Next steps? Pay down mortgage for more equity or save separately?

Question

Hello,

I am very new to investing for my future. I previously thought that buying my house would propel me in the right direction but now I am realizing I would have much rather purchased a multi-family property with my VA loan. I also have a rather small amount of money ($25k) tied up in an TSP.

I was hoping you could help with my next steps. My wife is from Brazil and owns a single unit apartment  there as well, but due to her contract, cannot rent it out until the mortgage is paid in full. Should we refinance or HELOC our house here in the US to pay off the apartment so we can rent it out? Or should I use my TSP?

Another issue to consider is I just bought my house in 2018 and it is new construction so there is probably not much equity.

Any tips or advice is appreciated!!

-Sean

Patricia Steiner · Answer

What is the rate on your mortgage?  How much will you earn from saving funds?  As a former wealth banker, here's what wealthy people do that others often times do not:

1. You don't pay off a mortgage when the rate is low/terms good.  When you factor in the tax deductions, it's a cheap date.

2.  Liquidity gives you power. Highly leveraged people are seen as high risk.  Those with liquidity are perceived as "diversified."

3.  You'll need to earn 2% on your cash savings to break-even considering inflation.  The national average for a Money Market Account is 1.8% but it's not hard to find a fully insured account paying over 2% now.

4.  What isn't earning you money needs to go away...it's the old "make my money work for me" versus the other way around.  Brazil is a volatile market and you have to pay-off the mortgage just to have the opportunity to rent it.  That's the "other way around."

Sean, most of all, thank you for your service. You certainly earned that VA loan and it appears that you've made a lot of solid decisions to get you to these options today.

Michael Ealy · Answer

Sean, the answer will depend on the numbers and whether you can pull enough money out of your house. Since you just bought it last year (and probably not below market value), the answer seems to be you need to use your TSP.

But even then it depends on the numbers.

If you use the TSP and pay the house in Brazil so it can be rented out, how much will your cashflow on that be?

Also, if you use your TSP and buy a small multifamily, how much will your cashflow be?

Another factor to consider is the management hassles of managing a property in another country vs. managing one close by.

Without knowing the numbers, I would probably:

• Use the TSP; and
• use it to buy a small multi in the US

Account Closed · Answer

My advise without knowing actual specifics is to sell the Brazil apartment and unless you are on active duty currently don’t touch your TSP, given the Penatly for taking a withdrawal from your TSP.

Sell the Brazil property (I am assuming greatly here that your wife will be on board with it). Save your money and save for a new downpyment for a multi-family using the rest of your VA loan. If that is a possibly for you.

Anthony Wick · Answer

@Sean Woods  I'll just address the TSP, since people have answered everything else. You cannot just withdraw TSP money because you want to. It would require a hardship withdrawal (with taxes and penalties) and I don't see anything in your post that would indicate you are approaching that (medical, divorce in some circumstances, etc). At $25k it's probably not even a good possibility for a TSP loan, although you could get several thousand dollars from your TSP. Your TSP simply is not a good method to solve your problems right now.

CAROLINE PETERSON · Answer

I read in order to purchase a second property you need to have at least 30% equity in the first property, less than 43% debt to income ratio, and 2% of unpaid mortgage in savings. If this is true, then it seems like you need to prioritize reaching that threshold of 30% equity in order to invest in more real estate. If it is not accurate, what is accurate? What is required to purchase a second property?

Shaun Futch · Answer

Sean, I will tell you that trying to sell a new construction home is not fun as you would be competing with builders for the sale so getting out of your current house is probably a no go, so I would say just stay the course in your new home and accept it as a property in the long run rental game.  Depending on your current home’s purchase price you should have some VA entitlement for your next house when you PCS away from Charleston.

For now I would give you the advice that a house hack isn’t going to be your tool for now, but it will be for your next duty station.  For now there are still many things you can do to invest.  Start going to local foreclosure auctions and see what the going rate is on properties.  I know Charleston is a crazy market right now but the truth is just in the last few months foreclosures have started popping up everywhere and yet builders are still going crazy building more and more…guess what that means (que the bubble pop sound effects).  Use this time to learn the auction systems and pricing that way when the time is right you know how the game is played, plus if you are at the auction and find a good deal it will be yours for the taking.

Don’t start paying off that new house yet as you will need that cash for the market dump or for your next PCS.  I am a firm believer in paying off houses when the time is right but the time is definitely not right if you are currently living in the house and you are in no way able to pay it off.  Picking up a few foreclosures will give you a more reasonable price point of houses you can have paid off.

TSP is a wonderful thing that I now kick myself for never contributing to.  Don’t take the money out of your TSP as you will incur fees as you said, but you can take a LOAN from your TSP and it is only a $50 fee.  The loan interest is also paid back into your account so your TSP becomes your own personal bank loan with built in interest toward your retirement savings.

Action steps: Go to a few auctions to learn and then pull a loan from your TSP to pull the trigger and get one of these foreclosures.  Save cash for your rehab budget instead of putting it toward your current home’s mortgage.  Save the remaining VA and possibly cash for your next PCS purchase where you will want to house hack.

For Brazil: I know nothing of their market but even if you sell it I would wait till the dollar is weaker to transfer the money over. Plenty of FOREX traders could give you advice on where we are in that exchange game to better help you time the market of when to make the switch.

Devin D. · Answer

Sean....  I understanding completely about exchange rates.  Not saying that I would recommend this but you might check into the logistics and true cost of transferring it through crypto. (That's what it was really designed for and I'll likely take some heat for even mention it.  As a disclaimer I think there is tremendous value in the technology but as it is today its a horrible store of wealth)

Charleston... I just purchased a property today... going to be a gem. The deals are out there but I will admit a few miles makes a huge difference here so know your localized market and know your comps.  Happy to chat more when your ready to start looking at options.

Patricia Steiner · Answer

Sean, you've proven yourself to be the real deal. Absolutely no reason to fill ashamed about having options in moving forward in building your investment portfolio.  You have a lot to be proud of...rock on!  And, keep me posted. I look forward to hearing of your continued success.

Sean Woods · Answer

@Patricia Steiner,

Thank you so much! Your information was clear and to the point. This makes a whole lot of sense. I am ashamed I didn't see it earlier.

Sean Woods · Answer

@Devin D.,

I agree with you. The last thing I need right now is another liability. The problem with bringing the money back up here from Brazil is the exchange rate. It might make more sense to keep the money there but invest in a multi-family. My wife is from there so it will be a little easier than going in blindfolded.

I still need to learn more about how CoC returns work. How is that working for you here in Charleston? Since I am new to this I have no idea what our market looks like.

I would love to make new connections while I am stationed here. The more people I can talk to the more I can correct my path. Also, who knows, maybe I can be of some help as well.

Next steps? Pay down mortgage for more equity or save separately?

Most Popular Reply