Investment showdown -- beyond the Roth, SDP, & TSP

[flyusaf83]

So why are you paying double on your mortgage payments on property that your renter will pay off for you? At 3-4% interest, and ~5-10% inflation, I'm in absolutely no rush to pay the bank back. A second mortgage should be easy, tons of guys have 2 or 3. Take the extra cash and use it for a down payment, or top quality scotch. Just don't use USAA.

First off, I hate debt - whatever the form or justification. The appeal of owning an investment property outright with no mortgage is just too appealing to me. Even though I'm only paying about 3% interest, I'd rather not be paying 3% interest. We still are able to make extra mortgage payments and save some cash for a down payment on our next home. And no, I'm not using USAA and don't plan on it - at least for a mortgage. I love their basic checking/banking, but have heard they are lousy for mortgages/home insurance.

I'm glad that I can get a mortgage on a seperate home, but what about the rate? Will I still be able to get a good rate, or will the fact that I owe on another home hurt the rate I can get?

[Day Man]

isn't interest on a mortgage payment tax deductible? save your extra mortgage $ and MAX out your Roth.

[ThreeHoler]

isn't interest on a mortgage payment tax deductible? save your extra mortgage $ and MAX out your Roth.

Terrible advice. You need to know a lot more about his situation before you can determine if it is better to pay down the house or invest the same money.

In the long run you pay way more in interest than you ever get back in tax deductions.

[joe1234]

Terrible advice. You need to know a lot more about his situation before you can determine if it is better to pay down the house or invest the same money.

In the long run you pay way more in interest than you ever get back in tax deductions.

Yeah, but if you can consistently beat the discounted interest rate, it makes more sense to put it in the higher-yielding investment. There's no sense in taking money you were going to invest in a 6% fund to pay down a 2.5% or so (factoring in tax deductions) mortgage interest rate.

To me, the only thing owning a property outright gets you is putting all of your eggs in that one basket. So, if for whatever reason that thing loses value, you just threw a shit ton of money after a depreciating asset, when you could have been diversifying. I dunno, if I'm way off base here, someone feel free to correct me.

[Disregard]

I currently have the Blue Cash Preferred card...any reason I should switch to the Platinum card? Honestly, the Blue Cash Preferred card seems like a better deal, considering I'm getting 6% on groceries and 3% on gas (by far my two biggest expenses). There's a few travel-related benefits that come with the Platinum card, but other than that I can't find any reason to switch...

Anyone know if there's a bank that will waive fees for a Visa card? I always carry a Visa card with my AmEx, since there's always a few places that don't take AmEx.

You get most of the benefits from the AMEX Platinum simply by having it, so get the card for no annual fee ($450 fee waived for active duty) and use the Blue Cash Rewards for your primary spending. Plus, the AMEX Platinum is a charge card (you must pay the balance every month), so it might even be Dave Ramsey approved. With the annual fee waived, it's a no brainer to get this card.

USAA Visa has no annual fee and 1% cash back. It's not advertised on their site, but you can get it if you call and ask.

AMEX Platinum Benefits

• $200 Annual Airline Credit
  
• $100 application fee reimbursed for Global Entry
  
• Gold Status With Starwood Hotels
  
• Free Airport Lounge Access for You and Two Guests
  
• Car Rental Elite Status
  
• No Foreign Transaction Fees
  
• Platinum Concierge
  

[Gravedigger]

With the annual fee waived, it's a no brainer to get this card.

AMEX Platinum Benefits

• $200 Annual Airline Credit
  
• $100 application fee reimbursed for Global Entry
  
• Gold Status With Starwood Hotels
  
• Free Airport Lounge Access for You and Two Guests
  
• Car Rental Elite Status
  
• No Foreign Transaction Fees
  
• Platinum Concierge
  

Shhh...we don't want to ruin the good deal. I don't think it will last long if everyone finds out about it.

[JS]

How do you actually go about getting the fee waived? I suppose you have to call them? Now is that during the application process, or after? I am asking because I would hate to pay the $450 and expect it to get refunded, only to find out that they changed the rules after I applied.

Also, I was reading some bad reviews online about the Platinum card. I guess if the fee is $0, then it is not really applicable, but the guys who paid the $450 pretty much unequivocally said it was not worth it. The concierge service is a joke, the $200 airline credit is only for bag fees and add-ons like movies, etc - probably not applicable to most average travelers. And they said more and more of the lounges are excluded from the airport lounge thing.

But, again, if it is $0 annual fee, then one single drink in an airline lounge makes the application process probably worth it.

[JS]

Terrible advice. You need to know a lot more about his situation before you can determine if it is better to pay down the house or invest the same money.

In the long run you pay way more in interest than you ever get back in tax deductions.

I disagree about this being terrible advice. You are correct, as the standard disclaimer crap goes - everyone's situation is different, and you should consider throwing away your money on a financial advisor before you listen to a bunch of guys in the internet with eerily similar financial situations to yours who have been there before. I would particularly take a closer look at the Roth vs Traditional in your specific situation, but we covered that ad-naseum a few dozen posts back last month.

But anyway, I generally agree with the concept of paying the mortgage down last and investing the difference as opposed to pre-paying more on the mortgage. I assume everyone has refinanced recently and is appreciating the record low rates. The tax deduction only makes the effective interest rate you are paying on the mortgage even lower. That being said, if you can invest at a higher rate than you are paying on the mortgage, then this is generally correct advice. Unless you have some special reason to pay down the mortgage - underwater on the loan, don't have 80% and are paying PMI, or something like that - I really don't see many reasons why anyone would pay extra on their mortgage with today's low rates.

Real numbers - my mortgage is 2.9%, plus the tax writeoff on that interest makes my mortgage effectively cost me about 2.5%. Any extra money I have goes into the retirement accounts and the personal investment account. This was a record year for the broader markets (which most of our investments are in), but even without this year, the markets are above where they were in the lowest point of the 2008 drop. In other words, over the "long" run of 5+ years, the markets are returning 5-12%, depending on where you have your money and when you put it in.

Why would you funnel extra money these days to pay down 2.5% debt while foregoing potential 5% returns? Oh, that's right, because that idiot with the radio show (whose name shall not be mentioned here) has an emotional hatred for the term "debt." He will lost you wealth in almost every bit of his advice.

[Disregard]

How do you actually go about getting the fee waived? I suppose you have to call them? Now is that during the application process, or after? I am asking because I would hate to pay the $450 and expect it to get refunded, only to find out that they changed the rules after I applied.

Also, I was reading some bad reviews online about the Platinum card. I guess if the fee is $0, then it is not really applicable, but the guys who paid the $450 pretty much unequivocally said it was not worth it. The concierge service is a joke, the $200 airline credit is only for bag fees and add-ons like movies, etc - probably not applicable to most average travelers. And they said more and more of the lounges are excluded from the airport lounge thing.

But, again, if it is $0 annual fee, then one single drink in an airline lounge makes the application process probably worth it.

I confirmed that they were still waiving the annual fee for active duty military when I applied for my card. I called back after I got the card to get the fee waived. American Express does this as a part of the Servicemembers Civil Relief Act. They'll even retroactively waive annual fees for your cards if you're active duty. You just need to provide them the information to verify that you're active duty: https://www.dmdc.osd...le_record.xhtml All in all, well worth it.

[Jughead]

First off, I hate debt - whatever the form or justification. The appeal of owning an investment property outright with no mortgage is just too appealing to me. Even though I'm only paying about 3% interest, I'd rather not be paying 3% interest.

What everyone else has already told you--makes no sense to pay off ~2.5% money with 5%-10% (or more) money (Google "opportunity cost" for details). The one exception to that is an intangible, i.e., if you can't sleep at night, then paying off the debt is "worth it" in that sense. Just have your eyes open to the fact that you are paying real money for that peace of mind.

ALSO: if you're unable to stomach debt, then you probably should re-think the rental idea. The sweet spot for a rental is to have positive cash flow but still show a loss for taxes (i.e., your income minus expenses is zero or greater, but less than allowable depreciation). Even a negative cash flow isn't all bad, so long as your budget can handle it, as you'll net more after taxes. Then, at tax time, you show an "above-the-line" loss that reduces your AGI, which plays into a whole host of other tax figures (say, your 2%-limited itemized deductions).

On the other hand, if you make money (after depreciation) on your rental, that's an above-the-line gain that has the opposite effect on your AGI (and all the other numbers it affects). OH, and now you have income "sourced" in the state where your property is located, so you get to pay state income tax on that amount as well, regardless of where your state of legal residence is....

I'm glad that I can get a mortgage on a seperate home, but what about the rate? Will I still be able to get a good rate, or will the fact that I owe on another home hurt the rate I can get?

So long as you have a lease, the bank will take that into consideration. Varies from lender to lender, but typically you'll get "credit" for 75% occupancy on a new, one-year lease--i.e., all of your expenses count against your debt, and you get 75% of your rental income considered for calculating your debt/income. That percentage may go up as you gain a longer history showing consistent occupancy and/or longer-term leases (again, varies from lender to lender). If that additional 25% "cost" is enough to put you in a different category (higher debt ratio), then it will hurt your rate (or potentially even keep you from getting the loan); if your budget can cover that "cost," then no impact. Way too many variables to give you a firm answer, talk to a mortgage lender for your own situation.

[HU&W]

Good advice all around. The one thing that hasn't really been addressed is the tax piece of owning a rental property. The IRS views your rental property as a business and you should view it the same way. You don't deduct mortgage interest the same way you do for your primary residence on your taxes. It's considered part of the cost of doing business and is therefore deductible from the money you're making in rent. Other important deductions to consider are depreciation on the house itself (not the land), property management fees, utilities you pay when you don't have a renter, maintenance, and a host of other things. Your best bet is to read up on Pub 527 at the IRS to get first hand knowledge for yourself. I'd also recommend talking with experienced landlords that you trust for recommendations and gotcha's.

Like any business, you have to have a strategy, and one size does not fit all. Personal debt avoidance is great, and I fully condone that personal financial strategy. Business debt, however, is different and is commonly utilized to leverage opportunity. A common strategy with rental properties is to combine deductions for mortgage interest with depreciation and reduce annual tax liability. YMMV

ETA: Sorry Jug. Took me so long to write my post, I didn't see yours. Well said and concur with the importance of having a small cash flow with minimal tax liability. Also, be sure to check on the specifics regarding state tax liability for the specific state your property is in. In some states (including the one my rental property is in) you don't have to pay taxes in the state if your only source of income from that state is one or two rental properties.

Edited April 15, 2013 by HU&W

[AnimalMother]

You've gotta be shitting me. By the time I retire 3 million will be chump change.

Disagree. By the time you retire 3 mil will be a lot of change...it just won't be measured in US dollars anymore, at least not in the contemporary sense. Not sure what exactly it will be, maybe "IMFs", maybe bitcoins, who knows. But 3 mil USDs certainly won't get you 3 mil of whatever they fabricate to replace it.

[matmacwc]

Disagree. By the time you retire 3 mil will be a lot of change...it just won't be measured in US dollars anymore, at least not in the contemporary sense. Not sure what exactly it will be, maybe "IMFs", maybe bitcoins, who knows. But 3 mil USDs certainly won't get you 3 mil of whatever they fabricate to replace it.

Tinfoil hat much?

[AnimalMother]

Actually, I get tinfoil hair extensions woven directly into my luscious locks. It helps tremendously.

[JS]

First off, I hate debt - whatever the form or justification.

Besides listening to the wealth-diminishing radio buffoon (whose name I shall once again refrain from mentioning), there is no real reason to "hate" debt, unless you are emotionally attached to your financial decisions, which is never a good thing. Math always trumps emotions.

Think about it this way. Assume that you, like the rest of us, have a nice mixture of debt (mostly in the form of a mortgage, maybe some old student loans or a car payment). The first pages of any economics textbook will tell you that economics is defined as the allocation of scarce resources. It then goes on to say that when those scarce resources are put to use in area A, they are not spent in area B, and you have an opportunity cost of not putting the money in B. Like Jughead said, you really have to understand opportunity cost.

In other words, hating debt is the exact same thing as saying you hate investments. If you funnel your scarce money toward paying down the debt you hate, you are not funneling it toward investments. In other words, your hatred of debt equates to a hatred of investments. Again, if the debt (mortgage) is 2.5%, and the investments yield on average 6%, then you are losing money equal to the "spread," which is 3.5% in this case.

So if you found $200K lying around tomorrow and paid your mortgage note in full as opposed to investing it, you would lose 3.5% x $200K = $7K the first year, and then a slightly smaller amount each year thereafter for the life that the mortgage would have had. "That guy" on the radio does indeed mention the sleep factor that Jughead is talking about. He said his head hits the pillow better each night knowing that he is "debt-free." I wonder if he would stay up at night knowing that he was actually losing 3.5% of his wealth annually (in my above example) by going full anti-debt.

[Butters]

Where are the dumb ass Dave Ramsey guys that pay cash for everything? Would love to hear what the say. Simple math people. Money is cheap to borrow and making 6% can be done with little effort. So if you are paying down your mortgage, please let me know how 1980 is going. Mortgage interest rates are not above 8% anymore if you haven't noticed.

Edited April 15, 2013 by Butters

[Red Fox]

My opinions only, but the ideas of maxing TSPs, Roth IRA vs. traditional, etc. are moot if one isn't actively involved and up to date with their investments. I believe the days of buy and hold are long gone. It may return some day when our economy again has a thriving manufacturing sector (meaning more people employed in manufacturing vs. the government) and our asset values are not artificially propped up by the Feberal Reserve. Those of you who invested in bonds, I would say you've done well if you bought them when interest rates were high. But, if you have bought recently, watch out. I don't know when, but sometime in the future, interest rates will rise and when they do, I believe the market will be flooded with investors tying to dump their "paper". You risk a big capital loss. Also, if you are looking to buy a home, again, watch out (depending on where you are buying). Once interest rates rise, home prices/values should decrease. People won't be able to buy as much house because of the larger payments. Markets where the major home builders (like Polte, Toll Bros., etc.) build are risky. The home builders have to build to make money and have flooded certain areas (like Vegas) with new homes - making it difficult for homeowners who need to sell. Also, if you are looking to buy as an investment property to rent, again, be careful of the area. Some large investment firms (like Blackrock) have been buying up distressed properties as rentals and then creating REITs. You may be competing with them. A strategy that has worked for me recently is to buy futures in a certain sector and sell covered calls against them. Or if you think a sector has topped, sell call spreads against it. Again, my thoughts only (based on 20+years of investing). Good luck, RF.

[sky_king]

All I know is that USAGX (Precious Metals) has not been so kind in the last 6 months. Some analysts are saying gold is going to keep dropping to pre-bubble values, some say it will bounce back.

Buy a shit ton at a discount rate? Bail? ugh, I should have just buried cash in my back yard.

[HossHarris]

Yes, but USCGX and USBSX have been way up.

Diversify, that way you end up exactly where you started. Just like burying cash, but modernier

[addict]

Don't forget to spend some of it.

The idea of beating interest rates - borrowing to invest - I don't accept it as a long term strategy. Not in a vacuum as a way to generate free money. Borrow - yes. Invest - yes. But investments and borrowing both create exposure that as an individual you have to cope with. 2008 hurt. More will follow. The historical average performance of investments might not be all that it is cracked up to be. Oh, and party on dudes.

Edited April 16, 2013 by addict

[mudhen69]

Where are the dumb ass Dave Ramsey guys that pay cash for everything? Would love to hear what the say. Simple math people. Money is cheap to borrow and making 6% can be done with little effort. So if you are paying down your mortgage, please let me know how 1980 is going. Mortgage interest rates are not above 8% anymore if you haven't noticed.

Ask and ye shall receive...

What the Dave Ramsey haters fail to understand is that his whole methodology is to get people, who have demonstrated an inability to live within their means, to a place where they can. He does not tout "paying cash for everything" as an investment methodology but rather a tool to learn how to live within ones means. It forces you to ask your self "do I really need this" before you buy something.

Think of it this way....you are a personal trainer and you have two clients...one is in good shape and is wanting to train for a marathon while the other is 100 pounds overweight. Your training regimes will be different for each client. If you can just get the one who is 100 pounds overweight to the gym every day to just to something, that is a step in the right direction. Whereas you would need a completely different approach to train the marathon runner and his work outs would not work for the overweight dude.

Sure, for a guy who does everything right money wise, you take on debt that economically makes sense like a mortgage, student loans, car (with exceptions). But the people that benefit from Dave Ramsey aren't there yet. They need to focus first on the simple things like living within ones means (...or going to the gym everyday) before they start option trading (...running 10 mile tempo runs).

[MilitaryToFinance]

All I know is that USAGX (Precious Metals) has not been so kind in the last 6 months. Some analysts are saying gold is going to keep dropping to pre-bubble values, some say it will bounce back.

Buy a shit ton at a discount rate? Bail? ugh, I should have just buried cash in my back yard.

Discount to what exactly? The huge bubble from the last decade? Gold is nothing but a hunk of metal we dig out of the ground in poor countries, ship it to rich countries and then bury it in the ground again and say it has value. Gold will never generate free cash flow, gold will never produce value in the economy. It isn't an actual currency and you can't create a currency based on it in the US (if you think you can then you need to read up on the Liberty Dollar and what happened to the $7 million in bullion backing it). Despite what people try to tell you it is not an inflation hedge. In fact the inflation adjusted high from the 1980's is about $2,700/oz. Not a great hedge if it has lost 50% of it's value in 30 years. There are some precious metals that have uses and value but gold isn't one of them.

[AnimalMother]

5000 years of human history would vehemently disagree with you. Gold is actually the only substance humans have used as currency with intrinsic, timeless value. No it does not generate cash flow, but if you think creating a currency backed by gold is worse than creating a currency out of thin air, than I think you probably read too much from Paul krugman. I would argue that the value of gold doesn't really change, it's actually the value of the fiat currency that we use to measure the value of gold that changes.

[MilitaryToFinance]

5000 years of human history would vehemently disagree with you. Gold is actually the only substance humans have used as currency with intrinsic, timeless value. No it does not generate cash flow, but if you think creating a currency backed by gold is worse than creating a currency out of thin air, than I think you probably read too much from Paul krugman. I would argue that the value of gold doesn't really change, it's actually the value of the fiat currency that we use to measure the value of gold that changes.

You are confusing an "ideal" world and the real world. You misunderstood my point about creating a currency entirely. The reality is we have a fiat currency that is legal tender. That currency will not go back to the gold standard. Even if it is more beneficial in the long term that doesn't matter, our government will not impose that restriction on itself. So that leaves you with 2 options. 1) Buy physical gold and attempt to barter with individuals by paying them in gold like we did thousands of years ago. It's not legal tender so nobody can be compelled to take it and the feasibility of that is slim. Option 2, you create a new currency backed by physical gold to compete with the USD. This is what the Liberty Dollar was which was started in 1998 and shut down in 2009. Despite assurances from Treasury that it was legal as long as he didn't call it "legal tender" once the idea gained popularity the Feds raided them, arrested him and seized all the gold and silver backing the currency. THAT was my point about not being able to create a currency backed by gold.

Sure if you are one of those nut-jobs who believes that the whole US government will collapse, the country is about to degenerate into complete anarchy, nobody will accept USD as currency anymore and gold will be THE currency, then by all means hoard your gold. But if you recognize that the likelihood of that happening is so slim as to be totally ignored then I suggest you focus your investments on real investments. It is meaningless to say that gold holds it's value and the fiat currencies fluctuate when you can't actually SPEND that gold on anything. Ultimately it's value as denominated by legal currency is what matters. So if the gold you bought in 1987 is worth half the purchasing power in USD today as it was then I would say you made a very poor investment choice.

[HU&W]

Sure if you are one of those nut-jobs who believes that the whole US government will collapse, the country is about to degenerate into complete anarchy, nobody will accept USD as currency anymore and gold will be THE currency, then by all means hoard your gold. But if you recognize that the likelihood of that happening is so slim as to be totally ignored then I suggest you focus your investments on real investments.

Thanks for the reminder. I forgot it was doomsday preppers night...

My 1.269 cents. There's nothing wrong with investing in gold as long as it is part of your planned diversified portfolio. I've made and lost money in the gold market just like any other investment. Admittedly, it is historically low risk as a long-term hedge against inflation. I don't personally see its usefulness as a bartering tool. In terms of economic disruptions, I doubt the likelihood of government meltdown, and if it happens we have bigger problems than obtaining useful currency. I have, however, seen minor temporary disruptions happen in peoples' ability to make electronic purchases during localized disasters. I've also personally experienced temporary financial issues due to bank errors and one instance of credit card skimming/theft. Because of these experiences I choose to keep a very modest physical cash reserve. I understand the cost of devaluation through inflation for that cash, but view it in a way similar to buying insurance.