bond market. So coupling that with the money I would lose paying rent during a transitionary period, I think could actually end up spending down my savings as opposed to building equity. Of course, there are risks involved. I would like advice relative to the type of investment I could make if I were not buying immediately and how that would compare to a very healthy housing market. Also any number crunching techniques for analyzing buying versus renting and other related considerations.
Expert:  jonacpa replied 11 years ago.

Thank you for providing additional information. I understand and appreciate your insight into the real estate market due to your experience. 


My personal opinion is still that not all of your net worth should be tied up in your residence, particularly from a liquidity standpoint. While a particular market or area may be "hot" at any given time or for a long period of time, there is still a longer and more involved process in getting your money out of it than in other investments.


A good money manager should be able to produce a low/moderate risk return of 8-12% by using an asset allocation portfolio that is suited to your investment horizon. The recommendation of a specific asset allocation model or specific investments is not something that should be done in a forum such as this, just as you cannot recommend a particular piece of real estate for me to buy. Nor would I recommend that you, on your own, select a particular mutual fund and put all of your money in that. That conversation should occur between you and someone that you either have some knowledge of and trust in or can get that knowledge and trust with.


Here is a link to a "number cruncher"  http://www.dinkytown.net/java/MortgageRentvsBuy.html that will help you factor in the investment return on the money not used in the acquisition.


Let me know if I can be of further assistance.


[email protected]
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Customer: replied 11 years ago.
Reply to jonacpa's Post: Thank you. I will pursue your lead tomorrow and do the crunching.