To Pay-off Or Not To Pay-off
Thru a bizarre turn of eventsI find myself in this scenario. We have 396K left on a 400K 5.5% fixed rate 30 yr home mortgage along with 750K cash in the bank and I am unemployed. We need to generate 80K a year with the mortgage or 50K a year without the mortgage to pay. I am trying to decide which would be better for us . To pay off the mortgage and then have 350K left in which to generate 50K a year
or not pay off our mortgage have 750K to invest and a 80K nut to crack each year. I am a reasonably intelligent person , but not a savy investor as some of you are , I am a business man however. Can I get some input here based on the degree of difficulty a novice investor would have either way ?. I have been to a CPA and many Bankers/Investment advisors and independent financial planners, Investment and real estate professionals etc. and everyone is advising us to do whatever it is that THEY are into ( good for them )and not necessarily what is going to be best for us . Where does someone like myself go , for a fee of course ,, to speak to someone who is very well versed and totally unbiased in which direction a potential investor should take should take , based on our own individual strengths and weaknesses , lifestyle preferences and priorities after taking into account all of the considerations like tax implications, the economy, the current trends, investment strategies themselves ,rather than referring me to another individual or another professional in which to gather the entire "load" of information. For example ,they render advise but then add ," you should check with your attorney" or you should check with your CPA" etc etc.. Everyone tells us to see someone else besides them for a plan . So I end up paying them for being even more confussed than I was before I went to see them . Is there some sort of "one stop shopping" office I can walk into ,and for a fee walk out with the complete package of options presented to us ? I am strongly considering paying off the darn mortgage just so I wont have to keep trying to decide what to do anymore and just have the responsibility of having a smaller amount to invest rather than a larger amount ..... but I dont want to do anything rash ! Can anyone here advise on this matter ? If this is not the type of question this forum was intended for could you perhaps refer me to appropriate one ? Thank you
Hello
I think the best thing to do is find a local RE investors club, they usually present different topics at each meeting on all different types of RE investing. I think that with the type of money you have in the bank, you should be able to generate a good cashflow. I don't know if in your position that I would pay off the mortgage, I would try and keep some as cushion and then invest the rest. Go to your local library and check out new books on real estate investing, they usually inform you of different ways to invest. Try to find local investors in your area and see what they are woking on, different things work well in different markets. Partnering with other investors is a great way to go. You could perhaps even be the bank on a few deals, charging points and high interest on short term loans - like hard money. You have many options, but you are right, it's got to be something you are comfortable doing and most of all enjoy.
Good morning!
You have many many options. I too am in a similar position as you. Although I am not unemployed, I have about the same amount of cash, my business can be feast or famine. So, therefore I am very conservitive in nature and live everyday as though I just earned my last 50 cents for the year!
I live well below my means and can relate to you wanting to shave 30k off your overhead. Especially not working and not sure how the results of a particular investment will pay off.
I am not affraid of risk. I take calculated risks, counting the costs plus a little extra in reserve.
the question you need to ask is; are you going to persue a job in your current field? or are you going to make 100% carrer change into a field that you have no idea what the expectations are?
Being that this is a REI board i am going to assume that you are wanting to try your hand at realestate right?
Assuming the latter, my dad is a financial advisor and very successful. his reccomendation would to have a 6mos reserve. I have a 2 year reserve. At my current expense level i have 2 years set asside that I do not touch. This allows me to try something new without the stress of how i am going to make $$ so i dont make rushed or hasty descisions.
Some folks leverage themselves out to the max. You dont seem the type. this is what I would do with my money and did.
First, I would put 60k in a loss reserve account to live on if neccessary. Things go well you wont use it ,but knowing that is what it is for is a breath of freash air.
Second, If i didnt want to sell my house and move down then I would see how much of a line of credit I could get IF my house was paid for.
Third, if i could get a line of credit for the amount of what i owed then I would pay off my house with MY cash and have a 0 bal on the line. Now I have less stress if any at all, and if i tap into the line I am only paying for what i use nothing more. On top of that ,the min pmt is interest only so if you used 50k your pmt would only be 291.67 at 7%
Just like investors business daily demands a discipline of a stop loss so should you.
Each to their own comfort level, but mine would be to take a portion of my cash and start investing in the arena you want to try. If a predetermined set of time goes by say 6mos 8mos etc. then it might be time to start looking in the field that got you that 750k in the first place.
This would be just one suggestion to do no matter what new venture.
If you get back on a fixed income you could always convert back to a mortgage pull your cash out to do whatever, Securities or cash in the bank.
Who knows what might happen. At least you will have a plan and you wont loose your hard earned savings to bad planning. Like you said you are intelligent.
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Holy Moley,
I just read that you retired in another post with no income. i thought you got laid off or something.
If you are 65, retired due to age, You are not supposed to have a mortgage! that is suppose to be part of the deal.
lufos gave sound advice in that post that I read. reread it. I would most definately do something NOW.
I am 34 and can afford to make a few mistakes and take some risk.
You might realy try to trim down that remaining 50k a year consumption down as far as you can. You dont need cable right? Get my point.
For awhile you need your health insurance, term life if you have a wife, food, and electricity. No car notes no nada!!!![ Edited by WheelerDealer on Date 02/08/2004 ]
MrInvestor,
First, I didn't take the time to read everyone else's response to you, so forgive me if I repeat anybody.
We'll only be able to give some very basic advice because no one here fully understands your financial situation or your tolerance level for investing. That said:
I'd pay off the mortgage. That free's up a ton of debt, and you can always borrow against the property again, if needed. In fact, you could pay off the current mortgage and open an equity line at the same time, if you wanted.
If you pay it off, you'll still have $350K to invest. I'll assume that you're thinking about investing in real estate since you came to a real estate website for advice.
First, I'd setup a cushion savings account of $100-150K. That alone covers 2-3 years of your income. Invest the other $200K.
Real estate is a very broad area, and with that much $$$, you're open to several different investing options. Truthfully, it'd take a small book to give you all of the options available to you.
You could loan money to other investors, be cash partners to investors, buy multiple rentals/resells (at discount) for 10% down, or buy 2-3 properties for cash and build from there.
Whatever you do, take some time to educate yourself on it, and don't rush to jump into anything. Your savings will last for a minimum of 3 years, so you''ll have time to build that income up. Don't speculate, invest. The difference is that speculators buy land/property hoping it will appreciate, whereas an investor buys property at a discount in order to make a profit now, whether in rental income or reselling.
Read some more here and you'll get a few ideas.
Roger
Do you really need a 400k house? The price range of the house you are wanting to live in relative to your income is not well balanced in my opinion. You are wanting to live in a house that very few people can afford, while having an income that is near the median family income. If you could get by with a $250k to $275k home which is still better than probably 80% of homes, you could make plenty of income to live off of investing in rental properties. Have you read "The millionaire next door"? According to that book, most millionaires live in middle class neighborhoods.
As Dan said you may want to lower your expense by moving to a smaller house. Find a good mortgage broker he may be able to help you safely invest your money in real estate. What I am speaking of is becoming a private/hard money lender to rehabbers. Most HML's charge 15-18% annual interest and 5-10% origination fee. Even if you kept $250,000.00 in reserve. You could still generate a $100,000.00+ income after you pay the broker a commission.
I don't know if I'd pay OFF the mortgage. Maybe consider paing it DOWN. If you need the cash you'd have to take another loan to get it back out. I don't believe tying cash up in the mortgage is the answer. Just my 2 cents...
You are going to get a lot of different opinions here! I know that you are in your early fifties. The 400k that you borrowed is the cheapest money that you will ever borrow. Do not pay it off.
You need money to make money in this world. If you educate yourself you can be a real player in the real-estate game.
I would really like to know what Lufos has to say?
My advice, keep the 400k loan at 5%.
Educate yourself as you have the money to do it and turn that 750k into 1.5 million in the next two years.
Best Riches,
Jeffrey Adam
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I agree with those who say that your mortgage money is the cheapest money you can get; however, I also argree with downsizing to a smaller house that way you still tap into the cheapest rates in decades but have more money working for you.
Say for expample you downsize to a 250K house. That gives you anohter 150K making a total of 900K to invest and have working for you. Your yearly needs with a 250K house based upon your numbers would probably be around 65K. At only 7% your 900K is generating 63K without doing anyting. A good financial planner should be able to generate 7% for you even in a down market. See the picture?
Have your money work for you instead of you working for your money. Being a hard money lender with 900K at 10% with points, etc...is going to earn you over 100K without doing a thing. Do you think you can be comfortable in a 250K house without having to do any work excpect cash some interest checks <IMG SRC="images/forum/smilies/icon_cool.gif">
Just my .02 worth,
Q
P.S. If you do decide to become a hard money lender I'll be one of your first clients but you have to cut me a deal. 9% interest and no points guaranteed by me with real property.[ Edited by RunningQ on Date 02/08/2004 ]
Regardless of your final decision, consider that for $350K to generate $50K in income you need to find investment vehicles yielding 14.3% or better. For $750K to generate $80K in income, you only need a 10.7% return. '
If you can find a way to generate at least 14.3% annual return, why not put all $750K (or as much as you can risk) to work? With the full $750K working at 14.3%, you are generating $107K per year. Use your excess earnings to pay down your mortgage balance if you feel the need to.
I wholeheartedly agree with the others who proposed that you reduce your cost of living by reducing your lifestyle and by downsizing your housing.
Great idea Running Q. I have a couple friends of mine who turned hard-money lenders and have been very successful.
They both make $250k - 350k a year.
I also agree with possible downsizing,
or even refinancing your house with an
interest only loan for now and maintain the same lifestyle with the tax benefits.
You only live once!
I strongly suggest that you educate yourself in real-estate and get in the game. You could play the pre-foreclosure market with great success offerring cash for keys. I am not talking about uhaul money! I am talking about offerring $10k - $20k cash to existing loan, depending on situation.
Best Riches,
Jeff Adam
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I want to thank everyone for their considerate replys to my post ,,, this information has helped me immensely. As the fact that I live in a "high priced" house seems to be an issue with most ,, in the interest of fairness please let me point out that the house itself is just a little modest little 1644 sq ft cottage build in 1949,,, the house itself is appraised at only 69K.........it is the oceanfront lot 50'x150' that it sits on which is worth all the money,,,,,,,and this in itself is an investment .(smartest investment I ever made actually ) I paid 500K 8 months ago and it has already appreciated up to 650K with no end in sight . Beside that it is gorgeous here !! I figure the house has offered the best of both worlds. Solid appreciation and a fabulous www.lifestyle.I think some of you guys should consider such a purchase yourselves. Invest in an oceanfront property ! Sure the mortgage payment will be higher ,but consider it a "forced savings " program which will appreciate at LEAST 4-5% each and every year regardlesss of what the rest of the world is doing , and not only that ,,,, the interest is tax deductable.... and it will bring tears of joy to your eyes every morning when you wake up ! This house is a pleasure , a pension fund a 401 K all wrapped up in one .
Do not pay off the house. There are 1000's of ways to earn better than 10% in real estate. HML's is a good way or build a 100 story condo project where your tiny house is. Imagine the view from your new penthouse. That may be a little far fetched and risky but it could be possible with that much loot. I am sure you can find many deals that are less risky and not ultra consertive and also not management intense either. You should be able to generate 10% cash on cash with 10 % appreciation almost anywhere in Fl
Good LUCK and Thank You
Hope this helps some
Ted Jr
Well now that I know the house is on the BEACH I would never sell it either, even it means freeing up some cash. Keep the house, enjoy the serenity which no amount of money can buy, and use your 750K of savings to work for you. When I think of a 450K house I think of more rooms than the occupants can use, enough bathrooms to have a "neighborhood pee party, and a kitchen big enough to cook for an army. But since the main value of your house is its lot, keep it and enjoy it. Great investment!!!
If you are smart about it that 750K should return you 75-100K every year without having to be ultra risky. I'd seriously consider meeting with your local Real Estate Investment Club and see if you could be a private lender/hard money lender from some investors. Don't pick any "joe schmoe" but interview them, get to know them and when you find a few good ones they'll put your 750K to work (backed ofcourse by real estate) and you'll earn some nice interest.
Good Luck...I'm jealous of your house <IMG SRC="images/forum/smilies/icon_smile.gif">
Q[ Edited by RunningQ on Date 02/09/2004 ]
Quote:I think some of you guys should consider such a purchase yourselves. Invest in an oceanfront property ! Sure the mortgage payment will be higher ,but consider it a "forced savings " program which will appreciate at LEAST 4-5% each and every year regardlesss of what the rest of the world is doing , and not only that ,,,, the interest is tax deductableAlmost everything in the country has appreciated 4-5% over the past years. Last year, the national average appreciation was slightly above 7%.
What we are seeing is a huge investment in a "non-producing" asset. Your house (and the land it sits on) is not generating any income, but appears to be a large drain on your cash reserves. Sure the mortgage interest is a tax deduction, but if you are in the 10% tax bracket (you said you are unemployed) then the interest deduction is of only marginal benefit.
Why not convert your house into a rental? At a $2500 monthly rent, you have your mortgage payment covered. Your mortgage interest, property taxes and hazard insurance expenses almost completely offset your rental income for a cash flow neutral position. The depreciation expense gives you a net passive income loss that offsets your other ordinary income on a dollar-for-dollar basis up to $25K.
If you have no income tax liability, how much of a mortgage payment could you make with the money you would have been sending to the IRS? Buy something on less expensive land for your primary residence and let your renters help you pay off your picture postcard property, and, at the same time let the IRS help you pay off your second home from your income tax savings.
But Dave,,,,,,,, isnt everyones home a non producing asset ? Besides I wont be unemployed and earning no income for long after I put your other advise to work ! I can appreciate the numbers you run in these things thou , number rule in my book. But what a view !
i agree i would pay it off and get a line of credit to use for your investment