Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

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atallatallatall
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Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 1:28 pm

New to the site so apologies if format presented below is wonky.

Below are mine and my wife's stats. We are starting to live a bit more frugal with monthly recurring expenses but still enjoy going on vacation with the kids twice or so a year. Our retirement goal is to get to a place where we have flexibility earlier in life than later, while having our money work for us. I'm trying to figure out if I should be setting aside more in 401k, if she should be rolling over her older 401k plan and setting aside more funds, if we should dump our rental property and use those funds for other investments, or if we should move our primary residence while renting out our current primary residence, for a total of a primary residence and two rental properties.

Me: 32 years old
Me Salary: 74k
Me 401(k): 5k
401(k) current contributions: 7k annual

Wife: 36 years old
Wife Salary: 90k
Wife 401(k): 75k
401(k) current contributions: no contributions currently, new job

Assets:
Savings: 26k
Equity: 55k on primary residence, 107k on rental property
Primary Residence: 305k owed, 27 years left on mortgage, Approx value is 360k
Rental property: 258k owed, 28 years left on mortgage after refi, Approx value is 365k

Other loans:
Student Loans: 10k remaining, to be paid off in 2019
Car loan: 10k remaining, to be paid off in 2019


Thanks in advance!
AAA

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Pajamas
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by Pajamas » Tue May 15, 2018 2:22 pm

Concentrate on the basics:

Emergency fund
Pay off debt unless it is no or very low interest
Max out 401(k)s

https://www.bogleheads.org/wiki/Getting_started

Not sure why you would consider moving in order to convert your primary home into a rental property. You could probably find a better rental property if you want to go into the real estate business and your current mortgage might not even allow it.

GAAP
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by GAAP » Tue May 15, 2018 2:26 pm

If you've been depreciating that rental property, you may find that your taxable gain on sale is quite a bit more than you expect...

chevca
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by chevca » Tue May 15, 2018 2:31 pm

How long have you had the rental, or how long has it been used as a rental? How much to you get in monthly rent compared to the monthly mortgage payment on the rental?

niceguy7376
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by niceguy7376 » Tue May 15, 2018 2:35 pm

What are the numbers (income, expenses) on your current rental property.
You mentioned of refi on rental, how long have you had this rental?

With your combined income of 164K, you have mortgages of 563K owed. You think you can get a new loan on a new primary residence?

You have saved 26K in savings and have loans of 20K . How about any emergency funds and such?

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 2:38 pm

chevca wrote:
Tue May 15, 2018 2:31 pm
How long have you had the rental, or how long has it been used as a rental? How much to you get in monthly rent compared to the monthly mortgage payment on the rental?
Have owned the property rental for almost 5 years and have rented for nearly 2.5 years. We net ~1k year after costs on it.

chevca
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by chevca » Tue May 15, 2018 2:40 pm

atallatallatall wrote:
Tue May 15, 2018 2:38 pm
chevca wrote:
Tue May 15, 2018 2:31 pm
How long have you had the rental, or how long has it been used as a rental? How much to you get in monthly rent compared to the monthly mortgage payment on the rental?
Have owned the property rental for almost 5 years and have rented for nearly 2.5 years. We net ~1k year after costs on it.
I'd sell based on that. You are likely still in the capital gains exclusion window. That's a big benefit to selling now if it still applies, which it sounds like it does.

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 2:42 pm

niceguy7376 wrote:
Tue May 15, 2018 2:35 pm
What are the numbers (income, expenses) on your current rental property.
You mentioned of refi on rental, how long have you had this rental?

With your combined income of 164K, you have mortgages of 563K owed. You think you can get a new loan on a new primary residence?

You have saved 26K in savings and have loans of 20K . How about any emergency funds and such?
Have owned the property rental for almost 5 years and have rented for nearly 2.5 years. We net ~1k year after costs on it. We have a lender who mentions shouldn't be an issue on getting approved for new property.

Other than the 26k savings, no other emergency funds other than retirement accts. Our monthly costs are such that one of us could lose our jobs and we should still be able to pay for everything. Would definitely have to watch funds very closely in interim.

pennylane
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by pennylane » Tue May 15, 2018 2:44 pm

1k net per month or year???? If per month, you would be crazy to sell...

Also why can't you just refinance and pull your equity out and keep renting it?

This way the property appreciates in value and your mortgage is being paid off at the same time.

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 2:48 pm

pennylane wrote:
Tue May 15, 2018 2:44 pm
1k net per month or year???? If per month, you would be crazy to sell...

Also why can't you just refinance and pull your equity out and keep renting it?

This way the property appreciates in value and your mortgage is being paid off at the same time.
No kidding! Just the 1k per year. Nominal proceeds.

I have a question about what we would be pulling the equity out for? RE: "Also why can't you just refinance and pull your equity out and keep renting it?". Any insight to that strategy would be appreciated.

We don't really have any high interest revolving loans. The only 2 loans we have amount to 20k and will be paid off next summer/fall. Last year of Car and student loans.

delamer
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by delamer » Tue May 15, 2018 2:53 pm

I’d suggest you come up with a concrete goal (or goals), like wanting to be able to retire by 60 and pay for 2 years of college for each of your kids.

Then you can figure out what you need to do to reach those goals.

Saving $7,000/year on an income of $164,000 is not going to get you to “flexibility earlier in life than later.” That isn’t even a 5% savings rate. Ironically, the more you save now the less income you’ll need in the future to maintain your current lifestyle. If you save 5% now, then you’ll need 95% of your current income to continue living like you are now. But if you save 20%, then you’ll only need 80% of your current income to maintain it. (Obviously, I am ignoring things like a paid off mortgage, childcare, payroll taxes, etc., but the principal holds true.)

You can decrease your current income taxes if you increase contributions to the 401(k)s. So your net income won’t fall as much as your gross contributions.

You do have the investment in your rental property. It is hard to give good advice on it without knowing your net costs/income. From my perspective, your net worth is very dependent on real estate. Some people are willing to take that risk, others are not.

Saw your earlier post — you could live on one income, but you are saving less than 5% of your gross. So where is all that money going?

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 2:59 pm

delamer wrote:
Tue May 15, 2018 2:53 pm
I’d suggest you come up with a concrete goal (or goals), like wanting to be able to retire by 60 and pay for 2 years of college for each of your kids.

Then you can figure out what you need to do to reach those goals.

Saving $7,000/year on an income of $164,000 is not going to get you to “flexibility earlier in life than later.” That isn’t even a 5% savings rate. Ironically, the more you save now the less income you’ll need in the future to maintain your current lifestyle. If you save 5% now, then you’ll need 95% of your current income to continue living like you are now. But if you save 20%, then you’ll only need 80% of your current income to maintain it. (Obviously, I am ignoring things like a paid off mortgage, childcare, payroll taxes, etc., but the principal holds true.)

You can decrease your current income taxes if you increase contributions to the 401(k)s. So your net income won’t fall as much as your gross contributions.

You do have the investment in your rental property. It is hard to give good advice on it without knowing your net costs/income. From my perspective, your net worth is very dependent on real estate. Some people are willing to take that risk, others are not.

Saw your earlier post — you could live on one income, but you are saving less than 5% of your gross. So where is all that money going?
We've just paid down a lot of debt and wife just got substantial raise. We're starting to net 2-3k in savings a month currently. I suppose that is quite relevant information :)

pennylane
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by pennylane » Tue May 15, 2018 2:59 pm

atallatallatall wrote:
Tue May 15, 2018 2:48 pm
pennylane wrote:
Tue May 15, 2018 2:44 pm
1k net per month or year???? If per month, you would be crazy to sell...

Also why can't you just refinance and pull your equity out and keep renting it?

This way the property appreciates in value and your mortgage is being paid off at the same time.
No kidding! Just the 1k per year. Nominal proceeds.

I have a question about what we would be pulling the equity out for? RE: "Also why can't you just refinance and pull your equity out and keep renting it?". Any insight to that strategy would be appreciated.

We don't really have any high interest revolving loans. The only 2 loans we have amount to 20k and will be paid off next summer/fall. Last year of Car and student loans.
Wouldn't your reasoning of dumping your rentals to have cash to be able to invest? Pull that cash out and invest it while keeping the property.

1K per year is a very nominal amount. I'd take a guess and say your mortgage is probably $1500? My rule of thumb is at least 15% NOI. If your mortgage is $18,000 per year plus you have some expenses on the property, I'd aim for minimum 15% net. Doesn't seem like the property is producing that for you.

the purpose for 15% is just so you have cushion money in case you have a bad year or help with vacancy. End of the day even if you make no money, you are building equity every month and you get the tax write off.

chevca
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by chevca » Tue May 15, 2018 3:02 pm

Well, you can typically only refi to 80% of the home value. So, you would be refinancing to pull out about $30k. I'd say that's hardly worth the cost and likely interest rate increase. And, I don't know if the cash out refi rules are different for a rental property.

I wouldn't take the lender's word for getting approved for another house. You may get approved for something. But, the current house without a rental history would count against you guys and you wouldn't qualify for much compared to what you could with out it.

Do you want to be landlords? You have a couple years experience and sounds like that's been good. But, what about when you need to replace a roof or a furnace or... ? Do you want to take all that on?

It's going to be a long time before your current rental is any kind of a money maker if you only net $1000/year now. That's tough to even make sense of with all the equity you have in that one and the refinance of the mortgage. Are you charging fair rent, or giving someone a great deal?

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 3:05 pm

pennylane wrote:
Tue May 15, 2018 2:59 pm
atallatallatall wrote:
Tue May 15, 2018 2:48 pm
pennylane wrote:
Tue May 15, 2018 2:44 pm
1k net per month or year???? If per month, you would be crazy to sell...

Also why can't you just refinance and pull your equity out and keep renting it?

This way the property appreciates in value and your mortgage is being paid off at the same time.
No kidding! Just the 1k per year. Nominal proceeds.

I have a question about what we would be pulling the equity out for? RE: "Also why can't you just refinance and pull your equity out and keep renting it?". Any insight to that strategy would be appreciated.

We don't really have any high interest revolving loans. The only 2 loans we have amount to 20k and will be paid off next summer/fall. Last year of Car and student loans.
Wouldn't your reasoning of dumping your rentals to have cash to be able to invest? Pull that cash out and invest it while keeping the property.

1K per year is a very nominal amount. I'd take a guess and say your mortgage is probably $1500? My rule of thumb is at least 15% NOI. If your mortgage is $18,000 per year plus you have some expenses on the property, I'd aim for minimum 15% net. Doesn't seem like the property is producing that for you.

the purpose for 15% is just so you have cushion money in case you have a bad year or help with vacancy. End of the day even if you make no money, you are building equity every month and you get the tax write off.
Thanks Penny,

This is what I'm working on figuring out. If we were able to pay off the rental property down the line (let's say in 17 years after making additional payment towards principal per year) and have that steady stream of income as rental property at that point, it might provide more flexibility than selling now and investing in the market.

Sounds like I need to have a more concrete understanding on what end game is, with some numbers. I have a feeling it will be a combo of rental income down the line, in addition to 401k distributions, potential ROTH, etc..

atallatallatall
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 3:08 pm

chevca wrote:
Tue May 15, 2018 3:02 pm
Well, you can typically only refi to 80% of the home value. So, you would be refinancing to pull out about $30k. I'd say that's hardly worth the cost and likely interest rate increase. And, I don't know if the cash out refi rules are different for a rental property.

I wouldn't take the lender's word for getting approved for another house. You may get approved for something. But, the current house without a rental history would count against you guys and you wouldn't qualify for much compared to what you could with out it.

Do you want to be landlords? You have a couple years experience and sounds like that's been good. But, what about when you need to replace a roof or a furnace or... ? Do you want to take all that on?

It's going to be a long time before your current rental is any kind of a money maker if you only net $1000/year now. That's tough to even make sense of with all the equity you have in that one and the refinance of the mortgage. Are you charging fair rent, or giving someone a great deal?
We have great tenants who maintain the property well. We also are out there periodically making sure everything is in good working order, so we are okay renting for a decent price.

Agreed that refi is not practical at this point. I see no need for it currently either.

chevca
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by chevca » Tue May 15, 2018 3:10 pm

I think 17 years is a long time to be missing out on tax advantaged saving/investing space because you might want to hang onto a rental. You guys have a decent combined income. If you're not maxing out even one tax advantaged account, let alone more than one, and banking on the rental property, I'd rethink that plan. Just my take on it from what's been posted so far.

pennylane
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by pennylane » Tue May 15, 2018 3:11 pm

atallatallatall wrote:
Tue May 15, 2018 3:05 pm
pennylane wrote:
Tue May 15, 2018 2:59 pm
atallatallatall wrote:
Tue May 15, 2018 2:48 pm
pennylane wrote:
Tue May 15, 2018 2:44 pm
1k net per month or year???? If per month, you would be crazy to sell...

Also why can't you just refinance and pull your equity out and keep renting it?

This way the property appreciates in value and your mortgage is being paid off at the same time.
No kidding! Just the 1k per year. Nominal proceeds.

I have a question about what we would be pulling the equity out for? RE: "Also why can't you just refinance and pull your equity out and keep renting it?". Any insight to that strategy would be appreciated.

We don't really have any high interest revolving loans. The only 2 loans we have amount to 20k and will be paid off next summer/fall. Last year of Car and student loans.
Wouldn't your reasoning of dumping your rentals to have cash to be able to invest? Pull that cash out and invest it while keeping the property.

1K per year is a very nominal amount. I'd take a guess and say your mortgage is probably $1500? My rule of thumb is at least 15% NOI. If your mortgage is $18,000 per year plus you have some expenses on the property, I'd aim for minimum 15% net. Doesn't seem like the property is producing that for you.

the purpose for 15% is just so you have cushion money in case you have a bad year or help with vacancy. End of the day even if you make no money, you are building equity every month and you get the tax write off.
Thanks Penny,

This is what I'm working on figuring out. If we were able to pay off the rental property down the line (let's say in 17 years after making additional payment towards principal per year) and have that steady stream of income as rental property at that point, it might provide more flexibility than selling now and investing in the market.

Sounds like I need to have a more concrete understanding on what end game is, with some numbers. I have a feeling it will be a combo of rental income down the line, in addition to 401k distributions, potential ROTH, etc..
Its very hard to give concrete advice not knowing every bit of detail and advice from strangers online may or may not be suitable for you, but I personally would not sell real estate. That is just personal preference.

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

Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by delamer » Tue May 15, 2018 3:37 pm

atallatallatall wrote:
Tue May 15, 2018 2:59 pm
delamer wrote:
Tue May 15, 2018 2:53 pm
I’d suggest you come up with a concrete goal (or goals), like wanting to be able to retire by 60 and pay for 2 years of college for each of your kids.

Then you can figure out what you need to do to reach those goals.

Saving $7,000/year on an income of $164,000 is not going to get you to “flexibility earlier in life than later.” That isn’t even a 5% savings rate. Ironically, the more you save now the less income you’ll need in the future to maintain your current lifestyle. If you save 5% now, then you’ll need 95% of your current income to continue living like you are now. But if you save 20%, then you’ll only need 80% of your current income to maintain it. (Obviously, I am ignoring things like a paid off mortgage, childcare, payroll taxes, etc., but the principal holds true.)

You can decrease your current income taxes if you increase contributions to the 401(k)s. So your net income won’t fall as much as your gross contributions.

You do have the investment in your rental property. It is hard to give good advice on it without knowing your net costs/income. From my perspective, your net worth is very dependent on real estate. Some people are willing to take that risk, others are not.

Saw your earlier post — you could live on one income, but you are saving less than 5% of your gross. So where is all that money going?
We've just paid down a lot of debt and wife just got substantial raise. We're starting to net 2-3k in savings a month currently. I suppose that is quite relevant information :)
Yes, I suppose that it is. :?

I’d certainly direct a lot of that savings to your 401(k)s. You could also direct some toward the loan with the highest interest rate.

atallatallatall
Posts: 8
Joined: Tue May 15, 2018 1:18 pm

Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by atallatallatall » Tue May 15, 2018 3:54 pm

delamer wrote:
Tue May 15, 2018 3:37 pm
atallatallatall wrote:
Tue May 15, 2018 2:59 pm
delamer wrote:
Tue May 15, 2018 2:53 pm
I’d suggest you come up with a concrete goal (or goals), like wanting to be able to retire by 60 and pay for 2 years of college for each of your kids.

Then you can figure out what you need to do to reach those goals.

Saving $7,000/year on an income of $164,000 is not going to get you to “flexibility earlier in life than later.” That isn’t even a 5% savings rate. Ironically, the more you save now the less income you’ll need in the future to maintain your current lifestyle. If you save 5% now, then you’ll need 95% of your current income to continue living like you are now. But if you save 20%, then you’ll only need 80% of your current income to maintain it. (Obviously, I am ignoring things like a paid off mortgage, childcare, payroll taxes, etc., but the principal holds true.)

You can decrease your current income taxes if you increase contributions to the 401(k)s. So your net income won’t fall as much as your gross contributions.

You do have the investment in your rental property. It is hard to give good advice on it without knowing your net costs/income. From my perspective, your net worth is very dependent on real estate. Some people are willing to take that risk, others are not.

Saw your earlier post — you could live on one income, but you are saving less than 5% of your gross. So where is all that money going?
We've just paid down a lot of debt and wife just got substantial raise. We're starting to net 2-3k in savings a month currently. I suppose that is quite relevant information :)
Yes, I suppose that it is. :?

I’d certainly direct a lot of that savings to your 401(k)s. You could also direct some toward the loan with the highest interest rate.
Thanks, Delamer.

GAAP
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by GAAP » Tue May 15, 2018 4:13 pm

atallatallatall wrote:
Tue May 15, 2018 2:42 pm
Have owned the property rental for almost 5 years and have rented for nearly 2.5 years. We net ~1k year after costs on it. We have a lender who mentions shouldn't be an issue on getting approved for new property.
Is that $1k/year net after depreciation? If so, your cost basis in the property should be about 22% less than the starting value by now. That 22% contributes to taxable capital gains when sold. Make sure you account for those taxes if you sell the property.

Nate79
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Re: Personal Finance Advise - Dump rental property for other investment? Put more in 401k?

Post by Nate79 » Tue May 15, 2018 4:22 pm

If your net is really $1k per year on a $365k property and over $100k of equity then I would sell it asap. That's worse than a savings account with much more risk...

Are you including principle payback in that calculation? Still, reality is it is probably cash flow negative and one month of vacancy or a roof replacement destroys any dream of profit.

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