You are in a very risky position, particularly with 3 children. $1500 in savings, are you kidding me? Your home is financed with a Heloc, is that correct (variable rate)? You think you are going to fix the rate "when rates start rising"...? If you are that good at predicting rates, you do not need to work, you can earn a living trading bond futures....
Before you can begin investing, you need a foundation: A fixed rate mortgage, a reasonable amount of liquid savings, and term life insurance if you do not already have it. Building a garage apartment to rent out is an investment. You are not yet in a position to do this. So, what I would do is:
1. Refinance the heloc into a 15 year fixed (10 year if you can afford it) right away.
2. Get any 401K match.
3. Build up your liquid savings to a reasonable level. Then and only then, go to #4
4. Explore the garage apt. rental investment. Look at your cash on cash return after investment (profit each year/investment in garage. Pay for it with cash.
also, where in this is saving for college? its not that far away, and you don't want to have to be cash-flowing college and a heloc AND a (potentially money-losing) real estate investment. get those 529s set up today if you haven't already!
OK - thanks so much everyone. I am a little confused about why our situation is so risky, and would love more feedback because maybe I just don't understand the math. What would "right side up" on our financial situation look like?
We have been trying to get to this point for a few years, and now that we are here, I don't want to relax if we really need to sit up and pay attention. BTW - when I wrote "all the extra money" it was tongue-in-cheek, I know that $2000 is not so much compared to many of you. But for us, it's great not to have to scrape by each month.
1. In about two months, we will have a fixed rate mortgage on about $130,000 as our only debt. Does that sound better? We just aren't there yet. We got a HELOC instead of a fixed rate mortgage for a variety of reasons, but the biggest one was because the "garage" was falling down and we are just "fixing" it by rebuilding and turning into a garage/ studio. So in our case, it's not a separate real estate investment, it was part of buying this house, which was undervalued due to the state of the "garage". The project should be done in a few months, and we will fix our rate then. HELOCs used to scare me, but we decided if at any time during the repair, if we got worried about rates, we could just fix it (that's what I meant when I said that we would fix when rates start to rise).
I know that some folks are in the no-debt-at-any-costs camp, and others think a mortgage is OK and you should invest before paying off debt. I guess we could have invested the $20,000 instead of putting it into the garage repair/studio, but I am not sure the return would be as good. We have a history of successfully renting garage apartments and now we live in Hawaii in a college town, so the rentability of this place is not an issue. We would net $500-700/month if we rent it out as a rental, and $1000+ if we do airbnb or other vacation rental. Am I missing something or could it be a money-losing investment? At $20,000ish for the "repair" it should take 2-7 years to recoup the investment.
Another benefit for us with this house is that we will have a work/trade person living for free in the basement to help with kids, garden, vacation rental turn-over, etc. If we want to drop the work/trade and just rent the basement apartment to a college student, there is that option. I have a health condition, though, and with me working, it will be much easier to have an extra adult around.
2. We have two very small 529s for the kids - $3000 for the two older, and $2000 for the younger. We were not in a position to put anything in for the past few years, but I figure that we should make sure that we are set up first, and then help them? What are folks' thoughts on this? I don't want my kids in debt, but I also think that they can learn how to go to college without taking out a ton of loans, and it is more important for us to invest so we are in a position to help when the time comes. No? We will never make a lot of money at our jobs. Our current high of $80,000 for a family of 5 doesn't put us in a situation to pay for college for 3.
3. Someone mentioned life insurance. Because we were pinching so tight before, we have term life insurance on husband, but not me. Maybe we will rethink that now that we have some income.
4. I'm not sure 401K matches are an option, but both DH (teacher with state retirement system) and I have homework of asking today. I guess I forgot to mention that DH has $50,000 in previous state retirement system and is set to get health insurance and $800 monthly when he turns 55 and 60, I think. We are mid-late-thirties.
5. As for liquid savings - how much do you guys recommend? 2-3 months of living expenses?
Thanks again. I need to get my brain back in this game!