Larry emails: Please help with this decision: I have two mortgages. In the one I live I owe $44,000. It carries a 4.25% interest rate with payments totaling $389/month. The other is a lease-to-purchase: I owe $54,000 at 6.5% interest for a payment of $510/month. I can pay the entire principal on the second home and reduce the overall cost to myself. I am, however, 62 years old and am thinking I should pay off the home I am living in first. Please give me your opinion.
PS: My tenants have also broken the lease-to-purchase agreement, but, according to law I am more like a bank. I will have to foreclose to get them out, rather than evict them as if they were simply renting. I intend to keep them as long as they make the payment. I do not want to be a landlord.
Sorry to hear about your tenants bailing on the lease-to-own contract. Your first question is regarding if and how to pay off one of your properties. It’s nice to hear that you have enough money to pay off one of the principals, but if this will mean tapping your savings or compromising your retirement, I’d say just sit tight and focus instead on shoring up your retirement accounts. If you have credit-card debt or other outstanding loans, that’s another reason to keep cash on hand. Sam Tamkin, a Chicago-based real estate attorney, agrees. “The issue is determining whether you have enough financial wherewithal to go through your retirement without liquid funds,” he says.
If you feel confident that you can pay off one of these mortgages and still have ample savings left to address your retirement needs, I’d make the move that helps pocket the most money, which for you may be paying off the rental property. I’m not sure what your tax bracket is or how much rent you’re charging your tenants, so please bear with me.
Here’s what we do know: The rental property has the higher interest rate. By paying off the second mortgage, you’d save about $3,500 a year in interest, vs. $1,870 if you paid off your primary residence. Of course, that doesn’t factor in the loss of the interest tax deduction, but without a mortgage to pay – and assuming you continue to receive sufficient rent -- you should be able to come out ahead and better off than if you paid off your first home.
Here’s a chart to illustrate your potential savings. Let’s assume you charge about $510 a month in rent (the cost of your mortgage) and are in the 25% tax bracket.
With Mortgage No Mortgage
Annual Rent Income $6,120 $6,120
Annual Interest Expense $3,510 0
Earnings Before Tax $2,610 $6,120
Income Taxes (25%) $652.50 $1,530
Net Income $1,957.50 $4,590
You’d pay an extra $878 a year in taxes, but your net savings would still be more than $2,600 a year by paying off the rental.
As for your second concern about your tenants who’ve broken the lease-to-own agreement, you should, at the very least, try to keep them paying rent. I know you don’t like being a landlord, but, as you stated, depending on how much the tenants have already paid toward the equity of the home, they could claim that they have an “equitable interest” in the home and the only way out of that contract would very likely be through a foreclosure. "The option to buy is the tenant's, not the landlord's. If they've decided not to go through with [the lease-to-own contract] but haven't broken their lease by not paying rent, or other ways, your best bet is to just wait until their lease is up,” says David Benton, a real estate agent with RE/MAX and investor in rent-to-own properties. “At that time, you can decide whether you want to extend it, sell, or get new tenants."
In the meantime, do schedule a one or two hour appointment with a real estate attorney with experience in lease-to-own contracts to fully review your options. If the contract has a certain expiration date or if the tenants stop paying rent, you may have certain rights. Good luck!
Meghan on Facebook asks: Hey Farnoosh, My husband and I are trying to cut out about $200 a month on groceries... Any out-of-the-box advice you could give us?
Meghan, your question couldn’t have come at a more appropriate time, with the holidays approaching and lots of mouths to feed. You’ve probably noticed a spike in food prices recently. Blame it – at least in part – on this year’s severe drought in the Midwest. The dry spell has hurt crop supplies and sent retail food prices surging – and the sticker shock is expected to continue next year too.
I’ll spare you the in-the-box coupon-cutting advice and give you a few alternative strategies.
My No. 1 tip is to plan your dishes based on what’s already stocked in your fridge and pantry, and buy ingredients that can serve more than just one meal (e.g. whole-wheat pasta, brown rice, legumes and seasonal produce). Bulk up on basic foods that can make their way into several dishes.
If your family is big on red meat, consider cutting it down to just one or two nights a week and substituting beef-based dishes with other protein-rich foods that are less expensive and healthier like fish, soy and legumes. For example, instead of beef burgers one night, try veggie burgers. Instead of spaghetti and meatballs, consider a veggie-based stir-fry. When buying beans and legumes, it’s cheaper to buy dry and in bulk – not canned. My go-to foodie and chef Allison Fishman, host of The Blue Ribbon Hunter on Yahoo, says you’ll get five times more beans for your buck when you buy bulk compared to canned.
And when you do purchase beef, poultry and other meats, go for the family packs or buy whole. During a recent shopping trip Allison and I found, for example, that an entire chicken was less than $2 a pound, compared with up to $6 a pound for individual breasts or thighs.
If you’re ever suffering from meal-planning fatigue (like most of us do), here’s a smart tip from Crystal Paine, founder of MoneySavingMom.com: Make a list of 30 meals your family loves to serve as inspiration if you’re ever short on ideas. The downfall to last-minute planning is that you tend to overspend on ingredients or (if you’re like me) reach for the take-out menus. By the way, check out my Financially Fit episode on ways to create 5 meals with a $50 bag of groceries.
Finally, consider shopping with a friend. Got a neighbor who makes Costco runs as frequently as you are? You can go together and divvy up bulk buys. This way you can both benefit from the reduced prices – but only pay for what you need.
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at firstname.lastname@example.org.