What's the 'safest' decision?

Non-investing personal finance issues including insurance, credit, real estate, taxes, employment and legal issues such as trusts and wills
Post Reply
TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

What's the 'safest' decision?

Post by TarHeel2002 » Tue Nov 06, 2018 3:58 pm

What path leads to the most financial security for me and my family?

(38 yo married 3 kids. Efund = 30k (5-6 months). Retirement assets = 550k. Retirement accounts maxed annually (401k, Roth, HSA)=50k/year. 529s well funded=18k/year.)

A. Pay off 188k 15 year 4.75% fixed rental property loan (that I occupy for small business). Eventually eliminate $1616 monthly payment.

B. Pay off 152k 30 year 3.125% fixed home mortgage. Eventually eliminate $750 monthly payment. Get there faster than A since loan total is less.

C. Start building a more significant taxable account (VTSAX) on a monthly basis $1500-2000 per month. This is the money I would/could use to pay down notes A or B.

D. A hybrid of (A or B) + C.

Thanks! :sharebeer
Last edited by TarHeel2002 on Sat Nov 24, 2018 7:49 pm, edited 1 time in total.

Thegame14
Posts: 450
Joined: Mon May 07, 2018 11:53 am

Re: What's the 'safest' decision?

Post by Thegame14 » Tue Nov 06, 2018 4:01 pm

not enough information, it seems like you are sayin gyou have an extra $1,500-$2K per month to do something with and you aren't sure if you should invest or pay off debt.

What is your age? Emergency fund? retirement assets? married/single/kids?

Assuming you have adequate emergency fund and are fully funding 401K, I would do A, mortgage is lower rate and you can likely deduct some of that interest to make the rate even lower, plus that rate is very low and fixed with rates going up, in another year, you can earn more likely with a money market than what you are paying in interest, so do not pay that off early.

TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

Re: What's the 'safest' decision?

Post by TarHeel2002 » Tue Nov 06, 2018 4:10 pm

Thegame14 wrote:
Tue Nov 06, 2018 4:01 pm
not enough information, it seems like you are sayin gyou have an extra $1,500-$2K per month to do something with and you aren't sure if you should invest or pay off debt.

What is your age? Emergency fund? retirement assets? married/single/kids?

Assuming you have adequate emergency fund and are fully funding 401K, I would do A, mortgage is lower rate and you can likely deduct some of that interest to make the rate even lower, plus that rate is very low and fixed with rates going up, in another year, you can earn more likely with a money market than what you are paying in interest, so do not pay that off early.
38 yo married 3 kids. Efund = 30k (5-6 months). Retirement assets = 550k. Retirement accounts maxed annually (401k, Roth, HSA)=50k/year. 529s well funded=18k/year. Thank you.

delamer
Posts: 6398
Joined: Tue Feb 08, 2011 6:13 pm

Re: What's the 'safest' decision?

Post by delamer » Tue Nov 06, 2018 4:12 pm

Don’t you get a deduction as a business expense for A?

ralph124cf
Posts: 2059
Joined: Tue Apr 01, 2014 11:41 am

Re: What's the 'safest' decision?

Post by ralph124cf » Tue Nov 06, 2018 4:14 pm

This could get interesting depending on how you hold title to the rental property, and how you use the property in your business.

Are you a corporation (Sub S or LLC) or a sole proprietor? Is this rented to others as well as you using it? Do you file Schedule E and or C? OK, those tax forms refer to last year, and I haven't checked what they will be called this year. Do you, John Doe rent this property to your company? How do you account for the expenses of this rental in your business?

The answers to these questions may (or may not) determine the optimum strategy.

Ralph

clydewolf
Posts: 732
Joined: Tue Jul 21, 2015 12:51 pm

Re: What's the 'safest' decision?

Post by clydewolf » Tue Nov 06, 2018 4:16 pm

TarHeel2002 wrote:
Tue Nov 06, 2018 3:58 pm
What path leads to the most financial security for me and my family?
really not enough information.
A. Pay off 188k 15 year 4.75% fixed rental property loan (that I occupy for small business). Eventually eliminate $1616 monthly payment.
For a rental, the interest is a deduction on your schedule E. Is it your business that is renting this place. If so the rental fee would be a deduction as a business expense on schedule C, but is income on Schedule E.
B. Pay off 152k 30 year 3.125% fixed home mortgage. Eventually eliminate $750 monthly payment. Get there faster than A since loan total is less.
This would lead to secure housing for your family.
C. Start building a more significant taxable account (VTSAX) on a monthly basis $1500-2000 per month. This is the money I would/could use to pay down notes A or B.
Generally always safe as you would have cash for the next opportunity that comes along.

User avatar
BolderBoy
Posts: 4174
Joined: Wed Apr 07, 2010 12:16 pm
Location: Colorado

Re: What's the 'safest' decision?

Post by BolderBoy » Tue Nov 06, 2018 4:59 pm

TarHeel2002 wrote:
Tue Nov 06, 2018 3:58 pm
What path leads to the most financial security for me and my family?

A. Pay off 188k 15 year 4.75% fixed rental property loan (that I occupy for small business). Eventually eliminate $1616 monthly payment.

B. Pay off 152k 30 year 3.125% fixed home mortgage. Eventually eliminate $750 monthly payment. Get there faster than A since loan total is less.

C. Start building a more significant taxable account (VTSAX) on a monthly basis $1500-2000 per month. This is the money I would/could use to pay down notes A or B.

D. A hybrid of (A or B) + C.
B + C should take precedence over A if the note on A is held only in the name of the business.
"Never underestimate one's capacity to overestimate one's abilities" - The Dunning-Kruger Effect

TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

Re: What's the 'safest' decision?

Post by TarHeel2002 » Sat Nov 24, 2018 7:40 pm

I had to personally guarantee the note on the rental property although it is titled under an LLC. I contacted my accountant and I do receive some tax deductions with regard to interest and depreciation (schedule E). I realize hind sight is 20/20 on this kind of question. I do appreciate all of the responses.

Schedule E last year
rents received $24,900
total income (after interest deduction and depreciation) = $10,585

I operate as an S corp

Nate79
Posts: 3718
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: What's the 'safest' decision?

Post by Nate79 » Sat Nov 24, 2018 9:36 pm

I would have a paid for home first.

TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

Re: What's the 'safest' decision?

Post by TarHeel2002 » Sun Nov 25, 2018 8:59 am

Nate79 wrote:
Sat Nov 24, 2018 9:36 pm
I would have a paid for home first.
Do the schedule E rental property deductions make it more attractive to pay off the 3.125% home mortgage?

I too would like to have a paid off home (and it’s doable) but I’m hesitant to go down that road because of the hisortically low interest rate on it.

Tdubs
Posts: 210
Joined: Tue Apr 24, 2018 7:50 pm

Re: What's the 'safest' decision?

Post by Tdubs » Sun Nov 25, 2018 9:05 am

4.75% seems like a nice return.

gr7070
Posts: 200
Joined: Fri Oct 28, 2011 10:39 am

Re: What's the 'safest' decision?

Post by gr7070 » Sun Nov 25, 2018 9:53 am

"financial *security*" would likely not be A. B and/or C would be most secure.

I do not pay extra on my rental property and choose to pay extra on my personal home even with similar mortgage rates as you. Preferring the security of B and C while getting some tax benefit of A.

Are you wanting to know which would provide the highest rate of return? Security is not necessarily RoR.

Personally, I'm not sure I care which is the highest RoR. All three are positives I'm fortunate to be involved in.

Nate79
Posts: 3718
Joined: Thu Aug 11, 2016 6:24 pm
Location: Delaware

Re: What's the 'safest' decision?

Post by Nate79 » Sun Nov 25, 2018 12:18 pm

TarHeel2002 wrote:
Sun Nov 25, 2018 8:59 am
Nate79 wrote:
Sat Nov 24, 2018 9:36 pm
I would have a paid for home first.
Do the schedule E rental property deductions make it more attractive to pay off the 3.125% home mortgage?

I too would like to have a paid off home (and it’s doable) but I’m hesitant to go down that road because of the hisortically low interest rate on it.
You said safest and financial security. You didn't say which will give the greatest return. I would much rather have the roof over my head paid for if it hits the fan vs a rental property.

JGoneRiding
Posts: 1241
Joined: Tue Jul 15, 2014 3:26 pm

Re: What's the 'safest' decision?

Post by JGoneRiding » Sun Nov 25, 2018 1:35 pm

Nate79 wrote:
Sun Nov 25, 2018 12:18 pm
TarHeel2002 wrote:
Sun Nov 25, 2018 8:59 am
Nate79 wrote:
Sat Nov 24, 2018 9:36 pm
I would have a paid for home first.
Do the schedule E rental property deductions make it more attractive to pay off the 3.125% home mortgage?

I too would like to have a paid off home (and it’s doable) but I’m hesitant to go down that road because of the hisortically low interest rate on it.
You said safest and financial security. You didn't say which will give the greatest return. I would much rather have the roof over my head paid for if it hits the fan vs a rental property.
As has been pointed out before that isn't nec the safest though. No matter how much you prepay a mortgage you still have to have the check the next month so having a larger buffer is "safest"

I think all of the plans are good and OP should pick the one that gives him and spouse the most drive. I think I would want to build the brokerage until it matched one of the loans and then decide if I wanted the loan paid off.

While a paid for house sounds great it's so low interest it's hard to justify targeting it.

gr7070
Posts: 200
Joined: Fri Oct 28, 2011 10:39 am

Re: What's the 'safest' decision?

Post by gr7070 » Sun Nov 25, 2018 8:53 pm

I would want to build the brokerage until it matched one of the loans and then decide if I wanted the loan paid off.
How much time is left on either mortgage might factor into that decision. If there's less than a handful years left I'd likely funnel it straight into the mortgage instead of risk market losses short term.
Last edited by gr7070 on Mon Nov 26, 2018 4:18 pm, edited 1 time in total.

TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

Re: What's the 'safest' decision?

Post by TarHeel2002 » Sun Nov 25, 2018 9:03 pm

Can someone please check my logic/math on option A as it relates to schedule E and effective/adjusted interest rate?

188k fixed rate loan @ 4.75% interest for the year = $8930

Depreciation deduction (1/39) = $5384

Income received = $24,900

Income after deductions = $10,586

federal tax on 24,900 @ 24% = $5976

federal tax on $10,586 @ 24% = $2540

federal tax savings = $3435

interest minus federal tax savings = $8930 - $3435 = $5495

$5495 / $188,000 = 2.922%

certainly over the years as the note gets paid down it trends upward but right now it's actually a lower effective rate than option B (home mortgage 3.125%). I'm leaning toward option B because it's the roof over my family's head. Just trying to weigh all the options before running with one. Thanks!

TarHeel2002
Posts: 128
Joined: Sun Jun 17, 2012 2:14 pm

Re: What's the 'safest' decision?

Post by TarHeel2002 » Sun Nov 25, 2018 9:09 pm

gr7070 wrote:
Sun Nov 25, 2018 8:53 pm
I would want to build the brokerage until it matched one of the loans and then decide if I wanted the loan paid off.
How much time is left on either mortgage might factor into that decision. If there's less than a handful years left if likely funnel it straight into the mortgage instead of rush market losses short term.
home mortgage has about about 24 years left. $750 month/payment

rental mortgage has about 13 years left. $1616 month/payment

I've ran scenarios where I apply an extra 2k/month to each loan individually and home mortgage gets paid off in about 60 months whereas rental mortgage gets paid off in roughly 58 months. Pretty similar but if I apply extra 2k to rental mortgage vs home mortgage I end up with more monthly cash flow ($1616 vs $750).

SoAnyway
Posts: 236
Joined: Tue Jul 31, 2018 11:49 pm

Re: What's the 'safest' decision?

Post by SoAnyway » Sun Nov 25, 2018 10:36 pm

OP, as the replies have indicated (including your own), it appears that (a) there's not enough info to determine YOUR priorities (the only ones that matter here), and (b) you might be overthinking.

My suggestion: Please re-read your original post and update it (using the pencil tool in the upper right corner) to state which way YOU're leaning based on what YOUR gut is saying. That will help folks get a sense of your priorities/situation and give better guidance.

Post Reply