The Money Mustache Community
Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mbyron on January 05, 2014, 01:07:48 PM
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Right now, my husband and I are living in Germany with all housing expenses paid, both working full time, saving my husbands entire salary of $80,000 every year. So far, we have been here 1 year and plan to stay another 1-3. The question we are facing is what we should do with the $80,000 we have saved thus far.
Right now we have two rental homes. They were both our primary homes until we decided to move over here. They are in Lexington Ky and no house has been vacant for more than a month.
The first home:
Zillow currently estimates it is worth $210,000.
Our mortgage is a 30 year loan with PMI at 4.75% interest and our monthly payment is $1,275. We currently still owe $164,000 on this house.
We receive $1400 in rent on the house. Only maintenance so far has been replacing the air conditioner. The house was newly constructed in 2004.
The second home:
Zillow estimates the house is worth $170,000.
Our mortgage is a 30 year loan with a 3.75% interest rate and our monthly payment is $775. We currently owe $87,000 on this house.
We receive $1000 in rent on the home. Maintenance has been minor (paint) when new renters moved in. Home is from 1976.
Should we refinance one of these homes so that our monthly payments are lower with a portion of the $80,000?
Or do a portion on both and refinance both?
Or leave them as they are, and use the money to purchase 2 more rental homes with our new knowledge that we should look to charge double the amount we pay on the mortgage?
We plan on saving at least another 80,000 to 160,000 (depending if we can stay here 2 more years) to purchase a house for our family when we return, as well as plan on having one of us quit working to stay at home with our 2 children ( a huge goal of ours). What we don't put down as a downpayment we plan to save as a buffer for our rentals, and to purchase a new used car since ours are getting up in mileage (both have over 130,000 miles).
Any help would be greatly appreciated! Thank you.
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I would pay down the more expensive mortgage. Purchasing and managing a new property from across the atlantic is asking for trouble.
Deciding to refinance or just pay down the mortgage is going to be a numbers decision based on what kind of deal you get.
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Just looking at your rental situation, it looks like it's really unsustainable. You aren't bringing in enough rental income over mortgage payment to make money, and though you are paying down principle it seems at some point (likely sooner rather than later) maintenance costs / carrying costs will catch up with you. So my first thought is why are you renting out the homes? Is it because you bought them for more than they're currently worth? If you can sell one or both for a profit I would go that route and get out of the rental business at least as you currently have constructed the business. Another thing to think about if you are thinking of selling is that if there is appreciation and you have lived in one of the homes at least 3 out of the last 5 years, your gains would be tax free whereas if you wait to sell the gains would eventually be taxable.
If you are deadset into making your current rental structure work, instead of buying more properties I would probably pay off the 87k mortgage that way your rental income is free and clear. You're "artificially" driving a rental profit since your totally unleveraged in the house, but the income each month will certainly be real and I think it gives you some flexibility to cover maintenance costs, etc. for your other rentals without dipping into your earned income. I think this scenario would allow for your business to sustain itself on its own without constant capital infusions.
The downside of buying more properties is that you're taking on more risk. You seem to be in a pretty good financial position but instead of improving your balance sheet you're instict is to go out and over-leverage yourself and put yourself in a vulnerable position financially. While in theory you could find the right house or two and bring in a few hundred (perhaps up to 1k) each month free and clear, you would and should live with the fear that all 4 of those homes could theoreticaly sit idle for some period of time. In my opinion, there is no sense in taking on that risk when you can instead eliminate a large expense (interest), which will allow you to bank your rental income and actually improve your risk profile.
Only other thing to consider would be to save the 80k, along with the next few years salary and use that money to purchase your personal residence free and clear. This frees up your personal income and allows you to get a full interest deduction for the business properties - the theory here is that if you're going to have x amount of mortgage in total, it's better to have it all in your rental properties as the expense is fully deductible as opposed to being haircut by the standard deduction.
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I was going to say payoff the rentals....and I'm still going to say payoff the rentals.
Yeah, mortgage interest deductions, liquidity, lots of reasons and excuses to keep paying the bank interest, but payoff the rentals.
I'd recommend refinancing the more expensive one and bring money into the refi to avoid the PMI and put it on a 15 year loan which you should be able to get for around 4%. Then throw all the excess cash at the second home until paid off, then throw it at the first.
You should be able to payoff both homes and net $1680/mo in rental income by the time you get back (70% of gross rents).
Then when you get back, decide what you want to do with the capital. Having a single family, $210,000 rental at $1250 just isn't economical. You'll probably want to lookup a 1030 exchange and go buy a duplex, 4-plex, or commercial building when you get back. Don't try to do this while in Germany.
I know my suggestion is boring, but its also pretty damn safe.
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Thank you all for your responses. Very helpful. I'll be doing some refinancing research today.
I should have added that we have our family managing both rentals currently back home for us (for free) that l live in Lexington, and aid in all the mgmt aspects for us.