All Forum Posts by: Jil Tin

The cost of my primary home is 730k (5BD,4BH) in Jan 2012, current loan $530k (3.5%)+Heloc 100k(3%) and the current appraisal is around 1.2M (It does not matter as long as I live here). 

This house can be rented for $4000/month, but any 3BD,2BH in San Jose minimum rent is $3000. 

By living in this home, I avoid $3000 rent. When I calculate rent equivalent of my current mortgage (Interest+property tax+insurance-MIRD benefit) it comes to $2000. This benefit of $1000/month can be accounted for $200000 I made so far principal portion of my home. This is almost 6% return.

On any case, I need a place to live and that is my current primary. 

There may be other cases to get the benefit of 1.2M price. If I sell, I can get 500k tax free capital gain, but the issue is that I can not get any home less than 1M here, and property tax jumps from $750/month to $1000/month, that defeats the thinking of selling this home.

As long as I pay the monthly payment, I can live at primary home and the value of the home retains. The benefit is lowest interest rate (3.5%), Mortgage tax deduction(MIRD) with $3263/month (fixed 30 years). With MIRD, rate currently works out (100%-33%-9.3%) =57.7% or 3.5 = 2% and after retirement (assume same tax bracket 100%-25%-9.3%)=65.7 of 3.5%=2.3%.

If I pay off my rental home (299k), it gives me free income that I can use to pay monthly payment of primary home. Rate is 4.25% for 30 years. The current rental is $3000 and I can easily add additional cash from my 401k to pay monthly primary mortgage. 

I see the leverage of low interest is higher along with MIRD benefit when I pay off rental home than primary home.

Computing tax benefit from primary mortgage after retirement, the effective primary home payment is rental home rent after expenses.

Brent, Got it (borrowings for no return = BAD debt). Thanks. 

Need to review carefully plan to pay down primary.

For other investments, I have two more rentals in san jose, but the rent takes care of all expenses+slightly positive cash flow. 

Then, the current rental (299k loan) is highly positive cash flow which can take care by its own.

All Bigger pocket members, I got the picture now. I may likely to extend my retirement until I pay of primary home.

Thank you a lot, this forum and members are no match in real estate & Investment area. Excellent !!!!

Greg,

Based on the comments, I am thinking to follow Dave Ramsey's debt reduction strategy.

1) 299k mortgaged (4.25%) rental is lowest amount (other than heloc) and highest rate, easy to complete in six-seven years.

2) The current 401k is around $500k, grows at 6%-8% may be used after retirement

3) Still utilizing 24k each (48k) 401k every year.  This will have easily another 300k taxable when I take it for emergency funds.

4) The net profit $2000, non taxable at least 15 years, helps me to pay primary home mortgage(3.5%)/heloc(3.5%). Additional money from my 401k can help pay monthly mortgage and can also be used as emergency cash.

What is the main reason to pay off primary home. This is altogether different plan.

If I need to pay off primary home, the loan is 530k (highest) and lowest fixed rate at 3.5%. I may not be able to pay off before retirement.

My homes were bought (rental & primary) during 2008 (REO) & 2012 (Short Sale).  It has lot of appreciation upside almost 80%, but do not want to sell as I enjoy lowest property tax rate and good cash flow.  Even though it gives 7% Cap Rate, this is best possible ROI in San Jose. 

I understand the risk & challenges of out of state rentals. My main aim to reduce as much as debt possible before retirement. If there is excess cash after clearing my debt, i can look out some cash flow property in future.

Presently, I am good at stocks, Mutual funds, Bonds etc and can still continue the same. Last 5 years, I made appx 15% growth on these.

When I make this rental fully paid and my primary fully paid, I can easily retire.  Until then, I need to be in part time work (if not full time work).

John & Bob,

You have mentioned Midwest. Do you mean Midwest states rental? What are the locations, cities mainly? 

I am also looking into your other suggestions.

Thank you.

 Thanks for correcting last sentence.

MIRD=Mortgage Interest Rate Deduction = Tax deduction on interest for primary home. 

Debt or Leverage of Low interest, what is best plan before retirement?

we live in California, have primary home and a rental home.

I have 530k balance primary home first mortgage locked 3.5% for 30 years (PITI=$3263), 100k heloc balance rate 3% interest only ($600/monthly) and rental first mortgage 299k balance at 4.25% for 30 years, rent is $3000/month.

Since we are living at San Jose, property tax and income tax puts us in AMT bracket with 33% IRS tax, 9.3% CA tax.

I am getting around 50k savings every year as bonus, dividend etc. This is the maximum possible extra savings per year after fully using 401k plans.

We are around 55-56 aged, counting maximum another 10 years of work. It can be down to 6 years until we hit 62 age.

Considering this, worst case 6 next years, little confused how to allocate $50k every year, whether to pay rental mortgage or Heloc or invest in Mutual or ETF funds.

If I pay $50k every year to rental mortgage,fully closed rental loan before retirement, I can get the rent $3000 as my free income. I save $2000 after expenses that will be washed off by depreciation loss. Eventually, when I am retired, I will get $2000 extra cash nontaxable (yes, depreciation will take care for at least 15 years).

If I pay 100k heloc, I may have some emergency cash to withdraw when required, but reduces my tax deduction at 43% level. Balance 200k I can pay in rental, but still leaves 100k on rental debt.

We can extend retirement further two years, but we do not know our situation at that age, would not like to count what we earn through work beyond 62. It will be extra bonus for us.

If I invest in Mutual funds/etf, the likely return is between 10% and 15% (S&P growth), but has risk as ROI is not guaranteed.

I do not plan to sell my current home as I plan to stay after retirement too. This is the best house for us, but would like to pay it slowly taking MIRD benefit. At the age of 62, if we retire, both of us will be getting 40k (20k+20K) social security and 50k (25k+25k) from 401k (taxable). This is enough for us to live including primary mortgage payment.

We are really confused what our best option is. We want to aggressively get out of debt before retirement. 

The house I am considering is slightly bigger than current one, but single story home. Just recently, My kids are settled in jobs. Their marriages, functions and their future family visits at least few times a year, we need good home equal to our current home level.

Bob,

I understand your concern. You are perfectly right. Kudos to your suggestion ! 

My rentals are growing 5%-6% year over year and cash flow cap rate is 4%. Combined together, it grows at the rate of 9%-10% range which is equal to long term S&P investment range. 

In fact, My IRA/401k is between 8% and 9% year over year. We also fully utilized max out 24k each 401k max. With company match, it becomes 30k/year for each. This will, without considering any 8% growth, make additional 720k by the 12th year. We had solid 20 year job run and confident that we can continue next 12 years.

The way I think: As long as we work/earn income, we are fine to let the rentals to grow at the market rate.

During the earning period, I can easily manage any maintenance cost of rentals+primary. 

By that time I retire, I need to either pay off my primary home or rentals whichever is tax efficient at that time. You have already provided me a clue for me to clear out my primary home rather than rental home.