Author Topic: Feeling squeamish about putting emergency funds at risk and/or using HELOC  (Read 1809 times)

LadyMaWhiskers

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A couple months ago I made the (non-mathematically motivated) decision to pay off my mortgage ASAP. I cashed out about $100,000 in mutual funds and threw that + other cash on hand at the mortgage. At the same time I finally completed my tax returns, which I knew would be yielding a large refund. My plan had been to park the refund as the new cash-on-hand emergency fund. It's about $50k, which is roughly 7 months living expenses. Note, one thing motivating the mortgage pay-down goal is that it's a huge payment - $4200 P+I only. There's another $1000 in RE tax.

I've read some advice on the MMM blog to use a HELOC for the e-fund, and invest all cash on hand. I don't know how to wrap my head around this. In a true emergency, I don't want to raise the price of everything I must buy/pay for by tacking HELOC interest on it. I've never carried any debt but a fixed rate mortgage secured by a high-equity residential building, so I'm not used to that living with debt feeling.

I'm a bit more comfortable with investing the e-fund conservatively, but I'm not sure what to do. That feels better, because if I needed the money, most of it should be there if the investments are conservative. I'm torn though, because I recognize that my reasoning is ignoring math once again, and unlike the mortgage pay-off decision, I can't readily articulate why I want to ignore math in this context.

Some biographical details that define my most likely emergency scenarios:

- single parent with no child support
- very stable job with a non-profit; still, a major turn of events in our industry could tank the company
- I'm a 8yr experienced product manager and live in Silicon Valley, so I'm thinking I'm pretty employable
- reliable rental income comprises almost half my take-home
- rental is a 12-unit apt. building, so major mechanical repair could be expensive; fortunately the goddamn driveways and roofs were redone fairly recently; rental is along CA coast, and is not insured for earthquake (cannot be)
-monthly living expenses are about $8500 now, and I'm assuming I could go down to about $7000 in emergency-status; $1200/month is childcare, which I would need less of while job hunting vs. working; also, I think I could rent a bedroom in my house out for ~$1200 in a heartbeat.

Speaking of renting out my own house, I have an unfinished, detached garage I could finish as a little 4-desk tech space or something too. So that's an option for part of the funds that would provide an other emergency cushion.

Ok Mustachians - tell me what you think I should do and why

cincystache

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I think we need some more details on your full financial picture in order to help.

-What is your annual income from the rental property? What could you net today if you sold the rental?
-What is your annual income from your day job?
-Total Assets?
-Total Debt?
-Do you live in one of the apartment units or do you have another house?
-Is the mortgage you paid off the rental or your other house or both?

Does your spending include all of the taxes/maintenance on your residency/rental property?

In general, if you are running a 12 unit complex, I would lean towards having cash on hand especially on one income. You have way more variables than the average family.

LadyMaWhiskers

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- About $75k annual net from the rental
- Could net appx. $1.4-1.5 on sale of the rental (I'm really guessing a lot since there are not a lot of recent comps, but this is conservative. Lots of capital gains to pay if I sold, which I've figured into this net.)
- I don't live in the rental, and it is paid for
- Day job salary is $125k, $6k/month take home after taxes, retirement, health care
- Total assets (so heavy on real estate that I'll quote the liquidation values for that)
---REO $2.1-2.2, including residence
---mortgage on primary residence $440k
---no other debts
---retirement accounts ~$150k
---liquid savings - this is the question at hand, $50k
- Expenses are for me to live on, including personal residence. I've taken the expenses out of the net rental income, but if I had no rental income, most would still be owed, and that's roughly $4k minimum

Thanks for the opinion Cindystache. I tend to the same conclusion: I need cash on hand for something to blow up at the rental.

cincystache

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Thanks for the info.

If I'm reading everything properly your net worth is around 2 million and without the rental, your base expenses are 4-6k per month:

Option 1: (my personal favorite): Sell both the rental and your primary residence. You can generate 6,600 per month (pretax) off of a 2M portfolio for the rest of your life. You no longer need to worry about emergency repairs on the rental or paying your mortgage or maintaining a primary residence. Rent a place where you want to live and continue working (if you enjoy it) and put the maximum into your 401k and traditional IRA. Or you could just be a full time mom/work from home and save the 1200 on childcare each month. You would also be free to move to a lower cost of living area if you'd like.

Option 2: If you love the bay area and want to stay in your current residence, sell the rental and invest the 1.4-1.5M and continue to pay your mortgage. If you have a low rate (under 4% fixed) I would take my time paying it off unless you lose sleep at night because of it. You now have no rental to worry about and about 5,000 per month coming your way in passive income (less after taxes). You keep maxing out 401k and IRA every year until you get tired of work and then quit and do something you enjoy.
 

I vote that you are already FI if you move your assets out of real estate and into index funds, enjoy life.

LadyMaWhiskers

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I wonder if I have a different definition of base expenses, or maybe just wasn't clear. My monthly household living expenses are about $8500, $5300 of which is PITI. A basic rental in my area would be $3k/month. I currently work from home, and that would be a drag in the $3k place, but perhaps more doable on about $3500. Something comparable to my house would be $4000-4500. Without principle, my monthly housing expenses are $2150 (and the capital tied up obviously.)

It's clear to me that I am FI, a few times over, if I live somewhere else. I am here for proximity to family. Do I love the Bay Area? It's home. In the future, I'd like it to be more home base than lay my head here 365 days per year. There's nothing killing me about the ridiculously-over-the-top-how-can-that-even-be CoL, and I'm not going to blow off my whole family for CoL (aging parents who are delighted by their grandson nearby + a sibling with special needs who will eventually transition from my mom's responsibility to mine and my brother's.)

I do contemplate selling the rental. The capital gains hit is hard to stomach, but there is clear math there. I get the 75k net passive income and appreciation now, plus tax shelter, but I should be able to get most of that on $1.5M from other vehicles as well.

I don't so much lose sleep on the primary residence mortgage as I just see the massive swing in monthly expenses and like the idea of needing $4200 to get by a month vs. $8500!

Any other Mustachian thoughts on emergency funds?