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Need a car - Have other debt obligations... Help!

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plush
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Hey oldguy, I'm hoping you can weigh in on this idea:

I've got about $25,000 on top of my 6 month reserve nut. I'm contemplating 2 different uses with it:

1. Pay off my wife's student loan in full ($25,000)
2. Buy a fund that tracks the S&P

I know you're a big proponent of option 2. The opportunity cost of option 1 is obviously a chunk of investment capital, but it would improve our debt to income ratio for the next rental purchase and free up the amount we're currently kicking out in monthly payments. My question is, would you borrow $25,000 at 6.8% with a minimum payment of $366/mo in order to invest in this way?

Would choosing option 1 make more sense if I could seed the mutual fund initially with $5,000 and commit to an annual $5,000 investment? I'd be fine with seeding the account with $5,000 knowing I could sell it (even at a loss) if I really, really needed it in the event of an emergency.

I'm a little gun-shy on preserving that capital for the down payment on a rental at this point as the cost of entry in rental real estate is much higher in our market, and I also feel that the real estate market is currently overheated. Just seems like buying a second rental might be better-timed if I wait for things to cool off for a bit, even if rates tick up. What do you think?

I appreciate your perspective and sage wisdom!
Post Sun Jul 03, 2016 6:57 pm
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oldguy
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quote:
My question is, would you borrow $25,000 at 6.8% with a minimum payment of $366/mo in order to invest in this way?


That's about an 8 year term - I avoid short loans, I like 30 yr capital for the low cost of servicing, eg, at 30 yrs the payment would be about $165/m, low enough so that a dip in income wouldn't cause you to default. (I also avoid loans that could force a decision - such as a loan with a balloon at the end, a VAR loan that could force a refi when there are no refi's available, etc). Those are the management skills that keep you from needing a bunch of 'what if' funds.

You probably mentioned this - but what is the equity position in your home? Maybe you could refi & add $25k to the mortgage - ie, a new 3.75% or 4% FR, 30 yr loan. That adds $120/m to the payment. And effectively converts 6.8% money to 4% longterm money and stops the $366/m cost.

And then the portion of your income stream going into an SP500 Index each month would be larger. by $240/m. Ie, your income stream could be going toward its "highest and best" use rather than to consumer loans.

($240/m invested at 11%/y = $640,000 in 30 yrs.) Yeah, I know - lol, even our 20-something grandkids roll their eyes. Very Happy
Post Sun Jul 03, 2016 10:04 pm
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plush
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Hey Oldguy,

I wasn't very clear with my whole 25k borrowed at 6.8%/366 payment comment--I was referring to the minimum payment on my wife's student loan. Because we have (most of) the $$ to pay it off in full, I was looking at that chunk of cash as being "borrowed" against the student loan since I'm losing 6.8% on that money as long as it's dead money. Am I thinking about this correctly?

Property #1 has about $60k in equity, or about 23%, but since we don't live there anymore I don't think we can pull out anything significant from it (maybe a couple thousand?). We bought this in 2014 for 205k--it is now worth 250k. Loan balance is $189k. Mortgage is 1250 and it is leased for 1600.

Property #2 was bought at 5% down in February of this year. Market improvement has us at about 14% equity position right now ($37,500, home was bought at 250k and is now worth about 275k), but not sufficient for refi, either.

I'm thinking about this approach, which might be a nice risk compromise?

• 42k in the bank
• Put 22k in a mutual fund that tracks the S&P.
• Pay $1,000/mo on the student loans (minimum is $654).
• Keep 20k in the bank for reserves (dead money) and invest surplus money as it accumulates. I could probably swing an average of $3,000 per month comfortably, though I don't want to totally neglect accumulation of rental property.

I like this approach because it has us making a little more headway on our student loans than paying minimums, but doesn't overly allocate funds to debt reduction at the expense of investing in stock. I'm trying to break from an all-or-nothing approach. It's also unlikely that our money in stock will vaporize and can be converted to cash in the event of a true emergency, even if selling it is poorly timed and comes at a loss. $20k in our savings account should be plenty of dead money. What do you think?
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Post Mon Jul 04, 2016 5:49 am
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oldguy
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That looks like a good plan. We usually max our EF at about $5000 & put any extra in the SP500 - but our SP500 Taxable Fund is our Fallback EF and it is well funded (about 45 yrs of accumulating). Your $20k EF has to cover the houses any income variations etc so $20k seems good.

As for refi on the houses - we often waited until we had about 50% equity, that way the refi's netted worthwhile lump sums - we put them into our Taxable SP500. And you want to make each refi count, they are expensive. When you refi the NOO house, expect to pay a rate premium of 1/2% to 1.5% above an Owner Occupied loan. And often DP requirements are higher - but that depends on your landlording history, the 'tone' of the era, how badly the lender needs to place his money into the market, etc. To optimize your assets, keep the OO fully mortgaged (95% loan if available, 30 yrs, FR).
Post Mon Jul 04, 2016 2:20 pm
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plush
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Thanks oldguy! Looks like the properties will have to stay put for a while.

Under what circumstances would you sell one of your rentals? I'm enjoying the cash flow, and hope to have enough passive income to do a bit more long-term traveling someday, so maybe it makes sense to keep it indefinitely?

I'm ready to open a brokerage account and have been eyeing TD Ameritrade based on a friend's advice. I've read up a little bit on the Vanguard 500 fund (VFINX) and was hoping to get your thoughts on this as a first holding.
Post Thu Jul 07, 2016 3:11 pm
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oldguy
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quote:
I'm enjoying the cash flow, and hope to have enough passive income to do a bit more long-term traveling someday, so maybe it makes sense to keep it indefinitely?


I tried to avoid passive income. We had good W2 jobs so any extra income would have been taxed at our highest marginal rates. Instead we kept the houses leveraged (the cash flow was kept low) and invested the equity from the houses in the stock market (where it could grow tax-deferred).

We sold most of the houses after we retired. We bought near-new houses. I like houses that are 2 to 8 yrs old, the lawn is planted, the drapes are there, the roof, plumbing, electricity, AC, appliances, were all near-new. When the houses aged to about 30 years, they started to need updating, added maintenance, we didn't sell until then.

quote:
TD Ameritrade based on a friend's advice. I've read up a little bit on the Vanguard 500 fund (VFINX)


I would (and did) go with Vanguard and the SP500. Ameri often has "sign up now, get $1000 free" stuff, that is off-putting to me, I prefer companies like Vanguard that simply provide a good product, don't try to hide their fees, and don't spend inordinate amounts on fluffy advertising. (Probably a generational thing, seniors don't care for goofy commercials - lol)
Post Thu Jul 07, 2016 4:40 pm
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plush
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Thanks oldguy. I took your advice and opened a Vanguard account. I'm ready to purchase VFINX (I am starting with $5000 and will bump to $10,000 by the end of this month, so VFIAX is not available to me based on minimum investment amount), but I wanted to first ask you if you try to time mutual fund purchases, or just buy them incrementally? The current price of the VFINX is the maximum it has ever been at $197.33 a share, but the same is also true for last week's prices. When you buy, do you wait for major market movements to occur (e.g. BREXIT) or just buy whenever you have the funds to invest?

Thank you; it's all a bit nerve-racking being new and all, but I know it's good for us.
Post Mon Jul 11, 2016 10:13 pm
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oldguy
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quote:
I wanted to first ask you if you try to time mutual fund purchases, or just buy them incrementally? The current price of the VFINX is the maximum it has ever been at $197.33 a share, but the same is also true for last week's prices. When you buy, do you wait for major market movements to occur (e.g. BREXIT) or just buy whenever you have the funds to invest?


I purposely avoid timing my purchases, I've done best (by far) buying incrementally, sequentially. And never selling. Eg, $1k/m, every month, for 30 yrs = $2,700,000 @ 11%/y.

When I was in my 20s & 30s, I studied trading - I bought individual stocks, penny stocks, sectors, short sales, options (both puts & calls), corn futures, yada. Used charting, point & figure, cup & saucer, stocastics, standard deviation calculations, Elliot Waves, Fibonacci Ratio.
After watching trades & traders, it becomes apparent that all prediction & probable outcome calculations are cased on history, ie the behavior patterns of past markets, the ability to match the future world with history. Of course that can't be done, tomorrow's market will be determined by overnite events, not by extrapolating yesterday's events.

Intuitively, it seems obvious to sell as the market enters a dip, and buy back when the market bottoms. But the human condition literally defeats you. You will hear people say "thsi is all I can afford to lose, I'm getting out" (Ie, they sell at the bottom). Then you'll hear that "I'm waiting for the market to recover so that I can buy" (Ie, they buy near the top). Sell low, buy high? lol

Actually, it is liberating to grasp that concept - you are now free to simply invest w/o worrying about 'timing'. And let your compounding run undisturbed.

BTW, that $197.33 was $2.29 when I was 29 yrs old. A factor of 86 - so maybe it will be $17,004 when you are my age - and you won't care whether you bought it at $167, $197, or $227, you'll just be happy that you bought it.
Post Mon Jul 11, 2016 11:47 pm
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plush
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howdy oldguy, hope you're doing well.

quick question: Since our income is volatile, there will be times that our set percentage of take-home pay for the week/month allows us to invest $2,000 - $5,000 + all at once in the VFINX, which is a pretty decent amount, IMO. Then, there are other times (like today) where our percentage of pay earmarked for stock purchases only amounts to $500 or so.

Since the VFINX is currently trading just around $200 per share, this is only 2.5 shares. My question is this: would you buy just 2.5 shares and pay the commission on such a small purchase order, or would you want for that stock money to queue up in cash to a few thousand before buying additional shares? Would you buy quarterly, monthly, annually, or...? Would love to hear your thoughts around structuring these purchases.

Thanks again,
Post Tue Aug 30, 2016 8:56 pm
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oldguy
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quote:
nvest $2,000 - $5,000 + all at once in the VFINX, which is a pretty decent amount, IMO. Then, there are other times (like today) where our percentage of pay earmarked for stock purchases only amounts to $500 or so.


Hello

We had W2 jobs so we were not faced with that issue, we had a fixed amount auto-invested every 2 weeks. So - steady incremental inputs, interrupting it would have required specific a decision/action on our part.

It seems to me that picking the amount each month could result in too much variance. Eg, on a good month it might be "let's reward ourselves and get a new couch" . Human behavior does that - after a year or two, we get lax and skip. Maybe you could set up an 'accumulator' account and then invest from it quarterly - or even semiannually - whatever it takes to provide a 'smoothing' effect so that the amount is always a family-imposed requirement?
Post Tue Aug 30, 2016 9:56 pm
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Paul@GFS
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quote:
. Maybe you could set up an 'accumulator' account and then invest from it quarterly - or even semiannually - whatever it takes to provide a 'smoothing' effect so that the amount is always a family-imposed requirement?


With a quarterly investment scheme you'll need to maintain a more even income than with any semiannual scheme. It has to be a family imposed thing if you really wish to save consistently. If you really wish to get the fruits in the future, you must start saving from now on.
Post Wed Dec 14, 2016 12:52 pm
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