Author Topic: Pay off this debt or invest ?  (Read 5449 times)

k9

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Pay off this debt or invest ?
« on: November 16, 2012, 11:25:33 AM »
Hello dear mustachians,

Here is my situation. Before learning about mustachianism, frugality & all these stuff, I made some sort of a mistake. My wife & I bought a second home, here in France where we live. Of course, we used as much leverage as we could. The problem is, it lost a lot of its value (its a niche market, so volatility on these houses is important and liquidity is veeeery low) and we are now in negative equity. We have not enough liquid assets (cash, gold & stocks) to pay off the debt right now. We are not planning to sell it back, so this is not really a problem, but knowing we CANNOT do it if we want to gives me a strange feeling. You know, freedom & all that stuff.

I wonder what to do. Shall we augment our monthly payments as much as we can to get out of negative equity ASAP, or shall we invest that money in liquid assets so that, if we really need to, we can sell the house & pay back the remaining debt with these assets ? It's a 4.8%, fixed rate mortgage. FYI, to give a point of comparison, cash here currently provides 2.25%.

I guess there is not one good answer to this question, but I'd like to hear your advice.

k9

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Re: Pay off this debt or invest ?
« Reply #1 on: November 17, 2012, 10:52:18 AM »
No advice for me ? :/

Captain and Mrs Slow

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Re: Pay off this debt or invest ?
« Reply #2 on: November 17, 2012, 11:36:17 AM »
Yeah bit surprised usually this posts bring a dozen or so comments. You mentioned that this is a second house, do you have much equity in the first?

On the second point it's a tough call, because, yes, getting out of debt is important, but so is having a cushion to fall back on. So next question is what is the job situation?

And third how long would it take to get back into positive equity.

Another Reader

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Re: Pay off this debt or invest ?
« Reply #3 on: November 17, 2012, 11:47:00 AM »
Ir's difficult for folks in the US to say what we would do in your shoes.  We don't know anything about your market or how real estate financing works in France.  You did not provide any income and expense information, nor anything about your first house.  What are your long term plans?  Where do you plan to live in 2, 5, or 10 years?  Why did you buy this house and is it serving the intended purpose?  With some more background and information, you would likely get more responses.

In general, your goal is to reduce debt and increase investments and investment income.  Is the second house a rental?  Does it pay its own way?  Are you losing money every month?  These are some of the things I would look at in deciding how to proceed.

gooki

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Re: Pay off this debt or invest ?
« Reply #4 on: November 17, 2012, 02:38:35 PM »
Assuming ther are no tax right offs on the mortgage interest, then it's exceedingly close to the 5% mark where ther is no right answer to what is best. If it was any higher, or you weren't established investors I'd say pay it down, but that's not the case here.

Personally I'd be looking at generating income out of this second home (can it be used as a short term rental, or holiday home). Would Moving ownership of the home into a business change the tax situation for the better?

And I wouldn't write of selling for a loss if property taxes, insurance, and maintenance are suitably high.

k9

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Re: Pay off this debt or invest ?
« Reply #5 on: November 17, 2012, 03:40:43 PM »
Yes, maybe a few more feedback would help.

We both have safe, public jobs. We have a primary house that is 8 years from being payed off, to quite a low rate (so paying that off would not be wise). No negative equity on this one, selling it would even let us pay off the second debt. No other debt of any kind.

Real estate financing in France : most mortgages are fixed rate ones, ours is. When in negative equity, you can't walk away and have your debt wiped out. Whatever happens, you must pay it back. You cannot even sell before having paid back the debt, so if you're in negative equity you must be able to give a check to the bank to pay off. That's one of the reasons why we think about getting out of neg eq ASAP : even if we don't sell it, we will have the opportunity to do it if we want to. Of course, investing would probably let us have enough assets to give the bank the check it would want, and maybe keep a little (or a lot) of theses assets after that, but that's not guaranteed.

We bought the 2nd house 75 000 ; it is now worth about 40 000 - 45 000 and we still have to pay 52 000 (I'm speaking in euros, but you can read "dollars", both moneys are quite close). It would take some more 14 years to pay all back and about 3-4 years to quit negative equity at current prices. It is a week-end house, not a rental one, so it does not provide income. We actually use it to grow a few vegetables & chop some wood, mainly. Some of the wood is being sold, but that's a very low income. Negative cash-flow, but we learn a lot in the process & actually like that kind of physical exercise. Renting it is not allowed for administrative reasons. As for taxes, they are quite low (about 300 / year). For the maintenance of this house, we save 50 / month.

We are currently saving 15-20% of our after tax income, which is roughly equivalent to the monthly mortgage payments for the second house. 15-20% might seem quite small for mustachians, but that does not include health insurance, job loss insurance and retirement pension that are mandatory in France. Using all that money would let us get out of negative equity in one year & a half and it would pay back the whole mortgage in about 5-6 years, but with no liquid asset beside the equivalent of 4 months of income we currently have in cash, gold & stocks.

As for expenses :

- income (after taxes) : 3500 / month
- mortgages : 1000 / month
- food : about 400 / month
- clothes, health : 150 / month
- electricity/fuel/water : 150 / month
- internet/phone : 35 / month
- home insurances : 50 / month
- car insurance, gas & repairs : 250 / month + saving 100 / month for the next one
- house maintenance costs : saving 150 / month
- second house maintenance costs : saving 50 / month
- books, holidays, gifts, restaurants, other such expenses : about 600 / month

That's about 500 left.

We do not plan moving or changing jobs in the next 10 years.

smalllife

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Re: Pay off this debt or invest ?
« Reply #6 on: November 17, 2012, 03:55:15 PM »
Do you plan to retire to the weekend house and rent out you current house?  How far away from retirement (both traditional and early) are you? 

Quote
books, holidays, gifts, restaurants, other such expenses : about 600 / month
  That is a lot of money going out the door each month.  You might be tracking in more detail personally, if not I would suggest doing so. 

I would also look at your $400/month food spending, especially because restaurants are not included.  I know food is more expensive in Europe but you mentioned growing your own at the weekend house so I think you can cut here.

My vote is for reducing negative equity ASAP - either through investing (so you can bring a check to the bank) or paying down the mortgage.  Which avenue you choose is dependent on your personal risk tolerance levels and tax implications of selling investments.

Another Reader

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Re: Pay off this debt or invest ?
« Reply #7 on: November 17, 2012, 04:16:11 PM »
In your shoes, I would stop spending the $600 on miscellaneous, non-essential expenses long enough to get into positive equity on the house.  That plus the $500 should get this loan under control in a year.  What "administrative" reasons stop you from renting the house?  Since you use it as a weekend place, would it be possible to rent it out to others for weekends?  What are your long-term plans for the property?  If the house is strictly a hobby and has no other purpose, I would seriously consider selling it when the market recovers, or possibly before that.  With your income and your other hobbies, I would likely conclude I could not afford this hobby as well.

TomTX

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Re: Pay off this debt or invest ?
« Reply #8 on: November 17, 2012, 07:45:56 PM »
Can you rent out the second house? Perhaps to someone who wants to live there full time.

k9

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Re: Pay off this debt or invest ?
« Reply #9 on: November 18, 2012, 03:14:42 AM »
Thanks for all your advice. Yes, cutting through the non-necessary expenses & lowering food budget might be a good option. I think we'll get out of negative equity ASAP & then see if we want to sell it back or not, depending on the market situation at the time (I wouldn't want to sell it in a hurry while real estate prices hit the bottom) & our own decisions at this time. If we decide to keep it, we'll mainly invest the money, I guess.

We cannot rent it as it is not connected to the official electricity network. Electricity is provided through a generator, a solar panel & a set of batteries, and you are not allowed to rent something that does not provide access to the official electrical network. It could be considered unhealthy. And, when you rent an unhealthy house, the judge can force you make it healthy ; connecting the house would cost almost as much as the price of the house itself.

If we keep the house, we might retire there in the future (in, say, 15 years) ; well, I'd like to do that, but it also depends on my wife, I'm not sure she's really ready to retire in a small house deep in the woods even if she said so a few years ago. Maybe we'll have to wait 5 more years so as to live in a more conventional house.

We are both 32, so that's not VERY early retirement we're looking for, retiring 15 years before official retirement date & feeling freedom even while working (you know, having fuck-you money) is our goal.

bogart

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Re: Pay off this debt or invest ?
« Reply #10 on: November 18, 2012, 08:00:17 AM »

We cannot rent it as it is not connected to the official electricity network. Electricity is provided through a generator, a solar panel & a set of batteries, and you are not allowed to rent something that does not provide access to the official electrical network. It could be considered unhealthy. And, when you rent an unhealthy house, the judge can force you make it healthy ; connecting the house would cost almost as much as the price of the house itself.


Would short-term rentals to tourists (perhaps the agrotourism model) be an option, legally and/or practically?  I can't tell from what you've written whether this is fascinatingly cool place in an exciting (if remote) tourist destination (or if not "exciting" at least "attractive to a niche market for short-term visits of a week or two") or not.  I have friends in Italy who rent an apartment in their farmhouse in the slap middle-of-nowhere in this manner; bear in mind that if you can appeal to the US market, being a 2- or 3-hour drive from a city or (other) tourist destination can seem "close" to us in a way that of course it does not to many more accustomed to European population densities and public transport.

Self-employed-swami

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Re: Pay off this debt or invest ?
« Reply #11 on: November 18, 2012, 09:02:23 AM »
My brother in law, who is from France, can't believe that people in North America would drive 5-6+ hours for a weekend away, let alone clear across the country for a road trip!

I'd see if you can find any eco tourists to rent it, on the short term.

SwordGuy

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Re: Pay off this debt or invest ?
« Reply #12 on: November 23, 2012, 10:05:08 AM »

We cannot rent it as it is not connected to the official electricity network. Electricity is provided through a generator, a solar panel & a set of batteries, and you are not allowed to rent something that does not provide access to the official electrical network. It could be considered unhealthy. And, when you rent an unhealthy house, the judge can force you make it healthy ; connecting the house would cost almost as much as the price of the house itself.


Can you let people stay in the house for free, but charge them a chopping lumber or gardening fee?

Perhaps you could start a back-to-nature club and let club members (who have paid their dues) stay in the house for free.  You would be charging dues for club membership, not renting the house.   

k9

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Re: Pay off this debt or invest ?
« Reply #13 on: November 26, 2012, 01:52:24 PM »
Hmm, you're giving me interesting ideas there. I'll have to dig further into these ideas to see if I can find something interesting to get some cash flow out of that place...