Author Topic: Case Study - $800,000 in debt and where to start?  (Read 23169 times)

thebudgetbloggo

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Case Study - $800,000 in debt and where to start?
« on: August 29, 2017, 10:22:06 AM »
It's a big number, yes.  I own three rental properties.  I'm trying to find some balance here (pun intended). 

I used the spreadsheet recommended but it didn't have enough room for all loans.  Wasn't sure where to put credit cards either, so those balances are below.  Debt consolidation loan?  Sell a rental property?  Cut back on spending?  If it's not obvious, I've never seriously considered a budget, so not sure how to attack this.  I did create a blog and intend to post monthly budget numbers and progress, but received a recommendation to post here for thoughts, so bring it on!  Thanks in advance!

Credit Cards   
1    $10,828.00
2    $1,734.00
3    $572.00
4    $255.00


Here is what the calculator generated:

CategoryMonthly
Comments
Annual
Salary/Wages for earner #1$12,500$150,000
Salary/Wages for earner #2$4,622$55,464
Pretax Health Ins.$500$6,000
Pretax Vision/Dental Ins.$64$768
FICA base salary/wages$16,558$198,696
401(k) / 403(b) / TSP / etc.$300Room to increase?$3,600
Subtotal 1$16,258$195,096
Pension contribution$556$6,672
Life/LTD Insurance$52$624
Subtotal 2$15,650$187,800
Rental income$4,275$51,300
Rental real expenses$285$3,420
Rental depreciation expense$1,000$12,000
Rental taxable income$2,990$35,880
Federal Total Income (for IRS tax)$19,248$230,976
Federal tax$3,7292017 rates, MFJ, item. ded., 1 exempt.$44,753
State/City tax$0Guess, using 0.00% * (AGI - Exempt'n)$0
Soc. Sec. tax$926Assumes 2 earners paying$11,115
Medicare tax$240$2,881
Total income taxes$4,896$58,750
Income before other expenses  $14,744$176,930
Monthly Average Expenses:
Mortgage$1,950Input to Itemized Deductions$23,401
HOA$10$120
Property Tax$769Input to Itemized Deductions$9,228
Home/Rent Insurance$143$1,716
Cable TV$50$600
Car Insurance$106$1,272
Car Maintenance, Registration, etc.$10$120
Christmas/Holidays$150$1,800
Dining (Lunch/Dinner/Etc.)$550$6,600
Dry Cleaning$45$540
Electricity$200$2,400
Emergency Fund$500$6,000
Entertainment$400$4,800
Financial Fees$20Input to Itemized Deductions$240
Fuel/Public Transport$200$2,400
Gas/Oil for heating$25$300
Groceries$600$7,200
Hair Care$86$1,032
Home Alarm System$32$384
Household; Maintenance$60$720
Internet$50$600
Landscaping/Yard work$100$1,200
Life Insurance$54$648
Miscellaneous$150$1,800
Pets$200$2,400
Phone (landline)$20$240
Sports/Recreation$100$1,200
Travel/Vacation$100$1,200
Water/Sewer$65$780
Wine/Beer/Tobacco$250$3,000
Non-mortgage total$5,045$60,540
Loans:
SFH$390PITI $673$4,679
CONDO$709PITI $1,049$8,505
DUPLEX$1,049PITI $1542$12,592
Personal Loan 1$321$3,847
Personal Loan 2$425$5,097
Total Expense$9,889$118,662
Total to invest$4,856$58,268
Summary:
"Gross" income$21,112$253,344
Income taxes$4,896$58,750
After-tax income$16,216$194,594
IRA+401k/403b/TSP/457$300$3,600
Living expenses$8,167$98,005
Non-mortgage loans$2,893$34,721
After-tax investable$4,856$58,268
Time to FI?:
Time to FIRE9.9years
Safe Withdrawal Rate4.00%percent
Real return on tax-deferred investments5.00%percent
Real, after tax, return on taxable investments4.25%percent
Current Savings
Taxable$52,000
Tax-deferred (e.g. trad. IRA/401k)$129,857
Projected Savings at Retirement
Taxable$813,488
Tax-deferred (e.g. trad. IRA/401k)$255,203
Total projected stash$1,068,691
Projected Expenses in Retirement
Non-loan, non-work expenses$53,868
Annual non-tax retirement expense$53,868
Total$53,868
Total loan principal due at FI$369,399
Stash needed for retirement @4.0% SWR$1,716,099
Need $647,407 more.


Filing Status21=S, 2=MFJ, 3=HOH
# Exemptions1
# Children <132
# Children for EIC2
Adult #1Adult #2
Age3937
# of earners2
Total Income$230,976
Std. Deduct.$12,700
Act. Deduct.$20,252
Exemption$4,050
AGI$230,976
MAGI$230,976
Taxable$206,674
1040 Tax$44,753
Tax after n-r credit$44,753
Net Tax$44,753
Monthly$3,729
Mtg. Int. (approx.)$11,024
Prop tax$9,228
Item. Deduct.$20,252
VersionV9.1

Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Mortgage$340,00020$329,935193.375%
SFH$80,46030$69,351234.125%
CONDO$100,00015$94,790153.375%
DUPLEX$185,00020$181,688203.250%
Personal Loan 1$16,0005$14,23357.500%
Personal Loan 2$25,0007$17,612710.750%

I added the following loans outside of the calculator:

Addtional Loans:Orig. Prin.Orig. LengthCurr. Prin.Yrs leftRate
Car 1$40,1276$26,48342.490%
Car 2$24,1496$17,03143.490%
HEL$18,66420$10,49887.240%
401k Loan$35,0005$31,0825.000%
TSP Loan$15,0005$13,6275.000%

Additional Loan Payments:
Car1 - $602
Car2 - $373
HEL - $148
401k Loan - $694
TSP Loan - $266

RENTAL PROPERTIES (Gross Rent)
FMVBALRENTPYMTTERMRATE
DUPLEX$225,000$181,690$1,825$1,540203.25%
CONDO$160,000$95,230$1,650$1,050153.375%
SFH$120,000$69,350$800$670304.125%
« Last Edit: August 30, 2017, 08:21:24 AM by thebudgetbloggo »
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Check2400

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Re: Case Study - $800,000 in debt and where to start?
« Reply #1 on: August 29, 2017, 10:49:10 AM »
Whew.

You may be the first person to have no one request additional details in your case study.

My two cents:

1) You have over 4 grand to invest monthly, but are contributing almost nothing to retirement.

If you want to know where to start, the answer is simple, start maxing your 401k, max out your Roth for 2016 since I think there is still time, and max it out for this year.  The 401K contributions alone will save you roughly 7 grand a year in taxes and will train you to live on less income (which is a good thing).

2) You aren't $800,000 in debt, but roughly $80,000 and a car loan in debt.

Whatever is left over after 1 goes towards your unsecured loans in the amount of $80,000 or so.  Luckily for you, the snowball and avalanche repayment approaches both dovetail for you at the 10+% loans you have.  Pay them off.  (I also didn't see the TSP and 401K and HELOC in the monthly debt payments-did I miss something?)

It technically makes sense to pay those loans off first, then arguably the 7%, then max your retirement savings, but you have income to still make these go away quick while still maxing retirement.  For a long term sustainable approach, I truly think that forced restrictions of income (401k withdrawals) are the best way to train yourself.  It is hard to have lifestyle creep when you don't let the creep hit your bank account to begin with.

Secured mortgage debt is a different animal than debt--you have them at good interest rates, get deductions and depreciation, and avoid cash flow rental property taxation--let them lie for now.

There are going to be lots of posts about low hanging fruit for spending (because there is a lot of fruit, and some of it is hanging very low) but you are in the "make a shit ton of money" category.  You asked for a place to start--drop the debt anchors weighing you down so that compounding interest starts making you money instead of costing you money. 

Once you have those payback horizons projected and automated, then you can look towards your spending. 

slappy

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Re: Case Study - $800,000 in debt and where to start?
« Reply #2 on: August 29, 2017, 11:03:04 AM »
Like the previous poster mentioned, there is a lot of low hanging fruit. You should definitely increase your 401k to help with lowering taxes, and you can easily do that if you cut out some of the spending.  $250 a month on alcohol/tobacco? $156/month on hair?  Plus the entertainment and eating out is almost a thousand dollars right there.

caracarn

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Re: Case Study - $800,000 in debt and where to start?
« Reply #3 on: August 29, 2017, 11:12:57 AM »
So income level wise we're in similar boats from wage earners.  I'd agree with previous poster that you need to increase your retirement savings.  Not sure which earner has this available, but you want to make sure you are hitting any matches you have.  With similar incomes we are at $12,000/year into my 401k.

If you are serious about working a budget something like YNAB is a terrific and easy to use tool that makes it pretty painless.  It's not free like a spreadsheet would be but I lean toward practicality in this case.  If it does not get used and you have fits and starts it can be discouraging and if you and your significant other are not always together or do not want to be carrying receipts home to enter later the mobile app more than pays for itself in the savings you can garner knowing what is happening.

From a spending standpoint, you've got a ton of low hanging fruit.  $1,800 for hair care?  My wife goes to a local ladies salon, and we live near a big city, and gets her hair done for $20.  I have always had a buzz cut and do it myself at home for $0 after buying a $30 Wahl shaver 10 years ago.  I think your monthly hair care bill covers our family of 7 for the year.  You're going to get slammed for the dining out budget.  If you are looking to save, this is easy pickins.  We're not anything more than social drinkers so the wine/beer/tobacco budget seems excessive.  That would be a lifetime budget for us in your yearly number.  Concerted effort on groceries also seems like a target.  If I understand your details you are a household of 4.  Your grocery budget is the same as our household of 7 who are all teenagers and eat like horses.  There are certainly other things to target, but those were the big ones that jumped out to me.

On the plus side, you have a very meager travel budget which would be tough to prune unless you went nowhere.  I think you outperform MMM in that category.  You also add a lot to the emergency fund, but keep an eye on when you've built that enough and when you can redirect to investing.  At a certain level you no longer have an emergency fund, it just becomes part of the pile. 

You can then start targeting your unsecured loans to get them paid. 

Laura33

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Re: Case Study - $800,000 in debt and where to start?
« Reply #4 on: August 29, 2017, 11:31:47 AM »
It sounds like you feel somewhat strapped for cash and are not quite sure why, given your massive income.  Other than the obvious advice to track your spending in much more detail, I think it would be helpful to break out each rental property separately -- your spreadsheet shows $4275 in income and $450 in expenses, but that doesn't include the mortgages you are paying for those properties, so it is difficult to tell if any individual property is turning enough of a profit to make it worthwhile. 

Also, what are those personal loans and CCs for?  Did you run up those bills from general overspending?  If so, then that is a strong signal that you are spending far more than these numbers suggest, which means tracking is priority #1.  OTOH, if they came from expenses associated with the rental properties (e.g., "private" second mortgage, reno cost), then you should be considering them when you evaluate the profitability of the various properties.

Finally, I am not a fan of debt consolidation loans in most circumstances.  If you have gotten into this situation by overspending, then consolidating your debt into a single lower payment is just going to free up more room in your budget to buy more stuff.  You have to do the hard work first -- tracking your spending, learning to budget, changing your habits to get used to living within your means -- if you want anything to stick.  You didn't get into this situation overnight, so you shouldn't expect to get out of it overnight either.
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mrspendy

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Re: Case Study - $800,000 in debt and where to start?
« Reply #5 on: August 29, 2017, 11:49:31 AM »
Is it possible that the real profitability of the rental properties is (perhaps vastly) overstated here?

You report a about a 90% NOI margin for your properties (revenue - "real expenses" / revenue). This makes them the most profitable I've seen. More profitable than scaled up public REITS that own 1000's of single family homes and more profitable than large trophy office buildings.

Wouldn't property taxes alone be more than your claimed expenses of $450 a month on ~$400K (a guess) of property?

It doesn't add up that you just took out $50K from your 401k/TSP via loan , have unsecured high interest debt AND have spectacular income / cash flow from properties and reasonable (but not mustachian) expenses relative to your income.

I think there needs to be more context as to the use of proceeds of your  non-mortgage borrowings to get a feel for what's going on.

the only explanation I can think of is you borrowed from 401k / personal loans to use as downpayment / rehab for your investment properties, which is fine assuming they actually are very profitable.

 

« Last Edit: August 29, 2017, 12:05:04 PM by mrspendy »

Dabnasty

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Re: Case Study - $800,000 in debt and where to start?
« Reply #6 on: August 29, 2017, 12:13:48 PM »
I like to link to specific articles from the blog if it pertains to a case study. In your case I think this would be an appropriate resource:

http://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

A few of your expense categories have been mentioned already. If you feel that you can't make a change in any of these categories tell us why. You may be thinking if you spend $600 on groceries now dropping to $300 would mean you only get half of what you want or half the quality. This is not the case. I compare myself to friends and coworkers and I'm confident that I eat more good food, and healthier food than almost anyone I know and I spend about $250/month for 2. That's with very little eating out and a diet of 3-4,000 calories/day, the other person eats about half that.

But seriously, if you have reservations about cutting back in any of the categories that have been mentioned make your case. Especially the hair.
« Last Edit: August 29, 2017, 12:15:23 PM by Dabnasty »

Rufus.T.Firefly

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Re: Case Study - $800,000 in debt and where to start?
« Reply #7 on: August 29, 2017, 01:00:41 PM »
Wow so many numbers. Do you track your rental/personal expenses separately? For example, when you say you spend $100/month on landscaping, is that at your rental properties or at your own house?

Obviously, there's substantial fat in your expense that can be cut, but it's hard to assess if any these expenses are driven by your properties.

I'd recommend separating everything cleanly.

Also - credit cards! Yikes! Kill them now! Don't waste a moments effort on consolidating, you make enough money just pay them off in a couple months and never carry a balance again.
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waltworks

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Re: Case Study - $800,000 in debt and where to start?
« Reply #8 on: August 29, 2017, 01:17:55 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

aperture

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Re: Case Study - $800,000 in debt and where to start?
« Reply #9 on: August 29, 2017, 01:22:32 PM »
It is a toss up whether you should max 401K or pay off credit card debt with any available money - would aim to accomplish both by end of December.  You will avoid taxes with the 401K contributions and you will avoid interest with the credit cards.  If you have to choose, consider opening Chase Slate if you can get the 15-month no interest on balance transfers, then transfer all credit card balances over. 

When others say "lots of fat" - they mean for instance the nearly $2K spent on hair, $2.5K spent on alcohol and tobacco and $4.8K on entertainment (not to mention misc at $1.8K).   

Suggest you look for low hanging fruit like memberships/services you pay a monthly fee on but do not use.  Best wishes, ap.
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dycker1978

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Re: Case Study - $800,000 in debt and where to start?
« Reply #10 on: August 29, 2017, 01:32:20 PM »
How has no one mentioned the $600 a month on groceries with a $550 a month of dining out.  The $600 is not even horrible.  But an additional $550 a month for eating out?

You have a big income, so I get it, but you are in a place where you could be ere very quickly.

mrspendy

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Re: Case Study - $800,000 in debt and where to start?
« Reply #11 on: August 29, 2017, 01:33:25 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

I think the OP has $365K of investment-related mortgages, the ~$700 includes primary, I believe.

Goldielocks

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Re: Case Study - $800,000 in debt and where to start?
« Reply #12 on: August 29, 2017, 01:38:54 PM »
Wow so many numbers. Do you track your rental/personal expenses separately? For example, when you say you spend $100/month on landscaping, is that at your rental properties or at your own house?

Obviously, there's substantial fat in your expense that can be cut, but it's hard to assess if any these expenses are driven by your properties.

I'd recommend separating everything cleanly.

Also - credit cards! Yikes! Kill them now! Don't waste a moments effort on consolidating, you make enough money just pay them off in a couple months and never carry a balance again.

This is what I found difficult to follow, too.  What is personal, what is business?  When it comes to loans and mortgages, and monthly costs, what goes where?   I would guess some of the loans are a result of the rental properties' impact, for example.

Can you separate your business from personal?  Start now, and keep it separate -- one cc for personal, one CC for business, etc.

And the PP advice -- your personal loans and debts and mortgages -- these should be minimal.. especially the credit cards and loans.  When you identify the personal amounts, pay them off ASAP. 

 Simplify and group your finances, and it should help you a lot, in making the best decisions... My guess is that some parts of your rental business are not profitable, if you have so much cc debt personally despite a super high income..

caracarn

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Re: Case Study - $800,000 in debt and where to start?
« Reply #13 on: August 29, 2017, 01:41:00 PM »
How has no one mentioned the $600 a month on groceries with a $550 a month of dining out.  The $600 is not even horrible.  But an additional $550 a month for eating out?

You have a big income, so I get it, but you are in a place where you could be ere very quickly.
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theotherelise

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Re: Case Study - $800,000 in debt and where to start?
« Reply #14 on: August 29, 2017, 04:10:48 PM »
Actually, even with the overwhelming amount of information here, I do actually have some requests!

What are the interest rates for you credit card debts and how much is your payment?
How much is your monthly HELOC obligation?
How much do you have in your emergency fund and how much longer do you need to fund it at $500/month to reach your goal e-fund amount?

And because I'm slightly confused on the three rental property expenses, is it accurate that you are spending $3264 on rental PITI plus $450 in real expenses (total $3714) with rental income at $4275? That is a whole lot of work for $571/month. Is your long term goal for these properties to fund your FIRE? What is the profit margin on each property?

If I were you, my #1 goal would be to figure out how to quickly eliminate the following ~$55k in debt (45k of which is unsecured):
  • Credit Cards (14k at ???%, freeing up ???/month)
  • Personal Loan 2 (17k at 10.75%, freeing up $321/month)
  • Personal Loan 1 (14k at 7.5%, freeing up $425/month)
  • HELOC (10k at 7.2%, freeing up ???/month)

Without more information on the rentals, I'd focus on cutting spending to get rid of these debts before focusing attention on maxing out retirement and hitting the lower interest debt next.

$400/month on "entertainment" plus $550 on eating out is a very easy place to start.

Recommended Steps:

1. Go through all your August expenses and detail what you *actually* spent ALL of your money on. The expenses you list in the OP aren't inclusive since you don't have HELOC or CC payments in there. This honest look at where your money is going right now is really important as a wake up call. When I first did it, I realized just walking into Target was a liability for me.

2. Sit down with spouse and talk about your financial goals. Do you want to retire early? Do you want to semi-retire and be full-time landlords? Do you want to move to the tropics ASAP?

3. Make a plan of action (The investment order is a good starting place to build off of) with your goals in mind. It may not be exactly in line with what MMM would do, but more than anything it needs to be something you both agree to 100% and will commit to working towards. That might be a) pay off all debt over 6.5%, b) max out IRA and 401k, c) pay off lower interest debt, etc...

4. Put together a spending plan with your spouse. This is not what you hope you'll spend, but what you commit you will follow as your plan for the month. Look for ways to cut back to achieve your goals and plan of action more quickly. You don't have to follow the same spending plan forever. You could cut back drastically until you pay off the unsecured and high interest debt, then reward yourselves with a bump in entertainment money after that goal is reached.

5. Figure out how to track expenses and then actually do it. Budgets are pretty worthless without expense tracking. That is the teeth of financial planning. Use YNAB or Mint or Everydollar or a freaking spreadsheet, it does not matter.

6. grind it out!


waltworks

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Re: Case Study - $800,000 in debt and where to start?
« Reply #15 on: August 29, 2017, 06:17:39 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

I think the OP has $365K of investment-related mortgages, the ~$700 includes primary, I believe.

Yeah, I'm confused about that too. $3300 of PITI expenses for $4275 in income (with nothing set aside for vacancy, maintenance, shit-happens, management, etc) is pretty awful regardless of the total loan balances, though.

-W

thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #16 on: August 29, 2017, 08:37:31 PM »
Whew.

You may be the first person to have no one request additional details in your case study.

My two cents:

1) You have over 4 grand to invest monthly, but are contributing almost nothing to retirement.

If you want to know where to start, the answer is simple, start maxing your 401k, max out your Roth for 2016 since I think there is still time, and max it out for this year.  The 401K contributions alone will save you roughly 7 grand a year in taxes and will train you to live on less income (which is a good thing).

2) You aren't $800,000 in debt, but roughly $80,000 and a car loan in debt.

Whatever is left over after 1 goes towards your unsecured loans in the amount of $80,000 or so.  Luckily for you, the snowball and avalanche repayment approaches both dovetail for you at the 10+% loans you have.  Pay them off.  (I also didn't see the TSP and 401K and HELOC in the monthly debt payments-did I miss something?)

It technically makes sense to pay those loans off first, then arguably the 7%, then max your retirement savings, but you have income to still make these go away quick while still maxing retirement.  For a long term sustainable approach, I truly think that forced restrictions of income (401k withdrawals) are the best way to train yourself.  It is hard to have lifestyle creep when you don't let the creep hit your bank account to begin with.

Secured mortgage debt is a different animal than debt--you have them at good interest rates, get deductions and depreciation, and avoid cash flow rental property taxation--let them lie for now.

There are going to be lots of posts about low hanging fruit for spending (because there is a lot of fruit, and some of it is hanging very low) but you are in the "make a shit ton of money" category.  You asked for a place to start--drop the debt anchors weighing you down so that compounding interest starts making you money instead of costing you money. 

Once you have those payback horizons projected and automated, then you can look towards your spending.

Thank you so much for the perspective and insight.  I'll try to respond to everything you mentioned, and adjust the post to add anything missing.

1.  Regarding the 401k contributions - I was contributing 10% of my salary to my 401k, and 20% of my drill pay to my TSP, but recently dropped those contributions to offset the payments for the $50k in loans i took out against those to invest in a startup business.  Those payments didn't make it into the calculator because it didnt give me enough room and all the cells are locked - I'm not really sure how to manipulate the spreadsheet to add more columns.  The payments on those two loans total $960/mo. and I will add that as a note in the OP.

2.  As far as the personal loans go - does it make sense to take cash (I have at least $20k to throw at something) and pay one, or more of those loans off?  I appreciate the position on the mortgages - despite the high amount of debt, I do have excellent credit and was able to refi 3 out of 4 mortgages to 20 years or less with good rates, and am clearing the mortgage (not including maintenance) on all 4 rentals.
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thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #17 on: August 29, 2017, 08:50:09 PM »
Like the previous poster mentioned, there is a lot of low hanging fruit. You should definitely increase your 401k to help with lowering taxes, and you can easily do that if you cut out some of the spending.  $250 a month on alcohol/tobacco? $156/month on hair?  Plus the entertainment and eating out is almost a thousand dollars right there.

I'm a fan of craft beer, and this is definitely discretionary spending that I need to get a handle on.  I was pretty surprised when I added it all too, but frankly this whole thing was a shocker since I've never really done a budget before.  Just trying to figure this all out before its too late, you know.  The hair number is probably a bit off - I get my haircut twice a month at about $28/pop, then I (mistakenly) assumed my wife got hers done once a month...that's not the case.  I'll adjust that number accordingly, thanks!
« Last Edit: August 29, 2017, 09:00:46 PM by thebudgetbloggo »
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Re: Case Study - $800,000 in debt and where to start?
« Reply #18 on: August 29, 2017, 08:54:55 PM »
I get my haircut twice a week at about $28/pop

I'm sorry, but I thought you said you get your haircut twice a week. Surely this was a mistake, no?

EDIT: I looked back at your budget, and you must have meant twice a month. Still, I think that could be much less.

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Re: Case Study - $800,000 in debt and where to start?
« Reply #19 on: August 29, 2017, 09:01:31 PM »
I get my haircut twice a week at about $28/pop

I'm sorry, but I thought you said you get your haircut twice a week. Surely this was a mistake, no?

EDIT: I looked back at your budget, and you must have meant twice a month. Still, I think that could be much less.

Clearly I am daft.  Twice a month, yes.  I'm updating the numbers now.  $28*2 = $56 plus $120 three times a year for my wife, so roughly $86/mo.
« Last Edit: August 29, 2017, 09:04:22 PM by thebudgetbloggo »
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Re: Case Study - $800,000 in debt and where to start?
« Reply #20 on: August 29, 2017, 09:08:40 PM »
So income level wise we're in similar boats from wage earners.  I'd agree with previous poster that you need to increase your retirement savings.  Not sure which earner has this available, but you want to make sure you are hitting any matches you have.  With similar incomes we are at $12,000/year into my 401k.

If you are serious about working a budget something like YNAB is a terrific and easy to use tool that makes it pretty painless.  It's not free like a spreadsheet would be but I lean toward practicality in this case.  If it does not get used and you have fits and starts it can be discouraging and if you and your significant other are not always together or do not want to be carrying receipts home to enter later the mobile app more than pays for itself in the savings you can garner knowing what is happening.

From a spending standpoint, you've got a ton of low hanging fruit.  $1,800 for hair care?  My wife goes to a local ladies salon, and we live near a big city, and gets her hair done for $20.  I have always had a buzz cut and do it myself at home for $0 after buying a $30 Wahl shaver 10 years ago.  I think your monthly hair care bill covers our family of 7 for the year.  You're going to get slammed for the dining out budget.  If you are looking to save, this is easy pickins.  We're not anything more than social drinkers so the wine/beer/tobacco budget seems excessive.  That would be a lifetime budget for us in your yearly number.  Concerted effort on groceries also seems like a target.  If I understand your details you are a household of 4.  Your grocery budget is the same as our household of 7 who are all teenagers and eat like horses.  There are certainly other things to target, but those were the big ones that jumped out to me.

On the plus side, you have a very meager travel budget which would be tough to prune unless you went nowhere.  I think you outperform MMM in that category.  You also add a lot to the emergency fund, but keep an eye on when you've built that enough and when you can redirect to investing.  At a certain level you no longer have an emergency fund, it just becomes part of the pile. 

You can then start targeting your unsecured loans to get them paid.

Thank you for your reply!  Clearly the hair care numbers were off.  I've fixed those now.  I do love draft beer, so I'm spending way too much money (and time) tracking down more beer than I can drink, much less afford.  We are a household of 4, but find ourselves either grocery shopping spontaneously for today or tomorrows meal, or just skipping the store altogether and eating out way more than we should be.  We can't seem to make time to plan out meals for the month, week, or even day.

I'd be interesting in hearing more about YNAB - is that something you use personally?
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Re: Case Study - $800,000 in debt and where to start?
« Reply #21 on: August 29, 2017, 09:18:50 PM »
It sounds like you feel somewhat strapped for cash and are not quite sure why, given your massive income.  Other than the obvious advice to track your spending in much more detail, I think it would be helpful to break out each rental property separately -- your spreadsheet shows $4275 in income and $450 in expenses, but that doesn't include the mortgages you are paying for those properties, so it is difficult to tell if any individual property is turning enough of a profit to make it worthwhile. 

Also, what are those personal loans and CCs for?  Did you run up those bills from general overspending?  If so, then that is a strong signal that you are spending far more than these numbers suggest, which means tracking is priority #1.  OTOH, if they came from expenses associated with the rental properties (e.g., "private" second mortgage, reno cost), then you should be considering them when you evaluate the profitability of the various properties.

Finally, I am not a fan of debt consolidation loans in most circumstances.  If you have gotten into this situation by overspending, then consolidating your debt into a single lower payment is just going to free up more room in your budget to buy more stuff.  You have to do the hard work first -- tracking your spending, learning to budget, changing your habits to get used to living within your means -- if you want anything to stick.  You didn't get into this situation overnight, so you shouldn't expect to get out of it overnight either.

THIS:  It sounds like you feel somewhat strapped for cash and are not quite sure why, given your massive income.  We make a freaking killing - like top 5% of earners killing, so it's extremely frustrating to feel like we are living paycheck to paycheck.  The money is just vaporizing- I mean, not making excuses- that's why I'm here.  I've literally never budgeted...like, ever.  It's disheartening to be honest.

Regarding the rental properties, I'll breakdown the income and expenses a little better in the OP.  Again, this spreadsheet limited me because my situation isn't exactly "simple".

The personal loans and CC's are just overspending - i've been carrying balances for a long time and have just been refinancing them...I kinda feel like a corporation without all the cashflow.

I really appreciate all of your input, it's encouraging to see so many people interested and helping.
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Re: Case Study - $800,000 in debt and where to start?
« Reply #22 on: August 29, 2017, 09:28:01 PM »
Is it possible that the real profitability of the rental properties is (perhaps vastly) overstated here?

You report a about a 90% NOI margin for your properties (revenue - "real expenses" / revenue). This makes them the most profitable I've seen. More profitable than scaled up public REITS that own 1000's of single family homes and more profitable than large trophy office buildings.

Wouldn't property taxes alone be more than your claimed expenses of $450 a month on ~$400K (a guess) of property?

It doesn't add up that you just took out $50K from your 401k/TSP via loan , have unsecured high interest debt AND have spectacular income / cash flow from properties and reasonable (but not mustachian) expenses relative to your income.

I think there needs to be more context as to the use of proceeds of your  non-mortgage borrowings to get a feel for what's going on.

the only explanation I can think of is you borrowed from 401k / personal loans to use as downpayment / rehab for your investment properties, which is fine assuming they actually are very profitable.

Great observations; I was pretty limited by the spreadsheet since my situation is a bit more complex than it was designed to handle.  You are correct, rental properties are definitely not that profitable.  I've added the rental income on each one below the calculations.  I wasn't able to place them under the 'mortgage' section in the spreadsheet, because it only had one line there...basically, here is the income vs. expenses for the rentals:

Rental Income   
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00

Mortgage Payments
Duplex    $1,540.00
Condo    $1,050.00
SFH    $670.00
SFH HEL    $148.00

As far as the the 401k loans go, I took those out to invest in a small business - nothing to do with the rentals at all. 

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Re: Case Study - $800,000 in debt and where to start?
« Reply #23 on: August 29, 2017, 09:30:03 PM »
I like to link to specific articles from the blog if it pertains to a case study. In your case I think this would be an appropriate resource:

http://www.mrmoneymustache.com/all-the-posts-since-the-beginning-of-time/

A few of your expense categories have been mentioned already. If you feel that you can't make a change in any of these categories tell us why. You may be thinking if you spend $600 on groceries now dropping to $300 would mean you only get half of what you want or half the quality. This is not the case. I compare myself to friends and coworkers and I'm confident that I eat more good food, and healthier food than almost anyone I know and I spend about $250/month for 2. That's with very little eating out and a diet of 3-4,000 calories/day, the other person eats about half that.

But seriously, if you have reservations about cutting back in any of the categories that have been mentioned make your case. Especially the hair.

I've correct the hair spending - probably not much better, but more accurate at least. 

We are a family of four though, so I would be interested in any pointers you could provide about accomplishing this:  I compare myself to friends and coworkers and I'm confident that I eat more good food, and healthier food than almost anyone I know and I spend about $250/month for 2
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Re: Case Study - $800,000 in debt and where to start?
« Reply #24 on: August 29, 2017, 09:34:17 PM »
Wow so many numbers. Do you track your rental/personal expenses separately? For example, when you say you spend $100/month on landscaping, is that at your rental properties or at your own house?

Obviously, there's substantial fat in your expense that can be cut, but it's hard to assess if any these expenses are driven by your properties.

I'd recommend separating everything cleanly.

Also - credit cards! Yikes! Kill them now! Don't waste a moments effort on consolidating, you make enough money just pay them off in a couple months and never carry a balance again.

Unfortunately, everything related to the rentals is co-mingled with our daily transactions.  I do have separate business accounts setup, but struggle to use them.  I even have an LLC I formed in 2008! to transfer the titles to, just don't know how to get that done.

Yeah, credit cards seems like a no brainer - I have enough cash to cover it so it's just throwing away money at interest...
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Re: Case Study - $800,000 in debt and where to start?
« Reply #25 on: August 29, 2017, 09:35:33 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

Thanks for your help; I've added even more information about the rentals in the OP
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Re: Case Study - $800,000 in debt and where to start?
« Reply #26 on: August 29, 2017, 09:44:50 PM »
Your rental portfolio is a money-loser.  The gross rent is only around $3,800.  Why do you have these properties?  Have you considered selling them?

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Re: Case Study - $800,000 in debt and where to start?
« Reply #27 on: August 29, 2017, 09:45:12 PM »

I'd be interesting in hearing more about YNAB - is that something you use personally?

It stands for You Need A Budget.  It is a program that forces you to do two main things: account for every penny you have, and project your spending for the future.  It requires some patience to get used to how it functions and discipline to keep up with inputting expenses as they happen.  It also requires you to be honest with yourself since it only works properly if you account for all monies coming in and going out.  Your vague categories of "entertainment" "restaurants" and "gifts" get put front and center as you see specific dollar amounts and where they went.  (personally I'm curious how Christmas is costing you $2k a year).  The interface is like a supped-up spreadsheet with budget categories where you apply your income to those categories and then watch them dwindle over the course of the month.  You can do a free 1 month trial to test it out and it comes with web-based tutorials.  I've been using it for over four years and it helps me stay honest with myself and maximize my investment contributions.

Take a look at the program. If it looks a little daunting (it often does to budget newcomers), then start with a simple excel doc and record every transaction you make for a couple months whether it be credit cards, cash, checks, automatic withdrawals, trips to the vending machine, etc.  Then look back at the end of the month and pick your jaw up off the table when you finally see where your money is going.

If you're looking for more nuanced help with your real estate (definitely get your accounting straightened out), we have a sub-forum here full of experienced landlords.

Earlier you said "drill pay." Are you still in?  If so, what regulation haircut are you paying $28 for twice a month?
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Re: Case Study - $800,000 in debt and where to start?
« Reply #28 on: August 29, 2017, 09:52:52 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

It's actually $346,000 in mortgages grossing $4,275/mo...which I thought was a decent ratio, am I wrong there?  Again, this calculator couldn't really account for my situation, so I think a lot of the calculations are off.  The $329,000 mortgage is our primary.
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Re: Case Study - $800,000 in debt and where to start?
« Reply #29 on: August 29, 2017, 09:54:19 PM »
Post more about the rentals. What is the mortgage balance/market value of each, and what are the actual expenses (PITI, maintenance, management, vacancy, etc)?  If you've really got ~$700k worth of mortgages making only $4200/month gross, that's horrible, and you should sell those properties immediately and go read some books about RE investing.

-W

I think the OP has $365K of investment-related mortgages, the ~$700 includes primary, I believe.

That's correct, thank you for catching it.

It's actually $346,000 in mortgages grossing $4,275/mo...which I thought was a decent ratio, am I wrong there?  Again, this calculator couldn't really account for my situation, so I think a lot of the calculations are off.  The $329,000 mortgage is our primary.
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Re: Case Study - $800,000 in debt and where to start?
« Reply #30 on: August 29, 2017, 10:03:37 PM »
Separate out your rentals and show income and expenses on them.  Depending on taxes and necessary capital expenditures, you should be running 40 to 50 percent expenses on the SF and the duplex, maybe a bit less on the condo, after considering the items covered by the HOA (HOA fee is an expense).  That's BEFORE deducting the principal and interest for the mortgage.  My guess is you are losing money on these.  Even without mortgages, the net income is low compared to your employment income.  Are you sure they are worth the hassle?

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Re: Case Study - $800,000 in debt and where to start?
« Reply #31 on: August 29, 2017, 10:06:20 PM »

I'd be interesting in hearing more about YNAB - is that something you use personally?

It stands for You Need A Budget.  It is a program that forces you to do two main things: account for every penny you have, and project your spending for the future.  It requires some patience to get used to how it functions and discipline to keep up with inputting expenses as they happen.  It also requires you to be honest with yourself since it only works properly if you account for all monies coming in and going out.  Your vague categories of "entertainment" "restaurants" and "gifts" get put front and center as you see specific dollar amounts and where they went.  (personally I'm curious how Christmas is costing you $2k a year).  The interface is like a supped-up spreadsheet with budget categories where you apply your income to those categories and then watch them dwindle over the course of the month.  You can do a free 1 month trial to test it out and it comes with web-based tutorials.  I've been using it for over four years and it helps me stay honest with myself and maximize my investment contributions.

Take a look at the program. If it looks a little daunting (it often does to budget newcomers), then start with a simple excel doc and record every transaction you make for a couple months whether it be credit cards, cash, checks, automatic withdrawals, trips to the vending machine, etc.  Then look back at the end of the month and pick your jaw up off the table when you finally see where your money is going.

Mint is also a good option, which I prefer because it's free online, though I doubt the YNAB fee will be a problem for you OP. By my understanding Mint can be a little simpler because you give it access to your bank/credit cards and it tracks the spending for you. The categorization isn't perfect and requires a little babysitting, but I think it's easier to start off with if tracking every penny is intimidating to you. On the flip side, I believe YNAB is more flexible in the future-planning aspect (speaking as someone who's never used it).

Since you mentioned the food budget, here's the blog post that covers the topic: http://www.mrmoneymustache.com/2012/03/29/killing-your-1000-grocery-bill/

And here's my budget cookbook of choice: https://cookbooks.leannebrown.com/good-and-cheap.pdf

My budget is $150/month on groceries for one person, for reference, so $600 would be comparable for four if you weren't spending almost that much eating out as well!

Cancelling cable is also low-hanging fruit, if you can get the family on board. Netflix is cheaper!
« Last Edit: August 29, 2017, 10:08:01 PM by Tass »

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Re: Case Study - $800,000 in debt and where to start?
« Reply #32 on: August 29, 2017, 10:08:28 PM »
Actually, even with the overwhelming amount of information here, I do actually have some requests!

What are the interest rates for you credit card debts and how much is your payment?
How much is your monthly HELOC obligation?
How much do you have in your emergency fund and how much longer do you need to fund it at $500/month to reach your goal e-fund amount?

And because I'm slightly confused on the three rental property expenses, is it accurate that you are spending $3264 on rental PITI plus $450 in real expenses (total $3714) with rental income at $4275? That is a whole lot of work for $571/month. Is your long term goal for these properties to fund your FIRE? What is the profit margin on each property?

If I were you, my #1 goal would be to figure out how to quickly eliminate the following ~$55k in debt (45k of which is unsecured):
  • Credit Cards (14k at ???%, freeing up ???/month)
  • Personal Loan 2 (17k at 10.75%, freeing up $321/month)
  • Personal Loan 1 (14k at 7.5%, freeing up $425/month)
  • HELOC (10k at 7.2%, freeing up ???/month)

Without more information on the rentals, I'd focus on cutting spending to get rid of these debts before focusing attention on maxing out retirement and hitting the lower interest debt next.

$400/month on "entertainment" plus $550 on eating out is a very easy place to start.

Recommended Steps:

1. Go through all your August expenses and detail what you *actually* spent ALL of your money on. The expenses you list in the OP aren't inclusive since you don't have HELOC or CC payments in there. This honest look at where your money is going right now is really important as a wake up call. When I first did it, I realized just walking into Target was a liability for me.

2. Sit down with spouse and talk about your financial goals. Do you want to retire early? Do you want to semi-retire and be full-time landlords? Do you want to move to the tropics ASAP?

3. Make a plan of action (The investment order is a good starting place to build off of) with your goals in mind. It may not be exactly in line with what MMM would do, but more than anything it needs to be something you both agree to 100% and will commit to working towards. That might be a) pay off all debt over 6.5%, b) max out IRA and 401k, c) pay off lower interest debt, etc...

4. Put together a spending plan with your spouse. This is not what you hope you'll spend, but what you commit you will follow as your plan for the month. Look for ways to cut back to achieve your goals and plan of action more quickly. You don't have to follow the same spending plan forever. You could cut back drastically until you pay off the unsecured and high interest debt, then reward yourselves with a bump in entertainment money after that goal is reached.

5. Figure out how to track expenses and then actually do it. Budgets are pretty worthless without expense tracking. That is the teeth of financial planning. Use YNAB or Mint or Everydollar or a freaking spreadsheet, it does not matter.

6. grind it out!

First, thank you for taking the time to post some real recommendations and next steps.  All of this information has been extremely helpful!

Credit card payments are about $425/mo
HEL is $185/mo
Emergency fund balance is $6,250 - I have the cash to push that up to whatever it needs to be, but assume I should direct some cash to paying off debt first?

Rentals are not highly profitable at this point, but I don't think are costing me much either.  I regret all the confusion, but as I mentioned earlier, the calculator didn't really work for my situation as well as I would have hoped. I've added more info about the rentals now.

Again thank you for the action plan...seems most advice is to pay down the credit credit cards/unsecured debt.  I have roughly $20,000 in cash, does it make sense to tap into that to pay this down, or just cut spending and apply the savings to debt?
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Re: Case Study - $800,000 in debt and where to start?
« Reply #33 on: August 29, 2017, 10:10:03 PM »
Is it possible that the real profitability of the rental properties is (perhaps vastly) overstated here?

You report a about a 90% NOI margin for your properties (revenue - "real expenses" / revenue). This makes them the most profitable I've seen. More profitable than scaled up public REITS that own 1000's of single family homes and more profitable than large trophy office buildings.

Wouldn't property taxes alone be more than your claimed expenses of $450 a month on ~$400K (a guess) of property?

It doesn't add up that you just took out $50K from your 401k/TSP via loan , have unsecured high interest debt AND have spectacular income / cash flow from properties and reasonable (but not mustachian) expenses relative to your income.

I think there needs to be more context as to the use of proceeds of your  non-mortgage borrowings to get a feel for what's going on.

the only explanation I can think of is you borrowed from 401k / personal loans to use as downpayment / rehab for your investment properties, which is fine assuming they actually are very profitable.

Great observations; I was pretty limited by the spreadsheet since my situation is a bit more complex than it was designed to handle.  You are correct, rental properties are definitely not that profitable.  I've added the rental income on each one below the calculations.  I wasn't able to place them under the 'mortgage' section in the spreadsheet, because it only had one line there...basically, here is the income vs. expenses for the rentals:

Rental Income   
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00

Mortgage Payments
Duplex    $1,540.00
Condo    $1,050.00
SFH    $670.00
SFH HEL    $148.00

As far as the the 401k loans go, I took those out to invest in a small business - nothing to do with the rentals at all.

Hey, this is great.  getting there.

Rental income   $4,275      $51,300
Rental real expenses   $450      $5,400
Rental depreciation expense   $1,000      $12,000

We can't forget these two.  Assuming you recapture your rental depreciation in a low income year, in future, and it is offsetting a very high income currently, the depreciation is worth, maybe $150 net to your monthly bottom line.

Rental Income:  $3950

Rental Income   
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00
Net Rental depreciation tax avoidance $150

Mortgage Costs
Duplex    $1,540.00
Condo    $1,050.00
SFH    $670.00
SFH HEL    $148.00
Real property costs $450

Plus -- other maintenance fund 5%, your expenses for car usage, forms and office paperwork costs, 3% vacancy  (assuming 1 month vacant per year out of three units), other?
:   $$380 per month (wild guess)

Total costs:
$4238 per month.

NET: Cost to you $288 per month, on average over a year or two.

.................  Think of the rule of thumb, that prefferrably 1% of your property real value (cost to buy) should be the monthly rent.  No less than 0.6% to 0.5% if your goal is capital appreciation (in which case, your market may already be pretty high, so a good time to sell?)

-----------------------
If all the cc and loans are for personal costs, tracking your expenses for a month would be a good idea.   Pay off all your CC, then designate the best one for business use expenses ONLY.  and one for personal use ONLY, that you pay off each month.

It looks to me that you have deliberately tied up as much of your free cash flow into "investments" and "Businesses", as you know that you will spend every last dollar in your checking account otherwise.   Not the worst plan out there, until you start to carry loans and CC debt.  Instead, you need to auto direct more money to long term savings and have $2k in a separate emergency fund, and whenever you have to tap it to pay a CC or other cost, it can be your signal to STOP SPENDING!  HAIR ON FIRE!   

Some people like MINT, some like YNAB, I just always used a download of all transaction from my bank account and cc account, and then categorized them on a spreadsheet or manually into budget categories.   It helps that I stopped using cash and only used debit / cc during this time, but if you use cash, keep the receipts.

Once you have your expenses tracked, then we can help you trim out the easy fat and boost you on your way.

thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #34 on: August 29, 2017, 10:15:18 PM »
Your rental portfolio is a money-loser.  The gross rent is only around $3,800.  Why do you have these properties?  Have you considered selling them?

I'm listening.  I updated the OP to show more detail on the rentals.  Gross rent is closer to $4,275/mo, but I don't understand the logic of selling them when my investment as a percentage of the total cost of ownership after rental income is still pretty low.  Please elaborate?
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Re: Case Study - $800,000 in debt and where to start?
« Reply #35 on: August 29, 2017, 10:17:10 PM »
"Rentals are not highly profitable at this point, but I don't think are costing me much either. "

They are costing you whatever return you could earn on the equity if it were invested elsewhere.  Plus, I'm pretty sure you are losing money on them which will become clear when you prepare a detailed income and expense statement for them.

Your real problem is you just don't know.  You don't know how much the rentals are costing or producing.  You don't have a handle on where your money is going.  Get that under control first, and then have a hard look at the rentals.

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Re: Case Study - $800,000 in debt and where to start?
« Reply #36 on: August 29, 2017, 10:24:42 PM »
"I don't understand the logic of selling them when my investment as a percentage of the total cost of ownership after rental income is still pretty low."

Please explain what you mean by this statement.  You are not cash flow positive on these properties.  My guess is you are not in a rapidly appreciating market.  From where do you expect the return on your investment to come?


Dicey

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Re: Case Study - $800,000 in debt and where to start?
« Reply #37 on: August 29, 2017, 10:48:03 PM »
... and was able to refi 3 out of 4 mortgages to 20 years or less with good rates...
Why did you take out mortgages (re-fi) for less than 30 years? If they were all 30 year loans, would they cash flow better?
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thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #38 on: August 29, 2017, 10:52:16 PM »
"I don't understand the logic of selling them when my investment as a percentage of the total cost of ownership after rental income is still pretty low."

Please explain what you mean by this statement.  You are not cash flow positive on these properties.  My guess is you are not in a rapidly appreciating market.  From where do you expect the return on your investment to come?


I have a very simplistic view of the value here I suppose.  I currently have about $150,000 in equity between the three mortgages.  Gross rent is $4275, mortgage payments (total PITI) is $3408.  They rarely sit vacant, so even if I was losing a little bit, someone else is still paying the majority of the mortgage, right?  Between mortgage interest deductions and carrying forward any losses to use against tax liability, I assume there wasn't much to lose. 

The return on investment would come when I sell, or when they are paid off, I guess?  With good rates and shorter term mortgages I assumed there wasn't really much reason not to hold them.  I'm all for figuring out what i'm missing here, and where this money could be better spent, if anywhere.  20 years from now, I should have about $505,000 in equity here based on current FMV's.  Are there other investments where that's possible for a roughly $3,000/yr investment?  I honestly don't know, which is why I'm here.
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thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #39 on: August 29, 2017, 10:58:12 PM »
... and was able to refi 3 out of 4 mortgages to 20 years or less with good rates...
Why did you take out mortgages (re-fi) for less than 30 years? If they were all 30 year loans, would they cash flow better?

Because I got such good rates the payments were essentially the same.  I suppose I could have dragged them back out to 30 years, but my objective was to hold them long term...perhaps not the best approach?  20 years and I would have half a million in equity for about $60 -$100 invested...plus be netting most of the rental income?  Even on the conservative side, that's over 8% annualized if I'm doing my math right, not accounting for anything to do with tax deductions or losses, isn't it?  I don't really know to be honest - I'm not purporting to know what I'm doing (hence being here). I kinda fell into this position by not selling any property I've lived in...never really had a plan aside from hold them as long as they weren't costing me a lot. 
« Last Edit: August 29, 2017, 10:59:47 PM by thebudgetbloggo »
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Re: Case Study - $800,000 in debt and where to start?
« Reply #40 on: August 29, 2017, 11:13:19 PM »
If you took $150,000 and invested it in the stock market at a compounded growth rate of 7 percent how much would you have after 20 years?  That's with no $3,000 additional investment.

It looks to me like you are a little lost in the weeds with the real estate investments.  There are two ways to make money on real estate - cash flow and appreciation.  You are cash flow negative, so you have to make it up somewhere else.  That somewhere else is appreciation.  Leverage may not be your friend here, even though your tenants are paying off your mortgage.

Sword Guy recommends Gallinelli's book on investment property math.  You might want to have a look at that.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated-ebook/dp/B018HOKXBG/ref=sr_1_1?ie=UTF8&qid=1504069909&sr=8-1&keywords=frank+gallinelli

thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #41 on: August 29, 2017, 11:29:36 PM »
If you took $150,000 and invested it in the stock market at a compounded growth rate of 7 percent how much would you have after 20 years?  That's with no $3,000 additional investment.

It looks to me like you are a little lost in the weeds with the real estate investments.  There are two ways to make money on real estate - cash flow and appreciation.  You are cash flow negative, so you have to make it up somewhere else.  That somewhere else is appreciation.  Leverage may not be your friend here, even though your tenants are paying off your mortgage.

Sword Guy recommends Gallinelli's book on investment property math.  You might want to have a look at that.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated-ebook/dp/B018HOKXBG/ref=sr_1_1?ie=UTF8&qid=1504069909&sr=8-1&keywords=frank+gallinelli

Appreciate the recommended reading and just purchased this eBook!  To answer your question, I came up with about $580,000 after 20 years @ 7%.  Add in the $3k more a year, and it's about $780,000.  It's not really that simple though, right?   This doesn't account for the mortgage interest tax deductions or losses offsetting tax liability?  At the end of the day, you're right though - I'm in the weeds.  I haven't put much thought into this and obviously need to crunch some numbers to determine if the rentals make sense. 
« Last Edit: August 29, 2017, 11:43:07 PM by thebudgetbloggo »
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Re: Case Study - $800,000 in debt and where to start?
« Reply #42 on: August 29, 2017, 11:50:25 PM »
The rule of thumb.

IF RENT is...
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00  (?? I am not sure how your rent is $4275 per month, something is missing from my numbers)

Is your property value under the following amounts (approximately)?
Duplex is worth no more than:   $148,400 to $250,000?
Condo:    $152,800  to $250,000?
SFH :   $80,000 - $130,000?

If the property value is on the low side of the above, you have a very strong rental property argument.  If it is closer to the higher number, you are definitely relying on capital appreciation to make this pay out, and you need to evaluate if your time and risk is worth it.   (It may be).

If your properties are worth a LOT more than this upper range, it is a strong candidate for selling, without compelling reasons to keep it (such as intending to move into it, exceptionally low inherited property tax, other investors demands,  etc).

former player

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Re: Case Study - $800,000 in debt and where to start?
« Reply #43 on: August 30, 2017, 05:39:16 AM »
I'm going to ignore a lot of the complications here.

Other than the mortgages and HELOC, you have balances on 4 credit cards totalling $13,389,  2 car loans totalling $64,276, a 401k loan of $35,000 and a TSP loan of $15,000.  That's a total of $127,665.  Which is more than a year of your net income.

What you've got going for you are relative youth and a high income. I propose you do the following -

1.  Put $10,000 in the cash account(s) you make your spending from: that's your expenses for September.  At the end of September, put enough cash into your cash account(s) to bring it up to $9,500 (you are going to take $500 off your monthly expenses next month).  After that, continue paying into your cash account at the beginning of the month enough to fund your planned expenses for that month, reducing the amount by whatever you can over time.

2.  Pay for everything you buy in September with cash or a debit card.  Over the next month, move all your family's routine payments, your cash withdrawals and your debit card into a single cash account so from October onwards you have a single easy to view record of what you are spending.  Similarly, make a separate cash account for your rentals and move all the rental income and expenses into that account.  You don't need to worry about the LLC for the moment, you just need to put all the money relating to the rentals through one account.

3.  Use all the other cash you have to pay down your debts, starting with the debt with the highest interest rate and working down through the next highest.  That includes using your emergency fund: your debt IS your emergency, and if do have an emergency you can go back to your lowest-interest credit card to deal with it.

4. Once you've got this system sorted, hopefully by the end of this month, you will have a better idea of what your expenses are and what your cash flow is.  You will be able to make a more complicated plan that includes additional pre-tax savings and keeps on paying down the debts.

Well done for sticking with us so far despite the facepunches.  I hope you stay so that we can see what a success story you are going to be.
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Re: Case Study - $800,000 in debt and where to start?
« Reply #44 on: August 30, 2017, 07:53:10 AM »
Actually, even with the overwhelming amount of information here, I do actually have some requests!

What are the interest rates for you credit card debts and how much is your payment?
How much is your monthly HELOC obligation?
How much do you have in your emergency fund and how much longer do you need to fund it at $500/month to reach your goal e-fund amount?

And because I'm slightly confused on the three rental property expenses, is it accurate that you are spending $3264 on rental PITI plus $450 in real expenses (total $3714) with rental income at $4275? That is a whole lot of work for $571/month. Is your long term goal for these properties to fund your FIRE? What is the profit margin on each property?

If I were you, my #1 goal would be to figure out how to quickly eliminate the following ~$55k in debt (45k of which is unsecured):
  • Credit Cards (14k at ???%, freeing up ???/month)
  • Personal Loan 2 (17k at 10.75%, freeing up $321/month)
  • Personal Loan 1 (14k at 7.5%, freeing up $425/month)
  • HELOC (10k at 7.2%, freeing up ???/month)

Without more information on the rentals, I'd focus on cutting spending to get rid of these debts before focusing attention on maxing out retirement and hitting the lower interest debt next.

$400/month on "entertainment" plus $550 on eating out is a very easy place to start.

Recommended Steps:

1. Go through all your August expenses and detail what you *actually* spent ALL of your money on. The expenses you list in the OP aren't inclusive since you don't have HELOC or CC payments in there. This honest look at where your money is going right now is really important as a wake up call. When I first did it, I realized just walking into Target was a liability for me.

2. Sit down with spouse and talk about your financial goals. Do you want to retire early? Do you want to semi-retire and be full-time landlords? Do you want to move to the tropics ASAP?

3. Make a plan of action (The investment order is a good starting place to build off of) with your goals in mind. It may not be exactly in line with what MMM would do, but more than anything it needs to be something you both agree to 100% and will commit to working towards. That might be a) pay off all debt over 6.5%, b) max out IRA and 401k, c) pay off lower interest debt, etc...

4. Put together a spending plan with your spouse. This is not what you hope you'll spend, but what you commit you will follow as your plan for the month. Look for ways to cut back to achieve your goals and plan of action more quickly. You don't have to follow the same spending plan forever. You could cut back drastically until you pay off the unsecured and high interest debt, then reward yourselves with a bump in entertainment money after that goal is reached.

5. Figure out how to track expenses and then actually do it. Budgets are pretty worthless without expense tracking. That is the teeth of financial planning. Use YNAB or Mint or Everydollar or a freaking spreadsheet, it does not matter.

6. grind it out!

First, thank you for taking the time to post some real recommendations and next steps.  All of this information has been extremely helpful!

Credit card payments are about $425/mo
HEL is $185/mo
Emergency fund balance is $6,250 - I have the cash to push that up to whatever it needs to be, but assume I should direct some cash to paying off debt first?

Rentals are not highly profitable at this point, but I don't think are costing me much either.  I regret all the confusion, but as I mentioned earlier, the calculator didn't really work for my situation as well as I would have hoped. I've added more info about the rentals now.

Again thank you for the action plan...seems most advice is to pay down the credit credit cards/unsecured debt.  I have roughly $20,000 in cash, does it make sense to tap into that to pay this down, or just cut spending and apply the savings to debt?

Yes do that. Then build back up to your 20K E-fund. Once you make the expense cuts mentioned here, you'll be so cash-flow positive, it will be like a massive fire hydrant of cash pouring back into your bank account and you'll have it built back up before the end of the year.
"I have worked my way up from nothing to a state of extreme poverty"

~ Groucho Marx

thebudgetbloggo

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Re: Case Study - $800,000 in debt and where to start?
« Reply #45 on: August 30, 2017, 08:17:02 AM »
The rule of thumb.

IF RENT is...
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00  (?? I am not sure how your rent is $4275 per month, something is missing from my numbers)

Is your property value under the following amounts (approximately)?
Duplex is worth no more than:   $148,400 to $250,000?
Condo:    $152,800  to $250,000?
SFH :   $80,000 - $130,000?

If the property value is on the low side of the above, you have a very strong rental property argument.  If it is closer to the higher number, you are definitely relying on capital appreciation to make this pay out, and you need to evaluate if your time and risk is worth it.   (It may be).

If your properties are worth a LOT more than this upper range, it is a strong candidate for selling, without compelling reasons to keep it (such as intending to move into it, exceptionally low inherited property tax, other investors demands,  etc).

$4,275 is gross rent, I pulled out the management fees from the Duplex and Condo.  They gross $1,825 and $1650 respectively.  I should probably put that back in and indicate the management fees separately.   Below is based on the gross...

RENTAL PROPERTIES (Gross Rent)
FMVBALRENTPYMTTERMRATE
DUPLEX$225,000$181,690$1,825$1,540203.25%
CONDO$160,000$95,230$1,650$1,050153.375%
SFH$120,000$69,350$800$670304.125%
« Last Edit: August 30, 2017, 08:20:40 AM by thebudgetbloggo »
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caracarn

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Re: Case Study - $800,000 in debt and where to start?
« Reply #46 on: August 30, 2017, 09:06:17 AM »
I'd be interesting in hearing more about YNAB - is that something you use personally?
I'll start with this but then address a few other things I saw discussed after.

Yes, I use YNAB.  And I use it after already being a tracker my entire life since college.  YNAB is a methodology as much as it is a program, and this is key to what I think makes it successful and better than just a spreadsheet.  I have always tracked my spending (which is a big reason I believe I did not go too far off the rails even though I only got on the MMM bandwagon a few years ago).  Tracking is the biggest thing.  I have used Mint, Quicken, a spreadsheet and almost anything else out there including trying other budgeting software like EveryDollar and GoodBudget.  In my opinion, nothing comes close to YNAB for ease of use and therefore for sticking with it.  Assuming you are in US, so YNAB will most likely import transactions from your banks and credit cards.  You want to enter your spending as you do it, but if you miss something the imports let you get accurate very quickly.  Most people end up falling off the tracking bandwagon because of the reconciling and such, but the YNAB method of spending five minutes or less every day takes that pain away.  The mobile app lets you just enter spending at the grocery, at the pump, at the hair salon etc.  Enter amount, enter vendor, pick category and done.  You can do all of this on a spreadsheet but where YNAB shines is in making adjustments, which is what is required to make a budget livable.  YNAB calls this "roll with the punches".  This means if your car suddenly needs work (like mine did this month) and you do not have enough in the Automotive Expenses category (or whatever you called it), no problem.  You just need to find those dollar somewhere else and adjust.  I needed $700.  Moved $100 from one category, $250 from another, etc.  Many people stop budgeting or tracking because in typical budgeting if you overspend a category, you "failed", but in reality you just learned something new about your spending. 

So YNAB is built on four rules.  1. Give every dollar a job.  Every time you have income, you assign every single dollar to a category.  That category may be savings, but nothing is left in an unassigned bucket.  2. Embrace your true expenses.  This means you provide categories that cover YOUR life.  You need to avoid a Miscellaneous category or keep it very small.  You can only learn and adjust if you have information.  Not knowing where you spent money and just tossing it in a bucket is not better than what you were doing when not tracking.  If a bill comes along this month that you forgot about but that you want to add to your budget, you just add a category so that next time it comes up you have the money ready.  3. Roll with the punches.  I spoke about this above.  Shit happens.  Most people think that makes budgeting hard.  With the YNAB process, it makes it a lot easier and removes the guilt.  The goal is learning and growing, not entering numbers at the start of the month and never changing.  4. Age your Money (used to be build a buffer).  Over time the goal is that your income this month is already being budgeted into next month, so that you are living on money you made long ago.  The concept is sound but the cutesy metric they created to show it has been controversial in the YNAB community.  Basically you do not want to live paycheck to paycheck, which even someone at your income level can do believe it or not. 

One of the best things it does which I think will appeal to most is how it handles credit cards.  I use a cash back card for EVERYTHING.  We do not pay with cash or check.  I want my free money.  With YNAB you spend to your categories (meaning if you have $500 in Grocery, that is your limit, not whatever your bank balance is or whatever you feel like today).  You charge it and you just enter it in the credit card account and YNAB magically moves it from Grocery to the CC category.  Then when you pay, the money is there.   Much harder to do in a spreadsheet and much clunkier.

So I cannot recommend YNAB more highly.  I just feel it is head and shoulders above anything else out there.  If you give it a try and need some help, PM me and let me know.  I'll be happy to help as much as you need.  It can be life changing for someone like you who is not tracking at all and I'd hate for you to drop out of using it when a couple little helps can get you back on the right track.  I do not think Mint is good for building a budget and tracking.  It is good for tracking. 

You asked how to lower the grocery bill.  As I said you're spending is the same as ours with a household of 7 of which 5 are teenagers who eat quite a bit.  Buy staples and other things you can in bulk.  We have a Sam's Club membership and I'd say 75-80% of our grocery budget is spent there.  We only go to the grocery store for items we do not consume fast enough before they spoil, or that Sam's does not have.  We also found a local produce market for fruits and veggies.  39 cents for bananas, $3.99 for a giant watermelon, 99 cents for tomatoes, $1.99 for a 10 pound bag of Idaho potatoes.  I walk out of there with two bags of produce for $20 or less a week.  Focusing more on Sam's lowered our monthly grocery spending by $200. 



Check2400

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Re: Case Study - $800,000 in debt and where to start?
« Reply #47 on: August 30, 2017, 09:45:09 AM »
Take a step back.  Let's break it down:

1) Rental properties
2) Spending
3) Debt

1)  Rental properties don't have enough information to make a decision.  You aren't far enough into your Financial Planning Journey to make a decision on such a large transaction.  Your worst case scenario right now is that you are borderline or slightly negative cash flow but with a 20 year note, so you're still making it up on the back end with principal paydown.  Let this be a second, third, or tenth step.

2) Spending--Get Mint.  It is free, automated, and has lots of shiny bells and whistles that making using it enjoyable.  If you want to graduate to YNAB later so be it, but baby steps.  Ideally this will also make you realize that you probably have overcomplicated your life with accounts, credit cards, and loans--get to work cutting that down to checking, savings, retirement, and credit card (2 max). 

3) Debts--You've itemized them, seen the interest rates, and you have the money to pay off part of them now and much more of then soon thereafter. 
--Take the $20,000 you said you have to throw at something and pay off the $17,000 personal loan at 10%, and you get a $425 post tax monthly raise.
--Take the remaining $3000 and put it towards the other personal loan.  You'll have 11 grand left, and at your rate will be able to pay that off in no more than 3 months, probably 2 if you make even a moderate effort at making and sticking to a budget lower than what you have now. 

That means that by November you will have given yourself a post tax raise of almost $750 dollars.  You'll then be two months away from paying off the HELOC, and you can start January maxing every retirement vehicle available. 

These are the easy first simple steps. 

Laura33

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Re: Case Study - $800,000 in debt and where to start?
« Reply #48 on: August 30, 2017, 11:38:43 AM »
Rental income   $4,275      $51,300
Rental real expenses   $450      $5,400
Rental depreciation expense   $1,000      $12,000

We can't forget these two.  Assuming you recapture your rental depreciation in a low income year, in future, and it is offsetting a very high income currently, the depreciation is worth, maybe $150 net to your monthly bottom line.

Rental Income:  $3950

Rental Income   
Duplex    $1,484.00
Condo    $1,528.00
SFH    $800.00
Net Rental depreciation tax avoidance $150

Mortgage Costs
Duplex    $1,540.00
Condo    $1,050.00
SFH    $670.00
SFH HEL    $148.00
Real property costs $450

Plus -- other maintenance fund 5%, your expenses for car usage, forms and office paperwork costs, 3% vacancy  (assuming 1 month vacant per year out of three units), other?
:   $$380 per month (wild guess)

Total costs:
$4238 per month.

NET: Cost to you $288 per month, on average over a year or two.

.................  Think of the rule of thumb, that prefferrably 1% of your property real value (cost to buy) should be the monthly rent.  No less than 0.6% to 0.5% if your goal is capital appreciation (in which case, your market may already be pretty high, so a good time to sell?)

So, first, pay attention to this post above.  You are making two critical errors here: (1) on the "investment" side, you are focusing only on long-term appreciation, when professional real estate investors always start with ensuring that the monthly profit from each rental will be sufficient to justify the investment; and (2) on the "income" side, you are looking only at the rent vs. mortgage + direct management fees, and ignoring the many, many other costs that come along with rentals (repairs, periodic roof replacements/recarpeting, short-term vacancies, etc.).  This means that you are in fact spending more and earning less from those properties than you think you are.  This is also contributing to your sense of having no clue why you're always broke and in debt -- you're constantly paying all these bills and getting all these checks, so the money flies in and out, but you don't have any control over it or even know whether it is personal, business, etc.

My bigger-picture advice is to think about whether property rentals is really the right path for you.  I say this because being a successful property investor means running it like a business -- the kind of business that has a CFO with the world's sharpest pencil.  People who succeed in that world do serious math before deciding that a property is worth investing in, they religiously track the expenses/rentability/etc. of each property, and they dump them when they are no longer profitable.  [They also, btw, tend to keep mortgages, because the mortgages are tax-deductible and low-interest ways to free up cash that would otherwise be locked in the property -- and that's usually a 30-year mortgage, because going back to (1) above, rentals are all about cash flow, and a 30-yr mortgage will always provide better cash flow than a shorter term.]  My impression from your posts so far is that this is not you -- you've apparently had at least one of these properties for almost a decade and haven't gotten around to changing the title, you don't know what you're spending on the properties, and you're not tracking the profitability of each one.  It's hard to make a good living in a field where the devil is in the details when you are not willing to put in the time/effort to pay attention to those details.

Please note that this is in no way a criticism -- I am also completely *not* a detail person, and I decided against investing in real estate for that very reason.  My version of saving is this:

1.  Max out 401(k)
2.  How much more can I afford to save?
3.  Log in to Vanguard, set up automatic transfer for that amount to VTSAX.
4.  When 2 changes, repeat 3.

This is literally it (and I mean that in the literal sense, too).  I am lazy as shit and don't want to deal with this stuff every fucking day.  And, frankly, I have a lot of other things in my life that I'd much rather spend my time on than tracking business income and expensee.  Like, say, cleaning my bathroom with a toothbrush.

So, again, this is not about shaming or criticism -- it's about Clint Eastwood's "a man's got to know his limitations."  The way to financial success is to play to your strengths, not chase a path that requires you to become someone you're not.

My proposed path for you would be:

1.  Start tracking expenses now, using the easiest possible app to do so.
2.  Sell the properties.  Pay off the CC debts and loans with the profits.
3.  Set up your 401(k) to the annual max (currently $1500/mo), in a low-fee, broad market fund (e.g., VTSAX). 
4.  Keep a reasonable emergency fund.
5.  Open an account at Vanguard and put any leftover money from the property sales into VTSAX (or a target date fund if that feels too aggressive).
6.  Once you have your expenses tracked and your budget scrubbed and your 401(k) maxed, take any leftover income and set up an automatic transfer to VTSAX for that amount.

FWIW.  YMMV.  [insert additional acronym here]
Laugh while you can, monkey-boy

SwordGuy

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Re: Case Study - $800,000 in debt and where to start?
« Reply #49 on: August 30, 2017, 11:45:55 AM »
Ok, first of all.  Congrats on deciding to (a) get a handle on your finances and (b) taking the face punches like a good sport.  Bravo!

Hereís the bad news.

The only reason you arenít bankrupt is that you have a really high income.  If you get ill or injured and are unable to work, or laid off and canít find high paid work, itís going to get ugly fast.

You have $120 annually for car registration and maintenance but you bought $64,000 worth of cars?  Really?  I think you are missing something here.

First for the easy stuff.

$1800 for Christmas when youíre $800,000 in debt and bleeding money is too much.   Like $1600 to much.  Use it as a life lesson to your kids Ė donít overspend or bad and embarrassing things happen.

$6600 for eating out?  Make that $200 for special occasions until the emergency (non-mortgage) debt is gone.

$6000 to build up the emergency fund?  Not when youíre paying Credit Card interest rates and owe money to your retirement accounts!  Pay those suckers down!  Then build it up again.

$1200 yard work.   You probably need the exercise.  You certainly donít need the expense.

If you work at it you can cut that grocery bill by 25% over the course of the year.  And youíll probably eat better, too.  That frees up $1800 a year.

$3000 for liquor?   $0 until you pay off your non-mortgage debt (except for a cold beer after you finish the yard work ;) ).  That frees up about $2800.

Car1 - $602 a month?   You canít afford a car that expensive in your situation.  Sell it and replace it with a $10,000 low mileage used car.  Finance it for 4 years and your cash flow will improve by about $4500 a year.

Car2 - $373 a month?   You canít afford a car that expensive in your situation.  Sell it and replace it with a $10,000 low mileage used car.  Finance it for 4 years and your cash flow will improve by about $1200 a year.

All those changes mean an improvement in your cash flow by $25,500 a year!
To put things in perspective, thatís just a smidge under Ĺ the median family income.  Thatís right, low hanging fruit in your budget equals almost half what a typical family lives on.  Think about that when you debate about whether you could *possibly* make those changes.

If you make those changes your credit card and retirement loans will evaporate in short order.  In about 2 years they would be gone.  At that point those personal loans would start disappearing really fast.    Within 4 years you would owe nothing but those mortgages.   Cash flow would be awesomely positive.

Now, about those rentals.  You are losing money on them at the moment.   You think you are making money, but you are not.  Every single day those rental properties are wearing out.   You just have not received the repair bills yet.   If a roof costs $10,000 to replace and lasts 20 years, thatís $41.66 worth of damage to the roof every month.   You wonít get that bill on a monthly basis, but itís accumulating and at some point you are going to have to cough up $10,000 to fix it.  Thatís not all.  That HVAC system, the dishwasher, the paint, the kitchen counters, the carpet, the floors, the EVERYTHING is wearing out.   Your rental income does not provide enough money to set aside enough to make those repairs, much less leave you with a profit.

There are 4 ways to make money (legally) renting out real estate.

(1) Cash flow.  You take in more than you spend, including set asides for repairs and vacancies.  You are failing on this measure.  That means you have to make up the difference with your salary, which is ďa bad thingĒ.

(2) Appreciation.   The property goes up in value while you own it and you make profits when you sell.  This is a whole lot easier process to enjoy if Cash Flow is positive.

(3) Equity Paydown.  Your tenants pay the mortgage (most of the time).   You are so-so here since one propertyís rent doesnít even cover PITI payments.

(4) Depreciation.   This isnít really making money so much as it is sheltering other money you made from taxes.  Youíre doing fine here.

Youíve already gotten a recommendation for Gallinelliís book earlier, it will teach you how to run the numbers.   Then, after youíve tracked down your true costs youíll know whether these are money makers or not.   If they are not making you money then sell them and buy properties that will.   

Best of luck!