our case study - any advice appreciated!

[sara54]

I discovered MMM about a month ago, and desperately wish we had started reading this stuff years ago. I thought we were decent savers until I started reading about the rest of you BAs. We want to quit working for "the Man" as soon as possible. Where can we do better?

Thanks so much for your time and help!

Here are our stats:

Income

Me: $1500 per month after taxes and 401(k)
(I work part-time and stay home with our two small children most of the week)

Husband: $5500 per month after taxes/401(k)/insurance/health savings account + monthly bonuses that can vary widely (we don’t budget for these and put them directly toward our stache)

*We both max out our 401(k)s each year, which is factored in the numbers above = $35,000 for 2013

Rental income: about $50. We have a condo that we have been trying to sell off-and-on for 5+ years. For most of that time, we have been able to rent it out, but our homeowners’ fees in the neighborhood are so expensive ($185) that it eats into most of our profit. We plan to try to sell it again this spring when the current renters leave.

Current Investments:

My Roth IRA: $50K

His Roth IRA: $50K

My 401(k): $125K
His 401(k): $200K

529 plans for both of our kids: $15K total (we put at least $5k away annually in these accounts. Our children are three years old and seven months old).

Stache account: $275K, invested mostly in cheap ETFs with some stocks, REITs mixed in

Savings: $100K in an Ally account.  We realize we have entirely too much in cash, but we don’t want to buy into the market at all time highs. We plan to invest $1000 per month in 2013 in the broad market Schwab fund (SCHB).

Expenses - based on our expense tracking for 2012

Primary mortgage: $2200
:: our actual mortgage payment is $1000, but we pay an additional $1200 per month with our goal to have the house paid off in seven years or less)
:: we owe about 165K on the loan with a 2.875 interest rate

Condo mortgage: $950
:: we cannot refinance this loan at a lower rate (current rate is 6%) because it is non-owner occupied

Other debt: $500 per month for my husband’s car (we bought his car recently when he got a new job and needed a car. We were able to get 0% financing, so we will just pay it off before the rate resets/expires).

TV: $24/month (we cancelled cable several years ago, but we do have Tivo and Netflix)

Internet: $63/month (this is pricey, but we need fast internet because my husband works from home and I do as well occasionally. I’m open to suggestions – I hate Comcast and would love to go elsewhere)

Gas/Electric: Depends on the season, but averages about $150 total per month.

Cell Phone: Our jobs both pay for our plans

Groceries/Dining Out/Alcohol: $500/month. These fluctuated wildly from this year because we had a baby in May and then our house flooded, so we ate out much more than usual. We do eat as local and organic as possible, but this is something where it is important to us to spend more money in this area. We also buy in bulk, so it is difficult to come up with an accurate monthly amount.

Car Expenses:  $100/month.  We both have cars – mine is paid old and for, and his is not (although we could pay it off – we’re just coasting on that zero percent loan)

Charitable giving: $1000/month to church and two local organizations that we’re passionate about

Travel costs: $100/month. We like to have this amount set aside to go to some drive-able spots that we like throughout the year. We would like to increase this category as the kids get older, however.

Medical: We have a high deductible plan, so we take pre-tax money from my husband’s pay check to fund our health savings account (already factored in the take-home income above)

Water/sewage: $60/month

Association fees: $50/month

Insurance (life, auto, and umbrella): $125

Gym + childcare at gym: $60/month

Childcare/Preschool: $860/month (ouch, but we love my son’s preschool and the lady that watches our daughter during the week)

Miscellaneous: $75/month - all other expenses including clothing, concerts/sporting events, books, music, hair cuts, house stuff, etc. (although we get most of our books and music from the library)

[Another Reader]

Non-owner-occupied properties can be financed at a rate somewhat above the rate for owner-occupied properties.  Unless the condo project is mostly rentals, you should be able to refinance in the low to mid 4 percent range for 30 years.  What is the complete reason given for not being able to refinance?  Have you checked with several lenders? 

The charitable contributions are too high for me, but that's a personal choice, especially if your faith requires tithing.

The car seems very expensive, especially with a payment of $500 at zero percent. 

You don't say how old you are, maybe early 30's?  If so, it looks like you guys are doing very well.

[gooki]

Are you planning to default on the condo?

If not why on earth are you paying 6% interest on it when you have 100k cash earning next to nothing?

[DoubleDown]

You are very good savers. I very quickly added up $815k net worth plus whatever home equity you have. The $815k alone will generate $32,600/year of passive income at the "4% Safe Withdrawal Rate" you'll see thrown around here.

So whenever you find that your annual expenses are $32,600 or less (or your net worth grows enough to exceed your expenses), then you are financially independent and can quit working for The Man! You're probably very close at the rate you're continuing to save. If you can find ways to reduce expenses, you will get there even sooner. Consider also that you should be able to reduce expenses easily once one or both of you quits working (such as dropping child care as an obvious example).

And I agree with gooki about putting that 100k into your condo mortgage. Without knowing anything else about the property, wouldn't it be a good investment property if you paid down the mortgage???

[iamsoners]

Mortgages--Agreed on refinancing or, even better, paying off the condo if possible.  What's the balance on the condo mortgage?  Even if you can't refinance or payoff, what's your rationale for paying ahead on your home at 2.875% versus your condo at 6%?

Internet--shop for a local deal with a competitor.  It also sounds like you live in a fairly urban environment--could you offer your wireless to neighbors in exchange for them pitching in (I wouldn't do it the other way around with your husband relying on it for work).

Cars--again, it sounds like you live in an urban environment--could you get rid of one? Preferably the expensive one?  With your husband working from home, it seems possible--it might take some rearranging of schedules/use of mass transit/biking but it could save you a bunch.

TV--I don't know much about TiVo but is it that useful when you can watch most network tv on the network's website the next day?

Are you using the gym membership a lot? If so, more power to you, if not, don't hold on to it in hopes you will start.  Consider what you can do without the gym and if that would work for you.

Childcare--when will your daughter go on to pre-school? Will there be a sibling discount?  Could you nanny-share to reduce the cost of paying the woman who watches her?  Could one or both of you go to four ten hour days a week so that you'd only need child care three times a week?  Do you have friends, family or a co-op around that might provide a different arrangement for watching the kids?  All just ideas to turn over because that's a major expense!

But overall, you're doing awesome!!  Congrats and keep it up.  I'd be curious your age range and what part of the country you're in so I can measure our family's accomplishments against yours.

[JohnGalt]

You should do the math - but looking at the numbers, you might be pretty much there if you shifted things around a bit.

What would your expenses look like if you paid of the condo and your car?
What if you then dropped daycare (because if you're not working, why would you need to pay someone to watch your kids?)?

Would your net worth (after paying off the car/condo) * .04 / 12 = your new monthly expenses?

If they don't, what if you subtracted out the charitable giving?  You could then just work enough to give what you want to give and/or replace some of that monetary giving with some of your new found free time. 

[iamsoners]

That's a tough spot on the condo mortgage and I can certainly see why you don't want to keep throwing money at it and just want out.  Hopefully that will happen this spring!  If the re-fi comes back as possible, I'm sure you'll do the math on whether it makes sense to do for such a short period.  All of that said, interest is accruing at 6% right now and mathematically, it still seems to make the most sense to throw some $ at the mortgage to save some on interest.  But I can totally understand why, psychologically, you don't want to.

Another mortgage/housing thought--would you consider throwing a bunch of your cash savings at your home mortgage?  Seems like a cash stash that big is primarily for peace of mind and you might get an equivalent peace of mind if you could pay off the house completely some time soon.  And, as MMM has suggested at one point, you can open a HELOC in order to continue to have a cushion (though I personally crave security and would keep 10-20k in cash in addition to the HELOC).

re: Internet--MMM has a whole post somewhere on setting up a really strong system for sharing wi-fi, just FYI.

re: kids costs--makes sense about you being able to make more by working.  JohnGalt had a good point about being able to eliminate that cost if you are ready to jump to FI.

re: tithing. Yes, we do.  FI is still a ways off for us but my plan would be to continue to tithe on any realized income.  In some ways that's not "fair" because we tithe on our gross paychecks now so we'd be tithing a second time on investment distributions but to me the point is to practice generosity and leave the penny pinching number calculating behind.  All to say, our donations will decrease some after FI but we'll still give some.  One of my hopes for FI is that it gives us an even greater sense of freedom to give generously because we know what our needs are and that we don't need to continue stockpiling so much.  And yes, we'll probably begin volunteer much more as well--although I don't necessarily see us volunteering for the same places we tithe to.

But like I said, great job.  We're in a similar spot in life (midwest, early 30s) and a few hundred thousand behind you!

[TomTX]

Biggest item: I wouldn't be paying an extra $1,200 a month toward a 2.9% mortgage when you could just as easily throw that extra $1,200 at a 6% mortgage.

Unless you're going to default on the condo, there is no economic reason you shouldn't just pay down the condo mortgage first.

If you ARE going to default on the condo (or try to force a short sale) there is no economic reason you're paying anything on the condo mortgage.

Yes, investigate a refi - but in meantime....

[Snowboard junkie]

What is the long term economic outlook for the area the condo is in?

Also, what price did you buy at vs current price?

I'm going to be a bit contrarian here.  You have to assess your own area and decide if this applies.  I suggest going for coffee with a real estate agent and having a very general conversation about the neighbourhood in question.

1. Never sell a profitable asset at a loss. 
  You are making money (not much, but some). I assume the 50/month is profit after covering mortgage, taxes, insurance, and fees.
  You could decrease your holding costs by refinancing or paying down the mortgage, and have a third income stream.
  Sounds like the real estate market in your area isn't great, but it may be worthwhile hanging on and trying to get some capital gain out of it.  Or, hanging on as rents go up.  I will grant it doesn't follow the 50/2 guideline described in the blog and related posts, but it is still possible to make money, and it's not always possible to get a perfect deal.
2.  Always have a plan for available capital.
  If you sell the condo, you will have cash on hand which you don't want to invest "at the top of the market".
  So, why sell?  It's not necessarily a bad investment, and arguably may be better to have as passive income with inflation hedging.  Your current alternative is to have 100k sitting on account with ally. 
  Instead, take a look at the condo board / homeowners association and try to see why fees are so high?  Perhaps some badassity can be shared there?
  High homeowners fees sometimes mean a low maintenance rental property because the condo board takes care of most things.  In that situation $50/door isn't bad.
  Sell if and when you need / want capital for other projects that have a better rate of return, or when the price has risen sufficiently to justify the sale,
3.  Long term, holding rental real estate is a great plan, which diversifies your assets and income sources. 
4.  Don't let other's ideas about how much charitable giving is appropriate influence your choices. Decide what you feel is appropriate and donate it. 
5. Pay down the 6% debt before the 2.9% debt.  If you have a 120k mortgage on a 160-170k property you are not just going to walk away.  Nobody walks away from a self funding asset leaving 50k of capital on the table.

[SunshineGirl]

What jumps out at me:

-- You spend more than your take-home pay on tithing and childcare. I'm not saying you shouldn't work, as it allows you to save in your 401K and gets you out of the house and gives you a break from home responsibilities. But are you really comfortable spending more than you make on those two items?
-- Paying off your mortgage is a stated goal, and yet you have enough in savings to pay it off right now and aren't.
-- I kind of agree about not selling the rental. Over time, it becomes the equivalent of a paycheck from a part-time job, yet without the need to pay social security taxes on it. In addition, it probably helps with your taxes more than you realize. AND, who knows what the credit environment will be down the road - getting back into real estate might not be as easy down the road. OPM (other people's money) is a nice way to make money. That's what banks do!

[sara54]

This is such great stuff...thank you! We really appreciate your help and insight.

I just spoke with the realtor to get some comps on the condo. We bought it for $167K, and the most expensive condo sold in the last six months for $120K, three others sold for $110K-$115K. There is one bank-owned model like ours currently on the market for $90K. Basically, there was a gluttony of condos built right before the crash, and the market has totally fallen out.

The main reason we didn't want to dump any more money into the condo at 6% was because we didn't want to dump more money into a bad investment. It looks like it will be a VERY long time, if ever, for the market to rebound back to anywhere close to what we paid for it. So here are our options at this point - let me know if you see any others:

1. Continue as we have been, but try to re-fi at a lower rate. Plan on clearing around $50 a month or a bit more with a re-fi.
2. Take out a HELOC on our primary residence to use as a mortgage on the condo.
3. Try to sell it at $115K and take a $60K+ loss. Try to balance it out by selling off some gains in the market this year.
3. Walk away from the condo. Ruin our credit (really just my husband's because only his name is on the loan because he bought it before we were married) and feel like total dirt bags. Pay off our primary residence.

@SunshineGirl: I work to fund my 401(k) basically (and because I do enjoy getting out of the house), but good points about the childcare. I honestly didn't realize how much that was until I reviewed the spreadsheet. We have three different childcare things going on, so it was easy to overlook until now. Great point about OPM!

@Snowboard Junkie: Wow, really good point: "5. Pay down the 6% debt before the 2.9% debt.  If you have a 120k mortgage on a 160-170k property you are not just going to walk away.  Nobody walks away from a self funding asset leaving 50k of capital on the table." Would you stick to your guns even with the information above about the condo?

Thank you so much for your time!

[JohnGalt]

This is such great stuff...thank you! We really appreciate your help and insight.

I just spoke with the realtor to get some comps on the condo. We bought it for $167K, and the most expensive condo sold in the last six months for $120K, three others sold for $110K-$115K. There is one bank-owned model like ours currently on the market for $90K. Basically, there was a gluttony of condos built right before the crash, and the market has totally fallen out.

@Snowboard Junkie: Wow, really good point: "5. Pay down the 6% debt before the 2.9% debt.  If you have a 120k mortgage on a 160-170k property you are not just going to walk away.  Nobody walks away from a self funding asset leaving 50k of capital on the table." Would you stick to your guns even with the information above about the condo?

Thank you so much for your time!

One important thing to keep in mind - you may have paid $167K for the condo - but it is not today a $167K property.  It is a $90K-$115K property that you owe $120K on according to the comps you listed.  You'll probably need to bring money to the table to be able to refi it.

[sara54]

One important thing to keep in mind - you may have paid $167K for the condo - but it is not today a $167K property.  It is a $90K-$115K property that you owe $120K on according to the comps you listed.  You'll probably need to bring money to the table to be able to refi it.

Ugh. Great, albeit depressing, point.

[Jack]

One important thing to keep in mind - you may have paid $167K for the condo - but it is not today a $167K property.  It is a $90K-$115K property that you owe $120K on according to the comps you listed.  You'll probably need to bring money to the table to be able to refi it.

Ugh. Great, albeit depressing, point.

Hey, at least you have the cash for the refi, which probably puts you ahead of most of the owners of the neighboring condos. Optimism!

[rtrnow]

The main reason we didn't want to dump any more money into the condo at 6% was because we didn't want to dump more money into a bad investment. It looks like it will be a VERY long time, if ever, for the market to rebound back to anywhere close to what we paid for it. So here are our options at this point - let me know if you see any others:

1. Continue as we have been, but try to re-fi at a lower rate. Plan on clearing around $50 a month or a bit more with a re-fi.
2. Take out a HELOC on our primary residence to use as a mortgage on the condo.
3. Try to sell it at $115K and take a $60K+ loss. Try to balance it out by selling off some gains in the market this year.
3. Walk away from the condo. Ruin our credit (really just my husband's because only his name is on the loan because he bought it before we were married) and feel like total dirt bags. Pay off our primary residence.

As others have said, unless you plan to walk away you should put money toward the condo loan or refi. Even if you sell for a loss in a few months, you've still saved interest money by paying off principle. Should you choose to walk read up on deficiency judgments in your state and other possible effects of foreclosure to be sure what you're getting into.

Lastly, $185 condo fee seems really cheap to me. What does it cover or not cover? Mine is $250 which is considered pretty low by local comparison. For me it includes insurance on the buildings, pool, grounds maintenance, water, sewer, and trash.

[Another Reader]

Call some lenders to see if the condo can be refinanced and at what rate.  You will have to bring money to the table to do that, unless you are eligible for HARP. 

If the loan is owned by Fannie or Freddie, and the loan was sold to one of those entities prior to June 2009, you can probably do a HARP non-owner occupied refinance, even with negative equity.  The easiest way to do this is through the current servicer of the mortgage, because there are fewer requirements for Fannie/Freddie to buy the loan from them.  Call your lender ASAP and ask if you are eligible for a HARP refinance.

[Snowboard junkie]

Ok. Tougher question.  if you have no equity in the project (at present you don't) then walking away is easier.  If you will have positive cash flow you can wait for values to rebound.  If not, walk away.

From a basic standpoint, you have 100k in uninvested capital.  Your fundamental question is what is the best option for this. 

1.  On account at ally is the wrong answer.
2.  Paying down your home mortgage nets you 2.875% per year.  It is not the most cost effective but it is the simplest and let's face it it may help you sleep better. 
3.  Invest in equities (return variable, historically an excellent option, market peak issues aside)
4.  Invest in real estate. 
   4a.  Paying 120k on a property currently worth 90k is a bad idea (caveats below).
   4b.  There may be many foreclosures in your area that follow the 50/2 rule.  You should look for these, especially if you have the capital and experience in the rental market.  The obvious option is the 90k unit (which doesn't meet the criteria above but would be a good deal for under 68k). If you can swing that then your total investment is 235k for 2 units currently worth 115-120 each historically in a rental market that you know and can generate cash flow from successfully.  If you can negotiate that kind of cash deal on the foreclosure, congratulations you just broke even overall.   

Your condo does not currently have any equity.  That sucks, but on the bright side, it does have positive cash flow. 
So, options are:
1.  Continue as you are: collect 50/month.  If a major expense comes up, defer it as much as possible; if it goes vacant, stop mortgage payments, rip out copper pipe and sell appliances, mail keys to the bank.  (only half kidding)  - Ideally,you can wait it out until the market rebounds. 
2.  Refinance.  You're underwater and your bank may not want to refinance.  Point out (politely) that their alternative is to have a 120k foreclosure in a 90k market.  They will negotiate. 
3.  You should not put cash in in this situation.  It would be analogous to buying a stock for dividend income but paying a 33% premium to market value. 

Hope that helps.  And I realize I flip flopped on my position but I was under the impression that assets were listed at present value not purchase price. 

[DidIBreakIt?!]

I also live in the suburbs of Indy! (Broadripple to be more precise) I didn't realize there were many Indy mustachians out there! Looks like you guys are on a great track. Do you mind if I ask which industries you each work in?

Keep up the great work!

[MountainFlower]

There was the big Attorney General Mortgage Settlement thing that happened where you can refinance to current rates even if you're not behind. 

the companies are:
Ally/GMAC
Bank of America
Citi
JPMorgan Chase
Wells Fargo

Go to http://nationalmortgagesettlement.com/ for more information.  We were with Wells Fargo so I looked into this.  Wells Fargo conveniently sold our loan right before this went down, so we were out of luck.  They had a lot of information on their website.  I'm sure that the others do too.

[sara54]

There was the big Attorney General Mortgage Settlement thing that happened where you can refinance to current rates even if you're not behind. 

the companies are:
Ally/GMAC
Bank of America
Citi
JPMorgan Chase
Wells Fargo

Go to http://nationalmortgagesettlement.com/ for more information.  We were with Wells Fargo so I looked into this.  Wells Fargo conveniently sold our loan right before this went down, so we were out of luck.  They had a lot of information on their website.  I'm sure that the others do too.

Thanks @MountainFlower. Great info. Unfortunately, our mortgage isn't with any of those borrowers.

[sara54]

Ok. Tougher question.  if you have no equity in the project (at present you don't) then walking away is easier.  If you will have positive cash flow you can wait for values to rebound.  If not, walk away.

From a basic standpoint, you have 100k in uninvested capital.  Your fundamental question is what is the best option for this. 

1.  On account at ally is the wrong answer.
2.  Paying down your home mortgage nets you 2.875% per year.  It is not the most cost effective but it is the simplest and let's face it it may help you sleep better. 
3.  Invest in equities (return variable, historically an excellent option, market peak issues aside)
4.  Invest in real estate. 
   4a.  Paying 120k on a property currently worth 90k is a bad idea (caveats below).
   4b.  There may be many foreclosures in your area that follow the 50/2 rule.  You should look for these, especially if you have the capital and experience in the rental market.  The obvious option is the 90k unit (which doesn't meet the criteria above but would be a good deal for under 68k). If you can swing that then your total investment is 235k for 2 units currently worth 115-120 each historically in a rental market that you know and can generate cash flow from successfully.  If you can negotiate that kind of cash deal on the foreclosure, congratulations you just broke even overall.   

Your condo does not currently have any equity.  That sucks, but on the bright side, it does have positive cash flow. 
So, options are:
1.  Continue as you are: collect 50/month.  If a major expense comes up, defer it as much as possible; if it goes vacant, stop mortgage payments, rip out copper pipe and sell appliances, mail keys to the bank.  (only half kidding)  - Ideally,you can wait it out until the market rebounds. 
2.  Refinance.  You're underwater and your bank may not want to refinance.  Point out (politely) that their alternative is to have a 120k foreclosure in a 90k market.  They will negotiate. 
3.  You should not put cash in in this situation.  It would be analogous to buying a stock for dividend income but paying a 33% premium to market value. 

Hope that helps.  And I realize I flip flopped on my position but I was under the impression that assets were listed at present value not purchase price.

Thank you! Great points. We don't want to buy another condo. The subdivision has strict regulations about how many units can be rented, and dealing with the Board is a bit of a headache. We haven't enjoyed being landlords, even though we have had good renters. Clearing such a small amount of money each month means that, basically, as soon as one thing goes wrong, we've eaten up our profit for the year. I really don't see the market rebounding back to what we paid for it. But you make a good point about possibly trying to find a deflated property that we could possibly make back some of our lost equity from the condo.

At this point, we're thinking to use about $30K to put toward our primary residence. We will put another $30K in the market over the course of this year - we're thinking to monthly cost average in hopes of spreading the risk a bit. We'll try to rent the condo again once our current renter leaves and go from there. I'm going to talk to the bank about refinancing and/or a short sale.

Unless anyone has any better ideas? :) Thanks again for all of your help!

[frugalcoconut]

HARP2 (link below) is slated to expire at the end of the year unless new legislation is introduced; therefore, I am looking into doing this with AIMLOAN.com sometime in 2013.  Although I previously was told by my current lender/servicer that they would not be able to do anything for me (given the negative equity and non-owner-occupied status), this post has reminded me that it would be a good idea to check with them again just to see if anything has changed.

http://www.nytimes.com/2011/12/18/realestate/expanding-a-federal-refinancing-program.html?partner=rss&emc=rss

[alandjackson]

A few have mentioned paying down the condo, but most people seem to be saying something along the lines of don't throw money at a bad investment. If you don't want to sell it and don't want to walk away from it, you are committed to keeping it.

If you keep it, you are paying 6% on the mortgage and you should pay it off. Even though you are under water, every penny you put towards the condo is earning a guaranteed 6% for the life of the mortgage. Most people would disagree, but personally I would just pay that 6% loan off right now. You're profit from it will instantly shoot up to $50 + the mortgage payment and you'll be able to think about the condo more clearly (as it is rather than what you paid for it or owe on it).

[Snowboard junkie]

You should think about your endpoints.

I.e. if you walk away from the condo, but turn around and buy an equivalent foreclosure for 90k, you will have 10k in the bank and a paid off property, with a resulting positive cash flow.  It does not qualify as an ideal investment property by the 50/2 rule, but it certainly does wonders for you psychologically, and you have a buffer to deal with unexpected expenses.

Vs.  If you pay 100k on your condo mortgage, you still have 20k of debt, and a tenuous cash flow until it is paid down. 

However, when you need to refinance your home it may be difficult to do so at a reasonable rate if you have walked away from the condo.  There are multiple implications to foreclosure and it is not a step to be taken lightly.  Overall, you must think your way through as many hypothetical scenarios as possible and don't rule out any options until you run the math.