| mortgage investment scheme |
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faugaun
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| mortgage investment scheme |
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OK not sure where to post.
Basically I have a mortgage, principle owed = 159k value of property 175k
Am considering refinancing, my current payment is 1180ish PMI is 120 a month original loan 4.5% interest rate 30 year fixed on 175k loan. Debt to income approx 25% credit score 720-755 ....OK hoping to refinance back to 30 years to lower interest rate (???) Current is FHA. Have decent liquid assets and would be willing to pay some additional towards the principal if needed to drop PMI. Hopefully ending up with a monthly rate of 850ish with a total loan of around 139k????
OK so first question, is all of the above acheiveable and realistic?
I am used to paying 1180 a month on mortgage and want to used this technique to free up additional funds for investment to maximize gain. Basically 1180-850 = 330ish....so keep paying 1180 each month (850 to mortgage) with direct depositing the $330 to an investment account where is is in an interest accruing format.....(CD/annuity/ market index fund/??? Open to suggestions) ....to maximize compound interest effect ...
Is this a sound logical plan or is there a financial flaw I'm not seeing? When I run the numbers at 7% interest I'm gaining 350-400k in the investment portion over 30 years assuming 7% interest (is this to high an assumption???), paying off mortgage and not spending a penny more than I would otherwise except an additional 4 years of mortgage at the lower rate....plus tax benefits from the mortgage interest to counter some of the capital gains income????? I hope I made sense 
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Sat Jun 07, 2014 7:45 pm |
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oldguy
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I use this plan with my rental houses. But you need to use investments that earn more than inflation (savings accounts, CDs, bonds, annuities, are designed to offset inflation, ie preserve wealth. Annuities are particularly bad - when you hire a company to assume the risk for you and 'guarantee' a return, you obviously have to pay them well for it - ie, pay a high fee
Equities, on the other hand, are designed to grow, outpace inflation. The generic market returns about 11%/yr, longterm. Your $330/m at 11%/yr for 30 yrs is about $900,000.
Here is a site that you might like - pick out some 30-year blocks and see what the history has been. For most blocks that I've looked up, the 30-yr return is between 9% and 13%/yr.
http://politicalcalculations.blogspot.com/2006/12/sp-500-at-your-fingertips.html
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Sun Jun 08, 2014 12:41 am |
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faugaun
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Thanks gonna go check out that link now, another question if I may be changing jobs 8 months from now and thus moving should I hold off on this or should renting with 20% equity at least break even? Guess I'm curious what avg monthly maintenance costs look like for renting property out. Also if long distance it probably best to let a management agency do the renting maintenance etc for me?
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Sun Jun 08, 2014 12:44 pm |
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faugaun
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Thanks gonna go check out that link now, another question if I may be changing jobs 8 months from now and thus moving should I hold off on this or should renting with 20% equity at least break even? Guess I'm curious what avg monthly maintenance costs look like for renting property out. Also if long distance it probably best to let a management agency do the renting maintenance etc for me?
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Sun Jun 08, 2014 12:44 pm |
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Publius
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I currently use a management company for my one property that is out is out of town. I pay 10% and am never hassled with repairs. Whether of not you can still make $ over and above repairs and fees depends entirely on the state of the property, rental rates in your area and, frankly, what kind of tenants you have.
My case, I have about 40% equity, pay 10% and make a couple thousand annually after maintenance. It is less about the revenue to me and more about the equity building while the property appreciates.
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Sun Jun 08, 2014 12:55 pm |
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faugaun
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No I'm totally down with that, having a house your renters paid for is great at the end but I don't want to have to worry about pushing additional funds at it (sure I get you need a floating balance of some sort to make repairs, repaint etc... as they come up, but the rent should cover this no additional money from me each time).
How much equity did you finance it at? 20%? I'm guessing 30 or 40 year fixed is the standard in rentals if you're financing to maximize the amount of rent beyond the mortgage?
So really rentals have 3 seperate income streams, profit above expense, appreciation, and equity (if on a loan).
How does this kind of investment compare to other types of investment it seems a lot more difficult to track profits with this, my investment accounts are easy they send me a slip each quarter and a slip for taxes and it tells me dividends, profits, losses, etc..
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Sun Jun 08, 2014 1:41 pm |
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oldguy
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Like Publius, I also use a property manager, they have a good screening system and a waiting list of tenants - so you seldom get dead-beat tenants - and you seldom have vacancies.
As for putting 20% down to break even on cash flow - I do the opposite - if a lender will give me a loan with 5% down I'll take it, I'm more interested in (1)growing the property value, and (2) freeing up capital for investing. Eg, an extra $35,000 of free capital can either make the DP on another house - or it can go in the SP500 and grow to about $750,000 in 30 years - I do some of both.
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Sun Jun 08, 2014 1:43 pm |
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faugaun
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It is across the street from the best public elementary school in a 500k person metro area, we moved to the house for that reason, so I'm guessing you could get parents, wanting to stay several years from that angle.
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Sun Jun 08, 2014 1:47 pm |
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faugaun
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quote:
Originally posted by oldguy
Like Publius, I also use a property manager, they have a good screening system and a waiting list of tenants - so you seldom get dead-beat tenants - and you seldom have vacancies.
As for putting 20% down to break even on cash flow - I do the opposite - if a lender will give me a loan with 5% down I'll take it, I'm more interested in (1)growing the property value, and (2) freeing up capital for investing. Eg, an extra $35,000 of free capital can either make the DP on another house - or it can go in the SP500 and grow to about $750,000 in 30 years - I do some of both.
Seems like a good way to diversify, I've got some domestic mutual fund investments and some Asian and Latin American investments was thinking about s&p index fund next (my current stuff has been under performing unfortunately, just now breaking even from 2008) but I like the risk profile its built at, kinda buffers itself as the dollar fluctuates. Ugh ok, so property or s&p next that's the question I think....the other plus to keeping this property is work makes me move is that all my family and wife's family are local so if we ever moved back it would be convient to already own something.
How many rentals are you pushing and how long ago did you start?
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Sun Jun 08, 2014 1:56 pm |
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oldguy
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quote:
rentals have 3 seperate income streams, profit above expense, appreciation, and equity (if on a loan).
No, just two - appreciation and rental income, the loan doesn't enter into it.
I started in 1975, had 4 houses for about 35 years, now 2.
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Sun Jun 08, 2014 6:06 pm |
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faugaun
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But the mortgage payment is two parts principle and interest. Interest is simply a loss. But payment towards principle is essentially income but like appreciation its very non liquid. Does that get counted as income on taxes? Like the equity gain? Hmmm intact I don't think I understand the tax process at all for renting....like if renter payment didn't cover mortgage and other expenses during the year do you get a tax break?
Is it worth setting up a business entity for renting?
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Sun Jun 08, 2014 10:37 pm |
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faugaun
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Ok , hitting back on browser rwsubmits the post...have to remember to not do that.
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Sun Jun 08, 2014 10:57 pm |
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oldguy
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Interest is simply a loss quote:
Really?
When I refi a house and add $50,000 to my loan, that adds about $250/m to the payment, ie about $90,000 total ($40,000 for interest). I place the $50,000 cash in the SP500 Index for 30 years and grow it to about $1,100,000. I don't call that $40,000 a loss, I'm happy to pay it for the use of $50,000 for 30 yrs. Plus, the $40,000 is a business expense, I deduct it.
You are entangling cash-flow with earnings. The loan has nothing to do with the rental income, the depreciation calculation, or the appreciation of the property. Ie, your appreciation is the same whether you have a loan or whether you own it outright.
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Sun Jun 08, 2014 11:30 pm |
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faugaun
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OK if you own 20% of your house and your monthly payment is say $1000, $500 is interest $250 is payment towards the principle and $250 is escrow....the escrow and interest are losses, worth while losses perhaps but still loss (you can call it expense if you prefer). The $250 towards the principle that is additional money in your pocket when the home is sold (which is an income/profit). As the loan progresses this hidden profit increases as the interest portion decreases.
Perhaps I am using the incorrect terminology I'm not learned in business speak unfortunately but I don't see how this isn't an income.
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Mon Jun 09, 2014 2:26 am |
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oldguy
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The $250 towards the principle that is additional money in your pocket when the home is sold (which is an income/profit).[/quote]
Yes. BTW, in general, it is a bad idea to "buy" equity, instead, wait and let the market "give" it to you. Eg, your $250/m is only $3000/yr of added equity - but a 5% market increase is a $10,000/yr gain in equity.
One time, years ago, I had an Interest Only mortgage, it worked great - I didn't have to pay that $250/m to principal, my cash flow was higher, that left more available cash for more investments. My loan remained constant - meanwhile the house value tripled over about 15 years. 
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Mon Jun 09, 2014 4:23 am |
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