Liquidity of an investment is usually considered to be a good thing. Some investments, such as real estate or a business, have little liquidity. Other investments, such as stocks and bonds, are easily converted to cash.
I’m coming up on a financial decision which would involve cashing out some of my investments. I would use the cash to buy a condo in Spain for around $125,000.
Buying vs. Renting
Obviously I like this condo which is why I want to buy it. If it was available for rent today, would I rent it and forgo buying it? Maybe. I like the predictability of ownership. But also enjoy the freedom of being a renter.
Buying means having to deal with the carrying costs of real estate and having to babysit the property. It’s not cheap holding real estate. But real estate has the advantage of providing rental income – potentially.
Renting a similar condo here would probably set me back about €450/month or $540/month. That’s not a big hit to my bottom line and something I already earn passively from my investments.
Borrowing vs. Cashing Out Investments
It’s good to reframe the situation when thinking about cashing out my investments. If I had $125,000 laying around in cash, would I spend it on this condo in Spain?
If I had a mortgage contract sitting in front of me ready to be signed, would I sign it?
I didn’t get approved for the mortgage here in Spain. Maybe if I applied at other banks I would have eventually found a willing lender. But frankly, I’m not a fan of debt. The only debt I like is business debt.
So, if I had $125,000 worth of cash in my checking account, I would have no problem spending it on the purchase of this condo. If the cash was already available, I wouldn’t have to stress about liquidating my investments.
Cashing out my investments adds the extra fear of missing out on the growth of my portfolio. And it should.
The purpose of investing was to leave this money alone and let it grow. Cashing out these index funds means that I’ll have less in my securities portfolio in the future.
Asset vs. Liability
Is this condo going to be an asset or a liability?
If I’m living in it, it’s a liability. I’m consuming it for my housing needs. The floors wear out. The appliances get used. And the pipes deteriorate.
If I rent it out in the future then it will become an asset. But it’s not a great asset. I could rent this place for maybe €400/month or $480/month. Spending $125,000 on a condo in order to have a gross income of $5,760/year – meh, it’s not that impressive.
Gains vs. Losses
When it comes to cashing out my investments, I have to decide if it’s a good idea to take a loss or lock in some gains. Because some of my investments will have appreciated and some might be down.
In reality, I don’t have any investments which are down. All of them are up so I would be realizing a gain; mostly long-term capital gain. This will create a tax event for me. But because I’m in a low tax bracket, it shouldn’t be too bad.
If I had any investments which were down, I would prefer to sell for a small loss. I could then use this loss on my taxes to offset any profits. Any excess loss could then be carried over on future tax returns.
Spain vs. USA
Buying real estate in another country doesn’t mean that I have to choose between the US or Spain. Fortunately, my Spanish visa and US citizenship allows me to live wherever I like.
There are advantages to each country. Practicing medicine hassle-free in the US is becoming less and less likely. It’s possible for me to get my medical license in Spain and practice here.
Consequences of Liquidating Investments
My private brokerage holds my taxable investments. It’s from this stash that I would cash out the $125,000. I have about $220,000 in that account.
Even if I cash out this sum, I can always save it up again. But I will have wiped out all of my current gains and all potential future gains.
If I were to play the prediction game, I would say that my investment will likely do incredibly well over the next 10 years. That’s about how much time I will need to save up another $125k.