Author Topic: house hacking, selling car, payoff house - critique my calculations please!  (Read 1106 times)

aajack

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Hey all! This is my first post, but I've been following the forums here and MMM articles for years now. I am having a financial dilemma that I would love others input on. In a nutshell, I am "house hacking" (others are helping pay my mortgage), and as of tomorrow when I sell my very expensive (mistake) car, I will have enough - barely - to pay it off. I am considering doing this. Here are some more specific #'s. If anyone wants to chime in I'd love to hear it!

I am a teacher making 38,000/yr, but my contract for next year is not renewed. Unemployed as of July.
Own a house with about 45k equity, and I owe 128,000. I have on a 15 year note at 3.25%. I bought it last fall. I am currently ďhouse hackingĒ it. After roommates pay rent and I pay bills, I end up paying about 350/month on it.

Separately, I have been tracking all expenses for about 2 years, and know that my monthly spending WITHOUT rent is about $900. (I am selling my car tomorrow to try just biking, so I think this number will go down, but Iím staying conservative).
So, my total living requirements are 1250 currently (900+350 rent). OR if I could get my house paid off, I would have $0 living expense AND make around 550/month from surplus rent after all expenses.

Here is my question. I currently have about 108,000 liquid dollars (some in bank accounts, some in the market). I am selling my car tomorrow for 27,800 (it was a stupid purchaseÖ Iím finally taking steps to fix it). So my total liquid cash after tomorrow is 135,800. I could theoretically pay the house off, have about 8k leftover, and move into a low cost lifestyle where I have no rent and have ~500 passive income per month. I would need another 400/month (to get to my 900 number), which would be pretty easy to get.
This situation really appeals to me philosophically. No debt, simple lifestyle, and only need to make 100 bucks a week to make ends meet.
 HOWEVER, I also ran the scenario where I DONíT pay the house off and keep all my money (except for an emergency fund) in the stock market. Here, I would simply withdraw 900 each month to, theoretically, have the same lifestyle as the house paid off scenario. In this case, I assumed Iíd only be making about 5% in the stock market, but would end up with about 30,000 left over after 15 years when the house was paid off.

So, in both scenarios after 15 years I own the house outright, but in one where I drawdown from my portfolio I end up with 30k leftover. Mathematically, not paying the house off is 30k better over 15 years. That said, I must admit the idea of having the place paid off, especially if I canít find another meaningful job for a while, is very appealing. If it really came down to it, I could adopt Early Retirement Extremeís budget and be fully independent just on my rental income.

What do you guys think? Hold out for the scenario thatís better on paper (not paying house off)? The other thing that makes me uncomfortable with that is it is all based on long term historical averages for the stock market, which I am applying to a 15 year period. I feel like thatís scarier than trusting that I will always have a roommate in a desirable mountain town.

Am I approaching this the right way? Any other calculations I should run? What would you guys do? Thank you!!!!



Dicey

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Confratulations on getting yourself into this position!

I love that you're thinking this through, but why are you not using the actual historical average of 10%? Please re-run the numbers and get back to us, we'll happily wait. We love questions like this!

Also, what other money do you have saved for retirement and or other investments besides what you're proposing to pay off the house with?

Rents will continue to rise with inflation, which is great, but so will taxes, utilities and most of all, repair costs. What's your plan when the roof leaks, the water heater blows out and who knows what the hell else happens in quick succession?

More words, please! Oh, and congrats on selling the car!!

backyardfeast

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Do you want to keep teaching?  As you say, earning a few hundred dollars a month is easy, but so is earning more than that at a part time job, tutoring, or even staying on the substitute teaching list and working on-call.

Are you planning to keep living in this house and this town for longer than your 15 years?

It's a tough call. :)  Personally I'd probably leave my money in the market and enjoy letting the roommates pay the mortgage off.  This allows you to keep a healthy emergency fund, keep saving, and of course, if you want to pay the house off at any point, you still can...but then again, no mortgage is an incredible freedom too.  It just keeps your daily resilience a little lower in cash reserves.  Unless you use a heloc, I guess!

barbaz

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How are your job prospects as of July? The expected return of stocks is higher than of paying off your mortgage, but unemployment plus a market crash with all your money in might be too big a risk.

Lady SA

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Purely mathematically, it makes more sense to invest than pay down your mortgage. Any return in the stock market, even your conservative 5%, is a better return than your 3.25% mortgage. Over the long run, you would be better off investing your spare change (as long as you don't pull it out when there is market volatility!) and paying the minimum on your mortgage.

There is a big "Don't pay off your mortgage" movement on these forums -- especially with the historically low mortgage rates. That low rate is the cheapest money you will pretty much ever get, so you want to keep the gravy train running for as long as possible.

Of course, there are psychological benefits to being totally debt free. But you know those, I figured I would throw my hat in the ring for not paying off your mortgage.

http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

TexasRunner

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I would definitely say do NOT pay off the mortgage.  3.25% is a great rate.

Additionally, If your Mountain Town is so awesome, any chance of bumping up the rent when the current tenants move out?

What are you planning on doing with your time?  A pretty common theme on this forum (and the blog) is that people with enough time to do whatever they want will almost certainly wind up getting paid for it (sometimes by accident).

Photography?  (Easily 1500$ a month working 2 weekends each month)
Trainer?  (Probably 800-1200$ a month with about 15 days at the gym)
Hiking Guide? (Probably 400$ a month or so with 4 hikes)
Ski Guide? (Varies based on where you are at)
Ski Patrol? (Sometimes minimum wage but fun, and sometime lucrative)
Substitution Teaching? (You know this one)
One-on-one teaching sessions with students who need a bit more help? (Easily 900$ a month working 2 nights a week)

The list goes on and on.  It might be better to think about what you would even want to do with your free time and post up.  There is basically always a way to make money out of it.

aajack

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All-
Thanks for all the comments, I really appreciate it!!! The advice was somewhat as expected - don't pay it off.

Dicey - regarding which rate to use... I guess I have some lingering confusion on the 10% historic rate you mentioned. This is without inflation, right? So isn't 7% a better number to use (for a "real" rate of return)?

And from the 7%, I guess I dinged it down to 5% for the short time period. Is 15 years a long enough period to justify using "long term historical averages"?   Haven't there been entire flat or even negative decades? So I'm just not sure I'm comfortable using that number for only 15 years. (And barbaz hit the nail on the head... unemployment+mortgage+all money in SM with a crash would be pretty stressful). So anyways, I guess that's why I took a more conservative number...

Other than the liquid cash, I have about 60k in various retirement accounts. I'm thinking the upcoming unemployment might be a good time to start the roth conversion ladder...

Lady SA I love your link about "Bob, the world's worst market timer!"

And TexasRunner, I am hoping that your line of reasoning pans out... I have lots of little odd job ideas floating around. I am actually kind of excited to have a mini work break and just take enough random jobs to pay for basic needs for a bit.

I really appreciate all you folks taking the time to input on my question - thank you!!!