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

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​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. 

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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.

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

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

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

    Brent, Got it (borrowings for no return = BAD debt). Thanks. 

    Need to review carefully plan to pay down primary.

    For other investments, I have two more rentals in san jose, but the rent takes care of all expenses+slightly positive cash flow. 

    Then, the current rental (299k loan) is highly positive cash flow which can take care by its own.

    All Bigger pocket members, I got the picture now. I may likely to extend my retirement until I pay of primary home.

    Thank you a lot, this forum and members are no match in real estate & Investment area. Excellent !!!!

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

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

    No return?  Paid off or not it will still probably be appreciating at about 9% a year.  That would be $45.000 on a $500,000 house. 

    1Reply
  • Wes Brand
    Investor · San Francisco, CA · Member since 2016 · 314 posts · 153 votes
    10y

    I would not pay off your primary residence first in this case -- it's the lowest interest rate and provides no return by paying it off. You save some $ in interest, but only 3.5% / yr; you could make that in stocks without even needing to worry about a downturn -- paying it off is wasting money. 

    You could consider paying off the rental, but the interest rate there is low enough that I'd say keep them around and just stick the money in other investments. Either invest in a second rental in CA (your free cash to throw at these things means you should be able to buy another rental...) or invest in stocks/bonds/etc. Why do you want to be debt free before retirement? The longer you can let the debt sit the better for you -- your payment is fixed but the value of your money is not. Say there's hyper inflation and in 10 years $1 is worth $2. You still owe a total of (say) 700k, but in real dollars that's only 350k now. Not to mention you're making money in other investments on the $ you could have used to pay it down. There is such a thing as overleveraged, but that's when a downturn wipes you out and forces you to sell. If you have 50k / yr to spend, a downturn isn't going to wipe you out...

    If you don't want to have another investment property, think about just keeping the total amount of $ for the debt in a separate index fund, and then take money out of that account to pay it off -- you'll make more $ in interest than you save by paying it off early.

    2Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Brent Coombs:

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

    No return?  Paid off or not it will still probably be appreciating at about 9% a year.  That would be $45.000 on a $500,000 house. 

    I'm aware. That's what my "blah blah" obviously referred to. BUT, in the meantime, especially if the OP doesn't intend to cash in on its appreciation, it IS bleeding Jil of well over $3k/m REAL dollars!

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

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

    No return?  Paid off or not it will still probably be appreciating at about 9% a year.  That would be $45.000 on a $500,000 house. 

    I'm aware. That's what my "blah blah" obviously referred to. BUT, in the meantime, especially if the OP doesn't intend to cash in on its appreciation, it IS bleeding Jil of well over $3k/m REAL dollars!

    So the solution is to throw $530,000 of REAL dollars to an obligation that is only asking for a few dollars a month over 30 years?!!!!   Where did you learn math.   $530,000 dollars!!!  $530,000 in 20016 dollars!!! 

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y
    Originally posted by @Account Closed:
    Originally posted by @Brent Coombs:
    Originally posted by @Account Closed:
    Originally posted by @Brent Coombs:

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

    No return?  Paid off or not it will still probably be appreciating at about 9% a year.  That would be $45.000 on a $500,000 house. 

    I'm aware. That's what my "blah blah" obviously referred to. BUT, in the meantime, especially if the OP doesn't intend to cash in on its appreciation, it IS bleeding Jil of well over $3k/m REAL dollars!

    So the solution is to throw $530,000 of REAL dollars to an obligation that is only asking for a few dollars a month over 30 years?!!!!   Where did you learn math.   $530,000 dollars!!!  $530,000 in 20016 dollars!!! 

    Bob, when did paying out $3,500 per month out of your salary equal "a few dollars a month"?...

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

    @Jil Tin, are any of your other investments bleeding you of the best part of $4,000 per month?

    Because isn't that what your home is doing? In principle, borrowings for no return = BAD debt.

    (Yes, it's an appreciating asset blah blah, but, you DO want to retire in six years, right?)...

    No return?  Paid off or not it will still probably be appreciating at about 9% a year.  That would be $45.000 on a $500,000 house. 

    I'm aware. That's what my "blah blah" obviously referred to. BUT, in the meantime, especially if the OP doesn't intend to cash in on its appreciation, it IS bleeding Jil of well over $3k/m REAL dollars!

    So the solution is to throw $530,000 of REAL dollars to an obligation that is only asking for a few dollars a month over 30 years?!!!!   Where did you learn math.   $530,000 dollars!!!  $530,000 in 20016 dollars!!! 

    Bob, when did paying out $3,500 per month out of your salary equal "a few dollars a month"?...

    When the alternative is $530,000  .   $3500 is only .6% of that.  Are you saying you'd rather have $3500 monthly for 360 months or $530,000 now?  If so and you have $530,000 I can make your dreams come true.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Account Closed, my point is, even if Jil wisely pays off their primary asap, it'll STILL be worth the $1.26M at the end of 30 years, PLUS all the additional appreciation because of its location!

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

    As long as I pay the monthly payment, I can live at primary home and the value of the home retains. The benefit is lowest interest rate (3.5%), Mortgage tax deduction(MIRD) with $3263/month (fixed 30 years). With MIRD, rate currently works out (100%-33%-9.3%) =57.7% or 3.5 = 2% and after retirement (assume same tax bracket 100%-25%-9.3%)=65.7 of 3.5%=2.3%.

    If I pay off my rental home (299k), it gives me free income that I can use to pay monthly payment of primary home. Rate is 4.25% for 30 years. The current rental is $3000 and I can easily add additional cash from my 401k to pay monthly primary mortgage. 

    I see the leverage of low interest is higher along with MIRD benefit when I pay off rental home than primary home.

    Computing tax benefit from primary mortgage after retirement, the effective primary home payment is rental home rent after expenses.

    0Reply
  • Johnson H.Pro Member
    Investor · San Francisco, CA · Member since 2010 · 910 posts · 889 votes
    10y
    Originally posted by @Jil Tin:

    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).

    Jil, you sound like an astute investor and know what you're doing already. In my opinion, you can never go wrong paying down debt. When the tide recedes for this economic period, you'll see who is over leveraged and those in a good financial position will pick up a few more good deals just like your real estate purchases in 2008 and 2012. There will always be plenty of options to park money, but not many good to great options to do so. Your returns in the stock market are great and I bet would equal or beat your returns if you went out to the midwest with a lot less headache. In my humble opinion, I would start paying down the HELOC and use that line to pick up another property in the bay area when prices are reasonable again.

    Whatever you do, I'm sure you'll be fine. Please keep us in the loop!

     Thanks for the shout out @Pari Thiagasundaram, see you Thursday night at the meetup.

    2Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y
    Originally posted by @Brent Coombs:

    @Account Closed, my point is, even if Jil wisely pays off their primary asap, it'll STILL be worth the $1.26M at the end of 30 years, PLUS all the additional appreciation because of its location!

     You haven't addressed the $530,000 COST in REAL 2016 dollars to implement YOUR plan.  Seems not to be prudent.  He's giving up

    1.  Time value of money

    2.  Leverage

    3.  Liquidity

    4.  Income from the $530,000

    For what? 

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

    The cost of my primary home is 730k (5BD,4BH) in Jan 2012, current loan $530k (3.5%)+Heloc 100k(3%) and the current appraisal is around 1.2M (It does not matter as long as I live here). 

    This house can be rented for $4000/month, but any 3BD,2BH in San Jose minimum rent is $3000. 

    By living in this home, I avoid $3000 rent. When I calculate rent equivalent of my current mortgage (Interest+property tax+insurance-MIRD benefit) it comes to $2000. This benefit of $1000/month can be accounted for $200000 I made so far principal portion of my home. This is almost 6% return.

    On any case, I need a place to live and that is my current primary. 

    There may be other cases to get the benefit of 1.2M price. If I sell, I can get 500k tax free capital gain, but the issue is that I can not get any home less than 1M here, and property tax jumps from $750/month to $1000/month, that defeats the thinking of selling this home.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    @Jil Tin, Bob wasn't requesting you to justify YOUR strategy, he was asking me to justify MINE (ie. why should I suggest to you that it's a good idea to pay it down early if you have the chance to?)

    So Jil, because of the IRS incentives for you to NOT pay off your primary,  you seem happy to continue paying $3,263 per month for many years to come, even well into your retirement, because after all, you are SAVING $700 per month vs if you were renting it (and will save even more, once rents continue to rise)? Well, come retirement time, I would personally prefer to own/live there needing to pay ZERO loan dollars per month out of my own wallet!

    That's NOT to say I wouldn't leverage it again into other income PRODUCING properties, but I will remind both you and Bob, until you do that, your $1.2M asset is not generating any folding dollars that you can take to your travel agent to spend.

    (Unless of course you're ALREADY using your primary as security on your other investments. In which case, you should check to see what your ROI is against your TOTAL borrowings - but quoting ZERO ROI for your own home). Get what I mean?...

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Not at all. You are rambling and not focused. ROI? How's that ROI look when $530,000 goes out of the investment pool just to pay a housing expense in 2046? Please clarify your plan. Seems very short on details.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y
    Originally posted by @Account Closed:

    Not at all. You are rambling and not focused. ROI? How's that ROI look when $530,000 goes out of the investment pool just to pay a housing expense in 2046? Please clarify your plan. Seems very short on details.

    Yep. That was deliberate. Jil is well capable of taking or leaving my musings.

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    But why won't you answer my direct questions?  You could have had your musings presented privately.  My opinion is that you clutter the forum with nonsense.  Do you even invest in real property?  What experience DO you have?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    10y

    Here endeth my responses to Bob on THIS thread (too)...

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    10y

    Typical response from you Brent Combs.  What a troll!  

    0Reply
  • Brent Seehusen
    Investor · Orange County, CA · Member since 2014 · 137 posts · 96 votes
    10y

    Just don't count on 10-15% returns in the stock market.  That is only going to lead to disappointment.  There was a nice bull run from 2009-2014 but that seems to be over now, and for the past 18 months, stocks have returned about 0%.

    0Reply
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