Question for Flagpole Willy or other financial gurus

The Bammer wrote:

Would you mind looking over my family's financial situation and telling me if you would recommend any changes?

Me:31, government income @ $80,000 to increase 10%/year until $100k ceiling

Wife:27, income @ $45,000 (sales)

Child:7

Home: $140,000 conventional mortgage, worth about $220k-300k

$150/month HOA

Rental property: $190,000 interest-only until 2016. worth about $210k-260k.

$375/month HOA

tenant only pays $1150/month. Need the address though for the public school.

Cars: both paid off.

$20,000 in emergency funds set aside in 4.75% apy savings.

$6,000 in savings set aside for honeymoon. Will probably only use $4,000 though

me: pension

her: ~20k in a 401k.

child: pre-paid college program, currently worth ~$7,000

Ok. Lets break this down:

1) Since you have a mortgage of $140,000 on a house that is worth $300,000 TOPS, I'm assuming you're NOT in a super expensive area. That's good.

2) Cars are paid for. That's good.

3) Conventional loan on residence. 30 years? I say 15 years is better.

4) Rental property. Interest only loan? Why? That is NOT a good idea if you ask me. You get to 2016 and you'll either have to pay a big loan rate or refinance right (or sell)? I hope you are saving the $1,150 a month from the tenant toward that house -- that will be $110,400 you can put toward that house then. I'd either make sure to do that OR refinance NOW -- unless you see yourself selling the house before 2016. If you plan to keep it, I'd refinance now while the rates are low -- if you have good credit that is.

5) Salary -- you make $125,000 a year RIGHT now with a big increase for YOU until you hit $100,000; you'll be at $145,000 MINIMUM within 3 years. That's pretty good. Honestly, you should pay your residence off in 3-4 years. I would with that kind of income.

6) The home owner's association fees seem a lot on both homes. I'm not wild about that, but I don't know enough about your area to know if that's common there. Another reason to get those freakin' homes (especially your residence) paid off.

7) Good start on the education for the kid. I'm not a big fan of completely funding a child's education as I had to get scholarships and work to go to the school of my choice, so I figure a little investment from my kids is necessary. I'll help them out for sure as you are. You want to dump more in though to really help them out and I'm ok with that.

8) Emergency fund is ok as long as you have a tenant in that other house. If you don't, you might want to have another $10,000 in there. Since you're married with a kid, I'd use 6 months of expenses. That second house really ups those expenses.

9) Retirement -- At age 27 your wife has $20,000. That's a decent start. She needs to continue adding to it annually -- 15% of her salary a year if she can. Your pension is nice, but as I like a lot more control, I hope that either you can get at that pension in a lump sum come retirement or that you start another retirement fund or non-retirement mutual fund.

10) Debt -- Your total debt comes from your homes completely. That's good, but it is a LOT of debt -- $330,000 in debt. That's why I say to get rid of that residential debt. If 4 years from now you didn't have a mortgage on your residence, you could either invest that payment each month OR start to pay that other house off. Normally I'm for getting rid of a house payment (especially for someone with a pension waiting) rather than invest in the market, but if you just have that second house payment, I'd probably dump more in the market and just make sure that tenants are paying toward that other house OR that you sell it before that interest-only loan is up. Is the tenant covering the monthly mortgage payment? I'm guessing not quite. That's definitely a bad thing, but I do understand your reasoning for doing it.

Summary:

You're not doing badly at age 31 with a 27-year-old wife. Your income in 3 years will probably be $150,000 (assuming she makes more too). Just need to get rid of that debt as soon as you can and then start investing more for retirement. Don't acquire more debt (home equity loans or credit cards). The rental is a concern. In this market you can't really raise the rate as the tenant will just go elsewhere. Again, if you're going to keep it for a while (10+ years) I'd think about refinancing to lock in a low rate.

You're on the way to financial freedom, but still not on solid ground. With some bad luck or another child, or a tenantless house you could fall into a bad way. That's why I say you need to knock some of that debt down now while times are good. Good luck brother.

Thanks, Flagpole.

Yes, the tenant is covering the monthly mortgage payment of $1,050 however like I was saying, the HOA is $375 per month. And the annual taxes are probably between $3,000 and $5,000 (I don't know yet because last year we had homestead exemption) So it is a negative cash flow situation. I kept this condo because I needed the address for the public school. That's also why I went for the interest-only loan at the time of purchase - it was the only way I could afford the condo at the time before we were married.

My wife wants to sell both of our properties and buy a more expensive house in the same neighborhood as the rental condo. Why? Because our current home is a 2 bedroom/1 bath, 900 sq feet, and she wants to have more kids (we have no space). She doesn't think it's necessarily more risky to have one $500,000 house in the best neighborhood since we currently have two $250,000 houses in two different neighborhoods. It would be the same amount of real estate, dollar-wise, we wouldn't have to worry about a tenant, and this new home would be in the neighborhood with the desirable public school. Actually, this home would be the cheapest single-family home in a neighborhood of $1-$4 million homes. Does this sound like a reasonable decision? I am generally risk-averse, but a big part of me feels like the rental condo is a bloodsucker.

Keep in mind that home ownership is not the best investment with your money. The only way real estate wins is with leverage.

http://money.cnn.com/galleries/2007/real_estate/0704/gallery.stocks_v_realestate.moneymag/index.html

I would consider keeping one of those properties as an invesment, but look into renting a bigger house for your family. Take all the money you save on a home and put in a a nice investment portfolio other than IRA/401K. You need to get over the risk adversion with a timeline goal with each position in your portfolio.

IMHO, home ownership pays off when you are retired and the property taxes are presumably waived.

Spend your time running, with your family, and not fixing the house.

Do you have some typos there?

"Take all the money you save on a home and put in a a nice investment portfolio other than IRA/401K."

Why don't you like tax deferred savings (or in the case of a Roth tax advantaged savings)?

"when you are retired and the property taxes are presumably waived."

I don't know about your state but the state I live doesn't ever waive the property taxes on a house. Did you mean that after the mortgage is paid off?

honeymoon?

I thought you said you were married?

Dude, you are in better position at your age than most by far.

Continue to buy a diverse set of assets. Consume less and accumulate appreciable assets more. Don’t waste your money on a wine collection or other bs that you plan to consume but like to talk about how much it is worth.

Keep your investment costs as low as possible. Don’t buy funds with loads. Buy mutual funds with very low annual expenses. Don’t overtrade.

I’d make some real low ball bids on some properties in the neighborhood where the desirable school is located. You might find a willing seller in this market.

But I'd make the bids with a contingent that you sell your house in a set time period.

Tax deferred is great, but you need some plain old liquid money as well that is not tied to retirement. Say you are 35-50 years old and need/want some cash for a car... or you get laid off. Also a 401K will likely have a limited set of investment options. An IRA has more options, but has a smaller contribution limit. Diversification of after retirement and before retirement investment types is prudent. Also, long term capitol gains are taxed at 15%, nice. A Roth is good if you are in a lower tax bracket. Otherwise, best to do a regular IRA/401K and hope your tax bracket is smaller when you retire. It is very easy to pick Morningstar 5 star funds and have great returns without needing to be overly proactive. Keep in mind this rating system is strictly numerical and is NOT an opinion based rating. A little research here can go a long way.In my state, property taxes are postponed or reduced if you are of retirement age, I believe. I know I had to pay a lump sum of property taxes on my grandmother's house when she died since she had postponed them. Also, many counties in my state allow a one time transfer of property tax assessment for those shy of retirement to allow them to downsize. States seem to vary greatly on this subject. http://www.retirementliving.com/RLtaxes.html

what up? yo wrote:

Do you have some typos there?

"Take all the money you save on a home and put in a a nice investment portfolio other than IRA/401K."

Why don't you like tax deferred savings (or in the case of a Roth tax advantaged savings)?

"when you are retired and the property taxes are presumably waived."

I don't know about your state but the state I live doesn't ever waive the property taxes on a house. Did you mean that after the mortgage is paid off?

Granted, he should not put all of his money into a 403(b) or 401(k). He will have expenses. He should also start to save for his kids college expenses in either a coverdell acount or 529 plan.

But if his wife works for a employer that has a 401(k) with a match, he should have her contribute at least to the match. Then contribute to a Roth IRA at a discount brokerage. He can contribute up to $10,000 a year this year. This money will grow tax free. That is a good deal. He could always take out the contributions without a hassle if he needed extra cash.

He won't be in a low tax bracket in a few years. He and his wife will have to look at the expenses and options between the 403(b) plan that he could potentially contribute and her 401(k) plan if the company she works for offers one.

A small capital gains tax each year adds up over time with the effects of compound interest.

I think your wife is right. ESPECIALLY if you plan to have more kids and need a bigger place anyway. Sell that rental first, then work on selling your residence. It is GREAT that it is one of the lowest priced homes in the neighborhood -- those are the homes that sell; location without having to pay a ton. That house will sell quickly. But, sell the rental first. You are correct that the rental is a bloodsucker. You are only paying the interest and with the taxes and HOA fees it is negative. What happens when you finally have to pay toward the principle? I'd sell it tomorrow. You get on top of your real estate debt and you're doing pretty well. Even if you swap the two homes for one that costs the same as the two put together, you have lowered your risk because you no longer are relying on a tenant. I bought a more expensive house to be in the most desirable school system and it has paid off big. I highly recommend paying extra to be in the best school system. You're on th eright track brother.

Thanks to all three of you. I'm going to contact my lender and make sure that we will qualify for mortgages large enough to afford a home in that desirable neighborhood. My only concern is whether the tenant will scare off potential buyers, and the fact that the tenant is a friend. It will suck to have to "kick him out". Maybe he'll buy the place. I could offer him his year's rent as a refund if he buys it, I suppose.

P.S. To answer the honeymoon question, we're recently married and haven't yet gone on the honeymoon. Sometimes people wait a few months before honeymooning...

Flagpole,

You said you would sell that bloodsucker rental property tomorrow. Well, I offered to sell it to the tenant but he doesn't want it. His lease goes until the end of September. Problem is - with all his junk and clutter in there, it'll be super-difficult to sell (maybe impossible). He offered to leave early (mid-May) if I want. But with him gone, the place will be costing me ~$1700 per month instead of ~$600 (his rent was $1100). Do you think it's worth it to have him out of there? Or should I try to sell it with him in it?

The worst part about this property is that I bought it at the peak of the market for $252,000. Now the same units are asking as little as $180,000 (short sale) and there's a bunch between $209-$230 that aren't even moving. If I can sell it for $220,000, I've lost HALF my $60,000 down-payment. But I'm afraid that if I try to ride the storm, that in a few years it'll be worth even less, maybe less than my mortgage!

What do you think? I don't know what to do.

WHAT GOVERNMENT DO YOU WORK FOR THAT GIVES YOU AN 10% INCREASE--I HOPE ITS NOT OURS

Sell your house and buy another while you still have good credit. Then quit paying on the rental property. let the bank take it off your hands since you have no equity in it anymore.

Pronate My Supinate wrote:

WHAT GOVERNMENT DO YOU WORK FOR THAT GIVES YOU AN 10% INCREASE--I HOPE ITS NOT OURS

It's not the US Federal Gov't. So unless you live in my county and pay property taxes, then no.

Bankr, very funny.

Bankr wrote:

Sell your house and buy another while you still have good credit. Then quit paying on the rental property. let the bank take it off your hands since you have no equity in it anymore.

This is good advice, but you're getting into the same trouble with your home.

The bankers created the game so they win, and you lose.

The answer is to stop playing their game.

If you've got a renter in there who might stay, you might have to just keep that property for now until the market starts to tick up again -- this is one of many reasons why I'm against interest only loans. If you want out of that trap of that house, you just might have to sell it at a loss. You wouldn't be the first to have had to do that. Then, make smart financial decisions later on down the road. People have become wealthy in real estate yes, but there have been LOTS that have been kicked in the ass by it too.

If you think you need to do a short sale on that house, then you should sell your current residence first and get a new mortgage (if you can) on the different house first before that short sale -- because a short sale will ding your credit and you might not get the best rate then.

Of course, in times of a housing recession like there is now, you might just have to wait it out a bit. If your renter moves out in September you might have to do a short sale then if you can't get another renter in there. There's no easy answer here. You're in a tough spot right now. I wish you luck.