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What would you do?
Old 02-22-2009, 03:20 PM   #1
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What would you do?

I need advice but because so many people I know are struggling I don't feel comfortable asking anyone I know in the real world. Plus, no one who knows me knows my financial situation.

I am 41, self-employed and currently make a very good living. While I might not make as much as I do now in the future I expect to continue doing well for at least the next few years (but again, I'm self-employed so there are of course no guarantees.) I'm single and have no one to fall back on if I struggle financially so it's important I make smart decisions.

I max out my retirement and have 16 months of savings in an emergency fund. I think real estate is a good investment now in certain areas of the country so I bought 5 houses - 4 free and clear, 1 with financing. 2 of the properties are rented and 3 are in various stages of rehab but I expect those 3 to be rented within the next 2-3 months. I also have a mortgage on my residence. Having debt really bothers me, but I know there are times when it's 'good.'

My parents are snow birds who live in my town 5 months out of the year. They are retired but don't have a lot of extra money. Previously they rented a car but this year the cheapest rental fee was $4,500 for their stay. I drive an 11 year old car and had been thinking about getting a new car anyway so I bought a car for them to use while they are here. I will probably drive the new car when they leave and go back to my old one when they visit.

I always way overpay my taxes so will be getting enough back to payoff the car which is what I thought I would do when I bought it. Then, I realized I could instead use that money to buy another house that will have a positive cash flow of about $400/month after expenses.

My dilemma: Should I pay off the car loan or should I invest that money in another house?

If the economy wasn't so crazy I would invest in the house but with all the doom and gloom I don't know if that is smart to do or if I should just hunker down and get rid of the car loan.

Any advice? Thanks in advance.
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Old 02-22-2009, 08:09 PM   #2
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Couple of questions:
1. What are the interest rates on the car loan and the house? Are either tax deductible?
2. What percentage of your portfolio is in real estate?

Basically, I would not be keeping any loan that is not "good debt" or is not tax deductible. Given that you are self employed it may well be that the car loan can be considered a business expense.

If you are not a professional real estate developer/property manager, most experts suggest keeping real estate to a maximum of 10-15% of a portfolio.

But who knows in these times?
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Old 02-22-2009, 11:00 PM   #3
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Quote:
1. What are the interest rates on the car loan and the house? Are either tax deductible?
The car loan is a 5 year loan at 4.4%. It isn't tax deductible. I would buy the house free and clear so there would be no deductible interest. The tax consequences are the same as for all investment real estate - depreciation, expenses, etc.

Quote:
2. What percentage of your portfolio is in real estate?
Right now, it's about 20% (it was lower before the market went down the tubes.) My goal is to use RE to help me ER so I'm okay having a higher percentage in RE than a normal allocation.
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Old 02-23-2009, 08:07 AM   #4
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Originally Posted by Red Rover View Post
I always way overpay my taxes so will be getting enough back to payoff the car which is what I thought I would do when I bought it. Then, I realized I could instead use that money to buy another house that will have a positive cash flow of about $400/month after expenses.
Wow! You loan the government an amount large enough to buy a house interest free. Would you be interested in lending to me on those terms?
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Old 02-23-2009, 10:52 AM   #5
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I know. It drives my accountant crazy. I'm more afraid of not having the money at tax time than I am of losing the interest. For better or worse, I'm a safety gal.
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Old 02-24-2009, 06:41 PM   #6
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I know. It drives my accountant crazy. I'm more afraid of not having the money at tax time than I am of losing the interest. For better or worse, I'm a safety gal.
Well, at least the money you lent the IRS for free was safer than if it had been in the markets.
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Old 02-27-2009, 12:25 PM   #7
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tough call chief. many believe, myself included, that prop values r going to continue to drop this year...perhaps by another 10-20%, but who really knows? i'm sure there's deals to be found but with my limited knowledge of the market i personally wouldn't purchase real estate right now.
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