Author Topic: In need of some direction  (Read 8152 times)

jsloan

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In need of some direction
« on: June 25, 2012, 07:31:42 PM »
Hello everyone, first time poster!  My wife and I are recent visitors to the MMM forum/website and are overwhelmed with this great source of financial information!   

We are both 31 and have 2 children  (3 years old and 9 months).  Over the years we have been generally frugal and have no major debt outside of our homes and my school loans.  My wife works from home part time running/working for our side business and I work at a corporate day job.   Recently we have talked about how great it would be if I could eventually work exclusively from home as part of our side business and enjoy some of the perks of working my own hours and working less in general.  We would like to have enough assets built up for me to quit my full-time job by the time I am 40 (a little over 8 years from now) at the latest.  We are not looking to retire by 40 per se, but would like to be able to live on the money that we make from our side business and have a hefty cushion in place in case things with the business donít go well. 

We are trying to formulate a plan to build assets quickly and make our money work for us the best we can, but since we are just now really getting serious we have some questions.  I have included a breakdown of our assets, debts, income and a few questions below.  Any insight that you can give would be appreciated! 

Retirement Accounts
My Retirement Accounts:
Current 401k: $24,000 (I contribute 10% with 3% company match)
Previous Employer 401k: $24,000 (we are working on having this rolled into the above account)
Previous Employer State Retirement Plan:  $12,000

Wifeís Retirement Accounts:
Traditional IRA Account at Sharebuilder:  $20,000 (she contributes the max $5000/yr to this account)
Traditional IRA account at e-trade:  $5,500
Previous Employer 401k: $21,000
401k Rollover at E-trade: $7,000
Total:  $113,500
Non-Retirement Accounts
E-Trade Brokerage Account: $22,000
ING Money Market Account:  $15,000 (this includes $10,000 earmarked for emergency fund and the rest is for our next car purchase and periodic insurance charges)
Total: $37,000

Credit Debt:
-Mortgage on Primary Residence:  $171,000 @ 4.85 (PITI  $1300) Ė Property is worth approx $230,000
-Mortgage on a Rental :  $149,000 @ 6.625 (PITI $1471) Ė Not exactly sure of property value.  Most likely between 190 and 200k
-Student Loan - $7,300 @ 2.125%
-All credit cards are paid off monthly.  We generally have $1500 - $2000 leftover monthly to save but are looking at ways to trim our discretionary expenses to save more. 

Income:
My corporate job: $85,000/yr
Consulting business: $40,000/yr (this is the business I would like to quit my day job to grow) 
Rental Income:  $1500/month

My Questions:
1. Based on the info above, should I try to increase my 401k contribution to the max allowed?  I am in the process of rolling my old 401k into the 401k with my current employer because that is what was suggested to me by the financial planner that my company deals with.  Is this a good idea or should I roll the old 401k somewhere else? 

2.  We are trying to sort through what to do with my wifeís accounts.  Our initial thought was to transfer the e-trade traditional IRA to the Sharebuilder account, and then invest everything in the Vanguard funds (VFINX, VB, VDMIX, and VBISX) suggested by MMM.  Does this seem advisable given our situation?  We would also like to roll the two 401k accounts together as well, but then what should we invest that money in?  Should we invest in the same Vanguard funds or something different? 
 
3. Does anyone have any suggestions for funds that we can open to keep our non-retirement savings in? 

4.  We are not sure what to do about our Rental Property.  We purchased it back in 2003 right before we got married and lived in one of the units (itís a twinplex) until we bought our house in 2006.  We put very little money down and as a result now get very little cash flow from it ($25/month max).  It is in good condition so we donít have much per year in the way of repairs, but we do pay approx $75/month for lawn maintenance in the summer and snow plowing in the winter.  We have been thinking about refinancing to get a lower rate, but since we arenít sure of the value there is a chance that we still donít have the 25% in the property that all lenders seem to require for NOO properties.  Is it worth paying down the loan amount, or should we just cut our losses with this property and sell?  And if we do sell, we will have to reinvest in another property to avoid Capital Gains Tax, correct?

All comments and suggestions are appreciated.  Thanks so much for taking the time to read this! 

arebelspy

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Re: In need of some direction
« Reply #1 on: June 25, 2012, 08:43:32 PM »
We are not sure what to do about our Rental Property.  We purchased it back in 2003 right before we got married and lived in one of the units (itís a twinplex) until we bought our house in 2006.  We put very little money down and as a result now get very little cash flow from it ($25/month max).  It is in good condition so we donít have much per year in the way of repairs, but we do pay approx $75/month for lawn maintenance in the summer and snow plowing in the winter.  We have been thinking about refinancing to get a lower rate, but since we arenít sure of the value there is a chance that we still donít have the 25% in the property that all lenders seem to require for NOO properties.  Is it worth paying down the loan amount, or should we just cut our losses with this property and sell?  And if we do sell, we will have to reinvest in another property to avoid Capital Gains Tax, correct?

Definitely refi.

If you don't want to keep it, consult with a CPA to see what your capital gains will be (especially if you took depreciation on your taxes, but you may have to pay depreciation even if you didn't take it).  Otherwise yes, you can invest in another property, but it must be done in a very specific way (via a 1031) and planned and executed ahead of time.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

gooki

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Re: In need of some direction
« Reply #2 on: June 25, 2012, 09:01:47 PM »
As above refinance, I'd personally refinance both loans, even 4.85% is more than you should be paying in this market.

Other than the home loans you appear to be in a very good position. Your side business is already earning a good income, and if you keep your expenses under control, and the interest rates on the loans as low as possible, I'm sure you'll reach your goal before you are 40.

PS if for any reason you don't refinance, I'd be paying pay down that rental loan ASAP. 6.625% is a very good guaranteed rate of return on your money, hell even 4.85% of you main home is high enough to warrant repayment over investment.

skyrefuge

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Re: In need of some direction
« Reply #3 on: June 25, 2012, 09:09:24 PM »
1. Based on the info above, should I try to increase my 401k contribution to the max allowed?  I am in the process of rolling my old 401k into the 401k with my current employer because that is what was suggested to me by the financial planner that my company deals with.  Is this a good idea or should I roll the old 401k somewhere else? 

Sounds like pretty junky (biased?) advice from the financial planner to me.  The only reason I can think of to roll your old 401(k) into your current one (rather than into an IRA) is if your current 401(k) has lower expenses than you can get in an IRA.  But since you'll be opening a Vanguard IRA and investing in index funds (right?), and should be able to buy into their even lower-expense Admiral shares (if you don't split into too many different funds), then the chances that your 401(k) can beat that IRA are very low.  Generally the chance to get your money out of a 401(k) is a "woo hoo!" moment, and it seems like your wife could also roll her four 401(k)/IRA accounts into a single to simplify things (and possibly lower expenses).

And yeah, go ahead and max out your 401(k), and then a Roth IRA for yourself too if you have money left over.  Poor sol is looking for additional tax shelters beyond those right now, he'll be mad if he sees you just letting big tax-shelters go unused.  :-)
« Last Edit: June 25, 2012, 09:11:42 PM by skyrefuge »

tooqk4u22

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Re: In need of some direction
« Reply #4 on: June 26, 2012, 07:32:41 AM »
Refi both as soon as possible - the rate on the rental is egregious - you should easily be able to save 2% or more on the rate and that will translate to $150+ a month in extra cash flow for doing nothing more than signing your name.  Your primary is really high compared to current rates, which are just under 4% or you could switch to a 15 year currently around 3% - payment would be higher but you would be paying off quicker at a lower rate and if you refi both it could be close to neutral from a cash flow perspective.

Also agree with sky - don't rollover existing 401 to current one - roll it over to an IRA (don't withdraw) at vanguard or fidelity - both will have lower costs and more options. 

velocistar237

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Re: In need of some direction
« Reply #5 on: June 26, 2012, 08:49:12 AM »
My Questions:
1. Based on the info above, should I try to increase my 401k contribution to the max allowed?

If you're about to refinance two properties, you might want to put your short-term savings toward those closing costs. Otherwise, yes.

3. Does anyone have any suggestions for funds that we can open to keep our non-retirement savings in? 

It's generally good to put tax-efficient investments into your non-retirement savings. I'm not sure exactly which Vanguard funds qualify as tax-efficient.
http://www.bogleheads.org/wiki/Principles_of_Tax-Efficient_Fund_Placement

jsloan

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Re: In need of some direction
« Reply #6 on: June 26, 2012, 09:32:58 AM »
Thank you all for your replies, this is great advice!  We are now looking into loan rates for our rental and home!  We also have a better grasp of what we need to do with our IRA/401K situation.   

I have one more wrinkle to add: Since we have bought our house we have talked about possibly adding on at some point because of lack of bathrooms (1 usable bathroom, 1 basement "bathroom").  There isn't a great need for this now since our children are little but we do see this as something we would like to do in the future.  I do a lot of work myself around the house (plumbing, carpentry, tile, etc) so we would plan on the addition being a 50% insourcing job (mainly we will need a construction crew to pour the foundation and frame it in.  With this in mind, we have been somewhat hesitant to refinance because we had thought that we would include the cost of the addition in our next refinance. 

So I guess we see the following options:

1.) Include the cost of the addition in a home refinance now since rates are low.  (We are not really considering this unless the numbers work out)
2.) Refinance our home now and save what we can for a few year and then open a HELOC to pay the rest of the cost of the addition. 
3.) Refinance our home now and begin saving for the cost of the addition and pay in cash when the time comes (basically we will be our own contractors).  If we don't have the money saved we cannot begin building.
4.) Figure out a way to possibly add more livable square footage to our current house.  Possibly finish out more of our basement and upgrade our basement bathroom by waterproofing, etc.

Obviously 4.) would be the most frugal option, but I think we would both be ok with working a few more years (at our side-company) to be able to add more living space.  Also, I'm factoring in that my wife and I would be doing a lot of the work that doesn't require the use of heavy machinery.

Are we being non-mustachian?     

grantmeaname

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Re: In need of some direction
« Reply #7 on: June 26, 2012, 09:58:09 AM »
Would you consider renting out the basement as a suite or subletting one of the rooms while on your way to retirement? That way, you could get the renovations you wanted and they may pay for themselves. Of course, it may not feel worth it to you, but we've had a couple of forum members consider it as a viable option.

jsloan

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Re: In need of some direction
« Reply #8 on: June 26, 2012, 10:21:01 AM »
Renting out part of our home isn't something we would like to do.  I would probably rather continue working on our side business to make up the cost than rent out a room (my job being low stress and flexible).   

mechanic baird

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Re: In need of some direction
« Reply #9 on: June 26, 2012, 10:33:43 AM »
We are not sure what to do about our Rental Property.  We purchased it back in 2003 right before we got married and lived in one of the units (itís a twinplex) until we bought our house in 2006.  We put very little money down and as a result now get very little cash flow from it ($25/month max).  It is in good condition so we donít have much per year in the way of repairs, but we do pay approx $75/month for lawn maintenance in the summer and snow plowing in the winter.  We have been thinking about refinancing to get a lower rate, but since we arenít sure of the value there is a chance that we still donít have the 25% in the property that all lenders seem to require for NOO properties.  Is it worth paying down the loan amount, or should we just cut our losses with this property and sell?  And if we do sell, we will have to reinvest in another property to avoid Capital Gains Tax, correct?

Definitely refi.

If you don't want to keep it, consult with a CPA to see what your capital gains will be (especially if you took depreciation on your taxes, but you may have to pay depreciation even if you didn't take it).  Otherwise yes, you can invest in another property, but it must be done in a very specific way (via a 1031) and planned and executed ahead of time.

I actually just sold my 2002 rental I took depreciation for 10 years. I thought I would get kicked in the butt by IRS since I didn't do a 1031 exchange. Turns out, your basis will include your mortgage. Given that your mortgage is still very high, you probably won't see much capital gain if there is any at all. So I wouldn't worry about the tax bite..

It seems that this rental can provide you a pretty good income if you shall pay it off.. Try to refi it. If they charge one percent higher than primary, you will still be better off.. Plus, rental gives you pretty good passive loss each year so you take advantage of its tax shelter right now.. If I were you, I would try to refi and keep it, If refi fails, I would try to pay it off as soon as possible to turn it into steady income.

gooki

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Re: In need of some direction
« Reply #10 on: June 26, 2012, 01:34:04 PM »
1.) Include the cost of the addition in a home refinance now since rates are low.  (We are not really considering this unless the numbers work out)
2.) Refinance our home now and save what we can for a few year and then open a HELOC to pay the rest of the cost of the addition. 
3.) Refinance our home now and begin saving for the cost of the addition and pay in cash when the time comes (basically we will be our own contractors).  If we don't have the money saved we cannot begin building.
4.) Figure out a way to possibly add more livable square footage to our current house.  Possibly finish out more of our basement and upgrade our basement bathroom

3 or 4. You'll have more than enough cash saved to do this when you are ready with the amount you save from re financing.

arebelspy

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Re: In need of some direction
« Reply #11 on: June 26, 2012, 02:19:33 PM »
I actually just sold my 2002 rental I took depreciation for 10 years. I thought I would get kicked in the butt by IRS since I didn't do a 1031 exchange. Turns out, your basis will include your mortgage. Given that your mortgage is still very high, you probably won't see much capital gain if there is any at all. So I wouldn't worry about the tax bite..

Fire your accountant; this is wrong.

Your mortgage is irrelevant to your cost basis and depreciation recapture.

Otherwise why wouldn't everyone refi to the max before selling to reduce taxes owed?

What you owe on the property doesn't matter tax-wise. The IRS still wants its money.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

tannybrown

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Re: In need of some direction
« Reply #12 on: June 26, 2012, 02:23:07 PM »
I was thinking the same thing when I read that.  See jlcollins' story about owing depreciation back when he sold his rental at a loss:

http://jlcollinsnh.wordpress.com/2012/03/29/how-i-lost-money-in-real-estate-before-it-was-fashionable-part-v-sold-and-the-taxman-cometh/

mechanic baird

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Re: In need of some direction
« Reply #13 on: June 26, 2012, 03:04:34 PM »
I actually just sold my 2002 rental I took depreciation for 10 years. I thought I would get kicked in the butt by IRS since I didn't do a 1031 exchange. Turns out, your basis will include your mortgage. Given that your mortgage is still very high, you probably won't see much capital gain if there is any at all. So I wouldn't worry about the tax bite..

Fire your accountant; this is wrong.

Your mortgage is irrelevant to your cost basis and depreciation recapture.

Otherwise why wouldn't everyone refi to the max before selling to reduce taxes owed?

What you owe on the property doesn't matter tax-wise. The IRS still wants its money.

I was puzzled about it too!! I asked him twice and he said it was correct... And signed off on it.. I am going to find another CPA now..

arebelspy

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Re: In need of some direction
« Reply #14 on: June 26, 2012, 05:50:50 PM »
I actually went and googled to confirm before I made that post so I didn't stick my foot in my mouth.

I was 95% sure, and your post knocked me to 90.  After reading about it more, I'm 99% sure now, the 1% being some rare, exotic case I haven't heard of.

I read 5 or 6 websites on it and couldn't find anything to justify your claim, and everything confirming that your mortgage doesn't matter.  Here is one example that fairly clearly describes how to calculate cost basis: https://ttlc.intuit.com/post/show_full/bwJpH0HB8r4AYVeJfaac24

Sorry for the bad news.  =/
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

mechanic baird

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Re: In need of some direction
« Reply #15 on: June 27, 2012, 12:18:37 PM »
I actually went and googled to confirm before I made that post so I didn't stick my foot in my mouth.

I was 95% sure, and your post knocked me to 90.  After reading about it more, I'm 99% sure now, the 1% being some rare, exotic case I haven't heard of.

I read 5 or 6 websites on it and couldn't find anything to justify your claim, and everything confirming that your mortgage doesn't matter.  Here is one example that fairly clearly describes how to calculate cost basis: https://ttlc.intuit.com/post/show_full/bwJpH0HB8r4AYVeJfaac24

Sorry for the bad news.  =/

thanks for checking mate.. Yeah, I did the same, googled around and even read IRS publication, which was not a fun read... But I am with ya..I think the CPA goofed up.. meaning, I will have to send in a much much bigger check for the next quarterly tax form. bummer.. there goes a few years of my FI.. damn it. but you don't ever wanna mess with the tax men..

mm1970

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Re: In need of some direction
« Reply #16 on: June 27, 2012, 12:28:49 PM »
I wouldn't roll your 401k into the new company.  It's easier, but generally not the best bet.

I did that once, and only once.  My new company was a startup, we got bought, the IRS froze the 401k for over a year to handle the buy-out and transfer.  This was in 2000.

You know where this is going.  Since the new company had JUST started the 401k, most people didn't care - they only had a few hundred dollars in there, but let's just say my $18,000 turned itself into $7000 pretty quickly over that year.  Not that I would have necessarily done better on my own, but ouch.

Now when I change jobs, I transfer to IRAs.