Questions About a Case Study, Rental Properties, Life Insurance Loans, and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Renting out house to students
2. Loan against life insurance
3. Home loan with middling credit
4. Rental property willed to tenant
5. Negotiate now or later?
6. Which debt first?
7. Pay off mortgage first?
8. Living off last month’s income
9. Paying myself first?
10. Opening a Vanguard account
11. Getting interest from taxable account
12. Setting priorities

This week, I’m trying something a little different with the latter half of the reader mailbag.

A reader sent in a very lengthy case study about her and her family, which she graciously agreed to have shared on the site for discussion purposes. Since she also included a lot of questions about her situation, I decided to include the full thing in this week’s reader mailbag. The case study starts with question 6.

I don’t intend for this kind of thing to become a regular part of the reader mailbag, but I do think it is an interesting thing to look at and the case study and resultant questions do lead down some interesting paths.

If you’d like to do the same thing, here are some important guidelines.

First, alter personal details. Don’t give me your exact age or your partner’s exact age – being within a few years is fine. The same is true for your children and their genders. For your career, be vague with it, or as vague as you can be while still having valid answers to your questions. Be approximate with your location, too.

Why do these things? The biggest reason is that, if you’re too specific, other readers might actually figure out who you are, and that can lead to embarrassment.

Second, try to come up with several questions you want answered about your situation. Don’t just send in five pages of information and say “what do you think?”

Finally, understand that I won’t necessarily be able to include your story in the mailbag. I receive many more questions than I can use in a given week, and a case study will take up a significant portion of the mailbag in a given week.

Don’t hesitate to send in a question using the contact link at the bottom of the website or by sending me a message directly on Facebook.

Q1: Renting out house to students

I’m in the process of getting divorced. We own a house that I will be responsible for afterwards. I can’t reasonably stay in the house and maintain any type of lifestyle that I’d like to. The house is worth less than I owe on it, so if I short sale it I’m still going to be responsible for the difference that’s owed. I have a realtor that recommended trying to rent it to college students (I live about a mile and a half from a mid-size university). The university subsidizes housing, even for students living off campus. The house has 5 bedrooms so could fit 5-8 students. If I was able to move in 5 students it would cover the mortgage, insurance, and property taxes; anything more is profit. Do you think this would be a good idea to try to maintain the house without affecting my credit, and make a little money besides? Also, would you recommend hiring a property management company?
– Andrew

I think this is a reasonable approach for your situation, provided of course that you have a place to live elsewhere that’s low cost.

I would strongly recommend using a property management company in this situation. Make sure that the company is reputable and that you can still make solid money after paying their fees. Don’t hesitate to shop around a little bit.

You also need to make sure that you’re properly insured for this. This will require different insurance than your typical homeowner policy, so contact your insurance company well before you do this.

Q2: Loan against life insurance

I live in Canada and am looking to loan against my life insurance policy and was wandering if you could recommend either someone or a reputable company. I would appreciate any help you could offer.
– Annie

I’m assuming from your question that you have some form of whole life or universal life policy. You can’t borrow against a term policy because the benefits in those policies expire.

In general, you have two routes you can take. One is borrowing directly against the balance of your life insurance policy, which can really only be done through the company that issued the policy. The other route is to get a loan elsewhere that uses your policy as collateral, which is something that many banks will consider.

I can’t specifically advise you which one is better. Some, but not all, financial institutions will lend you money using your insurance as collateral, so you have a number of options there. I’d probably suggest starting with a local credit union and then shop around for the best rates.

Q3: Home loan with middling credit

I’m willing to buy a house… my credit score is 620… first-time buyer… I have the money for down payment and closing cost, but, I don’t want to spend my savings in down payment and move to my new house with no back up for rainy days… so… I was looking at the LINE OF CREDIT that banks offer… and my question is: would a line of credit affect my purchase power some how? And, is that a good idea? I just don’t wanna be with no back-up like I said… do you have any other ideas? One more thing: If I wait for my credit score to at least be at 640, the mortgage company that I want to get the loan with can help me get first-time buyer’s help for the downpayment, but, I don’t want to be paying rent any more… any thoughts?
– Noelle

Here’s the thing: You won’t be paying rent any more, but you will be paying a similar amount in interest on a mortgage, and just like rent, that money is gone. You get nothing in return for it.

That’s why it makes little sense to jump into a mortgage until you’re in a situation where the interest is lower than what you’d be paying in rent – and ideally it’s substantially lower than what you’d be paying in rent.

How do you get there? Start building your credit score for one. Try to get your credit score over the 700 line, and you do that by paying all of your bills on time and getting your credit cards down to a reasonable level. You’re correct that you should maintain an emergency fund through all of this, too.

Q4: Rental property willed to tenant

What are the pitfalls for a tenant if a rental property is willed to the tenant?
– Maxine

First of all, your inheritance does depend on what exactly happens with the estate. Even if that property is willed to you, if the person who willed it to you left behind a bunch of debts that can’t be easily resolved with other assets, if this is a rental property and not a primary residence for the owner, it can potentially be sold to cover those debts. Such decisions are in the hand of the executor of the estate of the original owner of the house.

Unless the person is very wealthy, estate taxes shouldn’t be an issue.

When you inherit the property, it will have to be appraised immediately, and that will become the new basis for that property, meaning that if the value of that property goes up, you may owe taxes on the increase in property value when you sell that property.

Those are the pitfalls that immediately come into my mind from this situation.

Q5: Negotiate now or later?

My husband and I have a lot of debt at the moment and our current income is not covering our expenses so at the moment we have late payments and overdue notices everywhere. We are working really hard to bring in more money but I also want to reduce our expenses. I’m wondering if it is even worth me trying to negotiate lower interest rates or consolidate debt on lower interest with all the red in my current history. Am I better off trying to get a few months of good payment history down (once hubby gets a full-time job) or can I try now? If I do have to wait when will I be able to do this and not get rejected?
– Diane

In your current situation, you should definitely negotiate. Start calling up the credit card companies and flat-out tell them that in your current financial situation you cannot keep up with the bills, period. Tell them that you must negotiate your interest rate and payments or you are potentially facing bankruptcy, which appears to be the truth.

Now, some lenders – particularly credit card companies – may end up closing out your line of credit at this point, but they often will negotiate and lower your rates.

Don’t sweat those cancelled lines of credit. If you’re going to get out of this, you have to stop relying on them, period. You have to figure out how to get by on less than what you earn. This isn’t optional. It’s not going to ever work if you don’t.

My advice, then, is to start negotiating immediately. Get those payments and rates lowered as soon as you possibly can.

So, let’s get started with this case study!

Q6: Which debt first?

Please feel free to use me as a case study. I would love any and all advice!

Age of wife: 42
Age of husband: 43
Age of daughters: 6 and 5

Jobs:
Her: Teacher
Him: Police officer

CURRENT ASSETS

1) $22,000 in college savings through state-sponsored plan scholarships – We put in $400 a month after tax for our two girls ($200 in each account).

2) $48,000 + $13,000 in two separate 403b retirement accounts for myself – put in $500 a month pretax – going to consolidate them in July 2016.

3) $62,000 balance in state pension for myself. Putting in $500-$769 a month pretax. It is a defined benefit plan.

4) $200,000 in husband’s county pension. Putting in $2,000 a month pretax. It is a defined benefit plan as well.

5) $11,000 in cash savings – Currently put in $1,000 a month with goal of building to $15,000.

6) $2,600-$5,000 average in checking.

7) Toyota Tacoma truck used as the mommy mobile. Paid in full. 2005 model.

8) 2 bed/1 bath 950 sq. ft. home in Napa, Calif., purchased in 2005.

DEBTS

1) $22,000 loan on a very large towable camper (2 bed/2 bath…yeah…that big), which also acts as a guest house in our back yard.

2) $16,000 loan on a diesel truck to pull said fifth wheel (which hubby also uses to commute to work 10 days a month).

3) $300,000 mortgage left to pay. $610,000 current Zillow estimated value ($500,000 appraised value).

GOALS

1) For me to have more flexible time so that I can volunteer at daughter’s school (cook more homemade meals and do more gardening) Is semi-retirement (part-time work?) a workable goal? I’m a teacher so I already have some significant time off work. But I want more school days off work so we can leave and travel more on a flexible schedule. If they go on a choir trip to Europe I want to go. I want to see their performances. I want to be that mom that car pools for other working parents. 

2) To have some investment income to be able to earn interest and have our money start working for us.

3) To possibly buy a mobile home or small condo for my mom who is somewhat homeless and in her sixties. May share financial burden with one other sibling.

4) To buy our next used car with cash combined with trade-in value. I don’t ever want to do another car loan again!

HISTORY

I know the bad: the debt! It has been a six-year battle for me trying to convince my husband that our money can work for us instead of us working so hard. When I went part-time after the girls were born he had a heart attack and it was a huge fight. I told him that it would work out and showed him the numbers and how in some areas we would have to cut back but he was convinced it wouldn’t work. My goal was 50% but we compromised at 70%. I did that for two years and then went back full-time in year three. We had to change some priorities and it was good for me. Something in me clicked. I was working part-time and all I kept thinking was how I could save more/spend less to make it less hurtful at the end of each month. I wanted to work smarter/not harder.

We had tons of medical debt related to our children’s birth even with insurance and I was determined to never be sitting in that cesspool of debt again. I didn’t want our daughters growing up like that. I snowballed everything and paid off ALL of our debt: credit cards, medical, car loans, refinanced the house for a lower interest rate and less years for a savings of $80,00 in interest, and paid off my school loans. It took us two to three years but we did it! I had already started the savings accounts for the girls, every time someone gave us cash for birthday or Christmas I put it in an account and when it reached $10,000 I rolled it into the state sponsored savings plan and continued adding to it every month.

I also saved money for rainy days (something I’d never done before) and saved up our emergency fund.

Then my hubby started looking for trailers and I knew I was in trouble. While I liked the idea of a trailer and traveling the country I felt we should have saved up the money and bought something with cash. Something he would feel comfortable letting me drive. But my hubby likes big and impressive and we now have a truck and trailer debt. He really has no concept of how much things cost. I tried to slow down the train by asking him to research how much the trailer would cost per month to see if we could afford it but all he could come up with would be the trailer loan amount of $300 per month. I would ask what about insurance? Interest? Maintenance? Improvements? Things that came up later that I didn’t even predict was trailer storage until we finally fit it into our back yard. That grand total trailer cost is closer to $800 a month! Ugh!

But I agreed to it. I admit I get sucked into the fun aspects of the trailer too. Now I don’t have regrets that the trailer allowed us to spend three weeks traveling Idaho, Montana, and Wyoming last summer… Stayed in Yellowstone and the Grand Tetons and we used it for the first three years at least once a month for a quick trip to various locations all along California. I don’t regret one bit of the travel. Could it have been done cheaper? Absolutely.

So, first question: What to attack first? (Truck and trailer debt?) Saving up for a minivan? (Carpooling is hard in a truck!)
– Renee

The first thing you should attack is your husband’s spending habits. Given what you’ve described here, it doesn’t really matter what financial moves you make. If you have money to spend, your husband is going to find a way to spend it. That needs to be put in check immediately, or else all of the smart financial moves in the world are going to be for naught.

Now, how do you do this? The thing that worked best in my own marriage was simply talking about goals. What exactly do you each want out of life in the next 10 years? Where do you want to be in 10 years? With the debts you currently have, debt freedom is a pretty good goal. The challenge for your husband is to see that goal as important compared to having more stuff.

Now, if you’re looking at your financial options, assuming your truck is an extended cab and can in fact carry your family, I would focus on paying off the highest-interest debt first. My guess is that it is your truck and trailer debts, but I don’t know for sure as you didn’t include the interest rates. Whichever one of those two debts has the higher interest rate should be the one you tackle first and foremost.

Q7: Pay off mortgage first?

Do I try to pay off mortgage earlier before doing investments in a place like Vanguard? I have a 15-year loan at 3% interest. I figured out that it may be possible to pay off our house in four years… if we snowball all our debt payments and savings payments (not counting retirement and college). Hubby doesn’t believe me.
– Renee

If you have a mortgage at 3%, I wouldn’t be in a rush to pay it off. Normally, it’s a good move to pay off a mortgage as fast as possible, but that is an exceptionally low interest rate. I’d probably stick with paying it off slowly at this point.

However, this is all predisposed on the idea that you’re taking the money that would have gone toward extra payments and are doing something smart with it. Are you investing toward big future goals with that extra payment money? Are you paying off your trailer and truck debt? Those are smarter things. Buying a bunch of stuff you don’t really need isn’t a smarter thing – your money is better off going toward your mortgage if that’s your other option.

In other words, if you’re saving toward sensible goals and/or getting rid of or preventing other debts, I would do those things first before putting more money toward that low interest mortgage.

Q8: Living off last month’s income

I heard living off last month’s income is helpful for budgeting so I’ve been trying to save enough to have for that. Does that really work?
– Renee

This is actually a really smart way to handle things. The way it works is that, at the end of the month/start of the next month, you essentially have a month’s worth of income (that which came in during the previous month) to live off of. You use that money to pay bills, to save, and so on during the following month.

Also, during that following month, more income will come in, which you’ll set aside for the moment. At the end of the month, you just switch to using the income that came in during the month and balance out your budget. It’s pretty easy.

The big advantage of this system is that you can actually budget and plan at the start of the month and make all of your savings choices and so on immediately. You don’t have to wait until a check comes in to do certain things. Also, there’s a bit of an “emergency fund” factor, too, as the extra money serves as an emergency fund.

Q9: Paying myself first?

I want to semi-retire. I want to earn my other income with interest from my investments. This is my quandary. I have paid off all debt twice now and it lasts one year. Hubby decides he wants something and he goes and gets it and we are back in loan land. So I was thinking that I should pay myself into a Vanguard fund first before paying off the debt? I know it sounds crazy but then I could prove to him that it can be done.
– Renee

This is not crazy in the least. It’s a good idea to do your savings for big goals right off the bat in a given month. Before you do anything else, you take the money you want to save for big goals – like semi-retirement – and put it where you want to put it. Then, you live off of what’s left.

It goes really well with the “living off last month’s income” plan that you described in the previous question. At the start of the month, you just take some of the money you start with and put it aside immediately for your goals (semi-retirement, in other words).

Paying yourself first, in that you’re saving for big goals before living your everyday life, is a surefire way to make sure you keep making progress toward those goals.

Q10: Opening a Vanguard account

How much money do I need to start a Vanguard account? Do you open it directly with Vanguard?
– Renee

You don’t need any certain minimum to open up a Vanguard account. However, having said that, almost all of Vanguard’s index funds and other investment options have a $3,000 minimum to start investing. A few have less, but unless you’re going to stick with those for the long term, it’s not really worth it to put money in there for several months just to move to the investment you actually wanted when you hit the $3,000 mark.

My suggestion is to save in an ordinary savings account until you hit $3,000, then buy into a specific Vanguard fund that matches your needs. I like the Vanguard Total Stock Market Index for longer-term investments (things longer than a few years down the road).

You should make that savings plan automatic so you don’t have to think about it. Then, when you hit that $3,000 mark, turn off the automatic savings at the bank and turn on that same amount at Vanguard so money goes automatically into your new investment.

Q11: Getting interest from taxable account

Logistically how do you get the interest to you? All my 401(k)s reinvest.
– Renee

When you sign up for a Vanguard fund, they give you options as to what to do with your interest and dividends.

If you want, you can reinvest it. It’ll just roll right into the investment and you don’t receive a penny. You do have to pay taxes on that income, but it will be a percentage of a small percentage of the balance. For example, if you have $100,000 in there, your total dividends on a Total Stock Market index fund would be about $2,000, so you’d owe somewhere around $300 or $400 in federal income taxes. Not a huge deal.

You can also tell Vanguard to just send you a check whenever dividends are paid. Again, with the $100,000 example, that means you’d get about $500 a quarter from them, but you’d owe about $80 or so of that amount in taxes.

Q12: Setting priorities

I’m all over the map trying to squirrel away money and save so we can reach our goals before we spend it!! I can’t seem to settle on which priority to start first.
– Renee

This comes back to the very first answer I gave you: It’s all about goal setting. The thing you need to do more than anything else is to sit down with your husband and talk about your goals. Where do you want to be in the future?

This is not about dollars and cents. The money is just there to support what you guys want to be doing.

I will say this, though: When you choose to do one thing with your money, you close the door on other things. If you buy big expensive toys, then you might be closing the door on semi-retirement, for example.

It sounds to me like your number one challenge is that you and your husband have different goals and ideas about the coming years. If you can resolve those differences, things will start falling into place.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

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