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FI with 2 young kids?
Old 12-01-2009, 01:48 PM   #1
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FI with 2 young kids?

New here and so excited to find this forum!

I'm 37, have 2 kids (toddler and infant), married.

Live in and own a 2 bd beach condo in Venice, CA worth between $650-700K. I refi'd 1st TD @5.25% with cash out in 2005 for $600K. Took out a 2nd @ 7.5% in 2008 with cash out in 2008 for $230K. PITI + HOA = $4500/mo -- both mortgages are 10 yr interest only, 30 yr fixed.

I have $1 mil invested in a family business (grocery stores, hotels, restaurants) and though it was originally agreed that I could get my capital back with 30-60 days' notice, with the economy as it is, I can't get it without replacing my position -- at least for a while.

I'm gifted about $10K/month.

Fixed expenses around $4K/month. Did not include beer, entertainment, travel or taxes (s-corp and c-corp).

We freelance on occasion, so there is additional money that comes into the s-corp. Payroll from s-corp happens as appropriate.

Currently have about $100K liquid and a token $5-10K in a combination of IRAs (Roth, traditional, SEP). Also vested in a pension fund through a union around $55K.

Through the union, if I work about 6 weeks every 6 months, I can maintain great health insurance for the whole family. If I work about 400 hours a year, I will add to qualified pension years. I need 3 years after age 40 to receive health benefits in retirement.

My work is in film editing and the time demands/life demands are great. I worked to maintain health benefits for the last 3 years, but want to see how paying for our own health insurance goes in 2010. California has some low-cost health insurance for kids, so will look into that, too. Not so sure about the union pension and health being there when I retire, so my original plan was to buy a 2nd property (bigger house, with yard in less expensive area) and rent out the beach condo ($3200-3600/mo. long-term tenant or $3500-5000/mo. as exec furnished or vacation rental). But the economy and the mortgage industry have changed so I need to figure out:

1). Do I just start paying down my 2nd since I can't safely make anywhere near 7.5% in an investment?


2). Should I go for a short sale and see if the 2nd will settle for less than full payment?

3.) Should I not pay down my 2nd and try a short refi?

My big issues are that my gifts are not taxable=not reportable so it would likely be impossible to qualify for a refi, not to mention being self-employed. If I didn't have 2 rambunctious kids, staying here would be fine, but for everyone's sanity, moving to a house, even a rental would be better. Also, my capital was meant to be temporarily invested -- I was wanting to do a career change -- found out we were having a baby and now we're really dependent on the gift income. Obviously, I need a more secure source of income.

Got here by "luck" -- paid my way through private college, learned how LBYM and after all my debt was paid, didn't really change my spending habits. Bought property in Venice at the market bottom, rolled equity and own savings into a private investment.

But luck won't likely keep me safely FI!

My immediate family is a combo of blue-collar and govt employees, so retirement for them is all set with good pensions and SS still there for them. I need a good education and would appreciate any input.

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Old 12-02-2009, 03:30 PM   #2
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You have laid out quite a laundry list of issues. I’ll summarize what I think you’ve said, and make a few assumptions here to make sense of it for myself. Apologize if I didn’t get it right (just trying to understand/help).

It would appear that your Venice condo valued at +/- $675k is upside down in value – owing a total of $830k. You are skating at interest only on two mortgage loans for 10 years ~ 30 years fixed (will eventually be going up).

First assumption is that you took the funds made available from the two mortgages and along other personal assets (for a total of $1mil), invested it in what has turned into somewhat of an illiquid investment. The second assumption here is that given the economy, your ($1mil) investment has also fallen considerably. Third assumption here is that it would also severely cripple if not destroy a (your) family’s business (and their portions of the total investment) w/o your finding someone to buy you out at yesterday’s (your initial) investment cost.

Your two mortgage loan payments are $4,500.00/mos. (including HOA)
Your other fixed expenses are $4,000.00/mos
Your primary source of income is “gifted” @ $10,000.00/mos
Your personal savings is $100k (not including any illiquid retirement funds)
You have no other assets
You do not have steady verifiable income (assumption is that you haven’t really had to)
You are incorporated (self employed, work when you want to).

First off – If I have things correct – you appear to already have some sort of financial/legal counsel that you should be talking to for advice. You are very fortunate to have been gifted a very generous monthly income (although you haven’t said if this is limited or will change). Less than 20% of US households have incomes above $120k. But you do live a somewhat financially complex lifestyle. You’ve got love the California financial mentality. No offense intended – I’ve lived there twice in my life and my youngest Brother still lives there (close to where you are living).

Forgive me for saying - but when you look at what you have presented – you appear to be moving yourself from financial independence – to being dependent (you kind-of already are). You real net worth appears to be somewhere between zero and $170k if you’re lucky (investment + personal savings – debt). You also appear to not be able to secure a mortgage (lack of verifiable income and total debt load) for another home. Some of the things you are considering financially, to get out of your own way, might come back to bite you in the future (this is where you need financial/legal counsel). Rent doesn’t even come close to covering mortgages on condo. If it were me – I would stay put, bide my time, and try to get all my money back.

If all I’ve said is close to your reality – remember that California real estate values are like the waves that hit the Venice beach – it will come back. Californians are living proof that leopards can’t change their spots, and they all subscribe to the Wall Street “greater fool theory”. Long story short – Venice is a stable real estate area (for California). It will go back up, and pretty much you can rest assured that no matter how high it goes, someone will take it off you hands. Time is on your side, along with your generous “gifts”. You need to consider your future moves carefully as you appear to be moving towards a house of cards.
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Old 12-04-2009, 04:10 PM   #3
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Multiple mortgages, re-financing, s-corp, rental properties ... I could well be wrong, but it seems to me that you're making things more complicated than they need to be.

The KISS principle is generally valid.
"To know what you prefer, instead of humbly saying Amen to what the world tells you you ought to prefer, is to have kept your soul alive". Robert Louis Stevenson, An Inland Voyage (1878)
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