Because of compounding interest, you should fund the IRA as early as possible, and before putting the money elsewhere.

Hi Mil,

Good for you for taking on your financial strategic planning in a thoughtful way. It really doesn't need to be extremely complicated (though it is also definitely NOT what most people think intuitively...)

On rental property leverage (mortgages) the strategy is different than on your primary home because the tax structure effect is different. On your rental property every dollar of rent is initially taxable at regular income rates, and the appreciation will eventually be taxed at longterm capital gainst rates.

Every dollar in costs of business of owning your rental properties can directly offset (erase) the taxability of each dollar of rental income.

THUS... in the simplest sense, the "perfect" scenario is when your rental income is perfectly matched by your costs of doing business. Your rental income zeros out for taxation purposes by a perfect balance of business expenses for the ultimate "streamline" where you pay nothing in excess costs, nor excess taxes, yet you accumulate net worth as the property naturally appreciates.

You certainly want the lowest reasonable costs of business, including the lowest available costs of interest... but eliminating the mortgage by directly paying it off a little by little is usually NOT the best way to reduce your business expenses.

You certainly want the highest personal income... but not if an increased dollar of income is vulnerable to taxes when it COULD have been tax-protected by being used to offset the expense of owning additional equity that is appreciating to your benefit.

SO.... if you follow the above financial balancing, here are your "rules of thumb";

A) Assuming interest rates as low as possible INCLUDING amortization as low as possible (30 year terms, or interest only preferred,) you want as much leverage on your rental properties as your net rents (after maintenance costs) will cover... paying down the mortgage little by little is net detrimental, financially,
B) If you have MORE net expenses (maintenance, taxes, insurance & interest) than enough rental income, AND you have the capability of carrying the operating costs anyway, then DO NOT REDUCE YOUR MORTGAGE! You are booking a business loss, which you can carry forward UNTIL you have additional income or profits (and you will,) which you can then offset from the accumulated tax losses,
C) If you have any additional net rental income it is best employed in tax-protected investments 1st, non-qualified investments 2nd, and mortgage elimination last (preferrably after your investments have grown to the ability to aliminate the mortgage entirely by a simple single cash transfer.)

Mortgage elimination is a one-time savings, but investments provide compounding returns, and especially when tax-protected returns are compounding you far outperform what you would have saved in interest if you invest more, and earlier.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

I don't think that you've actually mentioned what you goal is. If it's to make money and provide for your future I would suggest that you take every penny that you can save from these rentals, save up and buy another rental. Save from that and buy another and continue. I've done it over 40 years, have friend who have done it and none of us have many money worries except who to leave it all to;-)
No matter what anyone tells you, owning rental property is probably the easiest way for someone to get started on a shoestring and end up rich someday. Granted it isn't alway easy, but it is worth the work.
You don't need any magic and complicated formulas. If you can buy something and get a 8% steady return on your ivestment who will do just fine because you will also get appreciation, depreciation and principal pay down. Thus over many years your actual and total return will be in the 15-20% range.

I don't think you've given enought data for an accurate answer, but I can see some potential problems in how you're figuring things:

1) You're describing "potential savings" as an absolute number rather than a number at a particular point in time, and

2) You're including rental income, insurance, and taxes as part of the savings from prepaying the mortgage.

In particular, (2) makes no sense to me because presumably you're getting that income and paying insurance and taxes regardless of the state of the mortgage.

I suggest you try comparing two scenarios: one in which you prepay the mortgage and one in which you invest the money at your suggested 8%. Ignore any income or expenses that would be the same in both scenarios.

Now pick a point in the future -- say, the point at which you would have paid off the mortgage in the ordinary course of events. In which scenario do you have more money available at that point? How much? Then you'll know the answer for sure.

I actually do agree with Dave. An aquaintance recently told me what he does although I only got sketchy details. He is older, has a nice income from his profession. He actually uses his real estate investments to offset his income so that his taxable income is always under 100k. I am not sure if that was what he was really saying as I am not an accountant. Each house is incorporated so he is able to carry over the paper losses against his personal income. I say paper losses because as rental property he depreciates it. So even if his rent is equal to his mortgage, taxes, insurance and other costs, he is still losing money on paper. From his point of view this is a good thing.

Next because he is depreciating it, his basis (how much he paid) is decreasing every year for tax purposes. So if he were to sell it in a regular sale (there are exchange sales etc) he would have to pay capital gains based on this new lower basis which would be a bad thing. So rather than sell, he and most owners of these types of properties do cash out refinancings. This was especially popular when equity was going up. So you have your cake an eat it too. You still own it, your tenant in theory is paying all of your costs and mortgage, you now still have your depreciation for tax purposes and you got a nice chunck of change pulled out of the equity of your house which is tax free because it is a loan and you can do whatever you want with. Of course this only works if your rent will cover the mortgage and your other costs. So the short answer is, the last thing I would do is prepay a rental mortgage with your extra income. Sounds like you need a good accountant

Should add that I do not own any rental property, the whole tenant thing scares me. Just curious for those who do own, where do you own if it is not in your own city (this person owns in different cities), how do you manage the properties if you do not live near. Are tenants a big pain as everyone claims

As a landlord who owns property locally and some 1,800 miles away from my home I can tell you that the local stuff is somewhat easier to manage. If the property is at a distance then you will be at the mercy of rental/management agencies which aren't really great. The only good way to own property at a distance is either to own something large enough to afford professional management on the payroll...this probably means a property with a value of 2M and up. The second way is to be involved with "Tenant in Common" investments. Where you own with partners and the property is professionally managed. You can sometimes get into these investments for as little as $100,000.
As far as dealing with tenants...it's a learning curve where everyone will make some mistakes in the beginning. I think the improtant things are to have a good location so you don't have to rent to the "bottom of the barrel", join local landlord groups to get contacts and information and hopefully have a location where there is a demand for housing...near a college or military base are usaully great.

Momto6 - Dave gives very wise advice. Not to say the other advice here isn't correct, but he knows his stuff.

I'm not going to address anything with your rental income or your home mortgage. I am going to ask you a few questions about the TSP.

You stated that you contribute the amount to the match. You should first be maxing the TSP as it is the cheapest way to monitor your retirement because there are no loads (charges) when you move the funds around. Depending on your state, the TSP from your pay is tax free federally (all states). Some states do not consider the TSP a 401K. I live in AZ and they don't, although I have written to congressmen/senators etc., to no avail. So, the deductions for TSP are done before tax on my husband's pay, but we get taxed on the amount for our state return. Sucks. Anyway....

What funds are you in within the TSP? Do you watch them? ARe they diversified or are you solely in G? Into what funds is the biweekly pay contributed?

If you're in G, you're making a HUGE mistake because, while secure, the growth is a pittance compared to the other funds. You're close to retirement so you need a combination of funds.

I have our TSP somewhat diversified - 20 C, 20 S, 60 I. The I fund increased nearly 19% over the last year and 90+% since inception. The link to the 12 month growth of each tsp fund is the bottom link.

Since I can only do one link, here are the others:
Last 5 years:

http://www.tsp.gov/rates/returns-5years.html

http://www.tsp.gov/rates/returns-lfunds.html

You sound like you are very in tune with your finances and you want to do the right thing. I suggest not only paying attention to your rental properties/mortgages, but also the TSP.

I check the returns and log in to our account daily. I rarely do interfund transfers because I learned the hard way that trying to time the market is a huge mistake. We lost alot in Feb because I was trying to circumvent the change in market conditions. Since I've left it alone and moved completely out of G, we've seen a nice return.

You gotta have a strong stomach for the rare losses, though. It took me a long time to look at the big picture rather than the small one where there will be pits and valleys.

I highly recco you familiarize yourself with the TSP website at tsp.gov, learn about the funds and pay attention to it as much as you can. You can change your contribution allocations and transfer between funds from that site. Any increase in your TSP has to be done from the EPP website where you view the E&L and benefit info.

I would like to recco a fantastic group to you that deals with the TSP. The girl who runs it really knows her stuff and she and the other members can help steer you in the right direction. She has been 100% I for a long time and is making fantastic returns. I don't have the stomach for that much risk, so I diversify our funds a bit more.

You can post your allocations and at the end of each month, she will calculate the returns for everyone participating as well as post the returns of the pay sites to show return comparisons. Her allocation is constantly the highest out of all the other TSP sites - and her group is completely free. She posts useful articles and no question is stupid to her.

Hmmm... I tried to link to the TSP_Strategy group and I got a notification that they cannot be linked because of spam here promoting businesses.

If you are interested in this group, please email me through my profile as the rule of this group says I can't circumvent the spam blocker, although, I think it would be ok to give you the name of the group over there since it is not a business, it is not a pay site and it doesn't spam anyone. Google TSP_Strategy and you will find it.

It really sounds like you are on the ball with your finances and in addition to being a mom to 6, you have a huge responsibility in terms of taking care of your family's finances.

I do the finances too. My husband is the federal employee (border patrol), but since he works such long hours, I have to handle the household tasks, including the TSP. Leaving it to him would be pointless because he doesn't understand that kind of stuff and it's been a huge task for me to learn all about it.

I highly recco you do what you can to learn about the TSP and how to strategize your retirement in terms of that.

Also, to answer your question about where to put extra funds, the concensus at the TSP group is:
1. Max TSP
2. Max ROTH IRA
3. Traditional IRA's
4. Pay off mortgage

I hope I haven't stepped out of the bounds of your question by focussing on the TSP. I just want to point out that it sounds like you're paying more attention to your rental incomes and mortgage than your retirement savings. There's alot you can do to plan within the TSP and I highly encourage you to do so!

I hope to see you at Sarah's group. It really is extremely beneficial!

Here is a link that might be useful: TSP 12 month growth

I did tell ya'll that it may take a minute for me to figure out what you're saying right? I hope you don't mind, but I replied to everyone in one post instead of several.

Dave: If I understand you correctly, you are saying that if I prepay the mortgage then I will lose the tax write off for the interest for however many months I pay it off early. Right? Thus will have to pay tax on the income.

Coolvt: My goal is to retire (in 17 years, age 60) with enough money coming in monthly to live comfortably, and zero debt, so that my husband can get a job that he LOVES, no matter if it pays or how much, or even not have one at all, if that is what he chooses to do. Myself as well. =0) To be able to go to Australia and Alaska, and then look at the rest of the alphabet. To visit my grandchildren. To travel the US for a month or a year, whatever we choose. I want the freedom to not be tied down, and the option of staying in one place. =0) I want it all!! =0) And I would prefer to leave the IRA and TSP until we HAVE to begin taking it out, as well as any income from Social Security.

alphacat: The absolute number of 118 months, is because that is when the house will be paid off, whether I pay it early or not. I guess, day 30 or 31 of that month would be the particular point in time.

2.) rental income for the 28 months would be "profit" (difference between 90 months at rapid repayment and 118 months at regular payment)

taxes and insurance for that 28 months is included with the payment at the regular payment rate, so will not cost me additional. At the rapid repayment it is only covered for the first 90 months, so I must pay that amount for the 28 months not covered by the mortgage payment. It has to be deducted somewhere as the "cost" of having the house.

saphire: One of the houses is in a nearby (less than an hour) away, and about 5 minutes from hubby's work. The management company we had for this house when we were out of country were a nightmare. For both us and the tenants. When we returned stateside, we got rid of them and everything has gone much smoother. The tenants we have are good (great would be paying rent every month on time - good is every month, sometimes a few days late), they do not have a cow over every little thing, and have taken good care the house. They have been there for 7 years.

The management company we have for our house 3 hours away is also the one that sold us the house, have very good communications with us, gets stuff fixed quickly, and keeps the tenants happy, the HOA happy, and we're happy with them. They have been honest with us, and helped us weed out a couple of possible problem tenants (wanted to nit pick the house, making demands, before they ever moved in!!). Since that house is near a deploying military base (meaning the whole base goes), and has a fairly high turnover for tenants (average between one and two years), I wouldn't want to deal with all the paperwork for a new tenant every time.

Tenants are like every other part of society. Some good, some bad.

coolvt: I agree with the learning curve.

I would add that you should "know your audience". One of my houses is outside of a major gate of a military installation....BUT set back in a neighborhood (not a subdivision). So the advantage is that it's close to post, close to supermarkets and schools, but not so close that you are looking at the gate every time you go anywhere. As a "family" dwelling, we also had the backyard fenced, and made sure that the yard was "easy maintenance" and it not being in a subdivision means that if soldier is in the field for 2 weeks or a month, the spouse can let the grass get a little longer without having to worry about the property nazis breathing down their neck. Our audience was the soldiers with their families. Knowing their specific needs, and desires, I'm sure is part of why the house stays rented.

sparksals: First I will have to tell you that our "retirement plan" has always been more of an idea than anything really concrete in my brain for a long time. Only recently has it taken on the importance it needs to come to the front of my brain. =0)

I have watched the TSP quarterly. I'm not totally sure of the % of the total goes to which fund, but I believe we are fairly diversified and have some funds in 4 or 5 of the different funds (not sure that's the right word). Our pay goes into each according to the % that we alloted the last time we did it. =0)

1. Is there a max on the TSP? Hubby says it "used to be 10%", but he thinks that changed.

No, I don't mind differing opinions, it helps my brain entertain new ideas and learn something. =0) I know that I am focused on the rental properties and mortgages on them, because at the moment, those are closer to paying off, than the IRA or TSP. I believe in diversification, so the rental properties are currently part of my "retirement plan". They are a part that will begin to pay off long before we retire, and continue once we do retire (or at least that's the plan). I am learning the IRA and TSP world and language (and remember we're looking at 27 years before taking anything out of them, and we are already putting funds into both), but I already understand the houses. =0)

Thank you for the sites. I'll take a look at them. And for the info on the group!

Everyone: Thank you for taking time out of your busy schedule and explaining things so that even a relative newcomer can understand. =0)

Mil

Are you factoring in rental increases?

Also about buying near a military base. We are the same age so you may remember as I do the military base closings of the last 20 years. Obviously that is a growth industry now (not trying to get into politics) however if the Republicans lost the next election or the one after that it may not be. Are there rules to looking at housing in military areas. Military personnel do seem like the perfect tenants but if the military needs to downsize as it did in the late 80s I would have concerns

On the military....I think all you can do at this time is to try to figure out what will happen in the next 8-10 years. There are bases slated to close and you definitley don't want to depend on them. But, the ones closing will increase the occupancy of some of the remaining ones. I think these should be safe for the forseeable future.
Probably one of the best things to be near is a college. A college with 40,000 students will only provide housing for about 15,000. That means there are 25,000 kids per year looking for housing. I have a few invesments near colleges. Although in one I don't rent to undergraduate students, I rent to plenty of teachers, grad students and medical students. The students suck up the available apts. and the rest of the population has difficult time finding housing. A great situation for landlords.
I recently got involved with a property that has a nearby college (3 miles away) with 15,000 students off campus and growing AND a military base 1 mile away that isn't closing, but is growing. The best of both worlds.

Thanks is there a list of which military bases stay and which go?

As for college housing, does the local resale price usually reflect the student occupancy?

In other words, If houses in equivalent neighborhoods 10 miles from school cost 100k per unit, does a house .5 miles away cost 100k plus a premium for being so close to school? Also with the Baby Boom, now is the toughtest it has ever been to get into college. As a result schools that were party/safety schools 20 years ago are now filled with serious students that would have gotten into highly competitive schools in 1985. Also their enrollment is much greater than it was then. Since 10 years from now enrollment is predicted to decrease again (although not to 1985 levels), do you factor that in? Will rentals loosen especially at these third tier schools?

saphire: No, I did not want to factor in rental increases because then I would have to factor in insurance and tax increases too. =0) I figure they'll come out relatively even in the end.

I don't know that there is a "safe" for military bases closings, but I feel relatively secure in the ones we have rentals near. Questions to ask.... Is the only reason the town is there is to support the military and their spouses? Are there other MAJOR employers? Who are they? What else is in town? College, regional hospital, VA hospital? etc... On the base itself, what is the reason it is there? What's on it? Schools (for the soldiers) are good, especially schools that have been there a very long time and are very large. If it is a Division, it's likely that the entire post may deploy together, leaving very few behind for a year or more. But it probably won't close either. Regional hospitals are also good (though they change too). How much housing is on post and what the waiting list is like. Housing on post can take as little as 2 months or as much as 5 years to get into.

For the rules of renting to military personnel, I'm assuming that you are in the US somewhere, different rules apply in different countries and I can not even begin to know about those. Yes. There are some stateside as well. They may vary from post to post and the best place to ask would be the local housing office on post. They generally will want a military clause in the lease agreement, meaning if the soldier comes up on orders to change posts or deploy you have to let them out of their lease. You have to keep the house in a good livable shape, and fix problems promptly. If you are a good landlord and take care of your place, then they will also help YOU. They keep a listing of available houses for rent, to show to every incoming soldier that needs housing. There are landlords out there that will never be on that list. The housing office can refuse to put it on there. Their main goal is to secure safe, decent housing for soldiers and their families. It just so happens that their goals and yours coincide. =0) Although I would encourage anyone to rent to a soldier I am a bit biased, having been one and married one. There are good soldiers and good tenants and just because you are one, doesn't mean you're automatically the other.

Hi Mil,

Dave: If I understand you correctly, you are saying that if I prepay the mortgage then I will lose the tax write off for the interest for however many months I pay it off early. Right? Thus will have to pay tax on the income.

Correct. If you are currently surviving just fine without feeding extra money to your rental properties (or the banks holding their mortgages,) then you are building your retirement nest egg faster & more securely by NOT feeding your money toward them (at this moment, anyway,) and instead sending any additional discretionary funds toward seperate tax preferred investment accounts... or seperate non-tax-preferred accounts... and lastly, toward the rental morgages.

Whenever you have both;
A) Enough in your seperate investment accounts to cashout & payoff the rental mortgage entirely, and,
B) the desire to convert your nest-egg investments into a revenue stream (the unleveraged rent revenues,)
THEN is the time to pay off the rental mortgages, once and entirely, in full, finally.

Trying to "sneak up on them" little by little hurts your safety and results.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

I have watched the TSP quarterly. I'm not totally sure of the % of the total goes to which fund, but I believe we are fairly diversified and have some funds in 4 or 5 of the different funds (not sure that's the right word). Our pay goes into each according to the % that we alloted the last time we did it. =0)

You're doing yourself a disservice to your future retirement if you don't know in what funds your money is allocated, how the bi-weekly pay is allocated and especially how much growth you've had.

I only say this because you have recently put your retirement planning to the forefront of your brain and that should include monitoring and learning about the TSP since it will be the vast majority of your husband's retirement. BTW is he under CRS or FERS?

Since I started watching the TSP several months ago, I learned that this is not the best time to be in the "F" fund because the USD is constantly down. The domestic US economy is 39th in the world with many of the countries in the "I" fund way higher and close to the top. I originally had everything 20% into each fund, but have since moved things over to the more profitable funds since I"ve learned alot about how the TSP works.

1. Is there a max on the TSP? Hubby says it "used to be 10%", but he thinks that changed.

Max amount for 2007 is $15,500 or 20,500 if you're over 50. The max contribution does not include the matching, so that is over and above the limit.

We allocate a specific number, not a percentage. We put $425 per pay period into the TSP and that is nowhere near the max, but is over 20% of dh's pay. The more you put in, the more matching you get.

If your husband has received any pay increases, then it might be a wise option to increase the TSP contributions. That's what we do whenever dh gets a raise. It allows for a greater tax benefit and more matching dollars.

No, I don't mind differing opinions, it helps my brain entertain new ideas and learn something. =0) I know that I am focused on the rental properties and mortgages on them, because at the moment, those are closer to paying off, than the IRA or TSP. I believe in diversification, so the rental properties are currently part of my "retirement plan". They are a part that will begin to pay off long before we retire, and continue once we do retire (or at least that's the plan). I am learning the IRA and TSP world and language (and remember we're looking at 27 years before taking anything out of them, and we are already putting funds into both), but I already understand the houses. =0)

It's good that you're looking to diversification and that you're open to look at all avenues. I think what you're missing is the tax benefit to the TSP, especially if you can afford higher deductions because it reduces your taxes that could be offset by the additional tax you pay with your rental properties and paying them off early.

Having said that, I prefer to have a home paid for, which goes against many other people's belief here that the funds should go to investment vehicles. I try to diversify that as well by having money in a high yield account plus pay a bit more to principal.

Sorry, I thought you were closer to retirement than 27 years to take out of the TSP. That gives you a long time to make the most of your investment opportunity there and is even more reason to learn everything you can about it.

If your funds are diversified btwn the 4 or 5, that means you're losing a strong growth opportunity because you would have some money allocated to the G and/or F fund, which aren't producing very well these days.

I was extremely overwhelmed when I first started paying attention to the TSP. It's definitely a long learning curve, but I am learning.

It is imperitive that you know in what funds you are invested, how much is going into each fund and how they are doing - an not just quarterly. At minimum, you would be best served by checking weekly.

Sparksals is giving you good advice. Start reading up on investing and especially on the TSP. It is a good system and you are fortunate to have that perk.

I agree you should immediately change your new allocations so you do not add any more dollars to the F or G funds. With a 27 year horizon, you will have plenty of time to ride out the ups and downs of the equities markets - no point in being very conservative.

As for the money already in F and G, once you decide on your goal balance (per cent in each fund), you may want to move the money in chunks over time rather than all at once. The term for that is "dollar cost averaging". Basically if you buy at different times you kinda protect yourself from buying everything at peak prices. If you move X dollars a month, you end up buying fewer shares when prices are high, and more shares when prices are lower. This is good.

Research and learning will help you choose the balance (per cent in each fund) right for you. TSP makes it incredibly easy to rebalance your account and keeep those percentages the way you want them over time. What should the percentages be? Ah, there is where art (and guts) come into play. One frequently cited rule of thumb is "100 minus your age" as the per cent to keep in equities (C, S and I), the rest in bonds or secure vehicles (G and F). In your case, the rental properties can serve as your security or ballast, so you could maybe take more risk, be more aggressive in your balance and weigh more heavily toward equities.

I'm not a financial advisor, and I want to be clear that the choices and risks are all yours here. Learn as much as you can and make the best decisions you can. I think it is excellent that you are starting to think about all this. You are already way, way ahead of the typical worker.

celtic.. FTR, I assumed she was in either F or G since she said she's split btwn 4 funds. She could very well be in the L fund, which is getting an oK return, but S and I are doing much better. G is a waste of space right now when the equities are doing so much better.

Are you aware of Sarah's group? She is a wealth of knowledge.

Sparksals, I figured F and G for the same reason: "split between 4 or 5 funds" wuould almost have to iclude one or both of them.

Intrigued by Sarah's TSP group but got hung up on the creating a Yahoo account ID step. Can't come up with a name that's not taken! Tell me, does the name matter like here in GW, e.g. it appears on all your posts, or is it just a registrationID and you pick a name later when you want to post? Can't figure that part out...got stuck.

CM - You can actually assign several different ID's under your one original ID.

Email me through my profile and I will help you set up.