​Debt or Leverage of Low interest,what is best plan before retire

Tax Liens & Mortgage Notes
10yFollow

​Debt or Leverage of Low interest,what is best plan before retire

Jil Tin
San jose, CA · Member since 2016 · 16 posts · 2 votes

Debt or Leverage of Low interest, what is best plan before retirement?

we live in California, have primary home and a rental home.

I have 530k balance primary home first mortgage locked 3.5% for 30 years (PITI=$3263), 100k heloc balance rate 3% interest only ($600/monthly) and rental first mortgage 299k balance at 4.25% for 30 years, rent is $3000/month.

Since we are living at San Jose, property tax and income tax puts us in AMT bracket with 33% IRS tax, 9.3% CA tax.

I am getting around 50k savings every year as bonus, dividend etc. This is the maximum possible extra savings per year after fully using 401k plans.

We are around 55-56 aged, counting maximum another 10 years of work. It can be down to 6 years until we hit 62 age.

Considering this, worst case 6 next years, little confused how to allocate $50k every year, whether to pay rental mortgage or Heloc or invest in Mutual or ETF funds.

If I pay $50k every year to rental mortgage,fully closed rental loan before retirement, I can get the rent $3000 as my free income. I save $2000 after expenses that will be washed off by depreciation loss. Eventually, when I am retired, I will get $2000 extra cash nontaxable (yes, depreciation will take care for at least 15 years).

If I pay 100k heloc, I may have some emergency cash to withdraw when required, but reduces my tax deduction at 43% level. Balance 200k I can pay in rental, but still leaves 100k on rental debt.

We can extend retirement further two years, but we do not know our situation at that age, would not like to count what we earn through work beyond 62. It will be extra bonus for us.

If I invest in Mutual funds/etf, the likely return is between 10% and 15% (S&P growth), but has risk as ROI is not guaranteed.

I do not plan to sell my current home as I plan to stay after retirement too. This is the best house for us, but would like to pay it slowly taking MIRD benefit. At the age of 62, if we retire, both of us will be getting 40k (20k+20K) social security and 50k (25k+25k) from 401k (taxable). This is enough for us to live including primary mortgage payment.

We are really confused what our best option is. We want to aggressively get out of debt before retirement. 

0Reply
74 views

Most Popular Reply

David Faulkner
Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
10y

I have to respectfully disagree with looking to buy rentals in the Midwest. I have nothing against the Midwest, or any other market for that matter, and I'm sure many locals do just fine investing there. However, take a person with somewhat limited REI experience, money to spend, and absolutely no familiarity with an out of state market thousands of miles away and absolutely no personal or professional connections there, and asking them to put all their money and trust into the hands of Real Estate Agents, Contractors, and Property Managers whom she has zero experience working with sounds very risky to me.

At this stage in the RE cycle, I'd pay off or refinance out of the HELOC to get rid of a variable interest rate, educate myself and look for great deals locally (which you won't likely find given the state of the market, but you'll learn a lot by searching), and build my war chest up. Be greedy when others are fearful and fearful when others are greedy ... right now in San Jose and many other RE markets, people are acting greedy, so caution is advised.

4Reply
See this reply in the discussion

45 Replies

Jump to latestLatest
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Jil Tin, what do you mean: "would like to pay it slowly taking MIRD benefit"? What's MIRD?

    Up until that sentence, my knee-jerk reaction was:- get your own home paid off ASAP!

    [That's not tax advice. But, why not get some?]

    Ever considered investing in the mid-west, where each $50k spent can NET you $500/m?

    One last thought: when you wrote: "Considering this, worst case 6 next years" - you COULD think about it like this:- "Considering this, BEST case 6 next years"! All the best...

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    10y

    Jil,

    My thoughts are if you are paying down a 3 or 4% loan you are only essentially making  3 or 4% with your 50k each year.

    Why risk your money in the stock market when you should be slowly moving out of stocks and more into bonds as you approach retirement to protect against a sudden market down turn. So I wouldn't put my money here either.

    Why not look into buying another rental property that should provide much better yields?

    There is also buying notes with high yields that are back by a solid piece of realestate, you could be a private money loan maker and get 12% or better back by real estate. You could buy tax lien which pay 12%, 16% or even 25%.

    Partner with someone who has experience in your area and flip some properties until you have the comfort level to do these yourself.

    I'm sure there are more real estate strategies but these are the ones that come to mind that will put you much further ahead than paying down a low interest loan or investing in the unpredictable stock market.

    0Reply
  • John UnderwoodPro Member
    Investor · Greer, SC · Member since 2014 · 13k+ posts · 17k+ votes
    10y

    Jil,

    My thoughts are if you are paying down a 3 or 4% loan you are only essentially making  3 or 4% with your 50k each year.

    Why risk your money in the stock market when you should be slowly moving out of stocks and more into bonds as you approach retirement to protect against a sudden market down turn. So I wouldn't put my money here either.

    Why not look into buying another rental property that should provide much better yields?

    There is also buying notes with high yields that are back by a solid piece of realestate, you could be a private money loan maker and get 12% or better back by real estate. You could buy tax lien which pay 12%, 16% or even 25%.

    Partner with someone who has experience in your area and flip some properties until you have the comfort level to do these yourself.

    I'm sure there are more real estate strategies but these are the ones that come to mind that will put you much further ahead than paying down a low interest loan or investing in the unpredictable stock market.

    0Reply
  • Jil Tin
    OP
    San jose, CA · Member since 2016 · 16 posts · 2 votes
    10y
    Originally posted by @Brent Coombs:

    @Jil Tin, what do you mean: "would like to pay it slowly taking MIRD benefit"? What's MIRD?

    One last thought: when you wrote: "Considering this, worst case 6 next years" - you COULD think about it like this:- "Considering this, BEST case 6 next years"! All the best...

     Thanks for correcting last sentence.

    MIRD=Mortgage Interest Rate Deduction = Tax deduction on interest for primary home. 

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    I see three options here:

    1. Take the Dave Ramsey approach and pay down debt by starting with the smallest balance.  When the fist loan is payed off take all the payments that were going towards that loan and ADD them to what you were paying on the second loan.  
    2. Invest in Turnkey rentals in the Midwest.  There are a lot of markets where 50k will buy you a nice $800 a month rental.  Do that for 6 years and you have, using the 50% rule, $2,400 a month in net income.  Not quite enough to pay the mortgage on your rental but close.
    3. Invest in performing notes.  You should be able to get decent notes at a 12% yield.  in 5 years you would have $2,500 a month in income, probably more if you reinvest the note income each year.

    Good luck to you.

    3Reply
  • Pari Thiagasundaram
    Lender · Fremont, CA · Member since 2014 · 292 posts · 102 votes
    10y

    @Jil Tin Come say hello to us at the local REIA. Lot of folks from San Jose attend this meetup.

    http://www.meetup.com/SF-Bay-Area-Real-Estate-Inve...

    @Johnson H.

    Will see you at 1350 S Park Victoria Dr, Milpitas, CA around 6:30 pm on 12th May.!

    Parktown Pizza Company

    2Reply
  • Jil Tin
    OP
    San jose, CA · Member since 2016 · 16 posts · 2 votes
    10y

    John & Bob,

    You have mentioned Midwest. Do you mean Midwest states rental? What are the locations, cities mainly? 

    I am also looking into your other suggestions.

    Thank you.

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y

    I have to respectfully disagree with looking to buy rentals in the Midwest. I have nothing against the Midwest, or any other market for that matter, and I'm sure many locals do just fine investing there. However, take a person with somewhat limited REI experience, money to spend, and absolutely no familiarity with an out of state market thousands of miles away and absolutely no personal or professional connections there, and asking them to put all their money and trust into the hands of Real Estate Agents, Contractors, and Property Managers whom she has zero experience working with sounds very risky to me.

    At this stage in the RE cycle, I'd pay off or refinance out of the HELOC to get rid of a variable interest rate, educate myself and look for great deals locally (which you won't likely find given the state of the market, but you'll learn a lot by searching), and build my war chest up. Be greedy when others are fearful and fearful when others are greedy ... right now in San Jose and many other RE markets, people are acting greedy, so caution is advised.

    4Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Jil Tin I mean midwestern states, Wisconsin, Michigan, Indiana, Ohio, etc.  @David Faulkner does have an important point about investing out of state, you need to make sure you educate yourself and build good relationships before putting money into any market that is not local.

    0Reply
  • Mike Hartzog
    Lender · Redmond, WA · Member since 2014 · 553 posts · 490 votes
    10y

    I agree with John and Bob.  In retirement you want a consistent dependable income stream and security with regard to your housing.  If you can take that 50K per year and start investing it in real estate backed income producing assets (rentals and notes) for an 8-12% yield, you can begin setting up and growing that income stream.  That stream can then be used in the short term to pay down your mortgage more rapidly and/or buy more income producing assets.  Given the rates on your loans, I would favor continued building of your passive income stream. 

    Your area, like mine, is not the right place to invest for income. As Bob points out, the Midwest has the opposite side of that coin, i.e., not much value appreciation but you can buy properties which will cash flow very well as rentals. Buying as turn key is a good option, but you need do some research to find the better turn-key operators. Buying rentals has a distinct advantage over notes for money which you have outside of retirement accounts. Rental property depreciation and operating expenses will generally shelter most of the income you receive from taxes. For money you have in your retirement accounts, I would recommend moving that to a self directed IRA and using it to buy real estate notes or make hard-money loans to local rehabbers. The local REIA is a great place to meet good rehabbers who need these loans.

    1Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Bob E.:

    @Jil Tin I mean midwestern states, Wisconsin, Michigan, Indiana, Ohio, etc.  @David Faulkner does have an important point about investing out of state, you need to make sure you educate yourself and build good relationships before putting money into any market that is not local.

    Thanks for the shout out Bob. If only it were that easy to just educate yourself and find a good team. Not trying to be argumentative, but my personal experience in investing out of state suggests that the odds will be stacked against her. I had a decade of REI experience, family contacts (not in RE) in the out of state market I chose, did thorough research, educated myself, and spent ~5 years after I bought to try to build and stabilize a quality RE team and was never able to, so I sold. I sincerely hope that if Jil chooses this route she will have better luck than I did, but my personal experience would indicate that it is not likely and that is why I advise against it. I'd also say that those who say or imply that it is easy or even likely have usually either not done it personally or are trying to sell you something out of state.

    The only ones I have heard and actually believe that are successful at it are large apartment syndicators that have the scale (100+ units) to get a fulltime management team on their payroll ... if Jil could qualify as an accredited investor and did some due dilligence, she'd have better odds putting her money to work out of state by investing in one of these syndicates IMHO. There are syndications for notes and hard money lending too, by the way ... and for the record, I do not sell or have any affiliation with any of them. Nor do I have personal experience or referrals with syndicates, so take that bit with a grain of salt, but not the bit about buying out of state, 'cause I've been there, done that.

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @David Faulkner - Sorry you had a rough time, it is challenging to build a team out of state but not imposable.

    part of building a team depends on your resources, we have successfully built teams in Lansing, Milwaukee, and Fort Wayne.  One of these markets took more then one try to find a property manger that was a good fit for us, the other two markets we got lucky on the first try.  In a few markets we just were not successful.  

    We are now concentrating on growing in markets where we have had the most success and are seeing returns between 10 and 15%.   

    0Reply
  • David Faulkner
    Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes
    10y
    Originally posted by @Bob E.:

    @David Faulkner - Sorry you had a rough time, it is challenging to build a team out of state but not imposable.

    part of building a team depends on your resources, we have successfully built teams in Lansing, Milwaukee, and Fort Wayne.  One of these markets took more then one try to find a property manger that was a good fit for us, the other two markets we got lucky on the first try.  In a few markets we just were not successful.  

    We are now concentrating on growing in markets where we have had the most success and are seeing returns between 10 and 15%.   

    Good to hear it can be done, from others who have done it. Bob, you're the man. Jil, if you choose this route you should consider riding some of those coattails if Bob would let you and you find you trust him and his out of state team :)

    0Reply
  • Jil Tin
    OP
    San jose, CA · Member since 2016 · 16 posts · 2 votes
    10y

    My homes were bought (rental & primary) during 2008 (REO) & 2012 (Short Sale).  It has lot of appreciation upside almost 80%, but do not want to sell as I enjoy lowest property tax rate and good cash flow.  Even though it gives 7% Cap Rate, this is best possible ROI in San Jose. 

    I understand the risk & challenges of out of state rentals. My main aim to reduce as much as debt possible before retirement. If there is excess cash after clearing my debt, i can look out some cash flow property in future.

    Presently, I am good at stocks, Mutual funds, Bonds etc and can still continue the same. Last 5 years, I made appx 15% growth on these.

    When I make this rental fully paid and my primary fully paid, I can easily retire.  Until then, I need to be in part time work (if not full time work).

    1Reply
  • Jay J.
    ., OH · Member since 2015 · 361 posts · 127 votes
    10y

    Hey @Jil Tin !

    I can see that others have already given some good advice, so I'll throw my 2 cents out there too..

    You said you two are preparing (financially) to retire and I assume you want a chill and relaxing style of retirement, right..?  So why not invest in notes? (I think that was mentioned already)

     I mean, that's as passive as RE gets and you wouldn't have to deal with out-of-state anything.

    1Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Jil Tin  Given your last post I would recommend doing the Dave Ramsey approach, pay off the smallest loan first (100k heloc)  as fast as posable (600+@4k?) while making minimum payments on the other loans.  When the first loan is paid off add the money that was going to that loan to the payment you were making for the second loan(600+4k+3k), when that is paid off take that money and add it to the minimum you were paying on the last loan (600+4k+3k+3.2k),

    As you can see by the time you get to your last loan you are paying down almost 11k a month and your balance will shrink very quickly.  

    0Reply
  • Svetlana Foley
    Realtor · New Berlin, WI · Member since 2016 · 118 posts · 47 votes
    10y

    Jil - do not count on getting 10-15% return through a stock/bond/etf route. Real estate is definitely a way to go, you just need to figure out an exact strategy - in state, out of state, notes vs rentals, etc. You should definitely have a talk with an accountant. If you have IRA or can transfer money from your 401k, you may want to set up Solo 401k or 401k custodial account (Sterling Trust and Guidant Financial are pretty much your only choices as far as I know) - both are vehicles for investing your retirement funds in real estate without paying taxes on it while it is in the account. This route should immediately give you access to large equity you amassed in 401k with a much higher and stable return than the stock market, and you should be able to afford to look locally. The rental income does not have to stay in 401k and can be used for paying down the debt, and you would use the extra 50k for paying down debt as well. Highly recommend to shop around accountants and find one knowledgeable about this, put together a plan, find a local realtor, and jump right in!

    0Reply
  • Richard Dunlop
    Investor · Detroit, MI · Member since 2014 · 755 posts · 462 votes
    10y

    @Bob E.

    I don't understand the appeal of going out of state to get 10% -15% return.

    Can't you get that in your Arizona market??  I wouldn't invest across the street for a 50% return since I can get 200% 300% and more in many areas within 10 miles. 

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    10y
    Originally posted by @Svetlana Foley:

    If you have IRA or can transfer money from your 401k, you may want to set up Solo 401k or 401k custodial account (Sterling Trust and Guidant Financial are pretty much your only choices as far as I know) - both are vehicles for investing your retirement funds in real estate without paying taxes on it while it is in the account.

    Actually Guidant is no longer offering Solo 401k plans, all they do now is business financing. And Sterling is not the only game in town either. There are several dozen companies out there who specialize in self-directed IRAs and 401Ks, take a look a this list:

    https://www.biggerpockets.com/rei/self-directed-ir...

    It would be also important to understand the difference between various companies:

    there are custodians, TPA (third party administrators) and facilitators who offer checkbook control account setups. 

    1Reply
  • Svetlana Foley
    Realtor · New Berlin, WI · Member since 2016 · 118 posts · 47 votes
    10y

    If you read the post carefully, as I mentioned there are two different ways of setting it up - solo 401k is very, very different from the custodial accounts such as Sterling or Guidant.  A couple of my investor clients had been using Guidant or Sterling for years, but their portfolios are in millions - will have to check on the Guidant.  The goal is the same - invest in RE with your retirement money. Set up, rules and regulations are completely different for SOLO vs custodial accounts, and should be used depending on your situation and finances - thus, talk to the accountant who is knowledgeable about the stuff.  Trying to set it up on your own can be extremely costly - must know regulations inside and out.

    0Reply
  • Bob E.
    Queen Creek, AZ · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Richard Dunlop  I am glad you are doing so well in Detroit, we are very happy with our portfolio.  The cap rate in AZ is running close to 8% for a lot of properties so moving into other markets is offering additional opportunity.  

    Glad you are doing well in Detroit but that is not our cup of tea right now.  Maybe another day, never say never.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Jil Tin:

    Debt or Leverage of Low interest, what is best plan before retirement?

    we live in California, have primary home and a rental home.

    I have 530k balance primary home first mortgage locked 3.5% for 30 years (PITI=$3263), 100k heloc balance rate 3% interest only ($600/monthly) and rental first mortgage 299k balance at 4.25% for 30 years, rent is $3000/month.

    Since we are living at San Jose, property tax and income tax puts us in AMT bracket with 33% IRS tax, 9.3% CA tax.

    I am getting around 50k savings every year as bonus, dividend etc. This is the maximum possible extra savings per year after fully using 401k plans.

    We are around 55-56 aged, counting maximum another 10 years of work. It can be down to 6 years until we hit 62 age.

    Considering this, worst case 6 next years, little confused how to allocate $50k every year, whether to pay rental mortgage or Heloc or invest in Mutual or ETF funds.

    If I pay $50k every year to rental mortgage,fully closed rental loan before retirement, I can get the rent $3000 as my free income. I save $2000 after expenses that will be washed off by depreciation loss. Eventually, when I am retired, I will get $2000 extra cash nontaxable (yes, depreciation will take care for at least 15 years).

    If I pay 100k heloc, I may have some emergency cash to withdraw when required, but reduces my tax deduction at 43% level. Balance 200k I can pay in rental, but still leaves 100k on rental debt.

    We can extend retirement further two years, but we do not know our situation at that age, would not like to count what we earn through work beyond 62. It will be extra bonus for us.

    If I invest in Mutual funds/etf, the likely return is between 10% and 15% (S&P growth), but has risk as ROI is not guaranteed.

    I do not plan to sell my current home as I plan to stay after retirement too. This is the best house for us, but would like to pay it slowly taking MIRD benefit. At the age of 62, if we retire, both of us will be getting 40k (20k+20K) social security and 50k (25k+25k) from 401k (taxable). This is enough for us to live including primary mortgage payment.

    We are really confused what our best option is. We want to aggressively get out of debt before retirement. 

     Why on earth do you want to take 2016 money and sink it into a house?  Don't you realize the extra cash flow you get later is just this $50,000 a year coming back to you?  And then with the appreciation of CA you'll be sitting on a few million dollars of real estate that you'll have to beg a bank to let you access at great expense to you. 

    If the money is burning a hole in your pocket then spend it.  Or buy a couple more CA rentals that are easy to manage and have a fantastic retirement. 

    1Reply
  • Dmitriy Fomichenko
    Solo 401k Expert · Anaheim Hills, CA · Member since 2012 · 18k+ posts · 6k+ votes
    10y
    Originally posted by @Svetlana Foley:

    If you read the post carefully, as I mentioned there are two different ways of setting it up - solo 401k is very, very different from the custodial accounts such as Sterling or Guidant... Set up, rules and regulations are completely different for SOLO vs custodial accounts, and should be used depending on your situation and finances - thus, talk to the accountant who is knowledgeable about the stuff.  Trying to set it up on your own can be extremely costly - must know regulations inside and out.

    Svetlana, as I mentioned earlier Guidant is not a custodian (and never was) and they do not offer custodial retirement accounts.

    Solo 401k account can be setup with a custodian such as Sterling Trust (which BTW is no longer exist, they changed the name to Equity Institutional, perhaps because of many complains that come on the first page of google search). Solo 401k plan however does not require a custodian and can be self-administered (unlike an IRA). The later option gives account account holder greater flexibility, checkbook control and the ability to eliminate custodian fees forever. More on the benefits here: www.biggerpockets.com/blogs/2810/blog_posts/21298-...

    The rules and regulations would be the same regardless if your Solo 401k plan is with custodian or self-administered. But I agree with you - it is very important to consult with the knowledgeable expert who could take the time to understand your circumstances and help you make the decision that is best for YOU. 

    2Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    Since no one knows what will happen to them tomorrow the best plan for retirement is to pay off your non income earning debt first. Interest rates are not going anywhere for the foreseeable future so I would advise aggressively paying off your home mortgage first then the HELOC. If you get it paid and your life changes, you sell your rentals as a example, you will still be able to live in your home and have access to the money if you need it.

    The rental property can take care of itself, you need to take care of yourself by getting free and clear of personal debt before you retire.

    1Reply
  • Jil Tin
    OP
    San jose, CA · Member since 2016 · 16 posts · 2 votes
    10y
    Originally posted by @Thomas S.:

    Since no one knows what will happen to them tomorrow the best plan for retirement is to pay off your non income earning debt first. Interest rates are not going anywhere for the foreseeable future so I would advise aggressively paying off your home mortgage first then the HELOC. If you get it paid and your life changes, you sell your rentals as a example, you will still be able to live in your home and have access to the money if you need it.

    The rental property can take care of itself, you need to take care of yourself by getting free and clear of personal debt before you retire.

    Greg,

    Based on the comments, I am thinking to follow Dave Ramsey's debt reduction strategy.

    1) 299k mortgaged (4.25%) rental is lowest amount (other than heloc) and highest rate, easy to complete in six-seven years.

    2) The current 401k is around $500k, grows at 6%-8% may be used after retirement

    3) Still utilizing 24k each (48k) 401k every year.  This will have easily another 300k taxable when I take it for emergency funds.

    4) The net profit $2000, non taxable at least 15 years, helps me to pay primary home mortgage(3.5%)/heloc(3.5%). Additional money from my 401k can help pay monthly mortgage and can also be used as emergency cash.

    What is the main reason to pay off primary home. This is altogether different plan.

    If I need to pay off primary home, the loan is 530k (highest) and lowest fixed rate at 3.5%. I may not be able to pay off before retirement.

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free