Need some financial advice after just purchasing a new home

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dave415
Posts: 38
Joined: Tue Jun 24, 2014 3:37 pm

Need some financial advice after just purchasing a new home

Post by dave415 » Sun Jan 18, 2015 2:01 pm

Hi fellow BHs,

Reaching out to you again to get some advice. I mentioned in previous posts that I was thinking about purchasing a new house. I did end up buying a house and now I was just looking for some advice on what to do next with my finances to kind of stabilize myself. In other words how is my overall asset allocation looking and what should I be doing to make it perhaps better. And what should I tackle first?

Here's a snapshot of my current situation, I have some thoughts about what to do next which I have listed at the bottom:

Wife and I are mid to late thirties. No children currently but planning on starting a family this year.
My income: 135k/yr
Wife income: 160k/yr (*note that if wife has baby she won't get paid when she is not working)

BANK ACCOUNTS
90k Cash

STOCKS
Brokerage 650k
Retirement Accounts 600k
Total asset allocation is about 59% large cap, 7% small cap, 24% International, 3% bonds, 7% Other

STOCK OPTIONS
Stock Options at Small Cap 500k - Will be vested in 3 months

REAL ESTATE
Primary home: 1.44m estimated value; 30yr fixed 4% mortgage with a 1m balance, 30 years left; $4800/month mortgage payment
Investment Prop 1: 880k estimated value; 30yr fixed 3.625% mortgage with a 500k balance, 28 years left; $3500 monthly income vs PITI+expenses of $3300/month
Investment Prop 2: 440k estimated value; 30yr fixed 4.25% mortgage with a 260k balance, 30 years left; $2650 monthly income vs PITI+expenses of $2100/month

OTHER LIABILITIES
Car Loan: 15k balance, 1.49%, $434 monthly payment, 3 yrs left
Student Loan: 4k balance, 2.1%, $44 monthly payment,
401k Loan: 30k balance, 5.25%, $950 monthly payment, 3 years left

SUMMARY
Assets
- 90k cash
- 1.25m stocks
- 500k stock options
- 2.77m real estate
Liabilities
- 1.76m mortgages
- 19k loans
- 30k 401k loan (not really a liability I think since I'm paying myself)


Should I use some of my 90k cash to pay off one of my loans? Was thinking of getting rid of the 401k loan so at least I would have the extra cash flow maybe?

Or should I focus my energies on paying off the Investment Property 2 as soon as possible?

When I vest in my stock options in 3 months, I will probably sell 100k of it, but let the rest ride a little longer. Does this seem like a good idea and how should I use the 100k?

I have heard that paying off a mortgage is similar to investing in a bond, so that is why I have so little invested in bonds. Is that really the case, or do you think I should have more in bonds?

Is there anything to do in terms of my allocation to account for the probability that wife won't be getting paid when she is having a baby, or if she decides to work less afterwards?

Any other advice that you guys have based on where I'm at right now?

The purpose of this post is so I can get a sense if there is anything obvious in terms of what I should be doing or not doing.
Thanks for your help,

Dave

Carefreeap
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Re: Need some financial advice after just purchasing a new h

Post by Carefreeap » Sun Jan 18, 2015 2:52 pm

I'd do a wait and see and keep throwing money into cash until the baby is born. Lots of things can change. Are planning on having more than one child?

Are you able to handle the mortgages and other household expenses on your salary alone or would you need to supplement with cash?

WHL
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Re: Need some financial advice after just purchasing a new h

Post by WHL » Sun Jan 18, 2015 4:13 pm

That's a lot of debt :shock:

There's no way I would try to have a kid and lose that second income until the majority of that debt is paid off.

rayson
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Re: Need some financial advice after just purchasing a new h

Post by rayson » Sun Jan 18, 2015 4:35 pm

dave415 wrote:Hi fellow BHs,

Should I use some of my 90k cash to pay off one of my loans? Was thinking of getting rid of the 401k loan so at least I would have the extra cash flow maybe?
Yes, I'd pay off 401k loan asap.
When I vest in my stock options in 3 months, I will probably sell 100k of it, but let the rest ride a little longer. Does this seem like a good idea and how should I use the 100k?
Use these funds to pay down investment property 2. Perhaps look into refinancing to a 15 year mortgage so you can pay down debt aggressively.
Is there anything to do in terms of my allocation to account for the probability that wife won't be getting paid when she is having a baby, or if she decides to work less afterwards?
At a net worth of over $2.25M ($2.75M including stock options), you are doing great. IMO, you don't have to change your asset allocation at all. You may just want to keep 6-12 months of expenses in cash/low-risk funds.
Any other advice that you guys have based on where I'm at right now?
Good luck with parenting. Once you have a baby, you may want to think of 529 plans etc.

Lafder
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Location: East of the Rio Grande

Re: Need some financial advice after just purchasing a new h

Post by Lafder » Sun Jan 18, 2015 5:06 pm

How much "extra" money do you have a month after all fixed debts are paid? Can your income plus rental income cover all monthly expenses?

If you can cover all expenses on your income if your wife takes extended leave, there is less pressure to have a larger cash reserve. If your income does not cover expenses, how many months' expenses do you have saved to cover debts while wife is off work. Of course you can always pull from taxable savings for living expenses as needed. And you have deep savings there, so a lot of $$ to last an extended time if your wife stays off or only returns part time.

I would go ahead and pay off all non mortgage loans (car, 401k, student) which still leaves you 41k cash in your emergency fund which is more than most people have. Then I would pay the $ that was going to the loans to savings to build up to an amount you are comfortable with for your emergency funds.

I would not be in a hurry to pay off the rental properties since it will raise your profits you are paying tax on. I would put "extra" to my primary mortgage. With 3 homes, the potential for pricey repairs in any year is higher. But you can always pull from deeper savings to cover (I would not hold cash out for that just in case a repair comes up).

I hear what you are saying about bonds. However, I believe in holding 20% minimum bonds to buffer drops in stocks, and to have a place to rebalance from in stock crashes. You have too high a % in your company stocks so I would minimize that when you can.

I understand it would feel satisfying to get the lowest balance rental property paid for since it can be done faster. It is a matter of preference since it is all your money and your debt when you look at your net worth. Except for the possible tax consequences on losing the interest deduction on your primary as well as increasing income on a rental. But if your goal is to pay off all in the next decades, does it matter which is first?

Kids change your life, perspective, and priorities, mostly for the better :)
best wishes,
lafder

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Duckie
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Re: Need some financial advice after just purchasing a new h

Post by Duckie » Sun Jan 18, 2015 5:37 pm

WHL wrote:That's a lot of debt :shock:

There's no way I would try to have a kid and lose that second income until the majority of that debt is paid off.
Yeah, but "mid to late thirties" means she's running out of time. Some things are more important than money.

dave415
Posts: 38
Joined: Tue Jun 24, 2014 3:37 pm

Re: Need some financial advice after just purchasing a new h

Post by dave415 » Sun Jan 18, 2015 10:46 pm

Carefreeap wrote:I'd do a wait and see and keep throwing money into cash until the baby is born. Lots of things can change. Are planning on having more than one child?
Hi Carefreeap, Yes we'd like to have 1 or 2 kids. But probably not more than 2.
Carefreeap wrote:Are you able to handle the mortgages and other household expenses on your salary alone or would you need to supplement with cash?
At present if her income were to stop, I would not be able to pay for all expenses alone. If I paid off the 401k loan so they stop taking that amount from my paychecks, I would be negative about 1500 to 2000 per month.
WHL wrote:That's a lot of debt :shock:

There's no way I would try to have a kid and lose that second income until the majority of that debt is paid off.
Hi WHL, Yes it does feel like a lot of debt, but I made the conscious decision to take it on. My rationale was that I had enough taxable savings to act as a buffer and if I really got into trouble I could sell one of my properties and that would easily leave me with a much more manageable amount of debt. It seemed reasonable to me at the time, I hope I didn't miscalculate any risk. Barring a major real estate downturn I think it seems safe.
rayson wrote:
dave415 wrote:Hi fellow BHs,

Should I use some of my 90k cash to pay off one of my loans? Was thinking of getting rid of the 401k loan so at least I would have the extra cash flow maybe?
Yes, I'd pay off 401k loan asap.
When I vest in my stock options in 3 months, I will probably sell 100k of it, but let the rest ride a little longer. Does this seem like a good idea and how should I use the 100k?
Use these funds to pay down investment property 2. Perhaps look into refinancing to a 15 year mortgage so you can pay down debt aggressively.
Is there anything to do in terms of my allocation to account for the probability that wife won't be getting paid when she is having a baby, or if she decides to work less afterwards?
At a net worth of over $2.25M ($2.75M including stock options), you are doing great. IMO, you don't have to change your asset allocation at all. You may just want to keep 6-12 months of expenses in cash/low-risk funds.
Any other advice that you guys have based on where I'm at right now?
Good luck with parenting. Once you have a baby, you may want to think of 529 plans etc.
Thanks for sharing your advice Rayson, I'm seriously going to consider paying off that 401k loan. Since I may need more bond holdings, I'm also thinking about putting that money in bonds. Does anyone know the difference between long term and intermediate term bonds? Which one would be considered safer?

Unfortunately I can't refinance my Investment Property 2 yet for another 4 months or so. I just recently refinanced it and there's a period that I was told to wait before doing another refinance. But if rates stay as low as they are I'll probably refinance. Not sure if it would be 30yr or 15 yr. I'm still on the fence about whether to focus on paying off the investment property 2 or my primary residence.
Lafder wrote:How much "extra" money do you have a month after all fixed debts are paid? Can your income plus rental income cover all monthly expenses?

If you can cover all expenses on your income if your wife takes extended leave, there is less pressure to have a larger cash reserve. If your income does not cover expenses, how many months' expenses do you have saved to cover debts while wife is off work. Of course you can always pull from taxable savings for living expenses as needed. And you have deep savings there, so a lot of $$ to last an extended time if your wife stays off or only returns part time.
I really like your advice Lafder! I'm probably negative 1500-2000 per month without my wifes income, but I think our short term goal will be to save as much cash as possible.
Lafder wrote: I would go ahead and pay off all non mortgage loans (car, 401k, student) which still leaves you 41k cash in your emergency fund which is more than most people have. Then I would pay the $ that was going to the loans to savings to build up to an amount you are comfortable with for your emergency funds.
I think of the three loans it makes sense to payoff the 401k loan first so I can free up cash flow. Paying off the other two are still in question. The rate is so low on the car loan (1.49%) and the payment amt is so low on the student loan ($50) that it may make more sense to keep those two loans? Would like to hear what other people think about this part of the plan.
Lafder wrote: I would not be in a hurry to pay off the rental properties since it will raise your profits you are paying tax on. I would put "extra" to my primary mortgage. With 3 homes, the potential for pricey repairs in any year is higher. But you can always pull from deeper savings to cover (I would not hold cash out for that just in case a repair comes up).
Lafder wrote: I understand it would feel satisfying to get the lowest balance rental property paid for since it can be done faster. It is a matter of preference since it is all your money and your debt when you look at your net worth. Except for the possible tax consequences on losing the interest deduction on your primary as well as increasing income on a rental. But if your goal is to pay off all in the next decades, does it matter which is first?
These are great points that I struggle greatly with. As for putting extra money in primary residence or rental property, my opinion actually goes back and forth all the time. One problem I have I guess is I don't really understand fully the tax consequences of the two options. On thing to add is that I think I'm very close to having to pay AMT each year. I think that's a reason to keep the primary mortgage. Is that right?

Actually it would be great if you could explain a bit more why paying off the primary residence might be better than putting money towards the investment property? If I put x amount towards either mortgage, do you think I would come out ahead after taxes by putting money in the investment property (forget the amt comment I made earlier, I just want to hear a bit about what you originally had in mind, I don't understand this part of my finances very much)
Lafder wrote: I hear what you are saying about bonds. However, I believe in holding 20% minimum bonds to buffer drops in stocks, and to have a place to rebalance from in stock crashes. You have too high a % in your company stocks so I would minimize that when you can.

Kids change your life, perspective, and priorities, mostly for the better :)
best wishes,
lafder
I agree with these points. I think I'll increase my bonds, but will probably target closer to 10%. I'm really enjoying hearing about what all of you would do in my situation.

Another idea I was tinkering with was whether I should think about selling any of my taxable account to pay into one of my mortgages?

Thanks for all the great ideas!

homermtb
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Joined: Tue Jul 15, 2014 11:26 pm

Re: Need some financial advice after just purchasing a new h

Post by homermtb » Mon Jan 19, 2015 2:39 am

Does your wife want to return to work or stay home with the baby? If she returns to work after 3-6 months, you're really only looking at a short time without 2 salaries (minus daycare or a nanny).

+1 for paying off the 401k, car and student loans. This would be a slow step to becoming debt free, without significantly stressing your finances. As for the rental properties, a 15 year loan would probably make you cash flow negative(guess).

dave415
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Re: Need some financial advice after just purchasing a new h

Post by dave415 » Mon Jan 19, 2015 9:04 pm

Ok I took my first step which was to initiate a transfer to pay off the 401k loan.

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sdsailing
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Re: Need some financial advice after just purchasing a new h

Post by sdsailing » Mon Jan 19, 2015 9:17 pm

1. I don't see a problem at all with the debt as long at the rental income is covering the mortgages with sufficient buffer.

2. As a previous poster suggested, the central consideration is if/when wife returns to work.

3. I see no compelling reason to pay down rental mortgages extra quickly unless that is a strong preference.

basspond
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Re: Need some financial advice after just purchasing a new h

Post by basspond » Mon Jan 19, 2015 11:50 pm

You have a $880k investment generating $200 a month. That is a 0.3% rate of return if it is rented. I would sell that, pay off everything except your house but refinance to 15 year note.

dave415
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Re: Need some financial advice after just purchasing a new h

Post by dave415 » Wed Jan 21, 2015 1:26 am

basspond wrote:You have a $880k investment generating $200 a month. That is a 0.3% rate of return if it is rented. I would sell that, pay off everything except your house but refinance to 15 year note.
Hi Basspond, you know I never thought about this option too much until you mentioned it. Now it's got me thinking some more about it. At first I was thinking I would just keep my 880k rental property and at least for this property I do slightly better than break even but let's just say it's only break even. By keeping it I essentially get the benefit of having my mortgage on this property being paid for by someone else. Right now that only really means I am getting about $900 per month paid to my principle.

On the other if I sold this property I could use it to pay off my other rental property. Thus I would save myself the cost of what i am paying in interest on the 440k rental property. That interest is currently about $900 per month.

Hmmm I just confused myself again.

investor1
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Re: Need some financial advice after just purchasing a new h

Post by investor1 » Wed Jan 21, 2015 11:14 am

If you guys are dead set on having kids now, I would sell at least one of those houses in addition to paying off that 401k loan. Get yourself cashflow positive on just your income since she won't be getting paid. Leave yourself some elbow room too. There is a rumor going around saying kids are expensive.

Lafder
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Re: Need some financial advice after just purchasing a new h

Post by Lafder » Sat Jan 24, 2015 5:27 pm

The more income/profit you make on your rental homes the more income you have to pay tax on. So paying off rental homes means more income/cash flow to pay tax on. You still get to count depreciation, expenses including property tax against income.

A not paid off primary home = income tax deduction on loan interest and property tax. Paying it off loses the deductions = more taxes owed.

In an ideal to me world, all homes are paid off and you just deal with the taxes due :)

((Some investors believe in never paying off homes and leveraging equity to buy more mortgaged homes. My goal is all debt paid off))

It depends on the numbers we are talking about. If not having the home interest deduction pushes you to AMT that is a consideration. Just watch that the income on the rentals doesn't do the same. The longer you have your home mortgage the less you will be paying in interest per year.

Smarter mathematical minds can run calculations if you provide more numbers. How much interest did you pay on your mortgage in 2014? How much rental income minus expenses/depreciation did you have?

The numbers may end up being close then you will have to decide which feels better to you. A paid off home, or paid off rentals.

Paying yourself first would pay off your primary home. Especially if you think you will stay in it long and you need a place to live.

In full disclosure: I have a paid off rental house, a former residence now rental with a HELOC, and a primary residence with the biggest mortgage. I think I will pay off my mortgage when the former residence sells. (But when I have the $ in hand I will also look at investing it vs buying another rental depending on the overall situation at the time) If we had not moved, we could have paid off the HELOC on our then primary residence by now.

Keep in mind and months of no income on rentals are less painful with lower rental expenses.

There are pluses and minuses to both sides.

Best wishes,
lafder

mistike
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Re: Need some financial advice after just purchasing a new h

Post by mistike » Sat Jan 24, 2015 5:34 pm

I won't give any investment advice because I'm not qualified at all.

However I'll say that, given your salaries (and your monthly expenses), if one of you has to take an extended parental leave after the first couple of months of the baby's life, it should be you, not your wife.

Lafder
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Re: Need some financial advice after just purchasing a new h

Post by Lafder » Sat Jan 24, 2015 5:41 pm

One more point, keep an eye out for taxable accounts with tax loss harvesting potential. That could be a way to tax loss harvest plus use the proceeds to pay down mortgages. You can sell funds with an equivalent capital gains amount at the same time to balance it out.

I am not sure if I would choose to sell funds with gains to pay down mortgage. But in 2008 I was thinking about doing just that and selling taxable accounts to pay off my mortgage. I decided not to. Then the market crash hit and I was very sorry I had not done so since the account values dropped so drastically to the point I no longer had the option.

It was a learning experience. If I had paid off the mortgage as I was considering, the market drop would not have hurt as much.

The thing about investments is the balances go up and down somewhat unpredictably. Yes up over time or we wouldn't be investing. The mortgage balance only goes down as you make payments :)

lafder

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