Ask Bankrate: Questions about losing money in IRAs, the future of the housing market and more

Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.

Questions:

  • Entering retirement. Should I go all in on cash or bonds?
  • My IRAs are losing money. Should I still make contributions?
  • How will COVID-19 affect the housing market?
  • What should I do with a $125K windfall?
  • Is buying a business a good way to grow my money?
  • Retiring soon. Does it make sense to buy a vacation home?

Q1: Entering retirement. Should I go all in on cash or bonds?

I’m just entering retirement, and I’m tempted to go to all cash or all bonds to be safe. I’m still down about 10 percent from the hiccup in March. Is this a smart move?

— John U.

Answered by Stephen Kates, CFP: “As scary as the recent drop in the market has been, taking your assets completely to cash will leave you in the difficult position of (1) having little to no growth on your assets until you reinvest and (2) trying to time when to return to the market. I suggest staying invested in a balanced portfolio of stocks and bonds.

Since the market drop, have you rebalanced your portfolio? One of the most important ways to manage your investment portfolio is to rebalance after significant market movements. You likely saw your stock investments fall in value while any fixed income you have likely didn’t move nearly as much. If your asset allocation is different from your target allocation, you should adjust it to bring it back to your target allocation.

If you feel uncomfortable returning to your prior allocation pre-coronavirus, you could reduce your stock exposure, but this will lengthen the time you will need to recover your lost value and slow down your long-term growth. If you have a solid emergency fund to use as a cushion (for retirees, I suggest 6-12 months of expenses), continuing to invest will give you the necessary growth throughout your retirement to keep up with inflation. Today is only the beginning of your retirement journey, and it often lasts for many decades. Growth now is just as important in retirement as it is pre-retirement because although you are planning to use this money for income, you need to also continue to invest it for years to come.”

Q2: My IRAs are losing money. Should I still make contributions?

I have a traditional IRA and a Roth. Considering both are just treading water in today’s economy, should I continue to put monthly contributions into those accounts when I see them losing money?

— Michael Mi.

James Royal, senior investing and wealth management reporter: “It sounds like you have your money invested in stocks or bonds, rather than holding cash in your IRA. If that’s the case, it can be stomach-churning to see your investments fall as the market gyrates. But tax-advantaged accounts such as IRAs offer a great benefit in helping you save for retirement, and you won’t be able to make any further contribution for a tax year once the tax-filing deadline runs out. So you have limited time to take advantage of it.

If you don’t feel comfortable investing the money today, that doesn’t mean you can’t still take advantage of the tax benefits today. You can still deposit the money in the account but leave it as cash and then invest it later. A Roth IRA may be an especially good option here, because it allows you to withdraw any contributions later without a tax penalty, if you have another pressing need. That said, the traditional IRA may get you a tax break today, saving you some extra money. But the key point is this: Because of the time limit on your contributions, you can’t get the tax advantages unless you deposit the money. Finally, while it’s not clear how you’ve invested, take a look back at the performance of the SP 500 index over the past 30 years or so. While the index has dipped – sometimes nearly 50 percent in less than a year – it’s continued to climb over the long term. If you’re investing, you need to think at least five years out and adjust your expectations to that reality. Otherwise, you may be likely to sell just when the market is at a low.”

Q3: How will COVID-19 affect the housing market?

How will COVID-19 affect the housing market over the next year? Will we see a decrease in valuation as forbearance agreements and unemployment hammers our economy? Or have enough measures been taken to protect the housing market, continue driving demand and appreciation of home values?

— Erick D.

Answered by Jeff Ostrowski, senior mortgage reporter: “You pose a trillion-dollar question, one with no clear answer. The U.S. housing market has held up remarkably well since the pandemic hit. Demand for homes has fallen, which is a predictable result of a spike in unemployment. However, the supply of homes for sale has fallen even farther, as homeowners have decided not to sell. The short-term result has been a continued rise in home prices, along with bidding wars in some markets. Many housing experts say the pandemic has created fresh demand for housing — those who can afford it are shopping for bigger homes.

While the housing market has seen a long run-up in valuations, the latest housing boom serves up nothing like the frothy conditions — overbuilding, loose lending standards — that led to the Great Recession. During the past decade, housing starts were tepid, lenders were strict and homeowners amassed a large equity cushion. All of that acts as a shock absorber for the housing economy during this bumpy ride. Of course, the path of the economy and the trajectory of the pandemic are unpredictable. A continued resurgence of COVID-19 cases, or a spike in unemployment, would act as a drag on housing prices. And it’s worth remembering that housing markets are intensely local: Areas such as Las Vegas, Honolulu and Detroit have been hit especially hard by this recession, and values could take longer to recover there.”

Q4: What should I do with a $125K windfall?

I have my retirement accounts in good shape and a six-month cushion for emergencies. My job is reasonably secure, and I expect to work for about 12 more years. I now have about $125K in cash that I need to deal with. I’m reasonably familiar with safe savings investments and know something about self-directed brokerage accounts, but I’m not sure what makes sense. I don’t mind risk, but I don’t want to bet the entire amount on something crazy. What are your thoughts on dealing with this windfall?

— Michael Ma.

James Royal, senior investing and wealth management reporter: “Congratulations on having your financial house in order and then thinking about what makes sense for your windfall. How long is your time frame? Is it the full 12 years you expect to work? If you’re looking to access the money in less than three years, your best option is likely an FDIC-backed CD, which offers you a return with no risk that you’ll lose your principal, up to $250,000 per bank.

If you’re able to go the full 12 years without accessing the cash, then you have the potential to generate more interesting returns. Superinvestor Warren Buffett recommends that investors looking to build wealth in the stock market turn to an SP 500 index fund and then continue to hold that for the long term. Yes, stocks can be volatile, as we’ve seen this year, but by investing for the long term, you’ll be able to ride out the market’s short-term dips. Over long periods, the SP 500 has returned about 10 percent annually to investors – but only if you held on through the tough times. The index is well diversified, holding hundreds of America’s best companies, and is about the safest way to invest in stocks. That said, if you want further diversification, it could make sense to add some bonds to that mix, which will make the overall portfolio less volatile and provide you more income.

It can be tremendously helpful to consult a financial adviser on these issues, but you’ll need someone who’s looking out for your best interests – here’s how to find one – and who helps keep you on the right track over time.”

Q5: Is buying a business a good way to grow my money?

I would appreciate your advice relevant to me in two finance matters:

  • I quit a job at the onset of COVID-19 early this year and have $70,000 in my 401(k). It hasn’t been managed since then because I don’t know what to do with it. Sadly, it depreciated a significant amount recently.
  • I have $200,000 I am thinking of using to buy a business, such as an existing one or franchise. However, are there better options to grow my money either for the short term (while everything is on furlough) or for the long term?

Thank you for your expert advice.

— Erwin A.

James Royal, senior investing and wealth management reporter: “As you assess your future directions, you’ll want to consider a few alternatives. While being your own boss may sound like a dream, it comes with increased risks, too. Small businesses are notoriously risky, with a high failure rate. However, if you have the right skills and expertise, you can make a go of it. But you ought to at least consider the value of diversification. If you use your cash to invest in a business, then your whole financial life revolves around the success of that business. If it fails, not only are you out of a job, you may deplete your whole savings in the process.

However, if you find another job and invest your money in a diversified portfolio including stocks, you have two potential sources of wealth creation. A well-diversified portfolio of stocks, such as an index fund based on the SP 500 index, should grow over time. Historically, the SP 500 has grown about 10 percent annually over long periods, but with significant volatility in the interim. While this is the approach proposed by superinvestor Warren Buffett, you must have a long-term mindset to invest in stocks and be willing to keep your money in the market for at least five years in order to ride out the volatility.

For short-term money, your best bet is a CD, and an FDIC-backed account will offer you a safe, albeit low, return. It sounds like it could be helpful to meet with a financial adviser to get your financial life in order and figure out where you can go from here. Here are my top tips for doing that.

Q6: Retiring soon. Does it make sense to buy a vacation home?

I’m a fairly healthy, 65-year-old single woman with a fairly stable job. I anticipate working for another two to three years. I’ve recently become debt-free and own my own co-op, which is worth about $700K with no mortgage. I have a six-month emergency fund. I have a 401(k) worth a little more than $1.8M and an IRA worth about $240K.

I would love to buy a vacation home. I love the idea of a house, but I’m a single woman who is not handy. I recently saw a property I liked for $425K. Is it financially foolish to take $300K from my 401(k), use $225K for the down payment and use the additional $75K for minor renovations, if necessary? Factoring 3 percent 30-year and 15-year mortgages, plus other monthly housing costs, my monthly housing cost alone would be in the neighborhood of $3,500 to $4,500 a month, about 50 percent of my take-home pay. 

Also if for some reason I am forced to retire earlier, I will not take Social Security until I turn 70 but will live off my 401(k) and a $3,800 a month pension.

Am I being unrealistic?

— Marilyn M.

Answered by Stephen Kates, CFP: “Congratulations on having saved so well and being debt-free. That is a huge accomplishment! However, taking on a mortgage at this stage of your life will put you back into debt and leave you with much less cash flow.  A 15-year mortgage will be paid off when you are 80 years old. This is a potential situation that you should weigh carefully. Before we break down your current cash flow and investments, it’s worth thinking about if you want to commit to a debt payment in retirement. Without knowing all of your current and future expenses, it’s hard to predict whether you can comfortably accommodate these additional expenses. Sustainable cash flow will be your new paycheck once you are retired and the higher your expenses the more of your paycheck will be spoken for.

Based on what we do know, the first consideration will be the withdrawal of $300K itself. For an after-tax lump sum of that size, you would need to withdraw approximately $460K to account for 35 percent federal taxes (more if you live in a state with its own income tax). Any withdrawal you take from your retirement account will be viewed as ordinary income by the IRS and therefore push you into a much higher tax bracket. By withdrawing that much from your investments, you would be depleting your investments by close to 25 percent and paying a lot in taxes. While your investments may still grow between now and retirement, it’s not a guarantee that you would make up that amount before retirement.

Second, it’s important to think about your cash flow needs. Your current balance minus the down payment ($2,040,000 – $460,000) would leave you with $1,580,000 in investments.  Assuming a normal 4 percent withdrawal rate in retirement, you could expect to withdraw $5,260 pretax, or $4,000 after tax. Accounting for an expected $2,100 in Social Security, and your pension, this totals roughly $9,000 in monthly income after tax. Based on the estimated housing expenses you predict, you would still be using 50 percent of your take-home income.  This is a high amount to be dedicating toward housing, especially in retirement. Keeping your housing expenses under 30 percent would be a more prudent level.

If you are committed to a vacation home, is there a way to lessen your housing costs though rental income or selling your co-op for a smaller primary residence? This could put you in a more stable position to balance two homes.

Having said all of this, my suggestion is that you take stock of all of your income, assets and expenses and work with a financial adviser who can do a proper assessment of your situation.  You have done an excellent job saving and have a very solid situation but owning both your co-op, and a second home could leave you in a tight cash-flow situation.”

Money talks: How to manage your family budget during coronavirus pandemic | Daily Sabah

Though the spread of the coronavirus has started to show signs of slowing down, its effects on our daily life and habits continue to endure, bringing along a multitude of financial problems and concerns.

Within the scope of the measures taken against the virus, millions of people in many countries have been confined to their homes, while millions more have lost their jobs, were furloughed or had cuts in their income, which has affected family budgets.

Here are some tips from Turkey’s first insurance company Generali Insurance – which has been operating in the country for over 150 years – on how to manage your family budget during the coronavirus pandemic.

Create an income-expenses table

Creating an income-expenses table will help you to see and control your monthly expenses. Putting the family budget on paper, in a tangible way, with all of your income and expenses laid out will provide you with a more conscious and accurate economic perspective during the coronavirus outbreak.

Only buy the essentials

The basic needs of the house and family are of primary importance during such uncertain times. Therefore, basic expenses such as food, rent and bills should be given priority in this critical period. Always make sure you have enough for your basic needs before you go for small luxuries.

Use a mobile app

Mobile applications, which already had an indelible place in daily life long before the virus came, are now of even more importance with the convenience and ease-of-use they provide. Mobile apps catered to tracking your expenses and monitoring the current state of your family budget can be of great help.

Make a shopping list

Always make a list before going shopping. A shopping list you stay loyal to will guide you, stop you from buying unnecessary extras and help you stick to what you need. One other tip: Don’t go shopping on an empty stomach, as it can make you crave unnecessary things and cloud your judgment.

Spend wisely

Be more economically conscious while shopping. Question every expense you make while creating a family budget. It is better to be a bit frugal than to overstretch your resources.

Save a bit

What the coronavirus pandemic will bring in the coming days remains unknown. When creating a family budget, try to set aside, if possible, a small amount every day. Having some savings will enable you to be prepared for similar situations and emergencies, and overcome them more easily.

These money and investing tips can help you manage the ‘new abnormal’ realities of the coronavirus-damaged economy

Don’t miss these top money and investing features:

  • Despite the stock market’s breathtaking rally, investors are closer to despair
  • Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era
  • Warren Buffett hasn’t lost his touch and Berkshire Hathaway’s critics — as usual — are short-sighted
  • If you could buy only one stock ETF, this would be it — and it doesn’t track the SP 500
  • Managing cash with interest rates low

These money and investing stories, popular with MarketWatch readers this past week, offer ways to manage your financial portfolio and to invest strategically as we all come to terms with the “new abnormal” life the coronavirus pandemic has brought us.

INVESTING NEWS TRENDS
Despite the stock market’s breathtaking rally, investors are closer to despair

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Despite the stock market’s breathtaking rally, investors are closer to despair

Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era

The chairman of Berkshire Hathaway seems to prefer the SP 500 to his own company’s stock.
Dud stock picks, bad industry bets, vast underperformance — it’s the end of the Warren Buffett era

Warren Buffett hasn’t lost his touch and Berkshire Hathaway’s critics — as usual — are short-sighted

Keep expectations real when a skilled investor lags the market, writes Mark Hulbert.
Warren Buffett hasn’t lost his touch and Berkshire Hathaway’s critics — as usual — are short-sighted

This settles the stock-market valuation dispute between billionaires David Tepper and Nelson Peltz

When coronavirus has made earnings and revenue forecasts difficult, look to the Q-Ratio.
This settles the stock-market valuation dispute between billionaires David Tepper and Nelson Peltz

Fed says pandemic has created U.S. financial sector fragility that will last for some time

The Federal Reserve said the coronavirus pandemic has created U.S. financial sector “fragilities” that will last for some time.
Fed says pandemic has created U.S. financial sector fragility that will last for some time

Insiders are making cautious moves with their company stock after April’s big market surge. Why it matters

One beaten-down industry sees buying, but most corporate insiders aren’t biting.
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What’s the most shorted sector? The answer might surprise you

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What’s the most shorted sector? The answer might surprise you

These are just some of the ways ETFs and index funds are making financial markets more unstable

Investors with indexed portfolios are vulnerable to increasing market volatility, writes Satyajit Das.
These are just some of the ways ETFs and index funds are making financial markets more unstable

Now we know: ETFs have made the investing world a better place

Exchange traded funds used to be tied to higher volatility and even fraud. It’s worth remembering their advantages.
Now we know: ETFs have made the investing world a better place

The rich are getting richer among high-yield ETFs, too

Investors trying to front-run the Federal Reserve’s purchase of below-investment grade bond ETFs are further concentrating the market for these funds.
The rich are getting richer among high-yield ETFs, too

ETF survival of the fittest shows just what’s going on in financial markets

There’s a lot more signal and a lot less noise in the ETF space as a few clear winners and losers emerge.
ETF survival of the fittest shows just what’s going on in financial markets

Investment giants seek stricter definition of what makes an ETF

BlackRock Inc., State Street Global Advisors and other large money managers are asking exchanges to enforce a more narrow definition of exchange-traded funds.
Investment giants seek stricter definition of what makes an ETF

If you could buy only one stock ETF, this would be it — and it doesn’t track the SP 500

This internet ETF has outperformed not only the SP 500 and Dow Jones Industrial Average, but also the Nasdaq.
If you could buy only one stock ETF, this would be it — and it doesn’t track the SP 500

This strategy may help stressed-out retirement investors

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This strategy may help stressed-out retirement investors

Managing cash with interest rates low

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Managing cash with interest rates low

How to make money off the volatility in the markets

SAN DIEGO (KUSI) – If you wondering how you can make money during these unpredictable times, president of Wilsey Asset Management, Brent Wilsey joined Good Morning San Diego with the details on how to manage your money.

Wilsey discussed ways to make money off the volatility in the markets.

Track Your Spending with Microsoft’s New ‘Money’ Template for Excel

Screenshot: David Murphy (Microsoft)

If you’re tired of using third-party services to track your spending—either because they aren’t as useful as you thought they would be or you’re concerned about giving third-party services access to your bank account and credit cards—you can now connect your various financial accounts directly to Microsoft Excel. All you need is Microsoft’s new “Money” template.

However, there are quite a few caveats that make Microsoft’s setup potentially less practical than services like Mint or YNAB. For starters, you have to pay Microsoft to use it. That shouldn’t be a huge deal if you’re already using YNAB, but users of free finance services like Mint might not be thrilled at the idea.

The “Money in Excel” feature comes in the form of a premium template you can download only if you’re a Microsoft 365 Family or Personal subscriber; those on Microsoft 365 Enterprise accounts can’t partake. Microsoft’s cheapest subscription plan, 365 Personal, will set you back $7/mo or $70/year, which isn’t that bad given what you get (access to all the Microsoft office apps), but is still more expensive than free. And the idea of paying money to manage my money always strikes me as strange, but that’s just me.

If you’re a Microsoft 365 subscriber, visit the website for Microsoft’s “Money in Excel” premium template. There, you’ll find two options: Edit in Browser, which launches the web-based version of Excel, and Download, which you can use within your desktop or laptop’s Excel app.

Once you launch the template, you’ll get a crude-looking landing page that explains the general point of the finance-tracking spreadsheet, with a series of tabs at the bottom you’ll want to click through sequentially.

Screenshot: David Murphy

Before you begin, make sure you click that ”Enable Editing” link at the top, which will reveal your regular Excel setup—as well as a “Do you trust this add-in?” prompt on your sidebar. Provided you downloaded your file from Microsoft directly, click the option to trust the add-in.

Screenshot: David Murphy

You’ll then be asked to sign in with your Microsoft 365 account (again), thus ensuring that you can’t use this spreadsheet/add-in even if a friend sent it to you, because that’s how Microsoft rolls. You’ll next need to connect your financial accounts to Excel—helped along by Plaid.

Naturally, my import didn’t work at all. Thanks, Capital One. (When I mentioned this to Lifehacker finance queen Lisa Rowan, she noted this issue can happen with a number of different third-party finance services. Double thanks, Capital One. Get it together.)

Screenshot: David Murphy

I had better luck with my credit card accounts, however, and was able to import the information for multiple cards via my provider. All of my transactions then showed up in my spreadsheet, like so:

Screenshot: David Murphy

I was a bit bummed to see that spreadsheet’s “Snapshot” tab wasn’t working for some reason—apparently it was having trouble pulling in the months of my transactions, as the drop-down menu didn’t have any to pick from. I assume this spreadsheet is incredibly useful for an at-a-glance look at your spending habits; I really wish it worked, so I could confirm that my daily Jamba Juice habit is, in fact, a financial risk. I hope you have better luck.

My monthly snapshot for finances
Screenshot: David Murphy
Microsoft’s monthly snapshot for finances
Screenshot: Microsoft

Microsoft also lets you add two extra templates to your spreadsheet if you want more information about your spending habits. You can quickly calculate your entire net worth across all of your accounts—useful if you’ve connected everything to Excel—and you can scan through your spending to flag recurring purchases in case your subscriptions are getting out of control.

While you can connect accounts to Excel that aren’t directly related to your spending, such as your 401k, there’s not much Excel can do with that data. You’ll see your account balance pop up on the sidebar, but none of the spreadsheet make use of this information. That’s a bit different than other financial-tracking services you might have used, which may give you more performance metrics about your finances regardless of type.

I have noticed a few people complaining that they can’t connect multiple accounts from the same provider—your account and your spouse’s account, for example—via Excel’s setup. I wasn’t able to test this myself, as none of my friends would loan me their bank account information for the day (sigh), but it’s something worth considering before you move your financial tracking over to Excel.

Otherwise, if you’re already a Microsoft 365 subscriber, there’s no reason to not test out Microsoft’s Money setup for Excel. It’s not perfect—far from it—but I have always enjoyed the clutter-free experience of a spreadsheet versus a web app. If your financial-tracking needs aren’t great, it might be all you need (plus a pivot table or two) to get better control of your spending and budgeting.

Oh, yes, that; you’ll have to build budgets yourself in Excel’s spreadsheet, as the Money add-in strangely doesn’t include any budget-creating tools whatsoever. That seems like a pretty egregious omission to me, given that those who track their finances would probably also like some way to ensure that their spending matches up with what they planned to spend in a given month.

A budget shouldn’t be hard to set up manually (if your Snapshot tab works), but if you’re not Excel-inclined, it might feel overwhelming. I’m sure Microsoft will add the feature as it rounds out Money with new features, but it’s not there yet—and that’s kind of how I feel about the Money template in general. It’s helpful, but it’s not quite good enough to handle much analysis and tracking beyond the basics.

5 Money Rules For Successful Romantic Relationships

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How to invest in real estate

Real estate investing is popular, and perhaps now more so than ever, as low mortgage rates make real estate more affordable. In fact, Americans love real estate, and a 2019 Bankrate survey showed that it was their favorite long-term investment, even beating out stocks.

Consumers have a variety of ways that they can invest in real estate, including many options beyond just becoming a landlord, although that’s a time-tested option for those who want to manage a property themselves. Plus, new business platforms also make it easier than ever to invest in real estate without having to come up with tens of thousands or more in cash.

Below are five tested methods for investing in real estate and what to watch out for.

5 best ways to invest in real estate

While many people get involved in real estate to generate a return on investment, it can also be about just simply finding a place to live. So for many, a real estate investment is their home.

1. Buy your own home

You might not normally think of your first residence as an investment, but many people do. It’s one of the best ways for you to invest in real estate, offering numerous benefits.

The first benefit is building equity in your home from your monthly payments, rather than paying rent that always seems to rise year after year. Some portion of your monthly mortgage goes into your own pocket, so to speak. However, experts remain divided on the pros and cons of owning your own home, and a home is not a buy at any price, as homebuyers of the 2000s learned.

If you’re planning to stay in an area long term, it can make sense to purchase a home because you’ll be able to lock in a monthly payment that may be as affordable as rent. Plus, banks treat owner-occupied properties more favorably, giving borrowers a lower mortgage rate and requiring a lower down payment. You may also be able to deduct interest expenses on your taxes.

Mortgage rates are now at historical lows, helping to make homes more affordable than they have been in the recent past. Unsurprisingly, then, demand has been surging.

“For owners and occupiers now is the best time to invest because they are never going to get mortgage payments this low and can get more square footage for their price point,” says Chris Franciosa, principal agent at Compass Real Estate in Delray Beach, Florida.

How you make money: Capital appreciation, building equity, potential tax break on appreciated value

2. Purchase a rental property and become a landlord

If you’re ready to step up to the next level, you might try your hand with a residential rental property such as a single-family home or a duplex. One of the bigger advantages of this kind of property is that you know the standards of the marketplace and the market may be easier to gauge, as opposed to commercial properties, such as a shopping center.

Another advantage is that it may take a lower investment to get started, for example, with a single-family house. You may be able to get into a property with $20,000 or $30,000 instead of the potentially hundreds of thousands required for a commercial property. You may be able to buy in even cheaper if you’re able to find an attractive distressed property via a foreclosure.

You’ll generally have to put up a sizable down payment to start, often as much as 30 percent of the purchase price. So that may be prohibitive if you’re just starting out and don’t have a huge bankroll yet. One way around this may be to buy a rental property in which you also live.

Another downside is that you’ll need to manage the property and make decisions as to what needs upgrading, for example. While owning property is considered a passive activity for tax purposes, it may end up being anything but passive as a landlord. And if a tenant ducks out on rent, you still have to come up with the monthly payments, lest you go into default on the loan.

Also note that real estate is relatively illiquid and usually requires a substantial brokerage fee, often 6 percent of the sale price, so you usually can’t sell immediately and without a big bite being taken out. Those are some of the bigger downsides, but landlords have other ways to mess up, too.

Historically low mortgage rates may make this avenue more affordable than in the recent past. A 1031 exchange can also help you roll your investment into a new one tax-free.

How you make money: Capital appreciation, growing rents and equity over time, 1031 tax-free exchanges

3. Consider flipping houses

House-flipping has become more of a popular avenue to investing in real estate, and it requires a keen eye for value and more operational expertise than becoming a long-term landlord. However, this path may help you realize a quicker profit than being a landlord, if you do it right.

The biggest advantage of this approach is that you can turn a profit faster than by managing your own property, but the expertise required is also higher. Typically house-flippers find undervalued properties that need to be cleaned up or even completely renovated. They make the required changes, and then charge market value for the houses, profiting on the difference between their all-in price (purchase price, rehab costs, etc.) and the sales price.

House-flippers need a sharp eye for what can be fixed at a reasonable price and the unfixable. They also need to estimate what a house can later be sold for. Miscalculate, and their profit might quickly evaporate, or worse, turn into an outright loss. Or a home might not sell quickly, and then the house-flipper is stuck paying any interest on a loan until a buyer can be found.

House-flippers may turn to non-traditional sources of funding, since they often prefer to hold houses for months, rather than years. Plus, the closing costs of a traditional mortgage are high.

House-flipping actually makes being a landlord feel like a passive activity. You’ll have to manage a crew of people doing many if not all of the repairs, and you’ll need to be the driving force in every transaction ensuring that it gets done and comes in at the budget or below. And you’ll always be searching for another deal, since you get paid only when you turn around a property.

House-flippers can also take advantage of 1031 tax-free exchanges if they roll the proceeds from one investment into another within a certain period and according to certain rules.

How you make money: Buying undervalued property and rehabbing, selling for more and repeating, 1031 tax-free exchanges

4. Buy a REIT

Unlike prior options, the next two ways to invest in real estate really are passive. Buying a REIT, or real estate investment trust, is a great option for those who want the returns of real estate with the liquidity and relative simplicity of owning a stock. And you get to collect a dividend, too.

REITs have numerous advantages over traditional real estate investing, and may make the process much easier:

  • Less money needed to start, potentially only $20 or $30, depending on the stock
  • No hassles managing a property (e.g., no 3 a.m. phone calls)
  • Very liquid, and REIT stocks can be sold on any day the market is open
  • Transaction costs are $0, as brokers have slashed commissions
  • Attractive long-term returns, averaging about 12 percent from 1998 to 2018
  • Regular quarterly dividends, with the best REITs growing their payout over time
  • Diversification, across many properties or even across real estate sectors

However, investing in REITs is not without its own downsides. Like any stock, the price on a REIT can fluctuate as the market gyrates. So if the market declines, REIT prices may go with it. That’s less a problem for long-term investors who can ride out a dip, but if you need to sell your stock, you may not get what it’s worth at any single point in time.

If you’re buying individual REIT stocks, you’ll need to analyze them carefully, using the tools of a professional analyst. One way to avoid this downside, however, is to buy a REIT fund, which owns many REITs and thus diversifies your exposure to any one company or sector.

Investing in a REIT is a great way to start for a beginner with a little cash, but you’ll need to work at it, too, since there are still some ways to mess up a REIT investment.

How you make money: Capital appreciation, growing stream of dividends

5. Use an online real estate platform

An online real estate platform such as Fundrise or Crowdstreet can help you get into real estate on bigger commercial deals without having to plunk down hundreds of thousands or even millions on a deal. These platforms help connect developers with investors looking to fund real estate and take advantage of what can be quite attractive potential returns.

The big advantage for investors here is the potential to get a cut of a lucrative deal that they may not have been otherwise able to access. Investors may be able to take part in debt investments or equity investments, depending on the specific deal terms. These investments may pay cash distributions, and may offer the potential for returns that are uncorrelated to the economy, giving investors a way to diversify their portfolio’s exposure to market-based assets.

These platforms do have some disadvantages, though. Some may accept only accredited investors (such as individuals with a net worth of $1 million or more), so it may not be possible to even use them if you don’t already have money. Still, while some platforms may require a $25,000 minimum investment, others may let you in the door with $500.

The platforms also charge a management fee annually, often 1 percent, and they may add other fees on top of that. That may appear pricey in a world where ETFs and mutual funds may charge as little as zero percent for constructing a diversified portfolio of stocks or bonds.

While platforms may vet their investments, you’ll have to do the same, and that means you’ll need the skills to analyze the opportunity. The investments are often relatively illiquid, with only limited chances for redemption until a given project is completed. And unlike investments in a REIT or even your own rent property, once a deal is completed and your investment is returned, you may have to find another deal to keep your portfolio growing.

How you make money: Capital appreciation, dividend or interest payments

How to decide if you should invest in real estate

Does investing in real estate make sense for you? You’ll need to ask yourself what kind of investor you’re willing to be. You can make a lot of money in each kind of real estate investment, so it’s more a question of your financial position and your willingness to do what’s necessary. The type of investment should match your temperament and skills, if at all possible.

In particular, potential investors should ask themselves questions across three broad areas:

  • Financial resources: Do you have the resources to invest in a given real estate investment? There are opportunities at every investment level. Do you have the resources to pay a mortgage if a tenant can’t? How much do you depend on your day job to keep the investment going?
  • Willingness: Do you have the desire to act as a landlord? Are you willing to work with tenants and understand the rental laws in your area? Or would you prefer to analyze deals or investments such as REITs or those on an online platform? Do you want to meet the demands of running a house-flipping business?
  • Knowledge and skills: While many investors can learn on the job, do you have special skills that make you better-suited to one type of investment than another? Can you analyze stocks and construct an attractive portfolio? Can you repair your rental property and save a bundle on paying professionals?

“If your retirement is on the line, it’s best to leave the ‘speculation’ to the experts and focus on industries that you have a deeper understanding of, so that you can easily follow the progress of your investments,” says James Richman, CEO at JJ Richman, an asset manager.

You’ll want to understand your own skills, abilities and willingness in order to assess what kind of investment fits best. And you don’t need to add real estate to your asset portfolio to do well. Many investors stick exclusively to stocks, with the goal of equaling the market’s long-term return of about 10 percent annually, and enjoy the benefits of passive investing.

Taxes on real estate investing

The taxes on real estate vary widely, depending on how you invest, but investing in real estate can offer some sizable tax advantages. Let’s run through them based on the investment type:

  • Your own residence: You’ll owe annual property taxes on any owned real estate, but you may be able to deduct any interest expenses from your mortgage, depending on your specific financial situation. When you sell your residence, you can also receive $250,000 in capital gains (or $500,000 for married filing jointly) tax-free, if you’ve lived in the house for two years and two of the last five years.
  • Your rental property: You’ll also owe annual property taxes here, but it’s also a cost of business as a landlord, so you can deduct that from any rental revenue, reducing any taxable gains. You can also deduct your interest expense and depreciation, reducing your taxable income still further, even as you still collect the cash flow. When you sell the investment property later, the taxes are assessed on its lower depreciated value. However, if you move the proceeds of a sale into a new house and follow the 1031 rules, you can defer the taxes on the gain.
  • House-flipping: The 1031 tax-free exchange can be an important factor here in keeping taxes low, because house-flippers don’t really benefit from depreciation typically. By rolling their proceeds into their next deal and following the rules, they can keep deferring any taxes on gains — as long as they can keep finding good property deals. Otherwise they’ll owe taxes on their gains, less any costs of doing business.
  • REITs: REITs offer an attractive tax profile — you won’t incur any capital gains taxes until you sell shares, and you can hold shares literally for decades and avoid the tax man. In fact, you can pass the shares on to your heirs and they won’t owe any taxes on your gains. However, any dividends that you receive are taxable that year, and much of the return from REITs over time is due to their sizable dividends, which typically do not enjoy the lower qualified dividend rates but instead are taxed at ordinary rates.
  • Online real estate deals: The taxes incurred by these investments can vary depending on exactly the kind of investment you make. Some investments are technically REITs and so will be treated according to that tax setup, while others may be debt or equity investments. In general, any income such as a cash distribution from these will be taxable in the year it’s received, while any tax on capital gains will be deferred until it’s realized.

By knowing how each of these types of real estate is taxed, you can make smarter choices about how to manage any given investment and minimize the cut that goes to Uncle Sam.

Bottom line

Investors looking to get into the real estate game have a variety of options for many kinds of budget. Real estate can be an attractive investment, but investors want to be sure to match their type of investment with their willingness and ability to manage it, including time commitments.

Featured image by Busa Photography of Getty Images.

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Get Your Children Saving: A Guide To Kids’ Savings Accounts

For parents who want to teach their kids about money and financial literacy, one of the best things to do is to help your child open a savings account. Many banks and credit unions offer special savings accounts for kids that can be opened under the child’s name.

Opening a kids’ savings account can help your child learn more about managing money, saving for the future and other aspects of personal finance, starting from a young age.

Before you open your child’s savings account, it’s important to do your research, shop around for rates and features and decide what the most important priorities are for having a savings account for your child. Several states have laws around allowing minors to open savings accounts; check with your local financial institutions to make sure this option is possible where you live.

Here are a few of the top considerations to keep in mind when looking for a children’s savings account.

Should You Choose a Kids’ Savings Account or a Custodial Account?

There are typically two types of accounts you can open for your child: a savings account or a custodial account, and the difference is important. If you open a savings account, you and your child will have joint ownership of the account, and your child will be able to access funds from the account (with the parent being able to monitor the account).

If you open a custodial account, also referred to as a Uniform Transfers/Gifts to Minors Act (UTMA/UGMA) account, the money in the account is treated as a gifted asset that is fully owned by your child, and cannot be accessed until they turn 18. There are potentially complicated tax implications for using this type of account. So unless you have a particular reason to want to choose a custodial account, you may want to go with a typical savings account.

What Are Your Goals for Your Child’s Savings Account?

Why do you want your child to have a savings account? There are several good reasons:

  • To help your kids learn more about money and finance. Having a savings account can help your child learn about the magic of compound interest, different types of financial accounts and how to manage money in everyday life.
  • To help your children learn more about banking. Your child can learn how to do online banking, how to deposit a check, how to handle real-life banking conversations at a brick-and-mortar bank and more.
  • To help your kids develop the habit of saving their own money that they receive from an allowance, getting paid for chores or a part-time job. If you are trying to teach your child how to manage their money, how to save a certain percentage of their income or how to use money for different financial goals, having a savings account can make all of this more real for them.
  • To save money for a specific short-term financial goal. For example, if your child wants to buy a new video game console, wants to save money for summer camp or wants to save up for some other special purchase, they could use their savings account to save for these specific goals.

Having their own savings account can help your child learn how to set financial goals and make decisions about how to use their money responsibly. Talk with your child about their savings account before you choose a bank or credit union. Make sure your child is old enough to understand and be curious about saving money.

See what questions they have, and use that conversation to guide your search. Having a real savings account of their own can help your child feel special and grown-up. You may even inspire them to learn more about finance and develop better financial habits at a young age.

Should You Use a Kid’s Savings Account to Save for College?

If you want to save for your kids’ college education, a savings account is probably not the best choice of financial vehicle for that goal. Set up a 529 savings plan instead. A children’s savings account typically pays low interest, making it better for short-term savings and smaller amounts.

A 529 plan can help you save for college more aggressively, with a broader range of long-term investment options. Depending on your state, putting money into a 529 plan also may help you get a deduction on your state income taxes.

What Interest Rate Can You Get on a Children’s Savings Account?

The COVID-19 crisis has caused the Fed to cut interest rates to near zero, and many banks are paying near-zero interest rates on savings accounts. The same is true for kids’ savings accounts. You’re probably not going to find very high APY rates in today’s low-interest rate environment. Some of the highest-yield kids’ savings accounts include:

These are some of the highest APY rates on children’s savings accounts that are available from banks as of July 13, 2020. Some credit unions offer higher APY rates than these, but you may have to be a member of a particular employer, organization and/or live in a certain state in order to participate in those accounts.

Other national banks like Wells Fargo and Bank of America offer children’s savings accounts, but the APY rates are quite low, almost zero. Don’t expect to get a high-yielding account for your child’s savings. The primary goal of a child’s savings account is not to build significant wealth or accrue a big ROI; rather, it’s to learn about money and have a safe place for your child to watch their savings grow.

What Features Should You Look for in a Kids’ Savings Account?

Along with a decent APY rate, the best children’s savings accounts sometimes offer unique features that can help make saving fun for kids. For example:

  • Matching programs. Wells Fargo can help parents set up a “savings matching program” for their kids.
  • Automatic savings plans. Other banks may offer an automatic savings deposit plan, where a certain amount of money can get transferred into the child’s account automatically each month.
  • Financial education. Some banks offer a special financial education website for kids, with interactive activities to help kids learn about money. Bank of America’s Better Money Habits website helps parents and kids learn about money.
  • Mobile apps/online banking. See what features are available for your child to use online banking, mobile banking or deposit checks via mobile app. Children are often tech-savvy, and they may enjoy saving money even more if they can make a game of it with mobile technology. Parents also have access to the account’s banking app.
  • Savings goals. The Capital One Kids Savings Account lets you set up multiple accounts and track different savings goals. For example, you could help your child set up separate accounts for “Summer Camp,” “New Bike” or “New Xbox.”
  • Debit card. Some banks will offer debit cards that your child can use to get cash from their savings accounts at ATMs.
  • FDIC insurance. Your child’s savings account should be FDIC insured, just like any other bank account. Double-check the bank website to make sure it is an FDIC-insured institution.

These are just a few of the specific features for kids’ savings accounts that you may want to look for or ask about; some banks have more customized offerings than others.

What Are the Fees and Requirements of a Children’s Savings Account?

Kids’ savings accounts tend to be fairly simple, straightforward products offered by banks, but some banks will charge a few fees or have different requirements for the accounts. Watch out for different requirements for:

  • Minimum opening deposit. Some kids’ savings accounts have a very low minimum opening deposit, like $25 or less. Others might require $100 or more. It depends on the bank. Be prepared to help your children save up (or give your child a “down payment”) to cover the opening deposit on their savings accounts.
  • Minimum daily balance. Pay attention to the minimum daily balance requirements. Many children’s savings accounts don’t require your child to have any money in the account, but some might require keeping a minimum daily balance to avoid being charged a fee.
  • Monthly maintenance fees. Most children’s savings accounts do not charge monthly fees, but make sure to check the details before you open an account.

What Documents Do You Need to Open a Children’s Savings Account?

Most banks will want you to bring one of the following documents to open your child’s savings account. The documents should be in your child’s name:

  • Birth certificate
  • Social Security card
  • Immunization records
  • School photo ID
  • Passport
  • Driver’s license (if your child is old enough to have one)

If you’re opening your kid’s savings account with an online bank, you will follow the usual online procedures for opening an account. In this case, it’s the parent who’s opening the children’s savings account, as the joint account owner.

If you’re opening your kid’s savings account with a brick-and-mortar bank, you will typically need to set an appointment to visit your local branch to open the account. Take along your child and this can be a fun occasion to help your kids learn more about banking and might even feel like a rite of passage: Your child is becoming part of the world of banking.

What Happens to a Kid’s Savings Account When the Child Reaches Age 18?

Most banks will automatically convert a child’s savings account to a regular savings account when the child turns 18. Depending on your bank, there may be different fees, additional paperwork to sign or other adjustments that your child may want to make to their account. For example, your child might want to have full control of their own account starting at age 18, without their parent’s serving as a joint account holder.

Talk with your kids about their overall banking needs as they become legal adults. Managing your child’s savings account can be part of a larger discussion about debit cards, credit cards, getting an auto loan or other financial needs your children may have as they enter adulthood.

Bottom Line

Children’s savings accounts can be a fun and educational way for your child to save some money of their own and watch their savings grow over time. Most banks are not paying high yields on kids’ savings accounts, so don’t expect to use these accounts as a way to generate big returns or build a large nest egg for college; 529 plans are a better choice for that goal.

A kids’ account is a safe place for your child to keep their money and to develop good savings habits. If you want to make it easy to help your child learn about money, how budgeting works and how to save for specific goals, opening a children’s savings account can be a wonderful way to introduce your child to the world of banking and personal finance.

Money management tips during a pandemic

ALEXANDRIA, La. (KALB) – The coronavirus pandemic has forced many Americans to make tough decisions as overdue bills pile up,

This could be a troubling time for college students as many leave home and manage their finances alone for the first time.

Nathan Grant, Senior Credit Industry Analyst with credit card insider says college students need to watch what they spend especially during times like these.

“Avoid making any purchases that are unnecessary during the pandemic so every dollar can stop you from feeling the economic impact of a crisis like this,” Grant said.

Grant says you should have savings for at least three months worth of expense and monitor your bill balances. He says one of the worst things you can do is overuse a credit card.

“Keep all of your balances paid down in full,” he said. “Your credit utilization is the amount of credit being used so the lower that is, the better.”

Grant says college could be the prime opportunity for students establish credit. He says secure credit cards are a good route for those without credit history.

“A secure credit card requires a refundable security deposit that funds the card upon your approval,” he said.

The secure card uses the money used for the deposit for purchases to prevent someone from overspending. Another option is becoming an authorize user on someone’s account, but that carries it’s own risk. If the account holder doesn’t pay their bill, it can negatively impact your score.

Grant says the golden rule is making sure all of your balances are paid in full.

Copyright 2020 KALB. All rights reserved.

Need for financial wellness services has reached critical mass

collage of clock and people imagescollage of clock and people images (Photo: Shutterstock)

The coronavirus pandemic brought on unforeseen challenges nearly overnight, and it is evident that the impact will be long-lasting. Data shows that 74% of employees are concerned about at least one aspect of their well-being as a result of COVID-19 (financial, social, mental, physical) and a majority of them (52%) are most concerned with their financial health.