House Rich and Cash Poor

[doneat54]

Read a fairly recent thread here on reverse mortgages..... enough to convince me it is not a good idea.


I'm FIRE'd, DW will work 2-3 more years. We hold 3 real estate properties that have equity totaling probably around 27% of our NW. Living (barely) off wife salary, not touching the portfolio.

Plan is to sell one of the 3 properties around the time DW retires. Two have $150-$200k in equity, our primary home probably around $450k.



DW changed jobs and had a small pension that we are taking as a lump sum (~$70k) and are putting it in an IRA in our home bank.


We have very little hard cash, maybe $15k.



The challenge is that in about 2 years, I'll want to replace 2 cars, and depending on where we go with the property, would want to have $10-$20k or so to work with.

Which leads me to my question: what is the best we to get that cash?


HELOC is considered, but would create a payment load on the already strained budget. (Interest only means that you are only required to pay the interest on the amount you have taken out, right?)

Pull from the IRA/Pension, but HATE the idea that 22 cents of every dollar will be lost as tax.


Refi the main house and pull some cash out, but then the mortgage payment goes up. But maybe not that much? Dread the thought of refinancing.



Sell a vintage car? NEVER ! LOL

Looking for any creative ideas here. Portfolio consists of Roths, IRAs, etc. Most all pre-tax accounts.

 

[mpeirce]

HELOC is considered, but would create a payment load on the already strained budget. (Interest only means that you are only required to pay the interest on the amount you have taken out, right?)

HELOCs are a useful cash flow tool at times. But they can get you into a lot of trouble if you aren't careful.

The first time I took out a HELOC I was reviewing the paperwork and was shocked to learn that one could make the payments using the HELOC checks - using the loan. I asked the loan officer if this was right and they said "sure".

Yikes, but still useful.

 

[HI Bill]

Reverse mortgages have their benefits and drawbacks. For some in dire straights, it's probably the only lifeline they have, short of selling and becoming a renter. In certain circumstances (married, no kids, single no kids), I do think they make sense if can get the right one. But they should probably be a last resort, as they limit your options later on, and you're essentially reducing equity in the house from the first payment. The biggest thing is ensuring that the property insurance, taxes and upkeep are maintained, and that all bank requesets for such information is followed up on to preclude foreclosure. Not as easy task if one experiences mental decline.

Do you have a ROTH that you could withdraw the contributions from? Are you sure that you'll be in the 22% tax bracket once your wife retires? New car loan rates are as low as about 3% right now...if your investments are making more than that, I'd consider taking out a loan, rather than paying a lot in taxes. Need a little more info....

 

[aja8888]

Car loans are cheap right now. PenFed CU is at 3.49% for three years.

 

[doneat54]

Do you have a ROTH that you could withdraw the contributions from? Are you sure that you'll be in the 22% tax bracket once your wife retires? New car loan rates are as low as about 3% right now...if your investments are making more than that, I'd consider taking out a loan, rather than paying a lot in taxes. Need a little more info....

We each have Roth's, but they are a very small percentage of our portfolio. Seems to me to leave them be for the longest time and let them "ripen".

No we will not be in the 22% bracket when DW retires, but the idea is to just be able to pull out a hunk of cash somewhere in a couple years, then sell a property a year or two past that to improve the cash situation.

I take great pride in the fact that at 58 years old I have never had a "car payment" LOL. But money at 3% is good. Still the issue of the load of having another line item in the budget. Could maybe suck it up for a couple years until a property is sold and can pay it off...

 

[copyright1997reloaded]

We are pretty long-toothed in the economic cycle and you are leveraged to three properties and have next to no emergency fund.

If I were you (and I'm not), I would sell one of the properties NOW to reduce my leverage and get better positioned just in case things don't go as planed.

 

[NW-Bound]

We have very little hard cash, maybe $15k.

I think that you do not have much investible asset in after-tax accounts either.

I have always tried to have a lot in after-tax accounts. In fact, I had to, in order to do ER, so that I had something to live on prior to 59-1/2 when I could tap my IRA/401k. I used to have a lot more, but even now still have several hundred $K in after-tax accounts.

If all you need is another $10-20K, can you draw a few additional $K each year from IRA and build up that slush fund?

 

[rodi]

My sister just did a reverse mortgage.... But her real estate was a bigger part of her net worth. I was against it until I looked at what it was.... Here in SoCal a paid off house is often a disproportionately large part of one's net worth. She has a teacher's pension and reduced SS, plus savings. This has allowed her to put some changes/upgrades into her house that she can truly enjoy, and still do some travelling while she's young and mobile. The reverse mortgage as a percentage of total equity is pretty small... so she'll still be leaving nephews (mine) and nieces a nice inheritance.

I wouldn't do it... but I've got more nest egg than she does.... didn't have a divorce cut my nest egg.

 

[pb4uski]

Why not just sell the properties other than your home? You can use the proceeds to invest some and live on until your wife retires and you can access tax-deferred money at a good tax rate.

 

[doneat54]

I think that you do not have much investible asset in after-tax accounts either.

I have always tried to have a lot in after-tax accounts. In fact, I had to, in order to do ER, so that I had something to live on prior to 59-1/2 when I could tap my IRA/401k. I used to have a lot more, but even now still have several hundred $K in after-tax accounts.

If all you need is another $10-20K, can you draw a few additional $K each year from IRA and build up that slush fund?

That's the idea behind moving the pension lumps sum to our home bank, so it is there and we can pull from it if/when needed in small amounts. I'd burn through all of the cash we have before we started taking a 22% tax hit on withdrawals from it.

 

[doneat54]

Why not just sell the properties other than your home? You can use the proceeds to invest some and live on until your wife retires and you can access tax-deferred money at a good tax rate.

Because we don't know what we want to do with them now, if anything. One is a lakefront 120 year old farm property that we bought last summer as a second home (I have a thread here on that) and the other is a large parcel of undeveloped land that I bought in '94 that I recently had logged out and cleared a spectacular view of a lake and mountains. Just not sure on where we will go with these properties, but I have given myself a 2 year window/deadline for us to figure it out and make a decision. So the "squeeze" is to try and figure out how to get to that point and pull some cash from somewhere, taking a loan of some sort if need be, and then selling at least one of them in ~2 years and move on.

But someone mentioned the Roths. Interested in views on this. I turn 58 in 2 days, DW is 60. She can draw from her Roth now if we want to. It is a modest 5 figure balance but *could* serve as a tax friendly fund/source for 2+ years to buy cars, develop real estate, etc. But is that a good idea? In my head, I had been thinking leave the Roths alone, let them grow as much as they can and tap them LAST. But if the other option is the IRA at a 22% tax hit

 

[Sunset]

OP is really fixated on the 22% number, while sounding strapped for cash.

OP is really land rich and cash poor, the other 2 properties are mostly negative cash flow, perhaps OP should rent out the lakefront property if it can get a good rent, same with the undeveloped land, but not likely as it's limited in use.

The easy answer is don't buy 2 new cars. Maybe buy 1 three year old car so someone else pays the depreciation.
Why doesn't OP go back to work, since his wife is working 3 more years ?

 

[doneat54]

OP is really fixated on the 22% number, while sounding strapped for cash.

OP is really land rich and cash poor, the other 2 properties are mostly negative cash flow, perhaps OP should rent out the lakefront property if it can get a good rent, same with the undeveloped land, but not likely as it's limited in use.

The easy answer is don't buy 2 new cars. Maybe buy 1 three year old car so someone else pays the depreciation.
Why doesn't OP go back to work, since his wife is working 3 more years ?

Funny, I have never bought a new car, and never will. Never suggested that. Have always bought 1-3 year old, one owner cars. RE properties were never purchased as income generating properties either, renting is not considered an option. Undeveloped land costs me $18 a year to sit on, I'm fine with that.

Going back to work... LOL too funny. DW's decision to keep working was hers, not mine...

 

[Sunset]

Funny, I have never bought a new car, and never will. Never suggested that. Have always bought 1-3 year old, one owner cars. RE properties were never purchased as income generating properties either, renting is not considered an option. Undeveloped land costs me $18 a year to sit on, I'm fine with that.

Going back to work... LOL too funny. DW's decision to keep working was hers, not mine...

Good for you on the smart car buying.

But buying property that cannot generate income, means it could be a simple money drag.
Sure your undeveloped land costs $18 to sit upon. Obviously you don't have insurance on it, so if someone trespasses and breaks their leg they can sue you for a Big pile of $$$$.
Also you didn't get that land for free, of course I have no idea what you paid, but suppose you paid $200K for the land, then you didn't have it in the stock market this past 10 years, so it didn't grow to $400K.
A lost opportunity cost of $200K.

You don't mention the other property carrying cost of the lake property, but I'm sure it a lot more than $18, surely it could be rented out while you think about what you want to do with it ??

 

[BeachOrCity]

Not enough info in the OP financially to actually make good recommendations.

Overall can’t understand why if things are tight OP would buy undeveloped land and second home and not generate income off either.

 

[FLSUnFIRE]

I just set up a HELOC on my otherwise paid off house to smooth out cashflow from income and to have a source of quick liquidity (closed this month in prep for 2020 FIRE date). Mine has no inactivity fee and I feel good having it in place now and know I can quickly log into my bank and transfer funds from the HELOC into my checking if I get in a liquidity pinch. -For me it will probably be a useful tool for managing realized income year to year to minimize taxes.

 

[Ginny]

Use your Roth and stop living like a pauper. No need to do a heloc or reverse mortgage now. We bought our new home with our Roth before we sold our SoCal home. It worked out great.

 

[pj.mask]

OP has ~$800k of equity as 27% of their net so that have about $3 mill of net worth.

Living paycheck to paycheck with $10-15k cash?

Not sure about fixation on 22% but you can likely support (3-0.8)*4% = 88k + wife’s salary per year spending (pre tax?)

Have you looked at what your tax rate will be in retirement? Surely some of that 2.2mill will be in taxable investment accounts you could pull at 15%?

 

[jazz4cash]

HELOC is considered, but would create a payment load on the already strained budget. (Interest only means that you are only required to pay the interest on the amount you have taken out, right?)

.

No!
Interest Only means all of the payment goes to cover the interest and nothing is credited to principle. Kinda like a balloon loan. It is true that you are only required to pay interest on the amount you have take out, but the rate is almost always variable.

 

[teetee]

Why can't you sell one of the three properties now and put all your cash shortage problem to rest? Getting a heloc to make the payment just shifts one loan to another. Your are paying more in interest payment. Why would someone do that?

 

[doneat54]

Not sure about fixation on 22% but you can likely support (3-0.8)*4% = 88k + wife’s salary per year spending (pre tax?)

Not quite sure what that means, but as I said above, we are paying expenses on wife salary alone and not touching any of the portfolio for monthly expenses

Have you looked at what your tax rate will be in retirement? Surely some of that 2.2mill will be in taxable investment accounts you could pull at 15%?

I think that all accounts are taxed as income. Our fed rate in years past, after deductions and all was usually in the 15-17% range. Our expectation is that after DW retires, we will for the near term not change our lifestyle and expect expenses to stay the same (adj for inflation however).

 

[doneat54]

Why can't you sell one of the three properties now and put all your cash shortage problem to rest? Getting a heloc to make the payment just shifts one loan to another. Your are paying more in interest payment. Why would someone do that?

As I stated already, we of course can sell one of the properties, but we are not sure if we want them to play a role for us after DW retires. Hanging on to them for now to keep options open.


If you needed a chunk of cash for say 2-3 years would you better to take it out of a HELOC and pay 3-4% interest (and then you have new payment/expense) or take it out of your IRA and pay 22% on it? That is where I am struggling a bit.


Would it be a bad idea to take it from Roth's tax free now and lose the growth that we would otherwise get if we left it alone until late in retirement?

The land BTW is worth 8-10X what I paid for it 25 years ago, so I have no regrets about "tying up" money.

 

[Ian S]

How hard would it be to squeeze a couple of additional years out of the cars? It's not hard to get 200,000+ miles out of cars these days. The extra time will let you decide on what to do with your properties.

 

[jollystomper]

If you needed a chunk of cash for say 2-3 years would you better to take it out of a HELOC and pay 3-4% interest (and then you have new payment/expense) or take it out of your IRA and pay 22% on it? That is where I am struggling a bit.

You are going to have to pay that tax sooner or later. You have already received the benefit of deferment. Just bite the bullet and do it now. From my view I do not see any sense in adding new debt with your assets.



This is a reason why I build up my project cash needs for 5 years... so that I am not forced to take money from my tax deferred accounts when I need the cash.

 

[SnowBound]

I know this is really un-american: But why not just buy one very good used car and keep both other cars. Will pay almost the same insurance. Would save A LOT of money.