Yet another "pay off mortgage" question, with a twist

[gofan316]

I am at the verge of FIRE - a few more months, I will reach another vesting cliff of stock options, that will worth about 50k after tax. then I am gone.

DW and I have about 2.3M investable money; we spend about 55k-65k a year, depending on how much we travel. DW is already retired. Kid is out on her own. I think we are good.

We have a mortgage (rate=3.5%) on our house. We also have a paid-off rental property. The monthly rents are higher than the mortgage payment, but if all expenses are included (property taxes, etc), the net of rental income minus expenses, minus our mortgage on the primary residence, comes about $2k short. (the above 55-65k expenses figure is after netting out the rental income)

If we sell the rental, we can use the proceeds to pay off the mortgage - they come to almost the same amounts. In that way we'd save about 2k in annual cash flow.

Or we could keep the rental, and pay off the mortgage with cash (Right now we have 50/50 stock/bond&cash. I expect to raise more cash in the remaining months of the year)

The third option is to maintain the current situation. For the last 3 years we were very lucky to have very good tenants, but now they are moving out. So we need to find new ones if we continue the rent.

Our mortgage has many many years to go. The rate is pretty good, but I still cannot see that we would carry it all the way during our retirement.

 

[ERD50]

What's the 'twist'?

It looks to me like you are tying together unrelated things. Your home mortgage is your home mortgage. Your rental income is your rental income. You can also sell the rental and not pay off the mortgage.

I'm not sure what the question/twist is?

That's a good mortgage rate, especially with 'many years to go'.

-ERD50

 

[sengsational]

You might consider figuring out how to spend more money rather than worrying about this little technicality :-D

Since you're only on post 5, I'll also suggest you go to i-orp.com when you have a couple of hours to spare. Take your time and get all the inputs right, reading the well-done help. It will give you what you "should" be spending to end without a huge pile of cash.

 

[Sunset]

Keeping a rental property when retired has a hidden surprise. You get to deduct (have to) depreciation. This saves you income tax, if you are in the 15% range or lower that is what you save.

When you sell the property, you have to recapture that depreciation at 25% regardless of what rate you were at when you took it.

So if your retirement taxable income is less than the 25% rate, you will be paying extra 10-15 percent tax

So sell it.

 

[pb4uski]

I think the "twist" as ERD terms it is smart because primary residence home mortgage rates are lower than mortgage rates on rental property. IOW, if you own both a home and a rental, it would be smarter to have a mortgage on the home rather than the rental, all else being equal.

For the OP, I think they need to look at more than just cash flow. The tax benefit of depreciation on the rental (which is a phantom part of the cash flow since it reduces taxes) and any after-tax appreciation of the value of the rental should also be factored in.

 

[gofan316]

What's the 'twist'? It looks to me like you are tying together unrelated things
-ERD50

I think the "twist" is to tie these things together .

In my mind I think them together. If we don't have the rental income to cover the mortgage, I would likely get rid of the mortgage to avoid paying a fixed expenditure. Without a fat paycheck, the interests in the mortgage barely cover the standard deduction - not much tax benefit.

When you sell the property, you have to recapture that depreciation at 25% regardless of what rate you were at when you took it.

Thanks Sunset for the tip. I didn't know that. Our tax rate right now is >40%(ouch). So no matter what we will pay above 25% for the depreciation amount.

We got both places at the 2009 housing bottom. So the value appreciated quite a bit. But going forward it will probably average 2-3%, based on case-shiller index data.

On one hand I like the healthy real-estate allocation as a hedge for inflation, and the reliable income stream from the rental; and like the sound of having a "rental property" . On the other hand I want to keep things simple and reduce fixed cost after retirement, and worried the times when the rental generates headaches instead of income.

 

[gofan316]

You might consider figuring out how to spend more money rather than worrying about this little technicality :-D

I take this as a positive feedback to my retirement plan .

It is easy to increase spending - either in the form of extra trip to Europe, or the tenants stoping paying rents for 3 months, or the stock market being 40% lower for the next 8 years.

 

[ERD50]

I think the "twist" is to tie these things together .

In my mind I think them together. ...

Money is fungible. I think you are doing yourself a disservice to tie things together, when they are not tied together.

Separate each out, and decide on the merits/comfort.

Your numbers aren't in a form that can be analyzed (at least I don't see it), due to this mixing.

-ERD50