Mustachians! I need your help. I'm trying to assess my housing situation so that I can best achieve my 3-5 year goals. I'm usually pretty good at this but for some reason I'm running into a mental block on some of the math...
About me: 28 years old. Single, no dependents. I really got into MMM about a year ago, just after I closed on my condo in Chicago (face punch? We'll see...). Before MMM I was pretty interested in personal finance but would place myself in whatever the next category is after MMM (ERE, MMM, ... Me.) I thought I had it all figured out and would cruise along with my 30-40% savings rate and retire at 65 with millions in the bank. Well, I've since decided to go full bore Mustachian which will require a complete reevaluation of my money habits and, for me, housing is the big one.
About my Condo: Purchased in July 2014 for $267,500. I bought it with 10% down at 4.625%. The condo is perfect - located in the best location possible, allows for an expanded future family situation and should meet my needs for the next 7-15 years. I live there with a roommate who pays me a flat $600 per month. This condo would rent for $2100 per month. My thinking at the time of purchase was that it was a good buy because the monthly payment for owning is less than the cost of rent in this particular area. My mistake was probably limiting myself to this (expensive!) neighborhood where I wanted to live.
My current stats:Net Monthly Income: $6,219Cash pay - $4,600
*PAYE student loan - ($522)*
Rent Income - $600
Simple IRA - $1291 ($1,041 me, $250 employer)
HSA: $250
*This program has been debated in other threads. I'm a big believer in its value for FIRE, but regardless I'm too far in to change course now. For those unfamiliar with the program, my monthly payment will always be 1/12 of about 8% of the prior years AGI. As it is tied to income and will be 0 upon FIRE, I chose to account for this as a reduction of income, like a tax, rather than an expense.
Total Monthly Expenses: $3,800
Condo: $1,865 P&I: $1,211 (P=$324, I=887) Again, Mortgage was for $240,000 in July 2014 at 4.625%. Condo value: $275,000. Current loan balance: ~$237,000
HOA: $194
Escrow: $460 (Taxes=$266, Insurance=$27,
PMI=$167)
*Other life expenses: ~$1,900/month
*Major room for improvement here, obviously, but outside the scope of the present conversation.
Retirement Accounts: $30,000
Cash on hand: $0.00
Debt (other than mortgage and student loan): $0.00
Near term goals (not necessarily in order):1) Refinance mortgage on condo to get a better rate and drop the PMI
2) Buy an income property (3 flat).
My plan is to rent my condo in May 2016 for $2,100.00 per month. Move to a rental property in a different neighborhood where I will rent and have a total cost of living of $2,000 per month ($800 rent, $1200 other), whereby I will save about $24,000 in cash that year.
After a year, I hope to buy a 3-unit property in the same neighborhood for $400,000.00. I would like to do the purchase with a 3.5% down FHA loan, live in one unit and rent the other two. This should result in a break even cash flow situation where both the cost of ownership and rent return from the other two units are about $3000 per month. My total monthly cash flow at this point should be about $2500-3000 + any cash flow from the condo rental. After two years of living in the income property, I would like to refinance to a conventional loan at 80/20% LTV, rent out the third unit where I had been living, and move back to the condo where I will stay into the foreseeable future. Target move back to condo date: May 2019.
At this time the rental building should cost about $2500/month and generate rents of $4500/month.
Sorry for all the buildup, I provided a lot more commentary above than I had intended....
The question is, what do I do with the condo? I feel that I need to refinance because my interest rate of 4.62% is too high (last year my credit score was about 680, now about 730) and I need to get rid of the PMI. I'd also like to ReFi before interest rates increase, and I need to do it while I am still an owner occupant to qualify for the best rates.
Here are the options as I see them (no particular order):1) Sell condo. Walk away with about $27,000 cash and start over (buy the 3 flat now?) Problem is, I LOVE my condo. I'd really like to live here as long as I can. I realize this is an emotional response and, unless it's very close, I will pick logic over emotion.
2) Refinance for a 30 year note at ~ 4.1%. In this scenario I would borrow the cash to get me to 20%LTV from family ($17,000-23,000 depending on appraisal). New cost of ownership would be $1,500 per month. I'd rent at $2100 per month and pay back the relative with the $600 monthly cash flow generated by the rental over the 36 months I'd be renting it.
3) Refinance for a 30 year note at ~ 4.1% without bringing cash to the table. This would make the monthly cost $1800, saving only about $65 per month and adding another year of payments. I'm assuming PMI remains at $167/month here. Probably the worst option on the table.
4) Refinance for a 15 year note at ~ 3.1% without bringing additional cash to the table. Monthly cost here would be $2302.00 (includes $167 PMI) until month 19, when PMI would automatically cancel as I'd hit 78%LTV, bringing monthly cost to $2135.00.
5) Option #4, but borrow the $17,000-23,000 extra to get to 80% and have payments be $1,966.00 from the onset. As rent is only $2100, I'd have to dip into my own cash flow to pay the relative back over the 36 months, which I fear could throw off my timeline on acquiring the rental property if unforeseen expenses occur.*
6) Don't refinance and rent condo. Here I would cash flow about $235/month from the condo. PMI would automatically drop early 2022.
7) The rental property plus constant moving is stupid. Instead just do any of the above options, reduce expenses and continue to live in the condo.
*I came up with the 15-year note idea after reading MMMs article
http://www.mrmoneymustache.com/2011/05/24/mmm-challenge-get-yourself-a-lower-mortgage-rate/ on the subject where he enthusiastically recommended it. Personally I've always disagreed, thinking that, considering today's interest rates, it is best to leverage as long as possible and invest the savings in the stock market. Here, the $466 monthly difference between the 15/30 years invested at 7% return results in $140,521 after 180 months. The balance on the 30 year note at that time is $138,800. So it seems the 30 year note is the better deal, but I think the element of "forced savings" through the 15 year probably outweighs that ~$2,000 benefit....
So there we have it. Any and all thoughts, comments, and discussion are appreciated!
I'm particularly interested in getting people's opinions on which ReFi/housing option best allows me to own the income property at 80% LTV in May 2019. I'm really struggling with the calculations on whether the 15 year or 30 year is better, as well whether the benefits of borrowing additional funds to get me to 20% is worth the trouble.
However, if you see holes in any part of my plan, have a better alternative, or really any other ideas, by all means please share!
Thanks in advance!!