Quite often when creating comprehensive financial plans, we find investors who have a large, illiquid asset that they are considering as a source of money for a major future expense. For example, the business owner who plans to sell his business to fund his retirement, or the family with an investment property who plans to sell the house to fund their child’s college education.
While it is certainly a boon to have an appreciated asset to fund these expenses, investors still have to decide whether they should sell their illiquid asset now and invest the money in something more liquid for a future expense or hold on to the asset and hope that it continues to increase in value and that they are able to sell it when they need the cash.
With illiquid assets, timing is everything. While the asset has an inherent value, the market may not be right and could put the investor in a position to sell for a substantial loss. Private company ownership interests, antiques or collectibles, and even homes are considered illiquid because they generally have far fewer buyers than those willing to buy stocks or bonds.
One of the most common illiquid assets is an investment property, as investors may have kept their old home to use as a rental or perhaps it is an inherited family home. The home currently generates a small income, so it has been beneficial to keep it. But now you’re looking at the home that has appreciated in value as a source of education funds because your child will likely be attending college within 10 years. What do you do?
You could hold onto the house for another 10 years and hope that the real estate market is healthy and that the home has increased in value. However you have to consider the cost of selling a house. Out of your selling price you may have to take out realtor commissions, concessions for selling, any outstanding mortgage balance and capital gains. What you may be able to sell for $250,000 could net you only $170,000. Furthermore, having your money tied up in one asset is not the best move—you would never think to put all of your retirement assets in one stock. Ideally, you want to be diversified across multiple asset classes, sectors or investment vehicles to reduce the risk to your portfolio.
You could sell the home today and invest the profit into a 529 Plan, taking advantage of a state tax deduction for the contribution and tax-free growth of the assets for education expenses. With a 10 year time horizon, you should have time for the money to grow.
A third option requires looking at your whole financial picture—not just this one asset. Perhaps there is money elsewhere that can be restructured to benefit your financial goals. If the rental property currently generates a profit, the profit could be invested monthly. In 10 years, you could have an investment nest egg and still own the property. At that point you may also consider borrowing against the house with a secured loan with a lower interest rate instead of an unsecured education loan.
Investors tend to see illiquid assets in a good light because they are tangible, whereas stock investments are up one minute and down the next. A financial adviser can look at the whole picture, considering your tax situation and other assets that may be put to better use. If you have questions on keeping or selling an illiquid asset for a future expense, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
