WWYD with this windfall of money? - Mothering Forums
View Poll Results: What to do with 14K?
Pay down the condo mortgage 2 18.18%
save for a future down payment 4 36.36%
other - please explain 5 45.45%
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#1 of 9 Old 09-25-2011, 09:51 PM - Thread Starter
 
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From various sources we have recently come into about 14K of money.  We already have an emergency fund and contribute to retirement.  Our only debt is two different mortgages, the first is 15 years, 3% interest for a house we are renting out.  The second is for a condo for 30 years at 5.5%, it is majorly underwater but because we are now living in it, we were able to get it refinanced for a lower interest rate and lower monthly payments. We are moving out of it this month  however, because my DH just started a new job and now we need to move again. 

 

When everything is rented out (3 units total) the two mortgages and the HOA dues are covered and about 100 dollars 'extra'.  We are about to sign a one year lease on a house by where DH now works.  Our current plan is to rent for a couple of years and then try to buy a house again if it seems like we will be staying in this area.

 

So we are not sure what to do with the money.We have a 100% track record of losing insane amounts of money at the stock market.  We are seriously thinking about sending it all to the mortgage on the condo.  The only thing that is stopping us is that there is no way we would be able to get that money back if for some reason we needed it (and yes we do have a fully funded emergency fund already that is above and beyond the money here).  It we do a one time lump sum payment of 14000 we will save 42K in interest and shave off 9 years to the mortgage, which is wonderful.  My only concern is, technically, it would still be underwater.  And it is just annoying to me that we have sent 'so much' cash and yet still could not sell it if we needed to without bringing more cash to the table.

 

The other option is to hold onto it and we would probably put it into an account at 2.9% APR guaranteed. We would then plan on adding to it monthly until the time we were ready to buy a house again and use it as a down payment.  We are concerned however that we might not qualify since we already have two mortgages . . . and one of them would most likely be upside down still.      

 

WWYD?


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#2 of 9 Old 09-25-2011, 10:03 PM
 
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I would keep the money in a money market account or a CD or something that pays interest like the account you mentioned.

 

I wouldn't put it towards any of your rentals, because someone else is making the payment and as long as it isn't paid off you can deduct your mortgage interest from the income you bring it for each property.

 

Another big reason I'd keep it in a reserve is for months that you might not have renters. It would be a little easier to weather a dry spell of tenants.

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#3 of 9 Old 09-25-2011, 10:59 PM
 
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I also vote to save most of it, and to treat it like an emergency fund for the rentals only. Not sure if you have this included in your regular e-fund, but if I had two rentals loans I would want a separate and hefty e-fund for vacant months or maintenance issues for just those units.

 

Congrats on the windfall!

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#4 of 9 Old 09-26-2011, 04:47 AM
 
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It doesn't sound like you intended the properties to be investments but are forced to rent them now due to moving for work and you are upside down on at least one of them. I wouldn't want to go near buying a third property for anything.

I agree with everyone else. Save it for the inevitable expenses you are going to have with your rentals. If you rent these out long term you are going to have to do repairs, have vacancies, etc. This money would be a good fund for that. 

 


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#5 of 9 Old 09-26-2011, 06:58 AM
 
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How much is in your current emergency fund? I only ask because I know some people consider $1K an adequate emergency fund, while others want $20K++ to feel protected. If you're on the low end, I would definitely add this entire windfall to it. If you're on the high end, I might set aside half of it to support the rentals, and put the other half toward the mortgage or whatever else you want to do with it.

I think you have some financial uncertainty -- new job, moving, renting out 2nd place, etc. -- so I would be cautious now, maybe just put the money in savings for a year or two until you see how things play out with all this.

I would also hold off on any thought of buying another house... unless you are really loving & profiting from renting out...

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#6 of 9 Old 09-26-2011, 10:26 AM - Thread Starter
 
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Our emergency fund is currently closer to the 20K range.  Also, we can pretty easily cash flow either of the two smaller rentals not having a tenant and if they were both rented we could cash flow the larger one not rented.  And we are not considering buying any new property for at least a year or two, I'm not sure I was clear on that. 

 

The house was not intended to be a rental (although the studio attached to it was), the condo  was somewhat purchased as an investment property, and partly to live in for a time, and we don't plan on selling it any time soon.

 

And I'm not sure I agree with the idea of keeping a mortgage on the condo because it is a rental.  I'm not sure I would argue that a possible tax write off is better then not paying interest in the first place.


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#7 of 9 Old 09-26-2011, 10:56 AM
 
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I agree that the tax write-off might not be substantial enough to make it worth keeping the mortgage. I think it really depends how much your other deductions amount to and you might even want to do a sample tax return to figure out how much you'd be saving with the mortgage interest deduction.

It does sound like you have a decent emergency fund and no other financial concerns (though I would still argue that all these changes coming up could bring unexpected financial challenges). I have a number in my head of how much I would want in my emergency fund to feel completely comfortable with it... depends on your COL & stuff... for us it is one year's worth of mortgage and basic living expenses. You need to figure out what that magic number is for you & whether you've reached it. If you have, then I don't see why you can't go ahead and pay extra on the condo. Sure would save you a ton in the long-term.

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#8 of 9 Old 09-26-2011, 02:39 PM
 
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I would put half towards the mortgage payment and half in a saving account specifically for the rental properties.  You never know what is going to happen.  Although it sounds like you are pretty secure.  In that case I would pay down the mortgage.  $42K is not a small amount of money!!

 

 


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#9 of 9 Old 09-26-2011, 11:11 PM
 
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I also don't agree with the idea of not paying down a mortgage to get the tax write off.

 

If you currently had a mortgage on a home you intended to live in I would be focused on paying that one down, before the rentals.

 

I think it depends on your comfort levels and COL. If I were in your shoes, I would want around six months mortgage payments saved for each rental--to be used for a time they were all vacant and I could not for some reason "cash flow" them out of my budget. Stuff happens and I like to have a hefty savings account to deal with it. I would also want $10,000 per house (so maybe only $20,000 in your two property/three rentals situation) to be able to deal with big things that can happen, sewer line needs to be re-dug, or septic system needs replaced, or major heating system failure, etc.

 

Your numbers might be different for your area, these are mine from the area I want to invest in. All these could all happen at once, and I would want to be able to afford to fix them without having to try to scramble for financing that I may not be able to get at the time and without having to dip into my families personal savings pot.

 

You basically have stumbled into a rental home business, but it doesn't sound like it was entirely intentional.  I would start separating things out and run it like a business if you intend to keep all these rentals. (And I do think rentals are a good business idea, but planning to cash flow any losses from your personal income is not my favorite idea).

 

**I would however invest in my business by saving (out of my personal income) a good vacancy  / maintenance fund for each unit, and would then invest a percentage of all income back into the fund to replenish it as needed. When my funds were complete, I would most likely use any income to pay down the mortgages on the properties.

 

Have you looked into incorporating the homes to limit you liability? Maybe you already are treating them separately and I am misunderstanding?

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