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.