By Laura Webb, founder and CEO of Webb Investment Services, Inc.
It’s easy to imagine many financial services professionals got their introduction to real estate investing when they first played Monopoly®. Today, over a hundred years since its invention, the popular game has its critics, but there’s no denying its value as a teaching tool for learning the basic skills and instincts real estate investors and financial advisors need for managing and growing real-world money.
In Monopoly, players receive a bankroll, or what might be called a windfall of money, to invest in various real estate properties on the board, gradually ranging in price from low to high as a player moves clockwise around the board. When players buy properties during the course of play, they invest their bankroll to work for them rather than letting it sit idle. Uninvested money represents a missed opportunity to grow wealth.
The game teaches fundamental lessons about the realities of investing and general economics, such as keeping cash on hand, being patient, maintaining cash flow, knowing that the most expensive assets are not necessarily the best ones and diversifying holdings in a real estate portfolio.
Money in motion in the real world refers to relatively large sums of money that are in transitional state following the sale of assets or an inheritance event. The sale of real estate, such as a person’s home, for example, represents money that is uninvested in its current state and therefore not working to earn any return. Money in motion needs a place to land that will enable it to continue its job of growing wealth for the investor. In the meantime, and temporarily, most investors will place these funds in a secure bank account while they determine their next investment tactic.
The State of the Real Estate Market
The real estate market in the U.S. is bustling with property owners in a selling mood and putting their proceeds to work for them. Several factors are driving the increased level of activity:
- Real estate values are significantly higher over the last year, with properties in many states selling for about 18% more than a year ago.
- The demand for homes to buy outstrips the available supply in many regional markets; sellers in some cases are fetching far more than their asking price courtesy of buyer bidding wars.
- The same holds true for rental properties. Lease renewal time for many renters forces some to move rather than pay hundreds more monthly for a new lease. Some are forced into making tough decisions. The push for rent control in U.S. cities and counties has become a socio-economic and ethical hot potato, notably in Florida, which sees an average of 1,000 people relocating to the state on a daily basis. They all need places to live.
A married couple I advise related a tale that illustrates just how challenging it can be to find a home to buy. Perhaps they failed to do enough homework, but they accepted a generous offer to sell their home without realizing that buying another home would take a year or more. They were compelled to rent a property much smaller than they really wanted – and more expensive than they expected.
Always Keep Cash Available
Having cash on hand at all times is a wise strategy for avoiding surprises when circumstances call for fast action. The objective of Monopoly is to be the last player left standing or the one with the most money. People who’ve played the game for any length time learn they cannot buy every property they land on. Those who do usually end in bankruptcy because they fail to have the money on hand to pay rent to other players or cover the taxes or other hazards they encounter around the board.
Most of us of a certain age remember the Great Recession of 2008 and the havoc it wreaked on many people who had went on spending sprees in the prosperous late nineties and early 2000s. They bought or financed new cars and appliances, remodeled their homes, subsidized their kids’ educations and generally spent on many nice, but unnecessary indulgences such as spa memberships and big screen TVs.
Then Wall Street hit a wall. Fortunes were lost, stock prices nosedived, and people saw the equity they had built in their homes evaporate almost overnight. The fallout was especially pronounced for homeowners who had leveraged the equity in their homes to secure lines of credit when more prudent options were available.
With little cash on hand and no channels left to replace their lost money, they began to know extreme financial despair. The boom days ended when the bubble burst.
Understand the Tax and Fee Implications of Selling and Buying a Property
I always defer my clients’ questions about taxes to a Certified Public Accountant because tax law is not my field of expertise. But I do know the general big tax picture:
When you realize a profit from a sale of property or other assets you may face tax implications regarding short- or long-term capital gains. Understanding the taxation consequences helps you plan accordingly and spares you the unwelcome surprise of a large bill for those taxes.
- If you sold a home that was your primary residence for 24 months in the five years preceding the sale, the Internal Revenue Service allows single tax filers to exclude up to $250,000 of capital gains and up to $500,000 for married couples filing jointly.
- Revisit your financial plan with both your financial advisor and CPA. Determine whether your plan includes provisions for escrowing the profits from asset sales to pay the taxes without disrupting your long-term retirement savings goals.
Similarly, as you calculate the profits you expect from the sale, consider these additional costs fees that may accompany the sale:
- Agent commissions—usually 6% of the sale price
- Real estate attorney fees
- Local fees such as Homeowners Association dues
- Any balance that remains on the home’s mortgage
Secure a Brighter Financial Future with Proceeds from a Home Sale
The proceeds from the sale of a home may represent the single largest deposit an individual investor will place into an account. Financial advisors recommend their clients put this money in motion to work for profitable results that enhance their future for a comfortable retired life. Here are several strategies to consider for investing your home sale proceeds.
- Buy another property
This is a core behavior of Monopoly players. But in the real world, most property owners follow a traditional path of buying a home, which is to sell it eventually and use the money to buy another home to accommodate their housing needs as they change over time. This pattern may repeat several times over the course of their life. However, if you own another place to live, say a second home, buying another property and renting it can create a monthly, supplemental cash income stream during retirement.
- Contribute to a Roth or IRA
There are limits to how much an investor can contribute annually, but over time these accounts are proven investment channels to build long-term savings for retirement. The money grows tax-free and is only subject to taxation when it’s withdrawn.
- Start or add to a taxable savings or investment account
A taxable savings account pays interest income, which is taxable, but a large amount of money in such an account delivers returns due to the greater scale of the investment. Placing your money in an investment account diversifies an investment portfolio that enables your money to earn returns across multiple industries.
- Create an accessible account to fund emergency expenses
A survey by Home USA reveals that nearly 1 in 5 Americans have nothing set aside to pay for an unexpected emergency.  This is an uncomfortable position to occupy should you be hit with a heavy cost for medical care uncovered by insurance.
There are far more options for using your real estate proceeds, ranging from setting up a college fund to taking your dream experience vacation. Your certified financial plannertm professional can guide you to the option(s) that make the most sense based on your retirement savings goals, age and tolerance for risk.
Home ownership forms the cornerstone of building long-term wealth. The equity in your home works on many levels:
- Builds personal credit rating
- Serves as a backup emergency reserve if needed through a home equity loan
- Increases a person’s net worth
- Provides collateral for future real estate purchases
We may not ever own the equivalent of a Boardwalk or Park Place, or have a Rich Uncle Pennybags to sponsor us, but through patience in saving and wise investing, a comfortable, worry-free retirement is entirely possible.
Monopoly is just a game played with phony money for fun. Real estate investing is played with real money – your own – and it’s for keeps.
Laura Webb is the founder and president of Webb Investment Services, Inc., based in Asheville, NC. She is a CFP® professional and the creator of the Her Two Cents podcasts, which focuses on helping women normalize the conversation around money. Her team focuses its efforts on helping women secure their financial futures. For the rest of the story, please visit the Webb Investment Services, Inc. website or email her at email@example.com.
Webb Investment Services, Inc is not a registered broker/dealer and is independent of Raymond James Financial Services, Inc. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc. 82 Patton Ave, Suite 610, Asheville, NC 28801. 828-252-5132.
Any opinions are those of Laura Webb and not necessarily those of Raymond James.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.
Sources: “Housing Prices and Inflation,” The White House, Jared Bernstein, Ernie Tedeschi, and Sarah Robinson, September 2021  “How to Put Your Home Sale Proceeds Toward a Better Financial Future,” Homelight, Corinne Rivera, September 2018