Investment help- do we sell to pay down a mortage?

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Topic Author
honeymoney
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Joined: Thu May 17, 2018 4:14 pm

Investment help- do we sell to pay down a mortage?

Post by honeymoney » Tue Oct 08, 2019 9:08 pm

Wasn't sure if this was personal finance or investment advice. But thought it may apply to both.

We recently moved for a job and we were unable to sell our previous home prior to purchasing our new home. Probably a bad decision- but we can't change that now so we have to move forward with better decisions. Our original plan was to sell our first home and put that money down on the new home. Instead we ended up renting that home out and have small positive cash flow.

Salary
His 145k
Her 107k- plus a second job that varies but on track to make about 20k pre tax additional by end of year.
2 young kids

Current situation:
New Home(purchased 1 year ago):
Mortgage Balance: 494k
Est. Value: 525k- purchase price of 530k - market is pretty stagnant here now, but not planning to move soon.
Rate: 4.5% 30 year fixed
Currently have PMI about $110 a month.

Previous home- now rental:
Mortgage Balance: 195k
Est. Value: 307k
Rate 4.5% 30 year fixed- 7.5 years in.
Monthly Rental rate: $2100
Current p/i/taxes+condo fee= (1717.85+136)= $1853

Current investments:
his:
ira- 190k
401k- 20k

her 403b: 120k

joint investment acct: 120k
HSA: 10k

kid 1 college fund: 5k
kid 2 college fund: 5k

cash: emergency fund 15k
vacation savings: 9k
kids school tuition account: 9k (covers preschool daycare, after care and summer camp we pay into it monthly and then deduct when those expenses are due in chunks)

we both currently max our employer retirement accounts at the 19k ish each.

We want to increase our net worth, and while retiring early is not a must, we want to make sure we optimize our finances to plan for the future with a nest egg that allows us lots of travel and living the good life and leaving some money to get our children off on the right track.

Should we prioritize selling the rental and use the equity to pay down our primary mortgage? Should we sell some of our investment accounts to pay down our primary mortgage to get rid of the PMI? Do we keep the current situation since there is a slight positive cash flow on the rental home? Do we attempt to refi any of these mortgages now that rates are generally lower?

I know there are a lot of factors to consider here. Thanks for any advice!

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whodidntante
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Re: Investment help- do we sell to pay down a mortage?

Post by whodidntante » Tue Oct 08, 2019 10:20 pm

honeymoney wrote:
Tue Oct 08, 2019 9:08 pm
Wasn't sure if this was personal finance or investment advice. But thought it may apply to both.
That's OK. We aren't sure either.

Getting rid of PMI is usually a good decision. You could sell whatever is in your emergency fund and enough stock to do that.

I don't think I would keep a distant rental unless I had a fantastic relationship with the property manager and contractors. So I would sell just for that.

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Watty
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Re: Investment help- do we sell to pay down a mortage?

Post by Watty » Tue Oct 08, 2019 10:32 pm

What is your capital gains situation with your prior house?

If you would qualify for the homeowners capital gains exclusion that could be a big plus for selling it before you lose that.

FoolMeOnce
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Re: Investment help- do we sell to pay down a mortage?

Post by FoolMeOnce » Tue Oct 08, 2019 10:39 pm

Are you sure you rental is cash-flow positive? You don't list maintenance or vacancies in your expenses. And do you pay a property manager? It sounds like you moved away.

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Nate79
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Re: Investment help- do we sell to pay down a mortage?

Post by Nate79 » Wed Oct 09, 2019 5:58 am

Easy. Sell the rental and get rid of PMI. Win win. That's not a great rental anyways.

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RickBoglehead
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Re: Investment help- do we sell to pay down a mortage?

Post by RickBoglehead » Wed Oct 09, 2019 6:01 am

Refinance your primary mortgage. 4.5% should be 3%.

Sell rental.
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grettman
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Re: Investment help- do we sell to pay down a mortage?

Post by grettman » Wed Oct 09, 2019 6:10 am

Sell the rental for sure. I doubt it is truly cash flow positive and there is risk with rental for sure. How old are you two?

CurlyDave
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Re: Investment help- do we sell to pay down a mortage?

Post by CurlyDave » Wed Oct 09, 2019 8:12 am

Every time someone asks about a rental on the board, the responses are always SELL !!!

I am not convinced that is the right strategy here.

Think about the transaction costs of selling the rental. $307k x 6% commission + misc selling costs of 2-3% and you are in the $25k range for transaction fees. Plus it is very difficult to sell an occupied SFH, especially with tenants in it. So there are even more costs in the form of lost rent.

Now I agree that paying PMI is like throwing money away, but the transaction costs on selling your previous home are in the same category. My calculator says I can pay $110/month PMI for 227 months before the costs are equal, even without considering lost rent.

I would think long and hard about refinancing the old home -- even non-owner occupied, I think a 3.5% mortgage is possible there. This would make the cash flow look a lot better, and you renters are paying off your mortgage for you. Then refinance you current home -- even with the high loan-to-value ratio you have you can do better than currently, and start working on lowering the principal of the loan to get rid of the PMI.

Of course if being an accidental landlord is just not for you, that is a reason to sell the old house. But if it is something you don't mind doing, think through the usual advice to sell before you take that jump.

Topic Author
honeymoney
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Re: Investment help- do we sell to pay down a mortage?

Post by honeymoney » Wed Oct 09, 2019 10:09 am

As long as we live in the house 2 of the last 5 years we do not have to pay cap gains when we sell. So we can rent for another 2 years without cap gains.
We do not pay a prop manager. The current renter is a friend’s brother. So far it has been an easy rental situation but we know that may not always be the case.
We had it on the market for 4 months before renting it. And if we let this tenant go then it could sit vacant while we try to sell it again so that doesn’t seem like a great situation either.
At least at this point we are probably breaking even on the house if not positive cash flow.

Sandi_k
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Re: Investment help- do we sell to pay down a mortage?

Post by Sandi_k » Wed Oct 09, 2019 10:29 am

Watty wrote:
Tue Oct 08, 2019 10:32 pm
What is your capital gains situation with your prior house?

If you would qualify for the homeowners capital gains exclusion that could be a big plus for selling it before you lose that.
+10,000 - the tax-free sale of a former personal residence is the best tax break still in existence. IMO.

I'd sell all day long.

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Watty
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Re: Investment help- do we sell to pay down a mortage?

Post by Watty » Wed Oct 09, 2019 6:19 pm

honeymoney wrote:
Wed Oct 09, 2019 10:09 am
As long as we live in the house 2 of the last 5 years we do not have to pay cap gains when we sell. So we can rent for another 2 years without cap gains.
You would need to allow time to sell it too.
honeymoney wrote:
Wed Oct 09, 2019 10:09 am
The current renter is a friend’s brother. So far it has been an easy rental situation but we know that may not always be the case.
You might check to see if the current renter has any desire to buy it. If so you could offer it to them at a discount that is equal to the real estate commision, the cost to refurbish it to get it ready to sell, and a month or two mortage payment which you would need to pay while it is empty and for sale.

dandinsac
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Re: Investment help- do we sell to pay down a mortage?

Post by dandinsac » Wed Oct 09, 2019 6:45 pm

I’d recommend taking $80-90K from your $120K investment account to pay down your current mortgage; then refinance to get a lower rate without PMI. You may have to be careful with capital gains on this withdrawal. If there are a lot of taxes to pay, then do some in 2019 and some more in 2020.

The next priority would be to increase your emergency fund to cover six months expenses, maybe more since you have the rental and can’t count on that money.

As far as the rental goes, it seems like you have a stable situation. You may want to make a decision when the lease renews. If you think you may want to move back to that city at some time in the future, it may be worth keeping it.

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grabiner
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Re: Investment help- do we sell to pay down a mortage?

Post by grabiner » Thu Oct 10, 2019 9:11 pm

honeymoney wrote:
Tue Oct 08, 2019 9:08 pm
:
Mortgage Balance: 494k
Rate: 4.5% 30 year fixed
That is $22,000 in mortgage interest alone, so you should be itemizing deductions, and the benefit from any mortgage prepayment is reduced by your tax rate.
Currently have PMI about $110 a month.
But that is an extra 3%. So, if you can get rid of the PMI, you are getting a risk-free 7.5% return, which is a great deal. (And as a further advantage, you may be able to refinance the primary mortgage to a lower rate.)

So I would be inclined to sell enough of an investment to get to 80% equity on the primary home, and then refinance to a lower rate. This could be either the rental or the taxable investment account.

Once you have refinanced, it may not be worth making any extra payments, given that the interest is deductible. If you can refinance to 3.5%, and you are in a 22% tax bracket, you get only a 2.73% risk-free return on prepayments, and that isn't a great deal for a long-term, illiquid return.
Wiki David Grabiner

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