New Perspective Needed

[rmphilli]

Good Afternoon ---

First time poster, however, need a fresh perspective here on how to proceed with debt & property management. Here are the facts:

4 degrees and 60K in Student Debt, and a remaining 20K in debt with a home improvement project and a car loan --- total, roughly 80K in debt.

We currently live in a home worth 150K, and have 61K left on the mortgage. We also own rural residential property, worth 125K, and we owe 95K on that. Between the two properties, we have roughly 125K in equity. Now, the fun part. We are growing out of our current home, and, have purchased a larger home to suit our family needs (we close at the end of the month). We want to be good stewards of all that we have been given to manage, that said, I have the means, if we sell the two properties that we currently own (the house and land), to wipe out all our non-mortgage debt, and move into our new home *debt free (minus the mortgage). The other option would be to rent out our current home, and use the proceeds to pay for the monthly mortgage on both the home and the property (we would tread water in terms of building equity --- so, I struggle to see the value there).

I should add, that I have 100K in a 401 that would take massive hit penalty wise if I drew from it to know out the debt, that said, I want to be transparent here as I am curious how some more experienced folk might handle this. Hold onto the 3 properties, rent out the current home, build very little equity? Sell the first 2 properties, pay off debt, move into new home? or, something else entirely that I have not heard of.

Thanks for anyone's time that they have to help here.

Matthew, Central IL

[disneysteve]

Welcome to the site, Matthew.

A few questions to start:

Do you want to become a landlord? Forget the financial pros or cons and just give an honest answer to that question. Some people do. Some don't. Personally, I have no desire to ever be a landlord so the decision would be very easy for me.

Why did you buy the rural property? What was your intent there? Were you planning on building on it for personal use or did you buy it as an investment to later resell? If you bought it to use personally, have those plans changed?

[rmphilli]

Steve, great reply --- and really good questions. The short answer is Yes, to all. We bought the land with a dream to build on it. That dream has at the very least been put on hold as I work for a company, that, I personally feel safe at, but has shown instability and I do not consider myself bulletproof in. I have 10 years with them, and would like to work with them 10 more --- but, the idea of building a custom home, going deeper into that kind of debt, with student loans, a little one to pay for, and other little ones hopefully on the way, gives me pause about building a expensive home. But man, we love the property, and would hate to give it up. So, my answer there is YES.

To being a landlord, YES, in the sense that we could hold onto this home that we have so many good memories in, and, in the reality of things --- are not all that far off from paying off.

I hope that answers your questions, in short, YES to both, but am willing to part with those dreams to be out of debt IF that proves to be the best option for us.

And thank you Steve for the welcome!

[disneysteve]

But man, we love the property, and would hate to give it up. So, my answer there is YES.

To being a landlord, YES, in the sense that we could hold onto this home that we have so many good memories in, and, in the reality of things --- are not all that far off from paying off.

So it sounds like keeping the property is pretty important to you.

As for the current house, keeping it because you've had good memories there isn't really a good reason since you won't be the ones living there anymore. The fact that it is close to being paid for could be important because once the mortgage is gone, the rent becomes much more profit (after taxes and maintenance) so that's worth thinking about. Have you looked into what it would rent for vs. what your costs are?

You haven't told us anything about the new home. Price, down payment, etc. Do you have a good emergency fund? If you keep both houses and the property you need to have a much larger EF since your monthly expenses are a lot higher, so factor that in, especially if you aren't sure how solid the job is. And can you comfortably afford to maintain all 3 properties and the 80K of other debt and still be saving adequately for retirement, other needs, college for the kids, etc?

[Gailete]

Welcome as well. I know I am coming a bit late here, but when I read you response to Steve asking if you wanted to be a landlord, I felt what you answered was more why you want to keep the properties, not anything about being a landlord. Being a landlord means dealing with plumbing problems, 20 degree days and the furnace won't turn on, tenants that won't pay their rent on time if at all, tenants that aren't taking good care of a property, tenants that lie to you about everything.

We have a property that we bought almost 15 years ago. Two sets of tenants, both never seemed to understand that the rent was due on the first, the one set that didn't think it was important to tell us that they were moving out leaving rent owing for the month as well as water and sewer bills, because of course, they didn't leave us a forwarding address. Our current tenant almost every month we have to remind him that the rent is due. Surprisingly enough, he is a grown man not a kindergartener that needs reminded to brush their teeth!

The good thing about all this is that within about a year, the mortgage and the loan to cover the cost of upgrades for the place will be paid in full if nothing bad happens. That will free up some money for us towards our other bills and hopefully income in our retirement. We should have around $400+/month extra coming in as long as we keep it rented.

This is what it means to be a landlord. You buy a piece of property that you think you will be able to rent easily for a decent sum. You don't keep it because you had enjoyed living there, or you think it is a beautiful piece of property. Those aren't business reasons to keep or sell a property. Being a landlord is a business proposition.

All that said, this should come down to working through the numbers. What is the best thing to do financially for your family. I'm not clear if the rural land is just land or does it actually have a home of some type on it that you are currently renting out or are you just having to make payments on it monthly and it isn't paying for itself at all? This is where if it is just land you have to decide if it is worth the monthly payment including taxes to have it to maybe have as your retirement property. The house, as much as you have fond memories of living there, that isn't a good enough excuse to keep it. If you liked it that much why move? Unless you are able to rent it for more that the costs of keeping it, mortgage, taxes, repairs, insurance, periods of being unrented while you find a new tenant, the income which will raise your income base, etc., you should probably sell it and use the money whereever it is financially most prudent for your family.

[debtplow]

If it were me, I would be conflicted as well. My gut reaction would be to get rid of the other house and focus on being completely debt free. But the other part of me sees it as a long-term investment that could very much pay off over time.

Financially, if the property was vacant for three to six months, could you continue to make your payments?

[~bs]

if the other 2 properties are at least cash neutral (factoring vacancies and maintenance on the properties), while you pay a mortgage on the main residence, I would hold all 3 properties.

[Petunia 100]

How much cash do you have sitting in the bank? If you have a BIG cushion and want to keep all properties, go ahead. If you don't have a BIG cushion, start selling real estate.

Your 401k is not a good source of funds if things go south.

[snafu]

Matthew, welcome to SA I am concerned if you are making financial decisions without fully understanding your numbers. When you and DW decided you needed a larger home, what was the plan for the current residence? What sum saved for closing costs, moving expenses?

What are figures? $ 150,000. - $ 61,000. - $ 20,000.
Suggest there are benefits from a basic spreadsheet detailing

monthly costs Principal, Interest, Taxes Insurance [current residence]
Home Improvement Principal, Interest
Rural Property Loan Principal, Interest, Taxes
SL Loan, Principal, Interest
Auto Loan Principal, Interest
How much income is needed to service your debt?
Any ideas to give rural property income?
Anticipated costs for new home PITI, utilities, maintenance

How much money goes to interest each month? Projected annually?

I hope you drop any idea of using 401 because you need that fund to grow for retirement which will likely need more than 35 years of disbursements. Do you understand that penalties and income tax withheld combine to pound value down to a pittance.

[97guns]

Although I'm not a fan of rental property in rural areas I would also lean towards hanging on to them, I'm a firm believer of building wealth through accumulation and there's no better way to build wealth and accumulate than to have someone else(your tenant) building it for you.

[frederickmorse]

We all know that our home is our investment. Of course, being a resident also means taking care of the areas surrounding your property like your sewer and drainage system. This is vital because a blockage may cause more problems than you expect. If so, you will be needing the best plumbing repair service Morris County NJ to do the job. But of course, in any case, prevention is better than cure hence regular maintenance job is highly recommended for maintaining your property.