Excess Cash - Play Monopoly or Repay Debt?

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Meg77
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Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Mon Mar 23, 2015 2:34 pm

DECEMBER UPDATE - See below in blue. We are officially consumer debt free! This year we paid off a $66K student loan, an $8K car loan, and a $34K car loan (plus $10K in 0% credit cards). This resulted in a savings of $1600 a month in payments.

We've decided to keep the rental properties (including those reserves) separate from our personal budget, so I'll keep whittling away at my smallest mortgage through rental income alone for 2016. DH and I will direct our personal excess cash flow to our primary mortgage, cash, and brokerage in roughly equal amounts. We opted out of several private equity type investment opportunities that we could participate in early in 2016, and are just going to keep it simple for now.

Thanks for all the advice, Bogleheads!


AUGUST UPDATE - After taking everyone's (much appreciated) advice, we have made some real progress toward repaying consumer debt in the last five months since this post went live. I've added our updates in red below. I mainly wanted to give everyone an update, but we are also revisiting the original question about what to do with our extra cash now that circumstances have shifted. If anyone has any additional ideas, we are open to them! Thanks for all the input and consideration we have already received. It really does help to have Bogleheads' perspectives!

Hi everyone. My husband and I are celebrating our first anniversary in a few weeks, and our discussions have turned to the next phase in our financial lives. From late 2013 to mid 2014 we spent a lot of money on our wedding and new home. Over the last 9-12 months though our spending has stabilized and we now have a predictable income, investment, and spending pattern.

What we aren't sure about is whether to focus extra cash: on de-leveraging (and if so, which loans?) or on investing (and if so, more rental property or taxable accounts?). I'd love to hear your thoughts! I comment a lot on this forum and analyze my own financials ad nauseum, but nothing beats an objective set of eyes.

Emergency funds: $91K personal EF (9 months of regular spending, 12 months fixed/necessary expenses) Aug update - $54K Dec Update - $48K
Rental Reserves: $40K (6 months fixed expenses) August Update - $57K Dec update $42K
Consumer Debt: $103K total August Update - paid down to $29K Dec Update - $0
$6K car loan at 2.74% (1.4 yrs left) paid off!
$32K car loan at 2.15% (4.5 yrs left) August update $29K Dec update - paid off!
$65K student loan at 2.7% floating (14 yrs left) Funds transfer to pay this off in progress!!
Home Mortgage: $375K, 30 yr fixed at 3.75% Dec update - $362K ($8250 in extra payments made in the 3rd quarter)

Rental Mortgages: $874K total August update $865K (from regular amortization) Dec Update - $854K ($300/mo extra payments being made automatically)
$99K 15 yr fixed at 3.25%
$95K 30 yr fixed at 5.0%
$142K 30 yr fixed at 5.125%
$176K 30 yr fixed at 4.125%
$41K 15 yr fixed at 3.0% (from my mother - unsecured/down payment loan)
$155K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
$166K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
*Rental Mortgages decrease by $32K this year and slightly more each year thereafter via regular amortization

Tax Filing Status: MFJ
Tax Rate: 33% Federal (18% effective rate), 0% State
State of Residence: Texas
Age: 31 Dec Update - 32
Asset allocation: 88% stocks / 12% bonds August Update: 83% Stocks / 17% bonds International allocation: 30% of stocks Actual as of August - 21% (working to raise by year end w new contributions

Investments:
Cash - $30K (checking/excess beyond reserve target) No longer exists; used to pay down debt
Brokerage - $138K (50% restricted employer stock) August Update: $184K (45% RSUs) Dec Update: $168K
Retirement - $481K (38% Roth, 60% Traditional, 2% HSA) August Update $494K Dec Update $500K
Rental Property - around $1.1M total value (6 properties)

New Annual Contributions/Activity: $101K - $107K
$36K to traditional 401ks
$13K 401k matching
$25K to ESPP August Update - No longer have access to ESPP due to job change
$4K a year ESPP bonus Gone
$6K to HSA
$6K-$12K cash buildup in checking New budget after increased salary, loan payoffs, and loss of ESPP: $84K cash buildup/year
New budget for 2016 after all debt paid off (and retirement options maxed) - $30K to cash, $33K to mortgage, $18K to brokerage (if market tanks we will move additional cash to brokerage).
$11K to backdoor Roth IRAs

Questions:
We have $30K of excess cash and are about to receive a $7K tax refund as well. We also accumulate $500-$1000 a month in checking that goes unspent and un-invested. Where should we direct this cash? We are also selling $6K a quarter from ESPP which we have been investing in taxable but which could be re-directed.

Aug UPDATE: We are revisiting this question. Now that most of the consumer debt has been repaid (and we lost access to the ESPP), we have $6K - $7K accumulating in checking each month. Should we allocate that to the 2.15% fixed rate car loan, to cash reserves (for some future opportunity) or to brokerage? Of course we could do some of each...We could wipe out the car loan today and then put cash toward rebuilding the EF (which would take just a few months), but then starting next year the question remains: Should we just dump extra cash into our investment portfolio, start paying down mortgages, or stockpile reserves for a future rental or other investment opportunity?

Idea 1
My husband has been expressing interest in purchasing a rental property; once cash gets up to about $40K we could put 20% down on a nice, newer rental in our area. We'd like to get a 15 year fixed mortgage and hold long term. I bought all the rentals on our balance sheet prior to meeting him, so I think this step would be positive in that it would give him a feeling of ownership and participation in that 'bucket" of our assets (as well as diversify us further with geography and property type).

I know it might seem crazy to want to lever up further with all that debt, but our current rental portfolio is cash flowing so the loans don't bother me. Plus it's hard to resist the idea of making a new investment now that our income is so much higher and rates are so much lower than when I started accumulating rental property. It was harder and riskier for me to buy my first properties, and I knew so much less. I feel it may be time to move around to the second side of the Monopoly board. I learned my lessons on the purples, now I've accumulated some cash and am itching to graduate to those oranges!

Idea 2
Using cash to ramp up repayment of some of that debt is also a good and obvious option. But in what order? My car loan has the lowest balance and highest rate of the consumer debt, so I'm leaning toward using our tax refund to wipe that out and redirect that payment - plus maybe the excess $500 in our budget - toward my spouse's student loan. My only hesitation is that the loan is so far along I'm only paying around $15 of interest each month. If we are going to buy a rental it may be good to maintain that $7K cash for cushion/closing costs instead.

Idea 3
Your idea here! Hoard cash in cash I get knocked up with triplets next month; wait for a market correction and dump it into stocks; invest in something else or pay down some other loan.
Last edited by Meg77 on Tue Dec 29, 2015 12:11 pm, edited 4 times in total.
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ResearchMed
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by ResearchMed » Mon Mar 23, 2015 2:50 pm

First, congratulations to both of you on your first! :happy

It looks like you have a nice little real estate empire in progress (it's 7 properties?), but not much equity yet?

Main concern... that consumer debt!!
What interest rate?

Assuming you don't have a 0% rate *and* 100k coming in to pay that off when it's due, I'd suggest piling into that and getting rid of it, and STAYING rid of it.
Those high interest loans add a huge drag over time.
Once it is gone, you'll both smile big time, and your cash flow will probably *feel* much better.

But if you are considering children (or not trying to prevent!), then you might want more of a cushion.
Things don't always go smoothly. What if you need to take more time off than planned, or have extra (and considerable) medical expenses, beyond insurance?
And if things do go smoothly, you'll be even further on your way, with that cushion for college accounts, perhaps!

RM
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DTSC
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by DTSC » Mon Mar 23, 2015 2:59 pm

OMG! I get dizzy seeing how much debt you have. I wouldn't be able to sleep if I had close to $1.5M in debt. To each his own...

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Meg77
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Mon Mar 23, 2015 3:13 pm

ResearchMed wrote: It looks like you have a nice little real estate empire in progress (it's 7 properties?), but not much equity yet?
Yes, we have 6 rentals (plus our homestead) with a total of about $260K in equity. Really that would be less after sales commissions - and who knows anyway until you try to sell. I put down 20% on each property but some have gone up and some have dipped in value over time.
Main concern... that consumer debt!!
What interest rate?
The consumer debt is all in the 2.1-2.7% range. Not high but not nothing either.
Assuming you don't have a 0% rate *and* 100k coming in to pay that off when it's due, I'd suggest piling into that and getting rid of it, and STAYING rid of it.
...
But if you are considering children (or not trying to prevent!), then you might want more of a cushion.
RM
Yeah the kids factor is the real question mark. We are tentatively planning to start talking about when to get pregnant late this year. So maybe have one by the end of 2016. By then my car would be paid off anyway and we could easily pay off at least his car too if we wanted to, or we'd still have a fat cash cushion. But I definitely want to have most of the consumer payments gone by then just to absorb the daycare costs without much overhauling of the budget.
DTSC wrote:OMG! I get dizzy seeing how much debt you have. I wouldn't be able to sleep if I had close to $1.5M in debt. To each his own...
Yes $1.4M is a lot of debt! But it's fixed rate debt, and we have a lot of assets to go with it. We could sell all the property tomorrow and pay off all the consumer debt and still have a 7 figures in the bank. And since the properties throw off enough income to pay the mortgages, it's really not a burden. In fact just the amortization of the rental mortgages ($32K this year) is more than some people earn annually, which is a really sobering thought. But that's the power of leverage.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Kosmo
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Kosmo » Mon Mar 23, 2015 3:19 pm

I'd pay off the 6k car loan first, then buy another rental. But definitely bump up your rental reserves first. An alternative would be to take a nice long trip. I recommend Italy.

Aside: I'd love to have a real estate "empire" like you have. We've got 1 rental now, but maybe when my kids are out of daycare (it costs more than the mortgage) we'll acquire another.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by niceguy7376 » Mon Mar 23, 2015 3:28 pm

Meg77 wrote: Rental Mortgages: $874K total
$99K 15 yr fixed at 3.25%
$95K 30 yr fixed at 5.0%
$142K 30 yr fixed at 5.125%
$176K 30 yr fixed at 4.125%
$41K 15 yr fixed at 3.0% (from my mother - unsecured/down payment loan)
$155K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
$166K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
*Rental Mortgages decrease by $32K this year and slightly more each year thereafter via regular amortization
OP,, I dont have any opinion to provide but curious that you say you have 6 rental properties but there are 7 of them listed above. Home Mortgage was listed separately. That was what ResearchMed was pointing to.

Also, what does "from my mother" mean for 3 of those properties? I am in the learning phase and hence curious.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by dolphinsaremammals » Mon Mar 23, 2015 3:30 pm

DTSC wrote:OMG! I get dizzy seeing how much debt you have. I wouldn't be able to sleep if I had close to $1.5M in debt. To each his own...
+1 On way to put cold facecloth over face.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by z3r0c00l » Mon Mar 23, 2015 3:33 pm

Deflation is a very real possibility for the future. Debt is a major risk in that kind of world and rental properties are very hard to make money on. Pay down the debt, I would even consider selling some of the properties to pay off the rest.

ktd
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by ktd » Mon Mar 23, 2015 3:36 pm

I would pay off those debts. You guys are Texas and that's just too much in real estate.

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Meg77
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Mon Mar 23, 2015 3:38 pm

niceguy7376 wrote:
Meg77 wrote: Rental Mortgages: $874K total
$99K 15 yr fixed at 3.25%
$95K 30 yr fixed at 5.0%
$142K 30 yr fixed at 5.125%
$176K 30 yr fixed at 4.125%
$41K 15 yr fixed at 3.0% (from my mother - unsecured/down payment loan)
$155K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
$166K 30 yr fixed at 3.0% (from my mother - 1st lien mortgage)
*Rental Mortgages decrease by $32K this year and slightly more each year thereafter via regular amortization
OP,, I dont have any opinion to provide but curious that you say you have 6 rental properties but there are 7 of them listed above. Home Mortgage was listed separately. That was what ResearchMed was pointing to.

Also, what does "from my mother" mean for 3 of those properties? I am in the learning phase and hence curious.
Sorry I know that is confusing! There are 7 loans against 6 properties; one property has 2 loans against it. One property was financed with the $176K loan listed above, which was from a bank, but I also borrowed $50K from my mother for the down payment on that purchase (the $41K "unsecured/down payment loan").

"From my mother" just means I borrowed from her versus from a bank. The first time I did that I was buying a short sale property; the process takes so long you really need to be ready to buy in cash once the bank gives you the go-ahead (at least back right after the real estate crisis when I was doing it). I planned to get a regular mortgage once the purchase was complete and pay her off, but she was happy earning 3% - more than she was making on her bonds (actually at the time I was paying her 5% but she lowered it a couple of years ago when rates dropped and since she was lending to my sister at 3% at wanted to keep things even). So I used her as a lender two additional times as well. I have a standing offer to repay her by getting a regular loan, but she's happy with the status quo.

The good news on those family loans is that I don't have to pay her on a schedule. One year I had a bunch of property issues blow up, and I was able to ride out the bad cash flow year by suspending payments to her for 6 months. I quickly caught up once the dust settled of course, but it does give me some added flexibility.
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by SimonJester » Mon Mar 23, 2015 3:50 pm

Wow if I were in your shoes I would pay off all my consumer debt, then work to quickly repay the family loans. I might even swap that around and repay the family loans even if It means selling a rental or two. Lets say this all blows up do you really want to stiff your mother for $362K?

When life throws you lemons and you default with your bank, you dont have to sit next to them during thanksgiving meal.
"They who can give up essential liberty to obtain a little temporary safety, deserve neither liberty nor safety." - Benjamin Franklin

ResearchMed
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by ResearchMed » Mon Mar 23, 2015 3:56 pm

Meg77,

I 'get it' about the debt for real estate (made some nice pin money over the years, and put children through school, too, that way, plus money for major updates in current home, etc.).

But from what I'm seeing, you are a bit too close to the edge, in many ways - not enough equity for forced sales, too much other debt.

You've got positive cash flows on all of the rentals? With enough for reserves, *comfortable* reserves?

Then I would strongly suggest paying off the consumer debt, at the least.
(For one thing, IF there were to be a future emergency, you'd have some ability to charge "whatever was needed", but that's NOT a good way to view the future.)

Then build up more reserves.
It may not be likely, but it is possible for several of the rentals to have "issues" at around the same time, or quick succession. Boiler in one, vacancies in two, new roof in another...
If you aren't prepared for those "just in case" things, that's what could derail everything you've carefully arranged.

It sounds like you are relatively young (not geezers, anyway!), so you are off to quite a head start.
You can afford to slow down a bit, get things more stable, before adding more properties.
ESPECIALLY if children are a possibility.
(In fact, I'm not sure you can afford *not* to slow things down a bit, without getting a bit reckless... in terms of "just in case"... that's what upsets the cart(s).)

Take some time to enjoy the progress you have already made!
And be sure you've got the reserves for any children, who are far more expensive than most parents-to-be realize.

RM
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by rayson » Mon Mar 23, 2015 3:57 pm

Meg,

Happy 1st anniversary in advance!

I enjoy your posts. They are always thorough and well thought out. One question for you to ponder: Have you thought of how your net worth split among asset classes (cash, stocks, bonds, and real estate) is expected to evolve? Based on that overall allocation, you may want to divert excess cash accordingly. For example, your target RE is 50% of your networth and you are at 25% today, it would make sense to acquire more RE. However, as you near your retirement age, you would ideally want to build a balanced portfolio: 1) have no debt, 2) balanced liquidity vs illiquidity, and 3) balanced taxable vs tax-advantaged.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Pajamas » Mon Mar 23, 2015 4:11 pm

Max out tax-sheltered savings and then pay off debt, highest interest rate first.

I am not at all against real estate as an investment, but consider that if you own it directly all in one place, a natural disaster could be a financial disaster. You could end up with destroyed properties without income. It happens and I know people it has happened to. Flood, tornado, hurricane, earthquake. Do you have insurance to hedge against that?

I would also want more diversification and liquidity. You can't simply sell your properties tomorrow at full value.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by powermega » Mon Mar 23, 2015 4:18 pm

Are you guys maxing out your Roth IRA contributions? In your tax bracket, you would need to use the backdoor Roth conversion to do that. I can't tell if you have any existing traditional IRA accounts, but if you do you could look into rolling those into your 401k. It's ideal to not have any tIRA accounts if you do a backdoor Roth.

I think that student loan debt would be the first target for additional debt reduction. I understand the mentality about trying to take out a small loan like your first car loan first, but you will have that paid off pretty soon anyway, and that student debt is the one that would survive a bankruptcy. Given similar interest rates, I think the student loan debt is a higher priority to pay off than the car loans.
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Chadnudj » Mon Mar 23, 2015 4:20 pm

My two cents? Pay off mom (or at least one of the mom loans). Aggressively.

If you have siblings, that money should be back in your mom's hands for estate planning/inheritance purposes -- how would those loans be handled if your mother died tomorrow? Just forgiven? Forgotten (meaning you'd end up with a potentially bigger windfall than any other siblings)? Or would you maybe be in a position that you'd now have to be paying loans to a sibling, who might not be as understanding as your mom on letting you "coast" on payments during times when the rentals have a ton of expenses?

Furthermore, it's just polite. If you're behind on payments to a bank, it sucks....but you're not sitting at Thanksgiving eating dinner with the bank.

(Plus, all those loans are 3% -- not the highest interest rates you have, but not the lowest either....it's at least more interest-efficient than paying off the car loans or student loan).

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by niceguy7376 » Mon Mar 23, 2015 4:45 pm

Thanks Meg for the clarification and information.
Another question that is tax related: Do you have these properties under LLC and thus able to get the max benefit of all deductions for them? As I understand, if annual income is more than 150K, passive income cannot be deducted or something similar to that.

Coming to my input, I am comfortable with your portfolio and debt and such. But what I would recommend is to increase emergency fund both for personal and rental properties. I wouldnt want to go for a new property until you two decide on the kids timing and get that out of the way. There are too many moving parts in your life to think of that right now. I understand the sentiment of your spouse to have a property with both of you together but by the time you get your 20% down ready, it might be near to year end and if the housing market is as hot as it was for the last two years (atleast in Metro ATL area), then there might not be deals worth the risk.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Clearly_Irrational » Mon Mar 23, 2015 4:51 pm

I like rentals so you won't get any guff from me about that. That said I think a bit of de-levering might be in order before buying more properties, more from a safety than returns perspective. I'd recommend the following:

1) Pay off the car loans for sure, you've got $37k in cash coming and only owe $38k with a $750/mo surplus so that should take you all of two months or so. That should free up some nice cash flow.
2) I'd then likely try and find a way to refinance the family loan, it's generally not a good idea to carry debt you owe to family, it's bad for relations long term. Nice that they helped out though.
3) Next I'd tackle the student loan debt. It'll likely take a couple of years but once it's done the only debt you'll have is real estate related, which is much more tolerable.
4) Ok, now that you've de-levered some it's a reasonable time to discuss buying another rental

Sure, you're not paying very high real rates on those three consumer loans but the extra payments make you less secure and paying them off will really increase how long your emergency funds will last. That's my take on it anyways.

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Meg77
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Mon Mar 23, 2015 5:00 pm

SimonJester wrote:Wow if I were in your shoes I would pay off all my consumer debt, then work to quickly repay the family loans. I might even swap that around and repay the family loans even if It means selling a rental or two. Lets say this all blows up do you really want to stiff your mother for $362K?
Chadnudj wrote:My two cents? Pay off mom (or at least one of the mom loans). Aggressively.

If you have siblings, that money should be back in your mom's hands for estate planning/inheritance purposes -- how would those loans be handled if your mother died tomorrow? Just forgiven? Forgotten (meaning you'd end up with a potentially bigger windfall than any other siblings)? Or would you maybe be in a position that you'd now have to be paying loans to a sibling, who might not be as understanding as your mom on letting you "coast" on payments during times when the rentals have a ton of expenses?
I definitely get the concern about the loans from my mother, but it's a non-issue. But she truly prefers having this relatively high, fixed rate of return to being repaid. I've offered many times, and she shuts me down each time. She literally has more cash than she knows what to do with right now, she still works, and she has a full pension that she hasn't tapped yet on top of everything. Her estate is quite large (and both her parents are still alive and well, from whom she stands to inherit more), so the loans will simply come out of my inheritance if/when she dies.
powermega wrote:Are you guys maxing out your Roth IRA contributions? In your tax bracket, you would need to use the backdoor Roth conversion to do that. I can't tell if you have any existing traditional IRA accounts, but if you do you could look into rolling those into your 401k. It's ideal to not have any tIRA accounts if you do a backdoor Roth.

I think that student loan debt would be the first target for additional debt reduction. I understand the mentality about trying to take out a small loan like your first car loan first, but you will have that paid off pretty soon anyway, and that student debt is the one that would survive a bankruptcy. Given similar interest rates, I think the student loan debt is a higher priority to pay off than the car loans.


Yes! I forgot to include backdoor Roth IRAs in our contributions (I edited the post to include them). We max those out each year as well. Yes I think you may be right about that student loan. Plus psychologically it's more of a burden to my husband - and anyway that's the only non-fixed interest rate we have!
Pajamas wrote:Max out tax-sheltered savings and then pay off debt, highest interest rate first.

I am not at all against real estate as an investment, but consider that if you own it directly all in one place, a natural disaster could be a financial disaster. You could end up with destroyed properties without income. It happens and I know people it has happened to. Flood, tornado, hurricane, earthquake. Do you have insurance to hedge against that?

I would also want more diversification and liquidity. You can't simply sell your properties tomorrow at full value.
Good points, and yes we do have good insurance (though not for floods). The properties are spread over a 50 mile area so it's unlikely one quake or tornado would impact more than 2 or 3, but you never know. I do have rental interruption insurance so if I lose tenants during repairs I get paid rent until the place is habitable. I like the idea of redirecting money to debt rather than taxable investing. I think we need to use the ESPP proceeds to pay debt rather than invest more.
rayson wrote:Meg,

Happy 1st anniversary in advance!

I enjoy your posts. They are always thorough and well thought out. One question for you to ponder: Have you thought of how your net worth split among asset classes (cash, stocks, bonds, and real estate) is expected to evolve? Based on that overall allocation, you may want to divert excess cash accordingly. For example, your target RE is 50% of your networth and you are at 25% today, it would make sense to acquire more RE. However, as you near your retirement age, you would ideally want to build a balanced portfolio: 1) have no debt, 2) balanced liquidity vs illiquidity, and 3) balanced taxable vs tax-advantaged.
Thank you! Yes I do think about my total asset allocation, though it's hard to determine a future target. Currently I'm 15% cash, 61% stocks/bonds, and 24% rental equity. Over the next two years if we keep doing what we are doing that will change only slightly to 12% cash, 64% stocks/bonds, and 24% rental equity. I like the idea of a 30-40% equity, 50% stocks/bonds, and 10-20% cash over time. But the dollar amounts make a big difference too. As our portfolio grows, 10-20% cash is just a really big drag on total return.
ResearchMed wrote:But from what I'm seeing, you are a bit too close to the edge, in many ways - not enough equity for forced sales, too much other debt.

You've got positive cash flows on all of the rentals? With enough for reserves, *comfortable* reserves?
Yes, the portfolio as a group is a positive cash flow; actually in 2014 all properties but one were positive which was a first (usually there are 2 or 3 that aren't but they take turns; overall it's been fine overall for the last few years).
Then I would strongly suggest paying off the consumer debt, at the least.
(For one thing, IF there were to be a future emergency, you'd have some ability to charge "whatever was needed", but that's NOT a good way to view the future.)
Yes I think you're right and we both hate having that debt anyway. I never had a car payment before 2013, and my husband didn't have one for a decade before last year. We kept those loans while we built back up reserves and to make sure we could max out all retirement accounts, but now that we have them we need to wipe them out.
Then build up more reserves.
It may not be likely, but it is possible for several of the rentals to have "issues" at around the same time, or quick succession. Boiler in one, vacancies in two, new roof in another...
If you aren't prepared for those "just in case" things, that's what could derail everything you've carefully arranged.
Oh believe me I know! I had a car spontaneously combust inside a garage, an angry ex-tenant trash a place, and a 5 month vacancy all in one summer in 2011. But I have 4x the amount of reserves I've ever had just in rental checking, plus more cushion personally as far as discretionary income and the ability to cut savings if we absolutely had to at any point for a few months if we really hit a wall. I do feel comfortable about the level of reserves we have, which is why I'm looking for what to do with new cash.
It sounds like you are relatively young (not geezers, anyway!), so you are off to quite a head start.
You can afford to slow down a bit, get things more stable, before adding more properties.
ESPECIALLY if children are a possibility.
(In fact, I'm not sure you can afford *not* to slow things down a bit, without getting a bit reckless... in terms of "just in case"... that's what upsets the cart(s).)

Take some time to enjoy the progress you have already made!
And be sure you've got the reserves for any children, who are far more expensive than most parents-to-be realize.
Thank you for the kind words and encouragement! I am guilty of often trying to plan too much and think too hard about the future instead of just enjoying our progress and relaxing while I can before the next project/investment/life change. I think I'm just getting antsy to make some real progress before kids come into the picture. Perhaps a big trip this summer wouldn't be such a waste of money...
RM
"An investment in knowledge pays the best interest." - Benjamin Franklin

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Ganacel » Mon Mar 23, 2015 5:17 pm

Clearly_Irrational wrote:I like rentals so you won't get any guff from me about that. That said I think a bit of de-levering might be in order before buying more properties, more from a safety than returns perspective. I'd recommend the following:

1) Pay off the car loans for sure, you've got $37k in cash coming and only owe $38k with a $750/mo surplus so that should take you all of two months or so. That should free up some nice cash flow.
2) I'd then likely try and find a way to refinance the family loan, it's generally not a good idea to carry debt you owe to family, it's bad for relations long term. Nice that they helped out though.
3) Next I'd tackle the student loan debt. It'll likely take a couple of years but once it's done the only debt you'll have is real estate related, which is much more tolerable.
4) Ok, now that you've de-levered some it's a reasonable time to discuss buying another rental

Sure, you're not paying very high real rates on those three consumer loans but the extra payments make you less secure and paying them off will really increase how long your emergency funds will last. That's my take on it anyways.
This is what I would do too, and for the same reasons.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by CoAndy » Mon Mar 23, 2015 5:48 pm

You are obviously doing fantastic but I would definitely make debt paydown the priority for the next year or so. As all your debts are relatively close in interest rate, maybe list smallest to largest and start there, beginning with your car loan and then tackling the next one one the list?

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by dolphinsaremammals » Mon Mar 23, 2015 5:51 pm

I'm still a bit worried about your Mom unless those loans are truly pocket change to her. If you kids lose everything, Mom perhaps goes down the tubes with you.

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avenger
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by avenger » Mon Mar 23, 2015 5:55 pm

I'd pay the debt down.
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by DVMResident » Mon Mar 23, 2015 7:18 pm

You're doing awesome and diversified with investments, solid income, and rental properties (plus family to support you through the volatility). You're winning the game of achieving Financial Independence. You just need time for the debt to deleverage/inflate away. The downside is you have a lot of systemic risk tied to the Texas RE market. A drop in RE prices and slow down in the rental market could send you into negative cash-flow forcing your hand to sell, leaving you at a nasty loss (or maybe mom would forgive the loan?).

If this were me, I'd be focusing on how de-risk my position rather than expanding my empire (marginal utility and all that).

The spread on the interest rates are small enough to make little difference. I'd probably focus on reducing monthly obligations in this order:
-Car loan: $6K 2.74% (1.4 yrs left) --> small balance will improve cash-flow quickly (<1 quarter)
-Car loan: $32K car loan at 2.15% (4.5 yrs left) --> roll first car payment into this one (end of 2015?)
-Rental Mortgage: $95K 30 yr fixed at 5.0% --> this is one of the higher rates and lowest balances; redirect car payments into this (end of 2017?)

Not a fan of Idea 1 because further exposure to the Texas RE market is too concentrated for my tastes. Systemic risk. Or maybe you want to own the whole town :twisted: Maybe give DH responsibility for one of the properties for him to learn the ropes and see if he likes being a landlord. Then think about expanding (besides CA RE market is bit rich, I don't know about TX RE).

I would not payoff Student Loans.

Congrats on the anniversary.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by smithers » Mon Mar 23, 2015 7:48 pm

Meg77 wrote:I do think about my total asset allocation, though it's hard to determine a future target. Currently I'm 15% cash, 61% stocks/bonds, and 24% rental equity.
I don't think you've got this quite right. Asset allocation is based on, well, your assets. Any debts you have—in this case, your mortgages—don't figure in.

Think about it this way: if the value of your rental real estate were to drop by 25%, would you then have a negative allocation to real estate? That wouldn't make any sense: you'd still have a lot riding on the real estate market, and you'd want your asset allocation calculations to tell you that.

In reality, your assets look something like this: 161k cash, 620k stocks, 1.1M real estate
So your asset allocation looks like this: 9% cash, 33% stocks/bonds, 58% real estate

And, of course, that doesn't even consider the house you live in. None of this is to say that your allocation is wrong (only you can decide that), just that you need to be honest with yourself about how much exposure you actually have to real estate here.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Rl2 » Mon Mar 23, 2015 9:21 pm

You and I have a similar set of circumstances (age and location), except I am allocated heavily on the taxable brokerage side and am looking to get more into real estate. Maxing all the tax-advantaged accounts is great. How about increasing your taxable brokerage account and staying the course with all others? I see you're already 30% international, so I imagine you'd just want to stick to your IPS and increase the overall equity positions.

With all of your existing properties, I'm sure you know the local market well. Do you expect total return from new real estate investment to out perform equities over the next 30 years? In my area of north Dallas, there is still so much new development that I wouldn't expect much real estate appreciation.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Lafder » Mon Mar 23, 2015 9:39 pm

Repay debt.

You have been buying real estate and do have a little, actually quite big by most people's standards, real estate empire already.

Once you spend some time paying down debt you can see how it feels, and then go back to buying new properties if that feels better for you.

No matter which you decide you can change your mind :)

Is your eventual goal no debt and all properties paid for or do you plan to keep buying and always have debt?

Lafder

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by MoonOrb » Mon Mar 23, 2015 10:17 pm

I actually like Option 1. I think there's a lot to be said for your husband having a real sense of ownership and shared purpose in the rental properties that make up such a significant part of your portfolio. I also don't think the risk posed by your debt is that great as you guys have an apparently very high income combined with a generous emergency fund and rental reserves. Not to mention that an enormous chunk of it is held by your mom who has shown she will give you relief from the burden if needed (and may even have the means to forgive some of it if a true disaster strikes). That's awesome and generous of your mom, and I don't think she'd be upset by the idea of you taking advantage of that added security to invest in more real estate.

I think the BH board skews largely debt averse, and you're seeing that show up in the answers to your question here.

I also feel that your allocation to bonds seems really low considering the amount you have allocated to real estate and equities.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by tj » Mon Mar 23, 2015 10:18 pm

Not understadning the posts recommending paying off Auto & Student loan debt. Some of the mortgages have rates twice as high. I guess it depends on your tax bracket.

Unless you are driving beaters (which I doubt), I don't see any reason to pay off those auto's ahead of schedule when you have 5% rental mortgages.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Hulu » Mon Mar 23, 2015 10:22 pm

I love what you're doing so much that I've been doing the same. I'm probably going to diversify this year because (1) real estate prices in the areas I'm already in are increasing and (2) I'm in a good spot. The only real difference between us is that I went for more cash flow because I may stop working soon...hence longer amortization.

Your first plan sounds like the right one for you. There's always more to a financial picture (family safety nets, ect.) than listed so you're more ok than you already look.

One piece of advice would be to "wrap up" your investments if you do not plan on selling them. You may have already done this. LLCs, estate plans, disability, etc. You'll be worth several millions in short order so you may want to envision when you'll have more to lose than to gain. It happens fast but it's a great problem to have :)

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Clearly_Irrational » Mon Mar 23, 2015 10:28 pm

tj wrote:Not understadning the posts recommending paying off Auto & Student loan debt. Some of the mortgages have rates twice as high. I guess it depends on your tax bracket.

Unless you are driving beaters (which I doubt), I don't see any reason to pay off those auto's ahead of schedule when you have 5% rental mortgages.
Well, the returns of the rentals rely on being leveraged. I see paying off the consumer debt as a way to increase safety margin. Sure, there are a bunch of other ways to do that but it seemed pretty straightforward.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by tj » Mon Mar 23, 2015 10:34 pm

Clearly_Irrational wrote:
tj wrote:Not understadning the posts recommending paying off Auto & Student loan debt. Some of the mortgages have rates twice as high. I guess it depends on your tax bracket.

Unless you are driving beaters (which I doubt), I don't see any reason to pay off those auto's ahead of schedule when you have 5% rental mortgages.
Well, the returns of the rentals rely on being leveraged. I see paying off the consumer debt as a way to increase safety margin. Sure, there are a bunch of other ways to do that but it seemed pretty straightforward.
The rentals will remain being leveraged, just a bit less leverage.

To me, having a 2% loan is better than a 5% loan....I mean even paying down the personal residence loan would be better than the negligible amount of the auto loans - it's not as if there is a cash flow issue here.

The student loan may make the most sense just because it's a variable rate - but it's tiny compared to the total amount of debt.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Compound » Tue Mar 24, 2015 7:27 am

I would advise either deleveraging or building up your reserves.

Right now it appears that you consider your mother's accounts as a portion of your reserves:
Meg77 wrote:
The good news on those family loans is that I don't have to pay her on a schedule. One year I had a bunch of property issues blow up, and I was able to ride out the bad cash flow year by suspending payments to her for 6 months. I quickly caught up once the dust settled of course, but it does give me some added flexibility.
While some, and apparently you, would be comfortable with this situation, I would not be. I would prefer to rely on my own funds rather than those of family members. Unfortunately, family help can sometimes come with strings attached, whether intended or not. I suppose our differences on this issue are an example of why personal finance is "personal."

Another is reason to consider deleveraging or increasing reserves is the possibility of starting a family. Having a baby will increase expenses; there can be significant decreases in income as well (such as time off around the childbirth or a parent may decide to quit their job or cut back).

Good luck.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Grt2bOutdoors » Tue Mar 24, 2015 8:07 am

Compound wrote:I would advise either deleveraging or building up your reserves.


While some, and apparently you, would be comfortable with this situation, I would not be. I would prefer to rely on my own funds rather than those of family members. Unfortunately, family help can sometimes come with strings attached, whether intended or not. I suppose our differences on this issue are an example of why personal finance is "personal."

Another is reason to consider deleveraging or increasing reserves is the possibility of starting a family. Having a baby will increase expenses; there can be significant decreases in income as well (such as time off around the childbirth or a parent may decide to quit their job or cut back).

Good luck.
Ding, ding, ding. +100. You beat me to it. If the OP's expenses now are $7,500, I can pretty much guarantee you that daycare and other expenses are going to raise that number by at least 1,500. I wouldn't want to try juggling an 8 or 9 property portfolio, work, home life and a baby at the same time. Even if you do get family support in terms of financial backstop or daycare, still quite a workload. I'd focus on the big rocks as Larry Swedroe wrote in his book - family first, then everything else. Newly married and thinking about starting a family? - no way, keep life simple - de-lever, accumulate, don't rush into anything, enjoy the "before child(ren)" lifestyle, because "after child(ren) you may find you don't even have time to go see a movie by yourselves. That trip to Italy sounds good right about now - Amalfi Coast - don't go in July you will fry from the heat (hotter than Texas). :beer
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by NoVa Lurker » Tue Mar 24, 2015 8:27 am

Compound wrote:I would advise either deleveraging or building up your reserves.

Right now it appears that you consider your mother's accounts as a portion of your reserves:
Meg77 wrote:
The good news on those family loans is that I don't have to pay her on a schedule. One year I had a bunch of property issues blow up, and I was able to ride out the bad cash flow year by suspending payments to her for 6 months. I quickly caught up once the dust settled of course, but it does give me some added flexibility.
While some, and apparently you, would be comfortable with this situation, I would not be. I would prefer to rely on my own funds rather than those of family members. Unfortunately, family help can sometimes come with strings attached, whether intended or not. I suppose our differences on this issue are an example of why personal finance is "personal."

Another is reason to consider deleveraging or increasing reserves is the possibility of starting a family. Having a baby will increase expenses; there can be significant decreases in income as well (such as time off around the childbirth or a parent may decide to quit their job or cut back).

Good luck.
Meg77, I would really, really try to listen to this advice, which is consistent with other good advice in this thread.

I have enjoyed your posts for what seems like years, and you always seemed to have great judgement. But, like most of us, you seem to have a blind spot with your own personal situation. Three notes:

(1) You are highly levered and relying on "The Bank of Mom" for three big loans. I am sure your Mom has encouraged this, as you noted, but that does not mean it is a good idea. You are in your 30s and married. These types of family loans are a recipe for disaster for a whole bunch of reasons.

(2) I could be reading it wrong, but you seem pretty casual about the financial implications of having children. As many have implied above, your child-bearing plans have more of an impact on your finances than anything else mentioned in your posts in this thread.

(3) You mention that you can sell your rental properties "tomorrow" if needed. Is this really true? Have you sold rental properties before? Sorry if I missed that detail in other posts. Real estate is sometimes very liquid (put it up on Tuesday and have five offers by the weekend), and then other times nobody wants to buy (property sits on the market for a year, when you need liquidity, but you can't justify dropping the price and selling it for a loss when the property is cash-flow positive for you). I'm sure you are generally aware of this, but you may not be thinking of how this could apply to you.

Good luck!

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Gropes & Ray » Tue Mar 24, 2015 9:10 am

Are you using corporations or LLCs to insulate yourself from liability? At some point, your real estate portfolio will be large enough to constitute a stand-alone business, and you should be able to avoid personal liability for debts for the business. You are not be there yet, but consider how deleveraging can help you get there. At that point, your risk in having a huge real estate portfolio is reduced, because the business can go through bankruptcy without dragging you in personally.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by dbCooperAir » Tue Mar 24, 2015 9:12 am

I would not do anything until you decide if you are going to have kids or not, see below.

From a purely family standpoint of view I would not want a full time job + 6-7 rentals while having a family, more so when the kids start hitting 8-10 years old.

For us the kids kept us running more and more every year until they started to drive. I still have the old calendars that shows us running 5-6 nights/week, those were just the scheduled activities. 2 kids in a sport can get you 4 games a week + practices. Toss in confirmation, band, volunteer time, etc. and your time becomes a real limited commodity. If a kid/you pick something like a dance/gymnastics you have a second year around full time job, it not that bad but you get the idea.

The last thing I would want is to be sitting on the field watching a game and getting a call to unplug a toilet. Worst yet missing the game altogether because some tenant trashed the place and you need to clean up the mess.

If the landlord gig can afford you to quit your daytime job after you have kids than that's another story.
Neither a wise man nor a brave man lies down on the tracks of history to wait for the train of the future to run over him. | -Dwight D. Eisenhower-

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Impromptu » Tue Mar 24, 2015 10:42 am

I would feel uncomfortable with $1,352,000 in debt and dual income of $226,851-$405,100 (33% married filing jointly tax bracket), especially with a child on the way and the potential loss of one income. I hate to sound cliche, but your system will work until it doesn't work, and then it will come crashing down.

$1,352,000 in debt with that little to back it up should be filling you with dread. Take a step back, take a deep breath, and don't buy anything else. At the beginning of our careers we often need to take risks to get us into a better position. We take out student loans in the hopes that and education will lead to a good job good income. But at some point we need to stop taking on more risk and start paying back the loans and risks we took get there. Once those loans are paid back we are officially established and can then begin expanding again.

The repayment period certainly isn't as exciting. It will be boring and mundane. Small or large real estate empires can be a lucrative career, but over extending can lead to bankruptcy very quickly and dramatically.

You can probably tell that I am debt averse.
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Clearly_Irrational » Tue Mar 24, 2015 10:43 am

tj wrote:To me, having a 2% loan is better than a 5% loan....I mean even paying down the personal residence loan would be better than the negligible amount of the auto loans - it's not as if there is a cash flow issue here.

The student loan may make the most sense just because it's a variable rate - but it's tiny compared to the total amount of debt.
*shrug* Certainly the repayment math favors paying down the higher interest rates first. My concern was that with a family coming up freeing up cash flow seemed like a better objective.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by 8foot7 » Tue Mar 24, 2015 11:05 am

Meg77 wrote: Yes $1.4M is a lot of debt! But it's fixed rate debt, and we have a lot of assets to go with it. We could sell all the property tomorrow and pay off all the consumer debt and still have a 7 figures in the bank.
I think your balance sheet would look a lot better, and you personally would feel a lot better, if you got rid of the $103,000 worth of consumer debt.

Most millionaires don't carry that level of consumer debt.

Yes, they're at a low, fixed rate, but it's also thousands a year in interest collectively and a cash flow burden at a time when you are considering adding to your family.

If the RE is cashflowing I would be less quick to tinker with it, but that consumer debt if I were you would have to go, which it should quickly with the power of your income and your existing net assets.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by tj » Tue Mar 24, 2015 11:10 am

Clearly_Irrational wrote:
tj wrote:To me, having a 2% loan is better than a 5% loan....I mean even paying down the personal residence loan would be better than the negligible amount of the auto loans - it's not as if there is a cash flow issue here.

The student loan may make the most sense just because it's a variable rate - but it's tiny compared to the total amount of debt.
*shrug* Certainly the repayment math favors paying down the higher interest rates first. My concern was that with a family coming up freeing up cash flow seemed like a better objective.
I can't argue with that - Meg ultimately knows what she is most comfortable with, and being a private banker, I am sure she has seen several different financial scenarios play out in her day to day work.

I personally would be investing any excess in index funds. That's way too much concentration in real estate - for me.

In fact, I'm planning to unload my single rental property (previous personal residence) because i don't feel comfortable with RE in the long term over equities - but I also don't have the capital to spread the risk around 6 properties. Everybody's different.

Meg obviously has an investment plan that has worked so far. I would not be doing anything different, but I would urge her not to fall into the trap of "all consumer debt is bad" when the rates are significantly lower than some of her other loans. Of course, if cash flow is an issue, then by all means get rid of the low balance loans first, if not - decrease your future expenses by paying down the highest rate...or further invest, preferably in something other than RE, but can't argue with the success to date.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by 8foot7 » Tue Mar 24, 2015 11:22 am

My overall concern here is that leverage has been kind to Meg77, obviously, to have allowed her to build up a mini-empire. But perhaps Meg77 has not yet seen how unkind leverage can be on the way down. Or perhaps she has and is comfortable with it. It's just something to think about.

I would also be a little concerned with the correlation between so much real estate and a banking job. If one tanks, the other may well follow.

Meg77, have you run a "stress test" to see what would happen in the event everything went to s**t at once? All of your rentals were vacant, you lost the larger of your two incomes, etc.? How long can you ride that out?

If you can do it for a year, you're probably fine.

The rental mortgages don't bother me per se especially if they are cash flowing, but after I got rid of the consumer debt I'd want to see each property in a position where it was no more than 60% levered, just to give you some additional cushion in the event of an overall real estate bust and also ensure you could probably get out of an individual position quicker without having to bring money to the table at the wrong time.

But I'd still be rid of that consumer debt asap. Sounds like you could write a check today and be done with the big car payment, and if I were you I'd click off this thread and go do that now.

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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Tue Mar 24, 2015 11:38 am

Thank you so much for all the thoughtful replies. I won't try to address them all individually, since there are so many and lots of them repeat advice. Here is an update though.

Bank of Mom
Yesterday I called my mother after thinking about these comments and asked her sincerely if it would benefit her at all or if she'd be more comfortable if I repay her loans this year. I told her we could easily refinance the two big ones with a bank - and I could repay the smaller $41K one at any time with cash on hand. She thought about it for a minute, and she thanked me for the offer, but she insisted that she'd rather keep those loans as long as they aren't a burden on me financially (as if I'm keeping them just to pay her interest!). She asked what banks would charge to refinance, and when I confessed that their rates would probably be a bit higher (understatement), she shut down the offer of repayment. She reminded me that she isn't earning close to 3% on her cash and bond portfolio right now and that these loans to us kids are a great thing for her financially.

We talked about a long term plan, and I pointed out that she may not want to keep them for 20 more years, but she shrugged off the possibility and asked why not. I told her we needed to keep this dialogue open and that if her attitude or situation should change that she had to let me know. For the record these loans represent less than 10% of her total portfolio (and she will inherit another 7 figures when her parents die). Still, I think I am going to start chipping away at the loans from her first as my rental reserves grow beyond what I need, even though other rental mortgages have higher rates. I could knock the small loan out in just a few years if things go smoothly with the rentals. I may not always be able to refinance the larger notes especially if property values fall.

Kids
Several of you mentioned this as a factor, and while we are still unsure when (or even whether) we will have a child, it is a possibility I think a lot about. Obviously our budget would change a lot, but we set it up from the beginning (when we chose a home and moved) to be able to accommodate childcare without much overhauling of our investment plan. Currently we blow about half our net pay ($5K a month) on travel, shopping, dining out, and personal care (spa, golf, yoga). I have one "after kids" budget where I still work and half that money is redirected to childcare. I have another budget for the possibility of me having or wanting to stay home which would require paying off all three consumer loans and rerouting ESPP sales from taxable investments into checking/spending, in addition to cutting much of the fun money.

I think this is one reason why I lean harder toward paying off the consumer debt ASAP - I know doing so is required in order for me to really be free to quit my job. In my current job I work very close to home and have lots of flexibility, but if that were to change I know I might just find it hard to get motivated to launch a new part of my career while having babies.

Real Estate
We are not going to pursue a rental purchase in the near future. I agree with most posters that now is not the time to take on more risk or leverage. It's worked out pretty well so far - the student debt got my husband a better job, the mortgages allowed me to buy assets that have made a bit of money, and the car loans enabled us to max out retirement accounts through a bull market. But now it's time to take a breath and de-lever a bit. However I'm not going to focus on de-levering the properties.

There is plenty of equity in most of them - enough to sell even if values dropped 20% in most cases. And vacancies are extremely low in DFW; I've never had a problem getting a new tenant into any property. I might at some point, but I have 10 very different rental units (4 properties are duplexes), so it's highly unlikely that all 10 will be vacant at the same time. Even of they are, I could still make it for 6 months on rental reserves before having to move money from my "personal" buckets or paycheck to supplement cash flow. I realize a lot of people are very debt averse, but having $858K in rental mortgages against $1.1MM in income-producing property (and that's cost, not current market value) does not scare me, particularly as all my mortgages are fixed rate. Short term loans and balloon mortgages are what can get rental investors into real trouble.

The New Plan
I had a long talk with my husband last night, and I tried to let him talk through how he wanted to use extra cash without jumping to all the conclusions I'd come too after reading and writing on this forum all afternoon. He is strangely (in my view) resistant to prioritizing consumer debt repayment. He is more comfortable accumulating more taxable investments while knowing that we could pay off the loans in lump sums at any point (like when the rates go up on his student loan). I explained and he agreed that we shouldn't be investing money we may want to use in less than 5 years for any purpose, and so he opted for preferring to accumulate more cash instead.

In the end we agreed to keep the extra cash we have on hand now and to split future windfalls (ESPP sales, tax refunds, bonuses) three ways: taxable investing, cash, and consumer debt repayment. I want to repay debt more and he wants to invest more and the cash is probably unnecessary, but for now that is the plan - which we will continually re-evaluate. If the market tanks then windfalls will go 100% to stocks for a quarter or two. If I get pregnant then we will probably knock out a car loan or two instead to free up excess cash flow.

Thanks again for all your input and helping us think through our next steps!
"An investment in knowledge pays the best interest." - Benjamin Franklin

ResearchMed
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by ResearchMed » Tue Mar 24, 2015 11:47 am

Quick question, Meg77:

I didn't realize that the "value" of your rental properties (and your home?) is the purchase price, and not the "current value" (which, of course, could drop dramatically in a bad RE market, etc.).

RE has appreciated here quite a bit, to our (pleasant) surprise, after watching 2008, etc.

What is your conservative estimate of the current market value of those rental properties?
(And then discount that for a quick sale, as that's the point of this question.)

If you have more equity than it seemed, then your situation is somewhat different. Maybe not a lot, but...?
You may have less risk of going "belly up" than it might have seemed, should several things go south.

RM
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Meg77
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Meg77 » Tue Mar 24, 2015 12:06 pm

ResearchMed wrote:Quick question, Meg77:

I didn't realize that the "value" of your rental properties (and your home?) is the purchase price, and not the "current value" (which, of course, could drop dramatically in a bad RE market, etc.).

RE has appreciated here quite a bit, to our (pleasant) surprise, after watching 2008, etc.

What is your conservative estimate of the current market value of those rental properties?
(And then discount that for a quick sale, as that's the point of this question.)

If you have more equity than it seemed, then your situation is somewhat different. Maybe not a lot, but...?
You may have less risk of going "belly up" than it might have seemed, should several things go south.

RM
I'm not convinced the current market value is too much higher than the cost of the rentals overall. Two properties decreased a fair bit due to a bunch of foreclosures in their area in 2010/2011. They may have come back up but I'm not sure, although I still owe less on the mortgages than I think they are worth since I put 20% down. On the other hand two others have increased pretty substantially based on recent comp sales in the neighborhood. My estimate is that the total portfolio market value is about 4% higher than the total cost, around $1.16M.

I listed the current appx value of my home though at $515K. That's actually a bit less than total cost since I'm not assuming we'll get back all our renovation expenses. We bought it for $485K just over a year ago and spent $45k replacing carpet with wood floors and adding an outdoor kitchen and firepit.
"An investment in knowledge pays the best interest." - Benjamin Franklin

Impromptu
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Impromptu » Tue Mar 24, 2015 1:16 pm

OP said,
Currently we blow about half our net pay ($5K a month) on travel, shopping, dining out, and personal care (spa, golf, yoga). I have one "after kids" budget where I still work and half that money is redirected to childcare. I have another budget for the possibility of me having or wanting to stay home which would require paying off all three consumer loans and rerouting ESPP sales from taxable investments into checking/spending, in addition to cutting much of the fun money.
That is $70,000/year less fun. It is hard to cut back once lifestyle creep has occurred. But you have already run the numbers, so at least you are aware. It might be doable.
I'll gladly pay you Tuesday for a hamburger today.

tj
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by tj » Tue Mar 24, 2015 4:36 pm

Meg - if you feel compelled to keep lots of cash on hand, consider the various rewards checking accounts opportunities - and if it's worth jumping through the hoops to increase your cash yield.

malabargold
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by malabargold » Tue Mar 24, 2015 6:05 pm

All that debt and you only have $500-1000 per month in extra cash?
This is scary. I would build up an emergency fund to match your debt
and unload some of this proerty rather than try to accumulate more
debt on another.

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Clearly_Irrational
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by Clearly_Irrational » Tue Mar 24, 2015 6:10 pm

malabargold wrote:All that debt and you only have $500-1000 per month in extra cash?
This is scary.
That's after their investing and $5k worth of fun money so not quite as strapped as it sounds.

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SC Hoosier
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Re: Excess Cash - Play Monopoly or Repay Debt?

Post by SC Hoosier » Tue Mar 24, 2015 8:43 pm

Meg77 wrote:
Thank you! Yes I do think about my total asset allocation, though it's hard to determine a future target. Currently I'm 15% cash, 61% stocks/bonds, and 24% rental equity. Over the next two years if we keep doing what we are doing that will change only slightly to 12% cash, 64% stocks/bonds, and 24% rental equity. I like the idea of a 30-40% equity, 50% stocks/bonds, and 10-20% cash over time. But the dollar amounts make a big difference too. As our portfolio grows, 10-20% cash is just a really big drag on total return.

You shouldn't need that much cash when the all the debts are paid down.
I live in No Payment Land. It is wonderful, and I'd love for you to live here too.

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