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Old 04-12-2013, 03:02 PM   #1
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Hi all,

First of all, want to say thanks to everyone on this website who have contributed their words of wisdom. I've been reading the forums for some time now, and picked up a lot of good info.

About 7 months ago, I was pushed to make a career decision (either follow my job across the country, or take early retirement). Because I didn't want to uproot my spouse and my son from their current jobs, decided it was time to call it quits and took ER. Also, after 34 years in the same job, I was getting really burnt out (stress, commuting, etc. etc). In addition, I had just turned 53 and felt like it was time to do something different in my life.

Left with the following:

29k annual pension
800k in Fidelity IRAs (which I started drawing down $24k annually using the 72T SEPP rule)
29k in savings
20k in spouse's 401k

Retiree Healthcare is covered, monthly contribution is $380 (covers me, spouse, adult son).

Primary home is under water by ($51k) as our region saw that huge drop several years ago (but home do values appear to be starting to finally rise this year, forecasted for 15% gain for 2013). Still owe a lot on the house. Actually considered walking away from it, but felt that I had an obligation to pay my loan, especially since I can make the monthly mortgage. Besides, you have live somewhere..right?

Have a rental property with equity of about $77k, renting for about $1300 a month. Expenses for the property are about $400/month, remainder of $840/month towards mortgage/extra principal. The Rental property should be fully paid off in 10 years.

With my pension and the 72T draw from the IRA, I'm still a little short meeting my monthly expenses (about $55k per year). I plan to take a part-time job to help close that gap.

Spouse works, but most of her income goes towards her school loan, her 401k contribution and working related expenses.

Question on the $800 IRA. I have it invested $380k mostly in Domestic stocks and some Foreign. $93k in bond funds. $327k in money markets (cash).

Been advised from the Fidelity folks that I should be investing the money market funds, but with the stock markets being at all time highs, I'm concerned about a major correction. Don't feel too good about bonds either, since interest rates are at all time lows.

I do realize the long term philosophy about adopting a set allocation and sticking to it, but I just don't know if now is the time to jump in with the remaining money market funds.

Would appreciate any advice, thoughts that anyone might be able to share on both my current financial situation, and what path to take on the IRA allocation.
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Old 04-12-2013, 03:45 PM   #2
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Can't give a strong opinion because you don't give expense budget. Try FireCalc.

Personally, I think you are a little light for ER. And if you are going to invest the MMF you should do it s-l-o-w-l-y.
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Old 04-12-2013, 08:53 PM   #3
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Did I miss the mortgage pmt on the primary residence? Could be a senior moment on my part. Maybe that will come when you list your expense budget. Cheers.
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Old 04-12-2013, 11:20 PM   #4
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Your pension - I assume you are being paid it now. Does it have any type of COLA? Also, does it have survivorship option.

How much does your wife owe on her student loans? When will they be paid off?

Any other debt other than the student loans, mortgage on your residence and mortgage on the rental property?

Will you be eligible for SS?

When does your wife plan to retire?


Unless you plan to sell your residence in the near future I wouldn't be that concerned about it being underwater. If you want to downsize then you just have to look at the economics of it. DH retired 3 years ago and I semi-retired. We wanted to downsize from a large, expensive to maintain house to something less expensive to maintain. We did sell at a loss and that was no fun but we cut our expenses enough by doing it to make it the right thing to do.

In our case when DH retired and we knew we would be drawing some from his IRA (he was over 59 1/2 so wasn't limited in what he could draw), I decided not to contribute to my 401k any more. There just wasn't much point. However, in my case, there is no match as the company makes a contribution each year whether or not I contribute. In your wife's case, I might be inclined to only contribute up the amount that she gets from any match unless there is some reason to contribute more.

I was just talking about the bond fund/cash issue with DH today. We have most of our money at Vanguard with about 55% equities, and about 43% bonds and 2% cash. we have part of the bonds in a short term bond fund and part in total bond fund and I don't feel real happy about it. But we don't really want more equities at this point and cash gives you nothing. Still we decided we would put another 6% or so into the money market fund.

In our case, my first thought is that less than 50% equities at your age seems a little light. While I think a case can be made to have a couple of years of expenses in a money market fund in the current environment I would be reluctant to have as much in cash as you have.

On the rental property if you are basically breaking even on it, I think I would sell it particularly since you don't seem to have any liquid assets in taxable accounts. If you sell it you reduce your debt, reduce your expenses and gain about $70k that you can use to bridge the cap to 59 1/2. If you don't sell it, then I would certainly stop paying any extra principal since you need cash right now.
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Response on projected expenses
Old 04-13-2013, 12:10 AM   #5
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Response on projected expenses

Kats, Joe, Supernova...thanks for your replies.

My projected expenses are somewhere near $55k per year.

Monthly as follows:
Mortgage 1800
Utilities 450
Retiree contribution to Healthcare 380
Home/Auto Insurance 300
Cell/TV/Landline 300
Life Insurance 250
Auto Loan 275
Food/Gas 500
Prop tax 200

I know...very tight budget given what I have to work with.

My pension has no COLA, but me and my wife will both eligible for
SS payments (hopeful, at early age 62, I would be eligible for 1800/mo and my wife would be eligible for 1200/mo 3 years after me).

My wife makes about $50k, however, the loan for her masters program is still about $35k, so most of her income currently goes towards those loans as well as for medical payments (she has recurring monthly treatment for chiropractors, accupuncture and physical therapy). She is contributing 6% to her 401k, which allows for the company match.

I agree with your comments that I shouldn't have so much in cash.
I've just been struggling with the constant market volatility, which has made me very gun shy.
I think I'll probably follow your advice by keeping only a few years expense as cash reserve (but no more).

On the rental, it was property handed down from family, but we really don't have any emotions tied to keeping it. I guess we thought that if it paid for itself, we could own it outright in 10 years (if we could hang on long enough). Maybe we should consider selling it to give us a cash reserve, but the market hasn't been real good lately.

All great advice and comments for me and my wife to think through.
We really do appreciate your kind and insightful thoughts.

Thanks.
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Old 04-13-2013, 06:37 AM   #6
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To the OP: have you entered your numbers in FIREcalc?
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Old 04-13-2013, 08:26 AM   #7
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Quote:
Originally Posted by Russman View Post
Hi all,
Have a rental property with equity of about $77k, renting for about $1300 a month. Expenses for the property are about $400/month, remainder of $840/month towards mortgage/extra principal. The Rental property should be fully paid off in 10 years.
Hi, and welcome to ER, even though it was somewhat forced. I feel like the negative nanny when it comes to rental properties, but since I have plenty of direct and indirect experience, I still bring it up. The bottom line is that most new(ish) landlords drastically underestimate what is required for a property to be cash flow positive. Simply taking the rental fee and subtracting out the mortgage payment and perhaps a few other little expenses is NEVER sufficient in the long run. This may work for several years, even longer sometimes, but sooner or later, BAM, a new roof, or new HVAC, or an unexpected eviction hits.

I recently had to evict a tenant from a property that is probably similar to yours. It depends on the state, but figure at least 30 days for the legal process, probably more like 45-60 from the time rent doesn't get paid until you've regained possession. In my case, it was around 45 days. Then I had court/attorney fees, lock re-key fees, and damage and repairs. All of those totalled about $7K, and this wasn't anywhere near the nightmare scenarios that I've seen (think every door stolen, holes in every piece of drywall, poop flung all over, and on). Then there's my lost rent -- 1.5 months while the tenant is still there but being evicted, then another .5 months for repairs. Now, after two months, I can finally start showing people the place. These tenants were a long-term family of four, but there was some sudden issue leading to separation and divorce.

Point is, I would sell the rental and use the cash proceeds to invest/supplement your cash flow needs. It probably isn't nearly as cash flow positive as you indicate, and there is also significant volatility to it you probably aren't expecting. If you still consider keeping it, you didn't provide enough info on it to completely analyze its cash flow. I would need to know what the PI is, plus TI, and the specifics of the mortgage on it.
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Old 04-13-2013, 04:41 PM   #8
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Someguy,

Thanks for your insight regarding the rental property.

In the back of my mind, I always felt that rental property was a dicey proposition, especially if you aren't able to do the maintenance and upkeep work yourself.

We ended up with the property from a deceased relative, picking up the mortgage as well.

I agree with everything you said, and those big ticket expense items, along with the churn that occurs with renters, keeps me up at night sometimes.
My wife might have some resistance to the idea of selling, since she grew up in the home, but it's helpful to have some unbiased input from folks like yourself who have had practical experience.

Thanks much.
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Info on the rental
Old 04-13-2013, 04:59 PM   #9
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Info on the rental

Hi Someguy,

Here's the info regarding that rental property.

Current mortgage balance 85k ($687 at 4% on a 15 year loan), would be
paid off by Feb 2027. Our plan was to add in additional principal payments, about $150 per month, to try to have it paid off by 2023 (approx 4 years earlier).

The value of the home currently is $162k. As I mentioned previously, our area took a big hit a few years ago, and the forecasts are now showing 15% year increase in home values (due to a recovery from earlier drops).
Second half of 2012 and 2013 so far do appear to show significant uptick in value each week.

The house did have a new roof done a few years ago, but it is a fairly old house.

Like you said, we probably aren't tucking away enough as a reserve buffer, for contingent liabilities.

Thanks for any suggestions.
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Old 04-13-2013, 05:16 PM   #10
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I would never prepay on a rental property mortgage when I am in a situation where I am really tight on covering existing expenses. I still think it would be better to sell the rental. In a lot of areas, lower end homes are actually selling quite briskly. I would suggest having a real estate agent give you some comps.

Do you have any kind of cash emergency fund for major unanticipated expenses?

As far as your expenses:

Quote:
Monthly as follows:
Mortgage 1800
Utilities 450
Retiree contribution to Healthcare 380
Home/Auto Insurance 300
Cell/TV/Landline 300
Life Insurance 250
Auto Loan 275
Food/Gas 500
Prop tax 200
I am concerned that you don't have many things budgeted for particularly irregular expenses.

To give you some examples of things you don't include (not all may apply to you):

Auto Repairs
Auto Maintenance
Home repair
Home maintenance
Health insurance deductibles and co-pays
Dental expenses not covered by insurance
Medical expenses not covered by insurance - vision, hearing, non-prescription meds
Household goods
Computer related expenses
Postage
Paper
Clothing
Personal care (makeup, hair cuts, etc)
Fitness related expenses (if any)
Pet related expenses (if any)
Vacation
Non-vacation travel (what if you have to attend a funeral or have some other trip you need to make that isn't discretionary)
Gifts
Donations
Entertainment - Netflix, Hulu, books, going to the movies, video games, hobbies, whatever
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Old 04-14-2013, 08:38 AM   #11
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The main rule in residential real estate rentals is the "50% rule". Simply put, it states that half of your rent will go toward expenses, which include pretty much everything except debt service (i.e., principal and interest). This rule is often disputed by newer landlords, but it really does always hold true in the US.

So since your rent is $1,300, $650/mo is immediately spoken for for expenses. Some of these expenses are regular and predictable, like real estate taxes and insurance. Others are irregular and unpredictable: repairs, maintenance, vacancy, marketing, legal, et cetera. So if your regular expenses (typically the TI in PITI) are $250/mo, you should be religiously putting $400/mo into a contingency fund.

Now, that leaves $650/mo that's not yet spoken for. This is for debt service, plus profit/cash flow. Since your principal and interest (PI in PITI) are $687/mo, your cash flow is 650 - 687 = $-37/mo. Over time, your rental is cash flow negative. The good news is that it's not horribly cash flow negative like many properties I've seen.

If your various income streams easily covered your personal/household expenses, you might make a decision to hold the rental because you wanted to even though it will cost, not make, you money. However, with your abrupt entrance into RE, cash flow is an issue and--as others have rightly pointed out--has to be a priority. You also need to minimize risk/uncertainty. I think you've got to get that rental on the market ASAP. We're just swinging into the prime real estate season, so that timing is good. As others have also said, I certainly would not be pre-paying any extra on the mortgage in the meantime.

I'll defer to others on the bigger issues of AA, income and expenses. Good luck and welcome to the forum!

Quote:
Originally Posted by Russman View Post
Hi Someguy,

Here's the info regarding that rental property.

Current mortgage balance 85k ($687 at 4% on a 15 year loan), would be
paid off by Feb 2027. Our plan was to add in additional principal payments, about $150 per month, to try to have it paid off by 2023 (approx 4 years earlier).

Thanks for any suggestions.
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Old 04-14-2013, 09:00 AM   #12
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Would you have purchased the rental home if you had not inherited it? Would it have made sense financially? Sounds like it would be iffy. It might be appropriate to detach yourself from any sentimental value the house might have and consider the economics alone. After all is said and done, a house is just a house and memories are portable.

Some years ago I inherited a family home free and clear. Evaluation of its rental potential suggested it would be a major headache. I sold the home. A year later, the property market crashed. The market value of the home would now be ~50% of the sale price.
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Old 04-14-2013, 11:36 AM   #13
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Thanks all for your great comments on the rental situation and my budget ! As you pointed out, I probably would not have entered into a rental, had I not inherited it. So we're trying to work our way through it (realizing that my wife still has some emotional tie to hanging on to it).

This is a really great forum, as there are so many helpful folks willing to share their experiences and insight. I know we were kind of thrust into ER due to the job relocation, and it would have been great to have had more assets built up, but you have to work with the cards you've been dealt. If I can get a part-time job, that'll help. Also, I haven't really figured out fully where my wife's $50k income goes. It's not that she hides anything. In the past, I micro-managed my own budget, but I've tried not to be too pushy on her expenditures. Now that our overall budget is more constrained, I guess we'll have to get more in depth in that area also. Also, I think there are areas that I can cut some expenses.
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Old 04-14-2013, 06:45 PM   #14
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NM. It was already covered.

If you sell the rental house, is there enough equity to eliminate your wife's loans and possibly bring the upside down mortgage in line?

I think you have far too much debt which needs to be eliminated. Interest on loans eating up your income.

I considered keeping alarge percentage of cash in stable accounts which paid 2.5% rather than bonds, but figured that would be detrimental in the long run. Running 60% stock and 40 bonds. I'd be less comfortable with money markets which are earning nothing, essentially.

How long will a 24k draw last on an 800k portfolio, especially with so much in money markets.

Just a few thoughts.
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Old 05-13-2013, 11:18 AM   #15
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The main rule in residential real estate rentals is the "50% rule". Simply put, it states that half of your rent will go toward expenses, which include pretty much everything except debt service (i.e., principal and interest). This rule is often disputed by newer landlords, but it really does always hold true in the US.

So since your rent is $1,300, $650/mo is immediately spoken for for expenses. Some of these expenses are regular and predictable, like real estate taxes and insurance. Others are irregular and unpredictable: repairs, maintenance, vacancy, marketing, legal, et cetera. So if your regular expenses (typically the TI in PITI) are $250/mo, you should be religiously putting $400/mo into a contingency fund.

Now, that leaves $650/mo that's not yet spoken for. This is for debt service, plus profit/cash flow. Since your principal and interest (PI in PITI) are $687/mo, your cash flow is 650 - 687 = $-37/mo. Over time, your rental is cash flow negative. The good news is that it's not horribly cash flow negative like many properties I've seen.

If your various income streams easily covered your personal/household expenses, you might make a decision to hold the rental because you wanted to even though it will cost, not make, you money. However, with your abrupt entrance into RE, cash flow is an issue and--as others have rightly pointed out--has to be a priority. You also need to minimize risk/uncertainty. I think you've got to get that rental on the market ASAP. We're just swinging into the prime real estate season, so that timing is good. As others have also said, I certainly would not be pre-paying any extra on the mortgage in the meantime.

I'll defer to others on the bigger issues of AA, income and expenses. Good luck and welcome to the forum!


Hi,
Appreciate your thoughtful insights on the "true" costs of owning a rental property, and recommendation to sell asap.

Putting the emotional aspect aside (inherited property), what about the consideration that my region saw one of the largest decreases in value in 2008/2009 ? California


In 2012, we saw home values recover 12%, and the forecast for 2013 is 15%....which thru May appears on track.
Would it be worth hanging on to the property, for the potential increase (rather recovery) of the home value.
(provided, of course, i can somehow manage my cashflow situation).



Thoughts?
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Old 05-13-2013, 11:34 AM   #16
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You are unusually open to the cash flow reality, which bodes well. As far as the timing of unloading it goes, that depends. Usually counting on appreciation as the sole means of wealth creation is inadvisable, but the property situation in some of the coastal markets is different than the rest of the country. If you can manage the regular cash flow situation and if having an unexpected $10K cash hit resulting from that rental property (say you have a situation like I'm dealing with suddenly develop) wouldn't sink you (financially or emotionally) then I might hold onto it. But you need to make sure that you and your wife are 100% on the same page....especially that this isn't just a way for her to delay coming to terms with the need to sell the property.

Of course if you could raise the rent $200/mo, that would make it cash flow positive at a fairly reasonable level.

Quote:
Originally Posted by Russman View Post
Hi,
Appreciate your thoughtful insights on the "true" costs of owning a rental property, and recommendation to sell asap.

Putting the emotional aspect aside (inherited property), what about the consideration that my region saw one of the largest decreases in value in 2008/2009 ? California


In 2012, we saw home values recover 12%, and the forecast for 2013 is 15%....which thru May appears on track.
Would it be worth hanging on to the property, for the potential increase (rather recovery) of the home value.
(provided, of course, i can somehow manage my cashflow situation).



Thoughts?
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Old 05-13-2013, 12:54 PM   #17
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Since you already have it and prices are appreciating I might hold on to the rental for a while but divert the excess monthly cash flow to an "emergency" fund for the property in case you have an unexpected vacancy or major repair bill. Depending on your tax situation in addition to the cash flow you are also getting a tax benefit for the deduction of depreciation so that is a hidden benefit in addition to any appreciation.

Also, scoot up the rents as they renew and you should be fine.
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Old 05-13-2013, 01:33 PM   #18
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I think you said the property was worth 162k.

Let's say that right now you didn't own this property but you had 162k in hand. Would you go and buy the property for 162k and keep it as an investment opportunity because you believe it is currently undervalued and will go up in value later?

Or would you take the 162k and put it into some other investment what would not have the negatives of rental property?

I would submit that keeping the property is functionally not a whole lot different from buying the property right now. And, if you wouldn't put 162k of your net worth into buying this property if you didn't own it, then I see no reason to hang on to it now. Now - it might be worth talking to a real estate to get an idea of when might be the best time to sell it and if this time of year is not optimal for selling then it might make sense to wait until it is optimal. But that is probably something no later than next spring.
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Old 05-13-2013, 02:17 PM   #19
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Thanks, Kats.

If I didn't already have the loan out on the property, and we were talking solely about a pure investment opportunity of $162k, I probably would not invest it in this particular house. Also, real estate wouldn't be my first choice because of having to deal with renters, maintenance/upkeep, and all the other risks associated with owning a house, etc.

Interestingly enough though, since I first submitted the question and now, the house is showing estimated value of $174k in zillow and $185k in trulia. I know those may not be entirely accurate estimate sources, but I also looked at homes that have sold recently, and it appears to be close to the market value for the size and this neighborhood. It also appears each week that the recovery in values is starting to get stronger and stronger.

I tried approaching the selling point with my wife earlier, but this aspect of the recovery makes my argument for selling a little less compelling. Also, because this was the home that she grew up in, I'm sure there is some part of emotion tied to it for her....I believe she has more confidence than me in the house not becoming a money pit and that we'll have decent renters on a going forward basis.

Thanks for your thoughts.
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Old 05-14-2013, 12:40 AM   #20
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I found this blog post interesting on rental property, particularly the part written by Joe which is in italics.

Let’s Buy A Foreclosure Episode 2 – What is the 50% 2% Rule? | Mr. Money Mustache
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