Since I am having to liquidate my retirement portfolio to pay for some tax debt, I want to have something financial that I can focus on and consider a project. So I am spending the next 3 years really focused on maximizing monthly cash flow and paying off debt. If I can pay off just the debts that I have listed in my spreadsheet, I can cut about 30% out of my monthly budget and free up cash for other purposes. Besides, paying off debt is a great way to improve my net worth without having to pay taxes on the gains.
Refinancing the Rental Property
I met with a banker yesterday to look at doing a refinance on 4 of my rental houses. I have anywhere from 20-29% equity in the properties with 20 years 10 months to 22 years 11 months left on a 30 year fixed rate mortgage. The interest rates range from 6.375% to 7%.
Even though I am unable to get the best deal due to my credit score (I have a lot of debt relative to the credit lines), it does seem worth it and is consistent with my goal of decreasing expenses and improving cash flow in order to pay off as much debt as possible in the next 36 months. This includes rolling some closing costs into the mortgage. Of course, I will have to see the final deal but the initial numbers looked reasonable.
Assuming everything continues as expected, I would only be saving from $60-70 per month, but multiplied across several houses, the savings will add up and allow me to use the money for paying off higher interest rate debt. I will also be able to eliminate PMI on the one property on which I only put 10% down.
Decreasing the Term
The best part of the deal, though, is that I will not only save a bit of money each month, but I will be saving anywhere from 10 months to 2 years and 11 months on the mortgages since they will all be 20 year loans with a fixed interest rate. This will add up to some additional savings on the back end.
When I add it all up, it looks like I will end up saving $132,000 over the next 20 years which works out to be a decent return on about $10,000 in total closing costs. I will report actual numbers after the closing.
This is just one of the steps that will help me pay off a lot of debt over the next 36 months and free up some cash flow that can be put to better use besides lining the pockets of the bankers.
Here are the carnivals that had articles from my blogs in them this past week:
I try to take a longer term approach to investing and if you read my post on Kondratiev and the follow up post on K-waves, then you know that I give some credence to his theories. It only makes sense that bubbles arise out of human emotion and the bust that follows would cause those same individuals to swear off investing in that particular asset class for several years.
In fact, I read an article last night about the lack of interest in stock mutual funds following this recent “lost decade” and someone made the comment that investors were leaving the market and not coming back.
Because I believe that K-waves are real and the description of winter corresponds to the situation that is occurring now, then looking toward assets that do well in spring would seem to be the logical choice. Also because the K-waves are typically 40-60 years in length, it would seem that most of the seasons would be about 10-15 years in length as well.
The gold bull (gold does well in Kondratiev’s winter) started in 2001 so I would estimate that we are more than halfway through the gold bull at this point. I will be offering further comments about gold in a future post.
Preparing for Spring
Since it is a little late to really be thinking about winter, I think the best thing is to begin thinking about spring. So what investments do well in spring? Well, think about the bubbles that burst in the last decade. Stocks and real estate come to mind. These are the investments that should do well as the business cycle begins to spring to life and gather momentum.
Personally, I think I have about 4-7 more years before these investment classes begin to take off. So I plan to pay off as much debt as possible as quickly as possible to improve my balance sheet in order to purchase more real estate when prices are low. I already have some rental houses from the past decade and would like to own several more but credit is tight so I will need to have a pristine balance sheet when credit begins to loosen up.
In my area, there is still quite a bit of real estate supply available so I think it will take some time to work through it all. If interest rates increase, that will only make it more difficult for those who would marginally be able to afford to purchase in the first place. My market will always have renters so I don’t think it will be a big issue. I just want to make sure that the real estate I purchase will have positive cash flow.
As far as stocks go, I will continue to invest in stocks through my retirement plans since I have a long term horizon of almost 30 more years. I suppose there isn’t anything fancy of magical about my investment thesis over the next decade. My plan is to continue to save as much as possible in order to pay off some debt and add to my real estate holdings while continuing to invest in stocks through the 401(k).
I do not, however, plan on investing in bonds since interest rates have almost nowhere to go but up. Bonds have done well for 20 years so it is time for their season to end. Will it be this year or next or maybe 2013? I can’t be sure but I do know that when interest rates start to rise, bonds will fall and the $1 trillion that have flooded bond funds over the last decade will begin to leave and need a home. I believe that home will be stocks and real estate. And spring will be just warming up.
I frequently (OK, occasionally) joke with my wife that I am worth more dead than alive. That is because of the amount of life insurance that I carry. Admittedly, I have a fair amount of debt.
The majority of it is mortgage debt on real estate since I have 6 rental houses and a one-half interest in a small commercial building. Nonetheless, it is still debt and would have to be paid should something serious like death happen to me. So, I carry a lot of term life insurance.
I have always been a little too good at planning for the future. I have been putting 10% or more of my gross income in retirement accounts. I have invested in real estate. I have a more difficult time estimating current expenses.
I could live very cheaply myself, but it turns out that my wife and our 6 kids aren’t into wearing the same pair of shoes for 3 or 4 years or eating Ramen noodles for 3 meals a day. I haven’t purchased any new clothes in well over 2 years.
How Much Life Insurance Do You Need?
I can’t really speak for anyone else, but I can tell you what my goals for life insurance were and maybe offer some guidelines. Ultimately, it depends on whom you might leave high-and-dry when you pass away.
If you are a young college age student, living at home, with no debt and no dependents, you really don’t need any life insurance. On the other hand, if you are like me with a lot of mortgage debt and 7 dependents (6 kids and a wife) whose wife was busy working raising kids at home without getting paid for it, then you might need a little bit more.
For me, being worth more dead than alive is where I need to be at this time when all things are considered. When I first obtained my current level of term insurance, the youngest was still in diapers. I knew that I wanted my wife to have the option of remaining at home to raise the kids until they moved away to college.
That meant adding up all of my debts and making sure that they could be paid off entirely with some money left over for surviving for about 15-20 years. After that, we figured that she could work for daily expenses if necessary.
If I were to kick the bucket after this post, the insurance payment would be enough to pay off every debt we owe including all the mortgages on all of our real estate investments and still leave some extra. Plus there would be all the money left in the retirement accounts that I have.
The rents alone from the paid off houses would be enough to live off without ever having to go to work again. She wouldn’t even have to mess with the stock market (which she knows nothing about) but could simply buy some more real estate with cash and have a six figure income from rental property after expenses. That doesn’t even count any potential Social Security benefits for surviving spouses or children. I don’t even count that in my calculations.
Now you know why I say that I am worth more dead than alive at this point in my life. Do you have enough life insurance? What would happen to your family if you died today? Would they have to change their lifestyle? Have you reviewed your life insurance recently?