Author Topic: What is the most Mustachian Way to Manage this Triple Mortgage Problem?  (Read 3650 times)

jonjacobmoon

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Hello, new here to the forum but long time reader. I am posting because the spouse and I want to be FI! Oh yeah! Toward that, we have a puzzle that feels like it has a right answer, but I don't know what it is. I am only ok with a spreadsheet, and I am really perplexed about both: (a) how to optimize a solution and (b) if I am overlooking something critical that will make me cry in five years. Here are the basics of our problem:

FACT SET:
--We have 3 income producing properties;
--We want to refi and/or pay off / down all three immediately (before end of April);
--We have $100,000 sitting in the bank to work with; (We have other reserves... this 100k can be totally allocated to this mortgage problem without fear...)
--Our income is wildly variable month-to-month because of our freelancing situation. About 6 to 8 months out of 12 we have to dip into previously set aside cash to meet expenses. The other 4 to 6 months we can stash extra cash. This means it is really important to us that our properties spit off cash flow, so in the lean months we can use that instead of opening up the psychological locked-box of previous stashed cash. This is purely emotional, but matters to us quite a bit and helps us be monster savers.
--We are extremely disciplined and we are very good at saving;
--We have considered using the 100k to invest in other assets or even another property, but we've decided we want to be free of the ups and downs of freelancing and so the freedom of no mortgage is a major goal.
--We like all three properties (easy to rent, good tenants, good locations for us) and don't want to sell right now.


PROBLEM:
How do we allocate our extra 100k across the three properties to achieve these three goals:
(1) Spit off a little to a lot of extra cash flow to even out the bad months;
(2) Pay off the properties as fast as possible to be free of the wild swings in our income;
(3) Pay as little as possible in interest / closing costs over the life of the loans.

DATA:
Property 1:
21 years left on a 30 fixed. 150k owed at 5.75%. Currently cash flows at $40 month. Equity over 25% so no PMI issues.

Property 2:
17 years left on a 30 fixed. 80k owed at 5.5%. Currently cash flow neg at -$100 per month. Equity over 25% so no PMI issues.

Property 3:
30 years left on 180k on an interest only loan currently at 6.5%. (I know-totally antimustachian. That's why I am here. We are going to fix this!) Only 10% equity, so we need to add 10 to 20k here (depending on bank's appraisal) to avoid pmi. This currently cashflows at +$350 month.

So, playing around with numbers-- and I am a total amateur at this-- my one thought was to:
(1) Pay off prop 2 with 80k. That flips it from negative 100 cahslflow to +500 (a 600 dollar swing) and gives 1 property free and clear;
(2) Refi prop 1 into a fixed 30, bringing payments down and adding a solid $300 to our cashflow;
(3) Refi prop 3 into a fixed 15 and add the other 20k to avoid PMI. Cashflow goes down a little.
(4) dump all cash flow from props 1 and 2 in the good months into prop 3. I think we can pay the 15 off in 10 years if we do that.
(5) Since we focus all efforts into paying off prop 3, we turn our money lasers on prop 1 (which has the 30 in this scenario) once prop 3 is paid off.
**Note, in this scenario we go for the 30 year on prop 1 to get the cashflow to even out the bad months and to pour into prop 3. Is this stupid or sensible?

So questions for you rockstar MMM's:
How would you allocate the 100k across the three properties?

It feels like there must be a "right" answer and I feel like I am just guessing with darts at that answer-- I just feel like I don't have the chops to figure it out :-( So, I really appreciate any thoughts you all have.



mlipps

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Let's start w/this: how much of a rate decrease would you see if you refinanced, being that these are investment properties?

Paying down property 3 to get LTV to 20%+ is a no brainer, the rest probably depends on how cheaply you can borrow money.

Another Reader

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In your shoes, before I looked at restructuring the financing, I would have a serious look at the returns these properties produce in cash flow.  It's not clear how you are calculating your cash flow.  How much are the properties worth and what are the rents and expenses?  It's difficult to decipher your numbers, but I would be concerned about the overall profitability of your portfolio.

jamccain

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Does property 3 have a variable interest rate?  Does it vary monthly or another period?  To me, that could drastically alter your strategy.  I would be hesitant to give advice without knowing that.  Also, I assume the two 30 year mortgages are fixed rates. 

Oh, and you don't have much of a problem....a problem is having $100K in debt...not $100k in the bank with two cash flowing properties.  What you have is more like an opportunity to further your FI journey.  Nice work!
« Last Edit: April 16, 2013, 10:28:10 PM by jamccain »

galaxie

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If what you want is to lower your monthly "mandatory" spending so that you don't have to dip into savings in the lean times, here's what I'd do:
  • Put enough money into the 3rd property to eliminate PMI.  It also has the highest interest rate -- can you refinance?  I don't think you should refi to a 15 year, just to a lower rate at 30 years with your higher equity & no PMI.
  • Put the rest of the money into property #2 and get it as close to paid off as possible.

unpolloloco

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Think this should be your priority list:

#1 goal: Refinance #3 to lower interest rates and get fixed rate
#2 goal: Eliminate PMI on #3 by paying down mortgage to 80%
#3 goal: Make sure you have enough cash on hand to cover lean months
#4 goal: Pay down #2 with any remaining cash. 
#5 goal: Lower interest rate on prop #1 with refinance (if possible)

Doing this should make all three properties have solid cashflow.

AJ

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Looking at rates on AIM's page for investment refis:

2.857% for 15 yrs
3.5% for 25 years
3.875% for 30 years

Given your goals of paying off the properties as fast as possible and paying less in interest, I would use the $100k to pay them down enough that they are cash flow positive on 15 year loans and refi. If $100k isn't enough to do that with all of them, do it to one or two, then refi other other(s) on 30 year.

iamsoners

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Theoretically what I would do, if my goal was to eliminate these debts as soon as possible is:

Pay off rental #2.
Put the rest of the cash towards #3 and refi into a 15 year.
Refi #1 into a 15 year as well.

If refi-ing both 1 and 3 into 15 years puts you in a tight money spot, I think you either (1) use your positive cashflow to pay down 1 to the point that a 15 year mortgage is do-able for you; or (2) if the math on that indicates several years until a re-fi would be possible, just refi that loan into a 30 year like your plan above.

I say "theoretically" because I don't own any rental properties and am sure some experience might change my math...

daverobev

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If one property is cashflow negative, have you thought of selling it and using the proceeds to pay off more on the other two? It might work out better for you.

Bear in mind 6% interest is NOT all that bad, by historical averages. If you can get it down to 4% or less - awesome. But if not don't feel TOO bad. IMHO.

But if you do want to keep all three.. Well, interest is interest, it doesn't matter "where" it is. The mathematically best thing is to pay the highest rate of interest first. BUT the mentally best could well be to pay off the one you CAN pay off, and snowball.

I wonder if you could go to a broker and have them consolidate the lot into a single fixed mortgage somehow (or at least, a single rate).

When you're refinancing and asking "stupid or sensible"... just factor in 3% inflation, and also cashflow. Nothing wrong with extending the term of a mortgage at a lower rate if it means you can pay the bills. You'll still own all the houses, eventually.

Basically it depends what you want - cashflow, or to get closer to paid off. Or a mix of the two!

Can you get a home equity line of credit - so you can use THAT in the lean months, but pay all your cash into the mortgages in the good months? As it sounds like you don't actually need the rental income to survive.

SunshineGirl

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Why don't you tell us more about your personal finance situation beyond the mortgages, and that might help us help you. Expenses, income, savings, etc. because you're right - the reason why you want to do this is emotional and there might be a way to address that in a helpful way. It's strange how money decisions are emotional, but they are!

In your lean months, how much do you fall short on average?

in a difficult economic environment, liquidity is what gets people through, so I'd like to know how long you'd be OK if both your freelance incomes suddenly plummeted or went away before I'd recommend locking up that chunk in exchange for higher monthly cash flow.

My point: Let us look at your situation holistically, especially since you admit your considerations are emotional as much as financial, and the advice you get will be the better for it.

jonjacobmoon

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Re: What is the most Mustachian Way to Manage this Triple Mortgage Problem?
« Reply #10 on: April 17, 2013, 05:16:31 PM »
Thanks for the feedback everyone. I am thinking about all this great input and will look into the suggestions...