Author Topic: Payoff 1.9% car loan, 4.75% rental mortgage first or other option  (Read 1558 times)

kungfujd

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New to the FI movement so cleaning up the balance sheet. My wife and I are DINK's, 150k cash/taxable, max out 401k each year, have 3 rentals(1 w/no mortgage). We have a car with a 20k 1.9% loan, 2 rentals w larger, similar balances at rates of 4.25 and 4.75 and our primary at 4.25. Right now we are focused on extinguishing all debt versus building additional taxable liquidity. That said, trying to determine which debt to tackle first the 1.9% car loan or the rental property with the lowest balance and a 4.75% rate. Would appreciate any suggestions or thoughts. I am leaning towards paying the car off through it's normal schedule(3 years remaining) and then applying addition principal to the 1st rental property which would pay it off in about 5 years.

boarder42

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Re: Payoff 1.9% car loan, 4.75% rental mortgage first or other option
« Reply #1 on: December 28, 2015, 12:19:54 PM »
paying off the lowest interst rate is backwards.  i'd keep that car loan to term.  hell i'd keep all those loans to term.  but in the interest of answering your question, you pay down the highest rate first.  though really should invest the money.

AccidentalMiser

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Re: Payoff 1.9% car loan, 4.75% rental mortgage first or other option
« Reply #2 on: December 28, 2015, 12:28:32 PM »
What is your income?  What are the balances owed on the rental property mortgages?  Where is your 150k currently invested?

I would pay off the car loan immediately.  The rentals are a business and should be treated as such.  With three of them, it's prudent to separate the finances of the business from your personal finances.  The business structure should align with your tax situation but you need to consider the liability of having rentals and ensure your growing wealth is protected from lawsuits, etc.

I realize you are wanting loan payoff advice but this is something you also should think about.

As far as paying the mortgages off, the advice I would give is based on how old you are and how long you intend to work.  Sub-5% mortgages with their attendant tax advantages are powerful, wealth-building tools.  Paying mortgages off early on rental properties is a fine idea but the benefits are more psychological than financial.  I think I'd want to build up a larger investment cushion first.

kungfujd

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Re: Payoff 1.9% car loan, 4.75% rental mortgage first or other option
« Reply #3 on: December 28, 2015, 01:15:22 PM »
yes, i recognize it is psychological. We don't want to owe anyone anything. i have gone round and round about this ideal versus being properly leveraged but that is where we are at today.  good point about running the rentals as a distinct business and liability.

household income from jobs is 300k. mortgage "a" is 272k which is the value of the property since i bought at the peak, mortgage "b" is 175k, value is 230k and primary res is 250k with 350k value. the properties are cash flow positive.

150k is cash and vanguard total market index.

i'm 40 and want to be able to retire before 50

boarder42

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Re: Payoff 1.9% car loan, 4.75% rental mortgage first or other option
« Reply #4 on: December 28, 2015, 05:06:49 PM »
You need to evaluate your spending if you're 40 and those are all your assets amount to on 300k per year. How much are you spending.  Your assets total 305k. Plus let's assume you've been maxing 401k for 15 years so you have around a million there.

So 1.3 million with my large assumption.

Right now a quick guess would say you're spending over 150k annually based on all these numbers.  So you'd need 3.75million to maintain your lifestyle assuming my assumption are correct but I'd guess the 401k is about half and you're spending closer to 200k.

To retire in 10 years I think you should do a case study and layout all your numbers. Cash flow positive on a property doesn't mean it's a good rentÓl either.