Author Topic: Which debt to focus on first?  (Read 2275 times)

mpresco

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Which debt to focus on first?
« on: May 29, 2014, 03:19:40 PM »
Hey All,

I'm in a situation where I am a landlord of an underwater house (financed @ 4.75%) that is not cashflowing and is unlikely to do so. If I were to sell today, I'm looking at bringing approximately $26k to the table. I do have tenants under contract until end of July, and they are leaning towards signing another 1 year lease. They are good tenants and for the purposes of this exercise let's assume that while they're in the house, I'm breaking even on cash flow.

I'm also on the hook for 34k in student loans (@4.5%). I'd like to get to the point where both of these issues are resolved- I.e no student loan and rental property no longer underwater so I can sell whenever I decide to pull the trigger.

So given these issues, where should I be putting my extra $$? Right now I have a $16k emergency fund, $6k in checking, and typically have about 2k surplus each month. I'd like to keep the emergency fund at 10k mainly since I have the rental. Thoughts?

former player

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Re: Which debt to focus on first?
« Reply #1 on: May 30, 2014, 04:45:34 AM »
Assets: $22,000 cash, plus $24,000 spare cash coming in each year.
Liabilities: student loan of $34,000 @4.5%, negative equity in tenanted house of $26,000, total $60,000.

You could pay off the student loan within the year while still ending up with an emergency fund of $10,000.

You say that the rental house is not cashflowing and is unlikely to do so, but that we are to assume the cashflow is roughly breaking even.  I agree you want to keep good tenants, but if you can negotiate a cost of living/inflation increase into the rent for the new lease, that could help the cashflow.  But the last thing you want is a void, as this would wipe out the benefit of any increase and send the cashflow negative, so you need to judge carefully your tenant's receptiveness to a proposed increase and/or the possibility of getting good new tenants in quickly.

Will the house increase in value within any timescale you are interested in?  If there is potential for a capital return, then your current break-even cash flow is a no-cost way (other than your time and effort managing the property) of keeping the potential for that capital increase.  If there are no potential increases in value within your timescales, then I would suggest keeping the house until you have whatever cash you need to bring to the closing (so you don't have to borrow)and then sell, as that would leave you free to start investing your $24,000 a year to its maximum potential.

Weedy Acres

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Re: Which debt to focus on first?
« Reply #2 on: May 30, 2014, 06:20:57 AM »
If you don't see the rental as a long-term keeper, I'd focus on paying the mortgage down and then selling it in a year when the lease is up.

nereo

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Re: Which debt to focus on first?
« Reply #3 on: May 30, 2014, 06:58:11 AM »
A bit confused about your precise situation because of your terminology.  You say you are 'underwater" and that we should assume that with the rental that you are breaking even on cash-flow, but also that each month you ahve $2k surplus in cash flow each month.  What you don't list is what the rental costs each month (interest, equities, upkeep, taxes and fees) vs what you bring in, so that makes it harder.

what i think you mean is that your rental is cash-flow neutral and with your job you still have $2k leftover, and selling your rental would leave you about $26k short of paying off the mortgage.

If that's the case, I'd keep the rental - sure it's not generating income (now) but you aren't loosing money on it either. 
Instead, I'd throw your available money at the SL and pay that down in the next 1-2 years.
Keep your renters but decide if you can raise their rent any relative to surrounding properties.  At the very lease it should go up 2-3% annually for inflationary reasons.

In the meantime, talk to your bank.  Depending on your mortgage you might be able to refinance for much less than 4.75%, especially with today's rates. 
that would be my strategy.   

marblejane

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Re: Which debt to focus on first?
« Reply #4 on: May 30, 2014, 02:46:50 PM »
I would offer your tenants a month to month renewal, save up $10k over the next 5 months, and prepare to list next spring. Then take care of the student loan once your property sells.

TomTX

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Re: Which debt to focus on first?
« Reply #5 on: May 30, 2014, 05:32:19 PM »
I would offer your tenants a month to month renewal, save up $10k over the next 5 months, and prepare to list next spring. Then take care of the student loan once your property sells.

The "right" choice depends hugely on the market. Have house values started to go up? Are they likely to go up? If you sell now, you are "locking in" a loss. Since we're assuming the house is cash-flow neutral (and presumably you are paying down principal on the loan) - may as well ride it out awhile if the prospects look decent.