Advice for Mom (real estate/IRA)

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Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 12:07 am

My mom is starting to think about her financial future and I'm trying to get some general advice or tips from people if they have any. Here's her info:

Tax Filing Status: Head of household
Emergency funds: might have this (savings account of $8,000)
Income: ~$35,000
Debt:

Credit cards
1) $750 @ 8%
2) $4,000 @ 5%; paying $90/month min
3) $1,500 @ 4%; paying $40/month min
4) $7,000 @ 2%; paying $110/month min
5) $2,000 @ 0% (turns to 9% if not paid off in 10 months); currently paying $199/month so it can be paid off before then)

Real Estate
Home mortgage: ~$187,000 @ 4.875%; getting $1,200/month from renter(s)
Condominium loan: ~$211,000 @ 7.25% fixed interest only (hopefully soon-to-be-refinanced to $218k @ 4.375%, 30 yrs); getting $2,000/month from renter

Investments:
Roth IRA - American Funds Washington Mutual A (AWSHX) - $7,500, 0.62 ER ($50/month goes into this)
Mutual Fund (?) - Sentinel Short Maturity Government Fund (SSIGX) - $1,300

The main thing I'm thinking would be to reallocate those "savings" funds into an IRA. Other than that, I'm not sure. The real estate stuff is what I'm most unsure about. Let me know if you have any questions or need to know other expenses.

Thanks!
Last edited by bmay on Mon Mar 25, 2013 9:47 am, edited 1 time in total.
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Re: Advice for Mom (real estate/IRA)

Postby BL » Mon Mar 25, 2013 12:29 am

I think she needs to "reallocate" as much as possible to get those credit cards paid off (but keep a few months worth of expenses in the emergency fund. Once paid off, if she vows never to charge anything that isn't paid off when the bill arrives, she can allocate those expenses to investing, preferably at a low cost place like Vanguard.

As head of household she probably has at least one child living with her, so she definitely needs the emergency fund.
Especially if she is in a negative cash flow with rentals, I would think about selling it as she would be in trouble if big expenses arise.
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Re: Advice for Mom (real estate/IRA)

Postby Watty » Mon Mar 25, 2013 12:59 am

There isn't enough information about the house and condo property taxes, insurance, condo fees, etc to see if she has positive cash flow.

She also does not have enough cash to cover a large expense on the rentals like a new roof or a deadbeat renter.

How much equity does she have in the rental properties?

I suspect that selling one or both of the rental properties would be a good idea.
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 1:13 am

Watty wrote:There isn't enough information about the house and condo property taxes, insurance, condo fees, etc to see if she has positive cash flow.

She also does not have enough cash to cover a large expense on the rentals like a new roof or a deadbeat renter.


I will get back to you on this.

Watty wrote:How much equity does she have in the rental properties?

I suspect that selling one or both of the rental properties would be a good idea.


There is only one rental property (the condo) and there is 0 equity in it. Right now, it's kind of in no-man's-land with the rent going towards the interest payments (fixed interest only loan). Once it's refinanced, the rent income can go towards paying down the interest and hopefully principal soon after.
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Re: Advice for Mom (real estate/IRA)

Postby Johm221122 » Mon Mar 25, 2013 1:15 am

The first two things she needs to work out are why five CC with balances and why is she using CC for things she can't afford.Not trying to be mean but CC debt is a drag on her financial future.She needs a budget before an investment plan
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 8:44 am

Johm221122 wrote:The first two things she needs to work out are why five CC with balances and why is she using CC for things she can't afford.Not trying to be mean but CC debt is a drag on her financial future.She needs a budget before an investment plan
John


Well, credit cards 2 and 4 were used to pay for the down payment on the condo.

Also, I don't know if this is relevant but she has a near-perfect credit score.
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Re: Advice for Mom (real estate/IRA)

Postby BL » Mon Mar 25, 2013 9:11 am

With perfect credit score, she might be able to refinance her home at a better rate. Is she paying PMI? How much equity does she have?

Unless she is paying more than the minimum on CCs she will take forever and pay a lot of interest before getting rid of them. I believe there is some required information on bill to learn more about how long it would take to pay them off.

Condo sounds more scary than ever to me. So she basically owes $211k plus 11k CC on the debt and has no equity and is gaining no equity.
Last edited by BL on Mon Mar 25, 2013 9:13 am, edited 1 time in total.
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Re: Advice for Mom (real estate/IRA)

Postby JW Nearly Retired » Mon Mar 25, 2013 9:12 am

Home mortgage: ~$187,000 @ 4.875%; getting $1,200/month from renter(s)
Condominium loan: ~$211,000 @ 7.25% fixed interest only (hopefully soon-to-be-refinanced to $218k @ 4.375%, 30 yrs); getting $2,000/month from renter

Was there more income or savings when she got these loans? I don't see how she would have qualified for the condo mortgage with a $35000 income and no savings?
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 9:19 am

JW Nearly Retired wrote:
Home mortgage: ~$187,000 @ 4.875%; getting $1,200/month from renter(s)
Condominium loan: ~$211,000 @ 7.25% fixed interest only (hopefully soon-to-be-refinanced to $218k @ 4.375%, 30 yrs); getting $2,000/month from renter

Was there more income or savings when she got these loans? I don't see how she would have qualified for the condo mortgage with a $35000 income and no savings?
JW


She managed to get it around the time of the housing bubble with a stated income loan.
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 9:25 am

BL wrote:With perfect credit score, she might be able to refinance her home at a better rate. Is she paying PMI? How much equity does she have?


What is PMI? Also, there is about $125,000 equity in the house.

BL wrote:Unless she is paying more than the minimum on CCs she will take forever and pay a lot of interest before getting rid of them. I believe there is some required information on bill to learn more about how long it would take to pay them off.


What other info do you need to know about the bills?

BL wrote:Condo sounds more scary than ever to me. So she basically owes $211k plus 11k CC on the debt and has no equity and is gaining no equity.


Well, as I understand, it's pretty risky, but isn't the return pretty good as well if she manages to refinance. Then, all the interest payments can start going to pay off the interest and then principal of the condo? Then, she has a very high-scale rental property.
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Re: Advice for Mom (real estate/IRA)

Postby Calm Man » Mon Mar 25, 2013 9:34 am

I don't see how she gets a refinance. There is not enough income to support a loan and rental income is not as valued as earned income. As somebody else pointed out, it is amazing she got the initial loans and why is she in the real estate business when she doesn't make any money or is even losing in it. Getting rid of these properties might be a life saver if she can get out intact.
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 9:40 am

Calm Man wrote:I don't see how she gets a refinance. [...] As somebody else pointed out, it is amazing she got the initial loans and why is she in the real estate business when she doesn't make any money or is even losing in it. Getting rid of these properties might be a life saver if she can get out intact.


She has had to jump through tons of hoops to get where she is now but other than the downpayment, she hasn't lost much money at all on this investment. Also, it is pretty likely that she will be getting a stream-lined refinance very soon.

Calm Man wrote:There is not enough income to support a loan and rental income is not as valued as earned income.


I'm not sure what you mean here.
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Re: Advice for Mom (real estate/IRA)

Postby WHL » Mon Mar 25, 2013 9:43 am

I gotta be honest here, this scares the hell out of me. No e-fund, no savings, no retirement, and debt upon debt upon debt.

The main house with equity has to be sold, I don't see any way out of it. The equity needs to be applied to the condo loan, which could then hopefully be refinanced into something reasonable.

The credit cards need to be cut up, and ALL income needs to go to paying them off.

The e-fund needs to be much, much higher. Since no routine bills or age of properties are listed, it's hard to judge, but I don't think I would be comfortable with less than 25k in the bank set aside for repairs and maintenance.

Some people may say your mom can get out of this without selling, but I am much more conservative, and I think your mom is one emergency (or 9 months, when that CC hits) away from complete disaster.
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Re: Advice for Mom (real estate/IRA)

Postby WHL » Mon Mar 25, 2013 9:46 am

bmay wrote:
What is PMI? Also, there is about $125,000 equity in the house.


PMI is private mortgage insurance. It's insurance for the lender against your mom defaulting on the loan. It's required until somewhere around 20% equity in the loan. She's definitely paying it on the condo, perhaps not on the home.
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Re: Advice for Mom (real estate/IRA)

Postby WHL » Mon Mar 25, 2013 9:49 am

bmay wrote:
Calm Man wrote:I don't see how she gets a refinance. [...] As somebody else pointed out, it is amazing she got the initial loans and why is she in the real estate business when she doesn't make any money or is even losing in it. Getting rid of these properties might be a life saver if she can get out intact.


She has had to jump through tons of hoops to get where she is now but other than the downpayment, she hasn't lost much money at all on this investment. Also, it is pretty likely that she will be getting a stream-lined refinance very soon.

Calm Man wrote:There is not enough income to support a loan and rental income is not as valued as earned income.


I'm not sure what you mean here.


I believe he is trying to say that your mom will never qualify for a refinance because her income from her job is nowhere near enough to afford the property, especially with other outstanding debts.

"Rental income is not as valued as earned income" means that the bank lenders do not consider your moms rental income as stable, thus it will not help towards the refinancing process.
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 9:52 am

WHL wrote:The credit cards need to be cut up, and ALL income needs to go to paying them off.


Maybe I was a little unclear, so I edited my original post - a lot of income is going to paying off those credit cards to minimize interest.

WHL wrote:Since no routine bills or age of properties are listed, it's hard to judge, but I don't think I would be comfortable with less than 25k in the bank set aside for repairs and maintenance.


The condo was brand new when she purchased it and I believe she has some sort of insurance on it (I need to clear this up). My impression is that she won't be doing much, if any, spending on repairs for it. The house is ~25 years old.
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Re: Advice for Mom (real estate/IRA)

Postby Calm Man » Mon Mar 25, 2013 10:39 am

bmay wrote:
Calm Man wrote:I don't see how she gets a refinance. [...] As somebody else pointed out, it is amazing she got the initial loans and why is she in the real estate business when she doesn't make any money or is even losing in it. Getting rid of these properties might be a life saver if she can get out intact.


She has had to jump through tons of hoops to get where she is now but other than the downpayment, she hasn't lost much money at all on this investment. Also, it is pretty likely that she will be getting a stream-lined refinance very soon.

Calm Man wrote:There is not enough income to support a loan and rental income is not as valued as earned income.


I'm not sure what you mean here.


I meant that if I were a lender I wouldn't lend her any money. There is no cushion for any major repair or if the unit goes unrented for any length of time. You are a good son trying to help a mother who somehow put herself in a dangerous situation. I fear that an unrented situation, significant rise in property taxes, loss of her job or major repairs or assessments in the house or condo will throw her into bankruptcy. She needs another job too or a better paying one I think if at all possible.

OP, if your mother would not mind that you posted here (and you can tell her this is all anonymous), you might wish to have her read this thread.
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Re: Advice for Mom (real estate/IRA)

Postby MN Finance » Mon Mar 25, 2013 10:45 am

I think it makes everyone very nervous that mom, who makes $35k / year, has decided to become a landlord and invest in real estate when there's no other cash or investments. And her loan is $200k on personal income of $35k / year (I think this ratio is important because if my income is $200k and I take out a $200k investment loan, that's clearly different than what mom did). The reason is makes people nervous is because if there's a problem with the unit or vacancy for just a few months, then that's very risky for mom and could wipe her out. The other issue is that real estate is not liquid, which seems like an obvious statement, but it creates a huge risk since mom has no other money.
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Re: Advice for Mom (real estate/IRA)

Postby bmay » Mon Mar 25, 2013 10:48 am

MN Finance wrote:I think it makes everyone very nervous that mom, who makes $35k / year, has decided to become a landlord and invest in real estate when there's no other cash or investments. And her loan is $200k on personal income of $35k / year (I think this ratio is important because if my income is $200k and I take out a $200k investment loan, that's clearly different than what mom did). The reason is makes people nervous is because if there's a problem with the unit or vacancy for just a few months, then that's very risky for mom and could wipe her out. The other issue is that real estate is not liquid, which seems like an obvious statement, but it creates a huge risk since mom has no other money.


Yeah, the $35k income is an approximation, because it varies - she is self-employed, which probably will make people think she is making even more of a risky investment. However, the unit vacancy issue is probably less of one than it seems to you all. The condos are in impeccable condition in an extremely high-traffic area and are also in very high demand.
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Re: Advice for Mom (real estate/IRA)

Postby JW Nearly Retired » Tue Mar 26, 2013 8:22 am

bmay wrote:The main thing I'm thinking would be to reallocate those "savings" funds into an IRA. Other than that, I'm not sure. The real estate stuff is what I'm most unsure about. Let me know if you have any questions or need to know other expenses.

Just to specifically respond to your main question, do not tie up any of the savings in an IRA. As everyone has said, her ER fund is woefully small as it is.
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Re: Advice for Mom (real estate/IRA)

Postby MN Finance » Tue Mar 26, 2013 11:15 am

As far as general advice goes and overall planning, I think you've gotten as much as you'll get without more info. How old is mom? Who is paying rent at the primary residence (you and your siblings?) How much does she need to live on when she retires? When will she retire? Where will income come from at retirement, etc?

The question on the real estate is that she owns it to what end? Did she buy this for the kids to live in? Or is this an investment?

Even if we assume the best the real estate isn't going to be anything great. If she retires in 10 years, get's decent appreciation, has it fully rented, never has a major expense, is at least cash flow neutral, and sells it without issue... She walks away with $50k - $60k at best. And at worst, it's a disaster. It doesn't matter how "in demand" the market is. All it takes is one renter who losses their job, stops paying rent and trashes the place and mom is out... 3 months rent for them, eviction expenses, another month vacancy to fix the place up, $10k in repairs, and another month before a new tenant moves in... that's $20k in losses. So she has an investment with modest upside potential and huge downside potential. This isn't a likely outcome, but mom isn't a landlord and probably doesn't understand the risks.

My guess is that the RE bubble was looking enticing, she felt behind in retirement planning, and stretched. It was a mistake and something she can unwind before something bad happens.
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Re: Advice for Mom (real estate/IRA)

Postby Bobby Ingersoll » Tue Mar 26, 2013 12:18 pm

I don't know enough about Streamline refinancing, but assuming you're correct and she can qualify for an distressed/underwater refi with her income/assets that will help her situation greatly.

My recommendations:

1. Stop new Roth IRA contributions. Take out all former Roth IRA contributions (not earnings - this event should be tax/penalty free) and apply to highest interest CC debt.

2. Evaluate all monthly expenses and cut back aggressively to allow for CC debt to be paid off as quickly as possible - commitment to no new CC debt is key.

3. Once CC debt is eliminated, create E-fund equal to 6 months of living expenses (bare bones) which includes assuming a 3 month stretch with no rental income.

4. Once that's complete, then I'd say it's a toss up between investing and paying down condo mortgage to get back to positive equity. I'd lean toward bringing the condo back above water, but she has to realize that while this is money she will probably never get back it will give her flexibility to unload the property if she has to - right now she has absolutely no cushion and no flexibility to get rid of the condo..

If she can't refi the condo, step 4 is definitely to paying that condo down until she's able to refi or sell.
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