Author Topic: Question for the math nerds  (Read 1187 times)

MelodyG

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Question for the math nerds
« on: February 17, 2017, 03:11:35 PM »
I need help from the finance math nerds.  I'm kind of agonizing on this and I'm hoping someone smarter than me has some insight.

Background:
  I own a house in Portland, OR and I want to maximize my financial benefits with it.  My planned FIRE date is Sept 2020, but would love to retire earlier if I can swing it.
I also own a house and some land with a partner in Montana.  We will call it The Farm.  This I want to keep and live on until I donít love it anymore.

Home worth:  ~$365,000 once I do the planned renovations which I predict will cost about $25- 30,000.


Current:

HELOC @ 4.5%:  $7,800
Home Mortgage @ 3.25%   $136,500; currently 11 years remaining on loan 
Farm Mortgage @ 3.875% $125,100; currently 29 years remaining on loan


Spending not including mortgages & HELOC payments:  $1,415 per mo (~17,000/year)

Monthly Home mortgage:
   Principle:  $920
   Interest  $380
   Tax & Ins  $ 300
   Total:  $1600 ($19,200/year)
Monthly Farm mortgage
   Principle:  $200
   Interest:  $200
   Tax & Ins:  $185
   PMI:  $200 (will be gone next year)
   Total:  $785  ($9,420/year)
HELOC: $7,800
       Payment $200/month ($2,400/year)
Value of investment accounts:  $115,000

At FIRE (Sept 2020)
 I predict that Iíll have about $350,000 at retirement in my investment accounts at the age of 40 (fingers crossed). 
  Home mortgage:  $95,200 @ 3.25% with 8 years remaining   
  Farm mortgage:  $115,675 @ 3.875% with 26 years remaining
   Assume HELOC will be maxed due to remodel: $23,000

Scenario 1:

Donít do anything until 2020, at which time I retire and remodel the house.  Sell it for $365,000, pay off the HELOC and Farm, and invest the rest. 

   
   Leftover after house sale, other mortgage payoffs, realtor fees, & misc sale stuff:  $127,000
  Total investment accounts after sale:  $517,000
  4% SWD:  $20,680
  Predicted spending:  $17,000

Scenario 2:
Donít do anything until 2020, at which time I retire and renovate the house.  Rent it out, let renters pay off my remaining 8 years of mortgage, and then have passive income of around $1,050 indefinitely.

   Home mortgage:  $95,200 @ 3.25% with 8 years remaining
   Rental income for first 8 years:  $0
   Rental income after 2028:  ~$1,050 ($1,800 minus taxes, insurance, HELOC, and maintenance costs)
  Total investment accounts at FI:  $350,000
     4% SWD:  $14,000
  Spending:  $17,000
  Farm mortgage:  $7,020
    Total:  $24,020


I played around with refinancing to a 30 year home mortgage, but the numbers didn't seem to work out in my favor due to the higher interest rates.  I could be way wrong with this, though.  Maybe it's best in the long term?  I welcome any suggestions!

GregO

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Re: Question for the math nerds
« Reply #1 on: February 17, 2017, 04:43:31 PM »
If all the numbers are the same in 2020, then Scenario 1.  At that point, you are deciding if $365,000 asset is worth an $1050/month rental income (or even less when you have the mortgage interest expense as well). 

$1050*12 months = 12,600
12,600/365,000 = 3.5% annual return. 

You can do much better than that either in the stock market or with a different real estate property.  In addition, paying off all debt will lower your monthly expenses and reduce the risk to your portfolio.  BUT, a lot can change in 8 years.

MelodyG

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Re: Question for the math nerds
« Reply #2 on: February 20, 2017, 06:37:17 PM »
I've been agonizing over this, and you just laid it out there.  So simple!  Thank you!