Author Topic: Need Objective Financial Advice  (Read 7968 times)

beemoney

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Need Objective Financial Advice
« on: October 10, 2012, 04:02:21 PM »
Greetings!

My financial situation has recently changed and I'm looking for advice on what to do next. Here are the facts:

Between my full time job and freelance income I make about $115,000.
My partner made about the same until August, when his job was outsourced to India.
His insurance for him and his two full-time custodial kids is $550.00. That, other than food, is our main expense. I'm insured through my company.
We recently invested about $5000 in equipment for a new business venture that has so far made over $8000 (but partner still has no full time work... So we plan on just putting all profit into savings and living on my salary)
Our recently re-fi'd mortgage is $957.00 per month and we're looking to have that paid off within five years. The house is worth $350k and we owe $225k.
Our savings is $17,000 (it was well over $50k, but we used it to re-fi, and this is where we are now after saving since March)
I have a rental unit worth about $280,000. I paid $445,000 for it and put over $100K into it about seven years ago (I had planned on living there forever, but, well, things happened.)
The mortgage on the rental is $2085 per month, HOA is $200. I have put about $3000 into it for repairs this year alone.
My rent (top of market for the area) is $2000 per month.
No debt except the two mortgages. No car loan, student loans or anything.
I have about $50k in IRAs and 401ks.
Kids' school tuition is $12,000 a year, but that will drop to $6k next year as one heads on to High School.

My big worry is the rental. I lose money every month and have yet to see really any tax benefits from it (that I can tell.) No matter what I'm out $285 per month and that's when there aren't problems like roof repairs, tree trimming and other costly things. I don't think I can re-fi because it's so underwater.

I'm just not sure that I'm maximizing my money at this point and I feel saddled with this rental that if I walk away or sell it I will basically have just tossed hundreds of thousands down a hole with no return. Should I cash out IRAS to refi? Should I cash out IRAS to help boost our payoff at the house we live in and then throw everything extra at the rental??

Any ideas or advice? I'm in California, if that helps clear anything up.

Thanks SO much. I look forward to your responses.


Seawolf

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Re: Need Objective Financial Advice
« Reply #1 on: October 10, 2012, 05:20:11 PM »
Quote
Kids' school tuition is $12,000 a year, but that will drop to $6k next year as one heads on to High School.

WHY?!?! You're paying $1000 per month to send your kids to a school that you're already paying for in your taxes (public school).  Drop that shit like a bad habit.

I don't have much advice for the rental unit...being 165k underwater is rough.  If you can really rent it out at 2000 a month then you definitely should be doing it until the housing market comes back more, once you get it paid off aggressively, it will start paying money toward your house.  Or, think of it the other way, you have your house paid off in 5 years and then that money goes to paying off more of the mortgage for the rental every year.  If you cut as much as possible from your total other expenditures and pay down your debt as aggressively as you can, you might be able to pull it off in 10 years, but you won't have much in the way of savings.  It my be better in the long run to just sell the rental at a loss, pay off your debt ASAP and then save for financial independence.

RadicalPersonalFinance

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Re: Need Objective Financial Advice
« Reply #2 on: October 10, 2012, 08:55:56 PM »
What are your short term and long term financial goals? Do you want to own rental real estate?

arebelspy

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Re: Need Objective Financial Advice
« Reply #3 on: October 10, 2012, 09:00:48 PM »
Do you want to own rental real estate?

OP already owns rental real estate (which it sounds like they should sell ASAP).

On top of that, they're located in California.  If they are interested in real estate the best plan for them is investing out of state (either being an out of state landlord or being a private money lender to other real estate investors).
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Another Reader

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Re: Need Objective Financial Advice
« Reply #4 on: October 10, 2012, 09:14:13 PM »
Where in California is the rental located?  You mention expenses that imply it's a house, but the HOA is more like a condo.  What I would do in your shoes would depend on what the property is and where it is located.

What's the loan balance?  Are you eligible for a HARP refinance?  If the loan is owned by Fannie Mae or Freddie Mac and the loan was sold to Fannie or Freddie before June of 2009, you might be eligible to refinance under HARP.

What are your partner's employment prospects?  If he can become re-employed quickly, even at lower pay, that would make carrying the rental more palatable.

No way would I take money out of retirement accounts to refinance in this situation.  That's throwing good money after bad.  Holding on if the market for the rental is likely to recover in a couple of years might make sense.  If the property is likely to be depressed for an extended time, it might be time to consider cutting your losses.

arebelspy

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Re: Need Objective Financial Advice
« Reply #5 on: October 10, 2012, 09:32:52 PM »
You mention expenses that imply it's a house, but the HOA is more like a condo.

Many houses in California (and Nevada, and other places for that matter) have an HOA that governs the neighborhood.

I think it's gotta be an SFR based on the roof repair and tree trimming.

Can you refi under HARP and then sell?  Or is there a holding period?

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

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Re: Need Objective Financial Advice
« Reply #6 on: October 10, 2012, 09:57:15 PM »
I meant the dollar amount of the HOA.  I have a number of rentals, but the ones with HOA's are all $70.00 a month or less.  I understand that newer developments in the pricier areas here in California, especially gated ones with private streets, can have HOA's at this level.  But we are talking a $445k property at the peak, not $800k or more.

Losing money for a limited time might be palatable if property values are going up by double digit percentages.  It does not make sense if values will stay relatively flat for an extended period of time.   

arebelspy

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Re: Need Objective Financial Advice
« Reply #7 on: October 10, 2012, 10:25:52 PM »
Ah.  200/mo. isn't unheard of.  Many places here have multiple HOAs that can add up to 400-500 total.  It can get quite ridiculous.

You're right that holding for a big hike if it appreciates is a good move, but how do you know it will appreciate?

And based on the 2200+ mortgage plus HOA and only 2k max rent, this is a big sink once you take into account maintenance, vacancy (one month hits you for a 2,000 loss), etc.

Definitely need to try the HARP refi first.  If that's out, I'd probably lean towards the short sale rather than throwing your money after it and hoping for stellar appreciation.

IMO, prices won't spike that high for a long time, especially due to the fact that once interest rates rise, prices will stagnate again.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Another Reader

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Re: Need Objective Financial Advice
« Reply #8 on: October 10, 2012, 10:36:48 PM »
I would consider holding the property if it were in Silicon Valley, the Peninsula, or lower Marin.  Or other parts of coastal California with long histories of rapid appreciation in strong economies.  I would give more consideration to cutting my losses if it were in the Central Valley or the Inland Empire.  The more desirable areas went down less, bounced back more, and buyers in these areas are more resistant to interest rate swings.

beemoney

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Re: Need Objective Financial Advice
« Reply #9 on: October 11, 2012, 10:44:30 AM »
Hi all -- thanks so much for all of your help.

I agree about the tuition, and would love to send the kids to public middle school. We did at first, and we had a severe bullying problem, so we're stuck there for now. Unfortunately.

The rental is located in Downtown Napa and it is a condo.

Are second homes/investment properties eligible for HARP refi? If so I'll start looking into that today. Call my bank??

My goal is to have the home I'm living in completely paid off so that I can just work freelance jobs without being tied to a full time corporate gig.

My partner is working the new business, and he does have clients -- so that's good. One twist is that we have always both worked from home so we're able to be with the kids when they're home. He could go to work in an office, but I fear that the expense of a commute, needing to get another car (we only have one), work clothes, etc. would be just as silly as our outrageous tuition issue.

Thanks again, everyone -- I truly appreciate all of your thoughts.


Another Reader

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Re: Need Objective Financial Advice
« Reply #10 on: October 11, 2012, 11:02:06 AM »
Yes, second homes and income properties are eligible, at higher interest rates.  The current loan servicer has an advantage with Fannie/Freddie because they don't have to meet the same standards a new lender would.  I would start with a call to your current lender/servicer to find out if the loan is eligible for HARP.  It has to be owned by Fannie/Freddie.

I don't have any knowledge of the downtown Napa market.  I would talk to a couple of agents active in the area to see what is happening with condo sales and prices in the immediate area.  If prices and demand are going up, it might be worthwhile to hold.  If not, you need to balance the annual loss against a meager rate of appreciation to see if there is any benefit to holding on to the property.  Locking in a $250-$300,000 loss is painful, but if things are not going to improve significantly, it might be better to take the loss and move on.

trammatic

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Re: Need Objective Financial Advice
« Reply #11 on: October 11, 2012, 11:13:20 AM »
Another option is to do a deed in lieu.  CA is a non-recourse state, so if you get foreclosed upon, the only thing the lender can do is take the home (and this is already priced into the risk of your interest rates...) and not any other assets/cash if they sell it for a loss.  It would hurt your credit significantly, but if you're already in your "pemanent" home, a Mustaschian doesn't need credit.  Speaking with your primary lender about this potential decision can also bring up some potential negotiating points.

I know some think you have a moral obligation to pay a debt if you can, but I'm not in that boat.  I think you have a moral obligation to live up to the terms of contract signed that gave you the debt.  Basically, in that contract, they agreed to loan you an amount of money for a monthly payment, and you agreed that if you ever should stop making payments, they can have the deed to the property and put an unfavorable mark on your credit report.  So long as you don't impede these punishments, I think the action is morally neutral.

$_gone_amok

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Re: Need Objective Financial Advice
« Reply #12 on: October 11, 2012, 11:58:28 AM »
Could you move back to your rental property, then try to refinance it at a lower interest rate?

Another Reader

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Re: Need Objective Financial Advice
« Reply #13 on: October 11, 2012, 12:44:52 PM »
If the property is worth less than the mortgage, the OP would likely be eligible for a short sale.  That's a much better option than a deed in lieu.  The rules are changing on short sales so that it may not be necessary to be late on the payments to do a short sale.  Again, the OP should talk to the lender/servicer about all the options.  If refinancing cuts her payment so the condo is less of a burden, holding on could be a good option.

If the OP lives in the Napa area and was willing to move back into the condo, she could get a lower rate.  However, she then has to deal with the house she is in now.  The frictional costs of rent loss, moving costs, and disruption of life might be as much or more than the savings achieved.

trammatic

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Re: Need Objective Financial Advice
« Reply #14 on: October 16, 2012, 07:26:30 AM »
If the property is worth less than the mortgage, the OP would likely be eligible for a short sale.  That's a much better option than a deed in lieu.
Interesting.  The only real benefit to a short sale over a deed in lieu in a non-recourse state is that it dings your credit less.  You still have to stage your home, and find a buyer who's willing to deal with a short sale/bank situation.  Then the buyer has to wait for the bank to approve the sale.  (I've heard of homes staying in this status for 6 months or more.)  Also, in order to not ding your credit, you'll have to pay the mortgage monthly during this whole process.  Plus, there's the whole process of being reasonable to your tenant, if you want them to stay during the sale.  (I've seen some banks not say anything, and then agree to the sale as long as you close in 3 weeks...not something that seems on the up-and-up with a tenant.)

It really seems like a lot of extra hassle, when the only downside is a lower credit rating.  If OP doesn't need credit for 3 or 4 years, this is definitely the hassle-free way to go.

Another Reader

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Re: Need Objective Financial Advice
« Reply #15 on: October 16, 2012, 07:38:11 AM »
Doing a short sale while not being late on payments would make a large difference in the OP's credit.  No lender accepts a deed in lieu without the borrower being way behind in payments.  A foreclosure would generally invalidate the lease, but the tenant may have some standing, especially with a Fannie/Freddie loan.  A short sale would not invalidate the lease.  No need to stage the home.  If the property is priced correctly, it will likely sell with the tenant in place.  Lots of buyers are looking for short sales and many banks have streamlined the process.

TomTX

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Re: Need Objective Financial Advice
« Reply #16 on: October 16, 2012, 07:49:03 PM »
Do you want to own rental real estate?

OP already owns rental real estate (which it sounds like they should sell ASAP).

On top of that, they're located in California.  If they are interested in real estate the best plan for them is investing out of state (either being an out of state landlord or being a private money lender to other real estate investors).

I completely disagree. They're in a very volatile RE market, they can float the rental house for a long time - no point in selling at the bottom of the market.

arebelspy

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Re: Need Objective Financial Advice
« Reply #17 on: October 16, 2012, 08:02:19 PM »
I completely disagree. They're in a very volatile RE market, they can float the rental house for a long time - no point in selling at the bottom of the market.

It'd take a crystal ball to know the correct course of action, but losing money every month on the hope of future appreciation seems like a bad strategy to me.

When the other choice you could make is to put that money into an investment that is much more likely to gain you money?

Not having a crystal ball, I'll take the latter.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.