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Mortgage math question
Old 10-26-2011, 09:12 PM   #1
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Mortgage math question

Hi,

Does my heart good to see some are managing through this economy and actually able to break away from the grind. My wife and I aim to do the same and look forward to contributing to this excellent forum as we progress. Part of our remaining grind is the mortgage on our primary residence. We have way more house (pool, yard, etc) than we need but do not want to sell into this market if such an act can be avoided. Here's our situation and we welcome any and all constructive input!

Myself 52 owner of a (now failing) business
Wife 28 Assistant to the owner of (a now failing) business

Cash on hand $300k
Monthly dividends $1,500 (from silent partnership in non-failing business)
Debt $0 (other than mortgage)
Mortgage $100k @6.25% (25 years remaining on note)
House value $900k (realistic)

We would like to retire to Thailand asap. We know the country inside / out and believe we will be comfortable there on $4K per month. I should say here that I believe my health is at risk if we continue to stay here (Hawaii). The stress has become intolerable. A recent 2 month trip to Thailand got me back to 100% but I feel myself slipping again. I must add that if we can get out of here, I sincerely believe my health will not be an issue (anytime soon).

My plan will probably rub some, if not all, the wrong way as it involves us dipping into our capital.

1) I believe the $1500 pm will be a long and steady income (has been for 20 years).

2) We will rent our house (and guesthouse) out for $3500 pm. After mortgage, T&I, pool service and yardcare we should net around $1500 pm

3) We will dip into our $300k at a rate of $1000 pm until my SS kicks in. If my calculations are correct, and adjusting for COL, we should have about $100k left at that time.

4) At that time (10-13 yrs) we will either move back to Hawaii and live in our very comfortable GH, while renting out the main, or we will sell the property. This should net us no less than $1,000,000 or we will be living on about $5,000 pm (+) and rent free, should we keep it.

Here's the mortgage question: We currently pay about $900 pm on the $100k. $600 to the mort and $300 to tax. I would rather not pay it off at this time (but could). OTOH, I don't want to pay 6.25% interest on $100k for the next 25 years!

I know nothing of such things and wonder if anyone can tell me how much we should add to our monthly principle in order to have this 100k paid off in 10 years? Our credit score is close to 800 so we could probably refi if that would make sense on this amount.

As stated above, we welcome all critique. I am sure our approach would be considered unorthadox if not irresponsible. I sincerely believe that my business here (30 years) is done. I just want to move on and if sacrifices need be made, sacrifices will be made. We are (now) very humble.

Thanks in anticipation,
Chuck
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Old 10-26-2011, 09:28 PM   #2
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Try this calculator:
Mortgage Calculator - Bloomberg

If I have done it correctly, your current P&I is about $660/mo. If you add $460/mo. prepayment, you can be paid off in 10 years.

With your credit score, however, I would look at refinancing. You can get a 30 year for about 4%. You can always pay it off on a ten year schedule. And if you can stomach those payments, a 10 year would be only about 3.25% right now.
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Old 10-26-2011, 09:31 PM   #3
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Welcome, chuckwow.

Paying off the mortgage threads are very frequent here on the board. Use the search function and you will see the issue has been tackled from many perspectives.

One source of information of mortgage payoffs is here:
Mortgage Prepayment (Paying Off Early)

A calculator that will answer your specific question on extra payments to achieve a 10-year payoff is here:
Mortgage Payoff Calculators
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Old 10-26-2011, 09:56 PM   #4
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Technically, don't most mortgages have restrictions on renting out the property?

You could sell the house (if it's realistically worth $900K, you'd net about what, $750K or so?) and put the proceeds and the $100K you already have into something that would pay 3.5% dividends (like Wellesley), for almost $30,000 a year, or $2500 a month. That is the same amount your scenario of net rent of $1500 and withdrawal against the $100K of $1000. And your principal remains intact, you just take the dividends.
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Old 10-26-2011, 10:00 PM   #5
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We thank you both for your prompt replies (wow!).

Using the mortgage calculator, I will look into the 10 year refi. If it does not total more than the additional payment of $460 pm, as calculated by Gumby (TY Gumby), it would seem to be a no-brainer.

Harry, I thank you for your input as well. We exhausted ourselves reading about the pro's and con's of paying off our mortgage. We ultimately decided last year to pay it down (from 400k to 100k). There were so many awesome debates over the topic that we ultimately just did what felt best for us. I dabbled in the market years ago. Lost close to $200k (in 2000) in learning that I am not of that ilk. So, not including the interest right-off, we felt I could not do better with that $300k than to erase a (large) portion of our 6.25% mortgage. Though now a moot point, I continue to read these pros and cons for sheer entertainment value alone. Both sides very steadfast and very adamant. Great reading!

You guys have any thoughts on our plan as outlined in my OP? Trying to talk myself (and Mrs.) into this, and like paying down the mortgage, believe it is the right thing for us at this time.

Thanks again,
Chuck
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Old 10-26-2011, 10:13 PM   #6
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Originally Posted by Bestwifeever View Post
Technically, don't most mortgages have restrictions on renting out the property?

You could sell the house (if it's realistically worth $900K, you'd net about what, $750K or so?) and put the proceeds and the $100K you already have into something that would pay 3.5% dividends (like Wellesley), for almost $30,000 a year, or $2500 a month. That is the same amount your scenario of net rent of $1500 and withdrawal against the $100K of $1000. And your principal remains intact, you just take the dividends.

Thank you for your response. We have kicked this around as well. As confident as I am about retiring to Thailand, I also do not want to commit 100% to the idea. We are in the construction industry and it would take a major event to turn things around (as well as our minds) but we do have such events happen here in Hawaii (hurricanes Ewa and Iniki come to mind). I mentioned that we are now quite humble and can live that way but I also know from the above events, that we are capable of netting as much as $1,000,000 per year if we keep a few ties to Hawaii.

OTOH, one cannot put a price on the freedom that would accompany your suggestion. This is perhaps the biggest hurdle of them all for us at this time. Has that 3.5% from Wellesley been very consistant? I am very concerned about the immediate future of both the market and real estate. I would hate to lose a significant quantity of our savings at the front end of our retirement. I think real estate in Hawaii will rebound and we are essentially giving it 10 years to happen (gulp). We have closer to 1.3 invested in our house at this time and like everyone else, hate to lose....if we can wait.

Thanks again!
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Old 10-26-2011, 10:27 PM   #7
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Originally Posted by Gumby View Post
Try this calculator:
Mortgage Calculator - Bloomberg

If I have done it correctly, your current P&I is about $660/mo. If you add $460/mo. prepayment, you can be paid off in 10 years.

With your credit score, however, I would look at refinancing. You can get a 30 year for about 4%. You can always pay it off on a ten year schedule. And if you can stomach those payments, a 10 year would be only about 3.25% right now.

Gumby, using the calculator you provided and refi-ing t0 10 years at 3.5% (I was fat), our payment would be close to $1000 pm. Using the numbers you provided earlier; on our 30 year note, we would be paying around $1120 pm (if we pay the 100k off in 10 years). Almost seems like it would be a wash after we write off that extra 3% of interest while giving us a bit more flexibility in the event we choose to miss an extra payment or 10. Yours was exactly the answer I sought related to our mortgage situation. I thank you once again.
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Old 10-27-2011, 12:45 AM   #8
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Chuck, why not retain some flexibility? You could refinance the house for a lower mortgage rate and lower your required payments. Then you could continue to pay down the principal on your schedule, not the lender.

Quote:
Originally Posted by Bestwifeever View Post
Technically, don't most mortgages have restrictions on renting out the property?
Usually a "primary residence" is occupied for a year after the closing. After that the owner can rent the place out without triggering any mortgage clauses.

But I'm sure the bank could find a way to call a mortgage if the borrower pissed them off.
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Old 10-27-2011, 02:03 AM   #9
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Nords,

It has been quite some time, but I have been a fan of your posts and insights for probably a decade. I believe the majority of them shared in another forum, but that is another story. Good to have found you here.

The Mrs and I have contemplated the excellent advice gicen thus far in this thread and have, st least for now, decided upon exactly what you suggest. We will add an additional $500 (+/-) to our monthly principle payments. When another need supercedes this luxury, we will discontinue until we are again comfortable with this strategy.

As far as pissing off the banks (FHB), we have probably already done so by paying down the mortgage, LOL. We are actually on excellent terms with all of our banks. Whether or not that matters, I am unsure, but if they have a complaint about us renting out the house, we will pay them off. We have taken our business elsewhere before (in better times) and the impression I get is they would like fr that to not happen again. As an aside, I don't think they would know anyway, or care, as long as the payments are made. Something worth considering just the same.

I would really appreciate it if yourself and others would look at the crazy plan I've posed in my initial post. Am I lolo?

Again, good to read you again. I have thought about you from time to time and hoped this economy had not driven you to work. Hopefully you are still stomping on your board over on Oahu. Mahalo nui, braddah.
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Old 10-28-2011, 05:27 PM   #10
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Hi chuckwow -- Here are some thoughts about your situation. It seems to me that the question of refinancing may be a little less important than the question of whether to sell the property sooner rather than later.

It sounds like your proposal to rent your house has you making a net return of $1,500/month ($18,000/yr) on your $900,000 investment. This is a 2% return, which is lower than you could get from a long term CD (discover bank, for example), although there are some tax advantages to renting. The hassle and risk is so much higher for renting than for passively collecting interest, there needs to be some additional incentive to justify that approach. Sounds like you are hoping that the property will appreciate, and also that you are into the property for $400,000 more than the house is worth. I know how that feels, and offer my condolences. I am not going to offer an opinion on where real estate in Hawaii will be when you are ready to sell, but I will offer some advice I once received, that has helped me a lot:

There's no financial reason to hang on to an investment unless it is something you would purchase today for the (net) price you could sell it for today.

In other words, if you had $900,000 sitting in your bank account, would you buy this house now? Does buiying this house with 2/3 of your investable assets sound radical and risky? Or does it sound like a solid way to fund your retirement? Hopefully whatever you feel when you consider this hypothetical scenario will assist you in more fully understanding the choice at hand (as it has helped me many times).

Of course, a house is more (and less) than an investment, and it could be that even if you wouldn't buy the house, the non-financial reasons for keeping it outweigh financial considerations. In any case, good luck to you and I hope you have a fantastic time in Thailand
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Old 10-28-2011, 08:15 PM   #11
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Aloha Sunsnow,

Your's was a very considerate post and very much appreciated. Your point about selling the hhouse (now) is an excellent one and one with agonize over daily. We have owned rental properties before and hated it. There is no freedom in being a landlord. OTOH, we believe the market here in Hawaii will return (it always has) and we feel that our home, moreso the landscaping, will just improve and drive the price higher. It is a nice parcel with many exotic fruit trees. It's just a beautiful place.

Additionally, I do love Thailand and consider myself a world citizen. The Mrs. is the same. But that said, there's no place like home (there's no place like home) and in the event we choose to abandon the charming corruption, pollution and rampant flooding (etc.) of Thailand, we would want to return to Hawaii and we would love to live right here.

This desire further disrupts our cash flow because we will be forced (by law) to hire a management company to oversee the property. That part don't bother me as much as the possibility of our home being converted to a crackhouse, brothel or both. I am unsure of what such agents ask for here in Hawaii but I am guessing around 20% per month (yikes). If it is more than 10%, we will take a closer look at selling.

The $400k loss really does hurt because it is probably more than that when you consider the thousands of hrs we have spent on the place (in addition to the money). But whatcha' gonna' do? We consider ourselves fortunate and bleed for our friends (and yours) that are facing a much more serious situation than ours. It's all very sad.

Thanks again and we look forward to any other comments. Maybe my plan isn't as outlandish as I intially believed!
Aloha
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Old 10-28-2011, 10:29 PM   #12
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Chuck

Our combined management fee plus Hawaii taxes on the rental income totals about 15% of our monthly rent on our property in Honolulu. We use Captain Cook Real Estate.

They have been reasonable, we only had 2 days vacancy between tenants.

The issue you may have with having a property with garden is will the tenants maintain it? If you have to hire a gardener what will that cost?
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Old 10-30-2011, 04:32 PM   #13
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Thanks Dangermouse.

Is your rental property a condo? 15%, inclusive of taxes, seems quite reasonable and a deal we would be happy with. Our garden (and pool) definitely complicates things and compromises our worry-free comfort (lol). The pool will be maintained by a pro @ a very reasonable rate ($100pm) but we fear a tenant could do damage to the pumps when messing with the Jacuzzi etc. Aside from turning the pool into a mini tennis court, not much we can do about this.

The yard is also a problem as you suggest. It will require no less than 6 hrs per week of attention. We can more than likely have the yard maintained for about $500 pm.

We are also considering cutting a deal with (perhaps) a retired couple, have them live in the GH while managing the property. Alot to consider for sure and I get consumed by such things. Wish I could get paid for the hrs wqe've spent just thinking this through, lol.

Thanks again and congrats on your great rental situation.
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Old 10-31-2011, 07:35 AM   #14
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Back to the math question on mortgage calculation. Let's say someone is paying you $1300 a month on a mortgage as per contract. They come to you and want to change the schedule and pay you $700 every two weeks. Do you credit them the extra $50 every two weeks on the principal or do you wait until you get the equivalent monthly payment and then credit $100? I've changed the amortization schedule to a bi-weekly plan and give them credit for the extra $50 every two weeks. Is this the proper way to do the calculation? I'm trying to do right by them. I don't want to cheat them out of even one dime but at the same time I don't want to short change ourselves.
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Old 10-31-2011, 07:55 AM   #15
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Originally Posted by JOHNNIE36 View Post
Back to the math question on mortgage calculation. Let's say someone is paying you $1300 a month on a mortgage as per contract. They come to you and want to change the schedule and pay you $700 every two weeks. Do you credit them the extra $50 every two weeks on the principal or do you wait until you get the equivalent monthly payment and then credit $100? I've changed the amortization schedule to a bi-weekly plan and give them credit for the extra $50 every two weeks. Is this the proper way to do the calculation? I'm trying to do right by them. I don't want to cheat them out of even one dime but at the same time I don't want to short change ourselves.
It would be somewhat similar to what you describe. When you receive the first $700 payment, the interest portion of the payment will be the interest rate * the principal balance * 14/360 and the principal reduction will be the remainder. Same thing the next month, etc. until the balance is paid off. It is very easy to create a spreadsheet showing the new amortization schedule or there are calculators out on the web that can do it.

If the payment is every two weeks it would be 14/360 and if it is twice a month (say the 15th and the end of the month) it would be 15/360. (Most mortgages use a 360 day year rather than a 365 day year).

Good luck.
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Old 10-31-2011, 10:16 AM   #16
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I believe the majority of them shared in another forum, but that is another story. Good to have found you here.
Thanks! I'm curious-- what forum? You could e-mail me if you don't care to name it publicly.

Quote:
Originally Posted by chuckwow View Post
This desire further disrupts our cash flow because we will be forced (by law) to hire a management company to oversee the property. That part don't bother me as much as the possibility of our home being converted to a crackhouse, brothel or both. I am unsure of what such agents ask for here in Hawaii but I am guessing around 20% per month (yikes). If it is more than 10%, we will take a closer look at selling.
It's been a while since I checked the rules, but I believe the phrase is "local contact" and you're not required to hire a management company. Even if there is such a law now, I don't see how it'd be enforced. I've been the local contact for a few shipmates over the years and there's never been an issue with the tenants or the state.

If you're on Oahu then another good property management company is Stott Real Estate (Stott.com). If you're specifically targeting military tenants (depends on how close you are to a base or to Tripler) then you could list on AHRN.com instead of Craigslist.

As DangerMouse points out, the income will be subject to general excise tax (4-4.5%) and the property management fee may be at least 8%. If you're renting for short terms then the tax rises to at least 11% (I'm not sure of the exact number).

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Originally Posted by chuckwow View Post
I would really appreciate it if yourself and others would look at the crazy plan I've posed in my initial post. Am I lolo?
Three things to consider:
1. It's my impression that $4K/month in Thailand is way over the top.(But if you're living in a suite at Bangkok's J.W. Marriott and partying every night in Soi Cowboy then I could see that.) You could possibly avoid touching the $300K if you cut back the lifestyle.

2. If for some unforeseen reason the $1500/month stops happening then what would you do? Cut your expenses in Thailand some more? Dig deeper into the $300K? Return to Hawaii? Sell the property? Sure, "long & steady", but it's a critical part of your plan and it'd be good to have a Plan B.

3. $1M for the property won't be $1M because you'll have been renting it out. The IRS will want to tax the sale for capital gains and you'll also pay recapture tax on the depreciation. It's quite possible that the size of the sale will also subject you to the AMT.

Before you blithely rent the place out and plan on equity appreciation, you should pay a few hundred bucks to a CPA to tell you exactly how much you'd have after tax. Then you can decide whether to quickly liquidate the place now for $850K (and lower taxes) or hold on for another decade in hopes of getting $1.1M (subject to higher taxes). I can't tell you which option will leave you with more after-tax cash in your hands, but I'd much rather have $700K now than hope for $800K in a few more years. In addition to the headaches of landlording from thousands of miles away, you're paying a lot of money to rent the place out and keep it in shape in hopes of equity appreciation. People were doing it from 1990-2000 and prices declined for the entire decade.

Speaking of Plans B, it'd be worth considering your reaction if you're in Thailand and receive the news that your Hawaii property just had $250K damage in a hurricane. Your insurer might charge your policy differently if you're renting the place out, and if it had been vacant at the time then you might find yourself excluded by an occupancy clause.

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Again, good to read you again. I have thought about you from time to time and hoped this economy had not driven you to work. Hopefully you are still stomping on your board over on Oahu. Mahalo nui, braddah.
After nine years of retirement through two recessions, our finances still support our lifestyle. I'm not returning to work, and I'll be surfing until I can no longer paddle out...
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Old 01-01-2012, 10:08 AM   #17
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I should say here that I believe my health is at risk if we continue to stay here (Hawaii). The stress has become intolerable.
Slightly different angle: without prying, what's causing the stress and can you resolve that? Sounds like you may be wrestling a financial decision as a proxy to resolve a different issue. Can you resolve the other issue to buy time for the housing market, etc?

A few years back I was at my wits end with work -- really, really not good. One problem: they sure did pay me a lot. After some introspection, I decided that a lot of the problem was that I cared too much both about the outcome and what people at work thought of my performance. I realized that if I changed my own approaches (let go of some of the control, be willing to be fired so long as I thought I was doing the right thing, bolster my cash position to make being fired a less traumatic event, put hard walls around how many hours I worked) then I could lower the stress and keep the income.

It worked. Less stress, same money.

Tweaking my financial approach was part of the plan, but I focused most of my energy on the underlying problem.

Just a thought. No clue if it's on point or not...

Good luck!
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Old 01-01-2012, 11:32 AM   #18
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Originally Posted by sunsnow View Post
Hi chuckwow -- Here are some thoughts about your situation. It seems to me that the question of refinancing may be a little less important than the question of whether to sell the property sooner rather than later.

It sounds like your proposal to rent your house has you making a net return of $1,500/month ($18,000/yr) on your $900,000 investment. This is a 2% return, which is lower than you could get from a long term CD (discover bank, for example), although there are some tax advantages to renting. The hassle and risk is so much higher for renting than for passively collecting interest, there needs to be some additional incentive to justify that approach. Sounds like you are hoping that the property will appreciate, and also that you are into the property for $400,000 more than the house is worth. I know how that feels, and offer my condolences. I am not going to offer an opinion on where real estate in Hawaii will be when you are ready to sell, but I will offer some advice I once received, that has helped me a lot:

There's no financial reason to hang on to an investment unless it is something you would purchase today for the (net) price you could sell it for today.

In other words, if you had $900,000 sitting in your bank account, would you buy this house now? Does buiying this house with 2/3 of your investable assets sound radical and risky? Or does it sound like a solid way to fund your retirement? Hopefully whatever you feel when you consider this hypothetical scenario will assist you in more fully understanding the choice at hand (as it has helped me many times).

Of course, a house is more (and less) than an investment, and it could be that even if you wouldn't buy the house, the non-financial reasons for keeping it outweigh financial considerations. In any case, good luck to you and I hope you have a fantastic time in Thailand
This thread is 3 months old, just got bumped...

I agreed with the comment above.

You have what appears to be about 2/3 of your net worth tied up into your house?

If you are renting the house out, I might suggest a cash out refi where you move 500k or so into an investment which yields more than $18k per year ($1500/mo=$18k per year).

I would expect a higher return than 2% on renting house out. The best risk adjusted returns are higher than the 2% you receive on your mortgage... dividend paying stocks would be exhibit A, a conservative equity portfolio like Wellesley is exhibit B.
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Old 01-01-2012, 02:41 PM   #19
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Slightly different angle: without prying, what's causing the stress and can you resolve that? Sounds like you may be wrestling a financial decision as a proxy to resolve a different issue. Can you resolve the other issue to buy time for the housing market, etc?
Good luck!
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This thread is 3 months old, just got bumped...
That was also Chuckwow's last post, and he hasn't been back since.

Hopefully for a good reason.
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Old 01-15-2012, 02:47 PM   #20
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Thanks! I'm curious-- what forum? You could e-mail me if you don't care to name it publicly.


It's been a while since I checked the rules, but I believe the phrase is "local contact" and you're not required to hire a management company. Even if there is such a law now, I don't see how it'd be enforced. I've been the local contact for a few shipmates over the years and there's never been an issue with the tenants or the state.

If you're on Oahu then another good property management company is Stott Real Estate (Stott.com). If you're specifically targeting military tenants (depends on how close you are to a base or to Tripler) then you could list on AHRN.com instead of Craigslist.

As DangerMouse points out, the income will be subject to general excise tax (4-4.5%) and the property management fee may be at least 8%. If you're renting for short terms then the tax rises to at least 11% (I'm not sure of the exact number).


Three things to consider:
1. It's my impression that $4K/month in Thailand is way over the top.(But if you're living in a suite at Bangkok's J.W. Marriott and partying every night in Soi Cowboy then I could see that.) You could possibly avoid touching the $300K if you cut back the lifestyle.

2. If for some unforeseen reason the $1500/month stops happening then what would you do? Cut your expenses in Thailand some more? Dig deeper into the $300K? Return to Hawaii? Sell the property? Sure, "long & steady", but it's a critical part of your plan and it'd be good to have a Plan B.

3. $1M for the property won't be $1M because you'll have been renting it out. The IRS will want to tax the sale for capital gains and you'll also pay recapture tax on the depreciation. It's quite possible that the size of the sale will also subject you to the AMT.

Before you blithely rent the place out and plan on equity appreciation, you should pay a few hundred bucks to a CPA to tell you exactly how much you'd have after tax. Then you can decide whether to quickly liquidate the place now for $850K (and lower taxes) or hold on for another decade in hopes of getting $1.1M (subject to higher taxes). I can't tell you which option will leave you with more after-tax cash in your hands, but I'd much rather have $700K now than hope for $800K in a few more years. In addition to the headaches of landlording from thousands of miles away, you're paying a lot of money to rent the place out and keep it in shape in hopes of equity appreciation. People were doing it from 1990-2000 and prices declined for the entire decade.

Speaking of Plans B, it'd be worth considering your reaction if you're in Thailand and receive the news that your Hawaii property just had $250K damage in a hurricane. Your insurer might charge your policy differently if you're renting the place out, and if it had been vacant at the time then you might find yourself excluded by an occupancy clause.


After nine years of retirement through two recessions, our finances still support our lifestyle. I'm not returning to work, and I'll be surfing until I can no longer paddle out...
Nords!

Sorry for the long absence.

I see there are several replies to my original question and feel it necessary to re-read this entire thread, inclusive of my OP, before going further. I did want to answer your question though, Nords. I believe the forum we previously conversed was called Raddrs (?) or something along those lines. I think the moderator (owner?) was a TCU fan, I recall his avatar. Hope this helped and it's good reading you again.
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