Author Topic: Paying off foreign mortgage at 12%  (Read 2738 times)

el_beardo

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Paying off foreign mortgage at 12%
« on: April 24, 2013, 02:05:04 AM »
The debt:
I'm from Mexico and in 2004 I bought a 3br house there for 125k. I have since relocated to the US, across the border to San Diego, but still owe about 70k on the mexican property. My monthly PITI payment is $1,000 and I rent it out for $600. So every month I'm out $400 to cover the payments.

The interest rate is 12% and by far my most expensive debt. I have 30yr mortgage in the US 180k @ 4.3%. My take home pay is $6500 a month, with $4500 in expenses

Equity wise the house can easily sell for 100k today. Rent wise I'm renting it on the low end since I don't want to risk losing my tenants and having to cover the mortgage payment myself. Property taxes are really low over there and I pay $70 a year.

The plan:
I currently have 40k in exercisable vested stock options with my employer + plus 25k in cash savings.

I'm thinking of cashing out the stock options and paying it off. I would go from being out $400 every month to being up $600. The stock options would be taxed at 25% so 10k in taxes, but I'm going to be out 10k in interest payments in the next year alone. I would also be diversifying away from my employer's stock into real estate.

Other options:
  • I could always sell the property and hope to get 20k out of it after taxes and commissions. There's the risk of the house not selling, losing my tenants, etc.
  • Bail on the property and keep the 70k
  • Keep the stock options, continue saving 2k a month and try to pay it off next year

There are also risks with investing in Mexico. My biggest fear being the currency exchange rate, but it has been stable for the past 10 years. I see this as a potential retirement location down the road.

Does this make sense from a cashflow perspective ? It looks like a no-brainer to me. I stop the bleeding on the interest and get income out of it, plus I have enough equity to sell in the future and at least get back my 70k. There's also all the money I've put into it: 20k downpayment + 9 years of interest. But I see that as a sunk cost. Is that the right way to look at it ?

mlipps

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Re: Paying off foreign mortgage at 12%
« Reply #1 on: April 24, 2013, 10:33:46 AM »
Why did you buy the house to start with? What was your purpose for it?

el_beardo

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Re: Paying off foreign mortgage at 12%
« Reply #2 on: April 24, 2013, 04:05:40 PM »
That is a good question.

Shelter: our family of 4 had outgrown our previous 2BR condo
Investment: it seemed everyone was buying and the price was cheaper than the US homes we looked at. And I got a good deal from the builder, similar comps in the area were at 140-150k

At the time I was commuting 35 miles across the border each way, 5 times a week!

4 years later we moved to San Diego, the real estate bubble popped and I became a landlord

mlipps

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Re: Paying off foreign mortgage at 12%
« Reply #3 on: April 24, 2013, 04:40:14 PM »
If you had $100k in cash today & could buy this house as a rental property, it'd be a terrible investment. The return just isn't there if the rent is only $600/month. I'd sell it and eat the loss.

el_beardo

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Re: Paying off foreign mortgage at 12%
« Reply #4 on: April 25, 2013, 10:26:41 AM »
If you had $100k in cash today & could buy this house as a rental property, it'd be a terrible investment. The return just isn't there if the rent is only $600/month. I'd sell it and eat the loss.

Thanks mlipps, that's the analysis that I was looking for.

In the meantime I have been trying to learn more about rental property cashflow numbers. A lot of things I had not considered before.

Curious on what sort of return you would expect or look for in return for 100k investment ?

mlipps

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Re: Paying off foreign mortgage at 12%
« Reply #5 on: April 25, 2013, 10:54:17 AM »
The rule of thumb, based on my limited research into investment real estate, is that rent should be somewhere between 1-2% of the purchase price, depending on who you ask. What I know, I have learned from the BiggerPockets forum.

el_beardo

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Re: Paying off foreign mortgage at 12%
« Reply #6 on: April 26, 2013, 11:38:15 PM »
I have also read about the 1% rule, but it is going to depend on the type of property and the geographic location of that property. I would be hard pressed to find a property that returned >6.6% near where I live.

A 100k house that rents for 600 is going to give at least a 6.6% annual return. Property taxes are near 0, maintenance is much cheaper because of labor costs.

If you look at http://www.noradarealestate.com/blog/20-best-markets-for-buying-single-family-rentals/ you can see that the 'best' markets for cash purchase sfr's in the US range between 8% to 10% cap rates. I have to do cash because of the crazy high interests in Mexico and I can still come out at 6.6%. Sure it's not the best, but it's far from horrible.

6.6% also happens to be "the annualized after-inflation return for U.S. stocks from 1926-2011" - source: http://www.obliviousinvestor.com/using-historical-returns-to-predict-the-future/

I guess it all comes down to having the bird already in hand. Considering the cheaper maintenance/labor costs and that the property is already rented it does not seem like such a terrible investment.