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Old 08-18-2019, 10:10 AM   #1 (permalink)
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Cash - what to do with it....

We just sold our home and move to North Carolina. This resulted in a large (to me) payout that gives us options.

We spent a chunk of it paying off credit card debt (that's a pit we won't be getting back into) and on moving expenses.

We are of course buying a house, but aside from that we are trying to be smart about how we use the equity we cashed out on.

We are interested in getting into some cheap rentals to get our foot in that door, but we eventually want many more.

So with our remaining funds I see two options:

1. Put a full 20% down payment on residence, leaving just enough to buy appliances, change carpets, and save 3 months of living expenses as an emergenct fund. This avoids PMI but ties up all of our cash.

2. Put minimum down payment on residence, still buy our appliances, change carpets, and save 3 months of living expenses, plus purchase a rental or two (cash, again cheap. Would net about $500 per mo each), and set aside 10k or so as a rental repair fund. But I pay MI. If I need to be more liquid I assume I could take out a mortgage on the rentals.

I'm leaning towards (2).

Anyone have any suggestions on how to intelligently spend?
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Old 08-18-2019, 10:35 AM   #2 (permalink)
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I for one would avoid PMI at all costs. PMI does is no advantage or benefit to you.
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Old 08-18-2019, 10:45 AM   #3 (permalink)
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Exactly what he said... PMI could cost you up to a thousand a year...
If your going for option 2, I would get a piggyback loan...

Personally I would choose option 1 .... I have had four rentals and never made a dime...
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Old 08-18-2019, 10:55 AM   #4 (permalink)
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Originally Posted by scottieb View Post
I for one would avoid PMI at all costs. PMI does is no advantage or benefit to you.
Could not agree more. I would like to propose option 3, put enough money down that the monthly payment on a 15 year mortgage is doable. Rates are usually a point less on 15 year mortgages so you save gobbs of money and are debt free much faster!

If you want to do option 2 and avoid PMI, many lenders will do an 80/10/10 loan. It is where you put down 10%, the bank writes you a traditional mortgage for 80% (hopefully at a fixed rate) and a short term loan for the remaining 10%. The smaller loan usually is fixed for a small period of time and then a floating rate.
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Old 08-18-2019, 01:03 PM   #5 (permalink)
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PMI on our loan is estimated to be about $230. We are still waiting on appraisal and inspection to come in on our purchase, and our credit score will change with the accounts we paid off, so that's all subject to some change.

I hate to incur the PMI. Is it wrong to look at it like a loan? I'm keeping about $50k (instead of paying it on my mortgage) and it will cost me $230 a month until my equity reaches 20%. And admittedly, when I think about it, between the PMI, higher mortgage payment (because of larger principal), taxes + insurance (and potentially principal + interest) on any rental properties I could buy, any profit gets wiped out pretty quickly.

At the same time, even if I don't purchase rentals I hate to have all of that cash go "poof!"
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Old 08-18-2019, 01:48 PM   #6 (permalink)
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Originally Posted by apamburn View Post
PMI on our loan is estimated to be about $230. We are still waiting on appraisal and inspection to come in on our purchase, and our credit score will change with the accounts we paid off, so that's all subject to some change.

I hate to incur the PMI. Is it wrong to look at it like a loan? I'm keeping about $50k (instead of paying it on my mortgage) and it will cost me $230 a month until my equity reaches 20%. And admittedly, when I think about it, between the PMI, higher mortgage payment (because of larger principal), taxes + insurance (and potentially principal + interest) on any rental properties I could buy, any profit gets wiped out pretty quickly.

At the same time, even if I don't purchase rentals I hate to have all of that cash go "poof!"
$230 a month!? That is what I currently pay each month for a car I bought new a few years back. How long will it take you to get to 20% equity if you keep the 50k?
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Old 08-18-2019, 02:37 PM   #7 (permalink)
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$230 a month!? That is what I currently pay each month for a car I bought new a few years back. How long will it take you to get to 20% equity if you keep the 50k?
To gain 15% equity? A long *** time assuming value of property doesn't change.

Of course if value goes up then it would be faster. If values plummet maybe effectively never.

Our last home doubled in value in 7 years. We bought low and the market just skyrocketed. We were out of our PMI In that home in 4 or 5 years because of that.
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Old 08-18-2019, 09:53 PM   #8 (permalink)
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I would personally lean towards buying the rentals. While they may not “make money” or cashflow they will at least be somebody else paying down a mortgage for you that you can eventually pull the money out through selling or refi. And imagine if you were able to pay off the rentals then you’re making big passive cashflow. Guaranteed the rentals will cover your PMI on your primary and then some.

Don’t be afraid of the bank, they’re putting a lot of money up for you and yes they will collect a fee. Think long term on what the rentals could do for your financial picture and in the end for retirement.

Cashflow, appreciation, equity building, and tax advantages are how real estate makes money. The more property you own, those things compound on one another: buy early, buy often. PMI may cost a couple grand a year but owning an investment property will at least cover that in tax advantages or equity growth no problem.

Last edited by Gabe; 08-18-2019 at 09:56 PM.
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Old 09-11-2019, 12:39 AM   #9 (permalink)
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Put the 20% down, no guarantee of quick appreciation. PMI is costing you approx $2800/yr. Plus you are also paying a higher pmt. How much is the payment difference? I doubt the rental income will make up the pmt difference. For a rental, start with at least a duplex. It is hard to make money on a single family rental. Also, do you really want to deal with renters, there will be months the rental will be vacant. You will have to make repairs. You are probably better off investing in the stock mkt or REITS. Also, a reduced term, 20 yrs or 15 yrs will save you alot of interest. Build equity in you house, then use the equity for a down payment on a rental.
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Old 09-11-2019, 01:08 AM   #10 (permalink)
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Keep in mind I'm pretty biased based on my line of work, but here is a different perspective:

My brother has 3 rental properties at this point that he built up over the last half a decade. While he has made money in them, If you factor in the 3-4 hours after work every night for a few years he spent fixing them up, the weekends he has sunk into them, the miscellaneous repairs, cleaning every time a renter moves out etc etc. They are a terrible idea. Basically if you factor in your own time & labor into a rental they loose tons of money, but if you are okay working for free on paper at least they make money.

Personally I highly value my time. I'd just dump any extra cash into a couple index funds and walk away. Way less work and if the last couple decades taught us anything, pretty solid returns & high liquidity.
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