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Should paying down our 2nd property/home be a priority?

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  • Should paying down our 2nd property/home be a priority?

    Here's our numbers:

    Husband 41, I'm 37, 2 kids (10 & 8)

    Here's what I know:   We have aggressively paid off  practice and building debt and not been as intense about investing in retirement. I feel like our retirement accounts are a bit behind. I know our 529's our behind. I'm using round numbers and leaving things out like cars, or farm "toys" . I feel like we are heavy in the property assets and not enough in retirement.

    Income 360k

    ASSETS:

    property

    personal residence  + land/cabin 600k     we owe 340 on these 2 things.

    #1 personal:  -120k @15yr 3.2%     1500/month

    #2 2nd home:  -220k @20 year 4%     1450/month

    2 dental practices and 1/2 the building  600k     (all paid off)

    duplex 115k   paid off

    3 rental properties 200k paid off

    5 acres bought for future house -- 180k        we owe 40k    Paid down 100k last year, plan to profit ~37-40k when we sell this summer

    investments

    retirement  accounts 270k    (which includes 7k in 529s...i know i know)

    cash

    cash in checking 115k     (too much and yes we are looking at what to do with some of this)

    DEBT --

    -380k (Primary home, second, + 40k on small land )

    -88k  student loans    @1.4%   don't plan on paying this off.

     

    We are currently selling the 5 acres --- plan to have around 137k to do something with.

    Options:

    1)   FA wants us to invest all of  the 137k and put it in our retirement accounts.   Do you think we are behind in this?

    2) We'd like to take some of our cash and put it in retirement, but take the 137k and put it on the farm/2nd property then refinance.  We are planning to put 50k in investments this year. That's not 20% so I'd like to get to the 20% which is 72k per year. For reference: We paid down 100k in debt last year so we are capable of saving alot.   We really hate that payment and it will be such a big relief to have it paid off.   Its possible we retire on this property in the future.

    behavioral:   We really don't like high monthly payments, hence the desire to pay off part of this 2nd home.   Even though both mortgages are still within the 2x recommended range..... we just like cash flow.    Currently we are at 1.16X of income with those 2 mortgages.

    What would you do?   Or should we stop caring about the mortgages because they are within the 2X recommended.

     

  • #2


    Do you think we are behind in this?
    Click to expand...


    Yes. You don't have to turn all of your focus towards your retirement but you need to be putting more money there than you are now.

    Comment


    • #3
      For your age and income you have meager, minimal retirement savings, meager college savings and now you want to put more money into property? Most of your assets are tied up in real estate. Invest your cash for retirement and college. Fatlittlepig would get rid of some of the real estate. Your advisor is right.

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      • #4
        I agree FLP.   Its too real estate heavy.  We are currently selling the 5 acres, and  selling the 3 rentals.    The duplex is paid for and was a gift from my husband's parents.                   I'm assuming you'd just get over the  "feeling" of the monthly mortgage payments and hit the retirement accounts hard.....         FA has us on an investing plan and we should be at 1M in retirement in 5 years.

        Comment


        • #5


          FA has us on an investing plan and we should be at 1M in retirement in 5 years.
          Click to expand...


          I'm interested in knowing more about this financial advisor...

          Comment


          • #6
            Any listing of “property” that’s more than one line long is too much for Fatlittlepig

            Comment


            • #7
              Staying in current home and nixing the five acres sounds wise.

              Do the duplexes/rental properties cash flow? Meet 1% guideline? If these cash-flowing nicely, they might be a reasonable retirement vehicle. Why not get rid of the second home instead? I am sure it's more of a money suck than the rentals. The second home is costing you a lot. It's going to be an ongoing drag, my guess is you live somewhere appreciation is not so great, and you'll spend less time there as kids get older.

              I'm not hot on higher ed, but you do need more in the 529s if you want to help your kids go to college.

              If your husband owns his practice, you really should max out his solo 401k.

              As noted above, I think nixing the "farm" and cabin will do more for you than anything else. My guess is it costs you more than just the mortgage (all those toys and upkeep) and that on some level you think it's an investment. My guess is it's not and that it's a money pit.

              Tell us more about the advisor, where you found him, if he's fee-only, and what he's advising. Tell us more about any psychological or other reason you are both so into real estate.

              Comment


              • #8


                and we should be at 1M in retirement in 5 years.
                Click to expand...


                I don't think it should take that long (5y) if you are selling so much, and have such a large (and maybe growing?!) income.

                Comment


                • #9
                  you are behind in retirement. have you both done your backdoor Roth IRA contributions for 2019? That's $6k per person so you should do that with that cash you have right now to get started. Also if your position is to pay more for college, you should also take $30k of that cash and put $15k into each child's 529 account today. Those are decent first steps that you can do immediately.

                  Comment


                  • #10
                    Why not keep things clean and put all available cash into retirement?

                    Then you won't be so behind and if you spend the next decade cleaning things up/simplifying and you can probably cash flow the rest of college right? At least for a state school.

                    Comment


                    • #11




                      Income 360k

                      ASSETS:

                      property

                      personal residence  + land/cabin 600k     we owe 340 on these 2 things.

                      #1 personal:  -120k @15yr 3.2%     1500/month

                      #2 2nd home:  -220k @20 year 4%     1450/month

                      2 dental practices and 1/2 the building  600k     (all paid off)

                      duplex 115k   paid off

                      3 rental properties 200k paid off

                      5 acres bought for future house — 180k        we owe 40k    Paid down 100k last year, plan to profit ~37-40k when we sell this summer

                      investments

                      retirement  accounts 270k    (which includes 7k in 529s…i know i know)

                      cash

                      cash in checking 115k     (too much and yes we are looking at what to do with some of this)

                      DEBT

                      -380k (Primary home, second, + 40k on small land )

                      -88k  student loans    @1.4%   don’t plan on paying this off.
                      Click to expand...


                      Is the duplex a rental property?

                      Are the 3 rental properties worth 200k total? I.e. 65k for each property? That part is a bit confusing.

                      How much rent do these rental properties bring in?

                       

                      As more of a philosophical question, why do you guys invest so much in real estate? Aside from the rental properties you have two homes and bought land with plans to build another home? Why did that plan change?

                       

                      Comment


                      • #12
                        Thank you for all the different perspectives. I will try to answer as best I can.

                        @Cord-- We just started with this FA. They are a firm out of Little Rock, that deals almost exclusively with Drs. Their AUM fee is .83% annually.  There's also a "Planning Fee" with an upfront higher charge, but gradually getting down to $700 quarterly.   Ive read enough here to know most of ya'll  here are DIYers, but we need that hand holding to feel comfortable. If you want more info, I can post a link.

                        Selling our 5 acres that we bought to build on is going to net us about 50k profit in under a year. Land around us is a very hot commodity bc people are flocking out of the suburbs to get their own space.   So we are going to throw about 150k in retirement from that sale + about 50k more this year alone.  That will have us over 450k in retirement (give or take) by the end of this year.. Adding yearly + the growth  should have us near 1M by 2025.  ~~~ estimating 10% growth based on portfolio we've picked. (these projections are based on our models from the FA)

                        @snowcanyon--Yes that second property is costing us alot. Its my hubs dream though... all the hunting a man could want. I agree we bought this land "too soon" in our journey, but hindsight is 20/20.  Its rare to find land as good as this, within driving distance of our house for the price its at.   As you all know, hunting is an expensive hobby....but all 4 of us love it.  We all 4 hunt together and its an "experience" cost for us.               The way we justify it is that we live very low in our primary residence (300k) to be able to afford this place.    And both things together (home + hunting place) are still 1.16x income.      If I am thinking about this wrongly, please explain more to me. Our mindset is we have 2 places that equal what a person would normally do in 1 house.     We are aware as our kids age this place may go up for sale due to available time to get up there.    I am always conflicted about this property bc we love it so much, but I also cringe at the numbers it costs.       After mortgage, we spend about 6k/year here (taxes, toys, food plotting, hunting licenses, utilties)

                        The rental properties: 

                        The duplex and a half (gifted to us)  nets about 6k/ year.  Extremely cheap duplexes in a very LCOL area.

                        @antheus  The 3 rentals were all bought on foreclosure about 5 years ago.   Extremely cheap rental properties--like one was bought for around 35k I think. We didn't even put money down. Never empty because its a college town and they are very near campus.  I'm not sure the rental income, but they've all cash flowed the entire time and now have appreciated ALOT.   All 3 are under contract right now to be sold.  We share these with his partner.    Their  2 practices are debt free and our 1/2 of the building (debt free).

                        So we essentially are shucking 4 properties THIS YEAR.

                        our mindset about real estate: 

                        The duplex gifted to us is just like a random savings account for us. We have considered selling it. We have no money of our own tied up in this.    The 3 rentals were a no brainer b/c they were bought so low. (foreclosure).

                        Our area is booming with growth.  We bought land last summer bc we knew prices were going way up --hence the 50k return in just 1 year.  Our current home is not ideal and we knew soon we would be wanting more space.  We would have built on it, but we got scared and didn't want to be back in a 600k house BC we want to keep our farm. We believe we would have been greatly stretched if we built and then we would have HAD TO sell our farm--plus our kids didn't want to change school districts.

                        We estimated if we built another house we would have been at all in 550k    but valued up to 700k (bc of land price/house) but again, having equity is an "airy number"   ( made up that term. =) that's the way I think of it anyways).  We've custom built before so I think our estimates are near correct but BUILDING ALWAYS COSTS MORE THAN YOU THINK...right?.?.?.     You never know your true equity until you have an offer in hand.

                         

                        Comment


                        • #13


                          Their AUM fee is .83% annually.  There’s also a “Planning Fee” with an upfront higher charge, but gradually getting down to $700 quarterly.
                          Click to expand...


                          ouch.


                          estimating 10% growth based on portfolio we’ve picked.
                          Click to expand...


                          overly optimistic is the best phrase i can think of.

                           

                          Comment


                          • #14


                            @Cord-– We just started with this FA. They are a firm out of Little Rock, that deals almost exclusively with Drs. Their AUM fee is .83% annually. There’s also a “Planning Fee” with an upfront higher charge, but gradually getting down to $700 quarterly. Ive read enough here to know most of ya’ll here are DIYers, but we need that hand holding to feel comfortable. If you want more info, I can post a link.
                            Click to expand...


                            I'm always leery of financial advisors that market themselves as "physician only". There's really no difference between physicians investing and other professionals/occupations investing. They market to physicians because that's where they perceive the money is at. That AUM is a tough pill to swallow but hand holding comes at a high cost. It looks like the planning fee is in addition to the AUM fee. You are currently paying 1.87% in fees. Ouch.

                            Comment


                            • #15
                              Point taken.... i understand this is a no-no for everyone.    Yes its planning fee + AUM.  We just don't feel comfortable enough to do it ourselves. It just is what it is for us.  I realize its a high price to pay but we need that reassurance.    Buying practices/ buying out his partner, hiring associates vs selling out to associates, are all things we have to consider.  Its not like just having a high salary and that's it.   His partner's retirement plans and bringing more people in, when to have debt and when to pay it off are things that will have a big affect on us.   So I think it feels like a "consulting fee" for us.   Practice owner vs high salary earner have different avenues and implications.   Atleast to me, there are major differences I notice.  I'm not implying one is harder or better than the other....just that the two scenarios are different. If my husband made his income at some corporate business it would feel totally different---besides fearing job loss--- the corporate income would be steady with many many benefits....and also some disadvantages too.     I'm not trying to debate owner vs salary----just trying to clarify why we feel ok using FA's because we need the hand-holding =)

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