Mixing family and money. It’s never simple, is it? In case you’re new here, we’re not in the habit of over-sharing money matters with our family. That we reserve for our little corner of the interwebs here. But, family and money come into play for us largely because when we bought our $50K duplex, it was Mr. PoP’s parents that were our lenders.
And great lenders they have been. Here’s a basic recap of what their loan allowed us to do.
We borrowed the $50K from them almost exactly 2.5 years ago. With it, we bought and then refurbished a rental duplex. Then we cashed out some of the equity in the rental duplex via a HELOC that we used to fund half (we saved up cash for the rest) of the purchase of another investment property, a residential lot. And now we’ve managed to kill the HELOC. *Whew* It’s been a busy 2.5 years.
Oh yeah, and did I mention we paid the Car #2 off yesterday, too? So that line on the balance sheet is going to be zeroed out on next month’s update. =)
Basically this means that by our next balance sheet our list of outstanding liabilities is going to be very, very short.
- revolving rewards credit card balances (these are paid in full every month)
- mortgage on PoP primary residence, a 15 year loan (<14 years left!) at 3.25%
- personal loan owed to Mr. PoP’s parents, $50K at 5%
Since the rate on our mortgage is so low, we’re in no hurry to pay it back. So the next logical place to throw money is at the $50K loan sitting at 5%, right? But because it’s through family it gets a little sticky.
Not even the good-ole US of A has a AAA bond rating anymore, and yet, that’s how Mr. PoP’s parents tend to look at us. While they might not have been 100% sure of the loan when it happened, hind-sight is 20/20. And with their hindsight, they’re able to see that they made a great investment. Our duplex is in great shape. We have amazing renters, and we’re totally on track to pay them as scheduled.
The original loan agreement says that we need to pay them back in full by (or before) August 2015 (that’s 2.5 years from now). In the meantime, we pay them interest semi-annually. So you can see on our January Income Statement that we paid them 6 months worth of interest – $1,250. We do this at the end of every January and July.
To Mr. PoP’s parents, this is a pretty fabulous deal. They’ve been getting a 5% bond the past 2.5 years. And if we draw out the existing contract to the end, that’s another 2.5 years at 5%! You want to know what the current yield is on a 3 year Treasury*? 0.40% Even a 5 year note is still yielding a meager 0.88%. And heck, with the state of the debt ceiling debate, Mr. PoP’s dad might even think their investment in us is safer than a US treasury at the moment, too!
So when Mr. PoP mentioned casually to his mom around the holidays that we were probably going to pay them back within the year, his mom said…
“Feel Free To Roll It Over”
That’s right. His parents are enjoying their 5% investment in us so much that they’re not all that excited about the prospect of us paying it back early. At least not nearly as excited as we are about the prospect of paying it back early. =) In fact, Mr. PoP told me recently that his dad offerred to front us another $70K if we had another property that we thought we could turn around the same way we did the first.
And this is where it gets a little weird.
The thing is, if we had another investment that we felt was as good as our duplex, we’d consider it. Seriously. But for now, in our area, real estate isn’t cheap anymore. A few months ago I updated the market comps valuation for our duplex and felt really comfortable saying it had a market value of $97K. You want to know what a similar (but perhaps not as nice) duplex is selling for on the same block today? Current list price is almost $140K. I’m not convinced it’ll sell at list price, but the fact that an asking price is even that high is very telling.
I’m not saying our area is back in bubble territory, but we’re not eager to jump in at these prices. Frankly, we’re just not convinced that we’d be able to find short-term virtually guaranteed returns of 5% or more over the next year which would be worth extending the loan repayment for.
So, sorry mommy and daddy PoP. You’re getting your $50K back. Whether you like it or not!
If this were like the HELOC, we’d throw money at it every month until it’s dead. The bank has no problem calculating daily finance charges after all.
But because we want really clean books with Mr. PoP’s parents, our game plan right now is to aim to pay back half of the loan in 6 months at the next scheduled interest payment. So we’d pay them 6-months of interest and half of the principle in August. That comes to $1,250 + $25,000 = $26,250. Then we’d aim for the second half and 6-months of interest on it ($25,000 + $625 = $25,625) to be paid at the scheduled interest payment after that. If all that happens, this $50K loan could be dead by this time next year.
In which case our list of liabilities then becomes VERY short. Pretty much just “mortgage”.
Small Losses Because They’re Family
Because we’ll be accumulating money in money market accounts to pay them in big lump sums, we’ll end up paying a little more in interest than if we paid them a little every month like the HELOC. Think of it this way, every month that we put money into a money market account and hold it there instead of paying Mr. PoP’s folks we’ll earn maybe 1% (and this is a generous estimate), but be paying 5% interest on it.
But I’m not worried about that. I’ll consider it a bit of an unwritten pre-payment penalty. Or just some amortized loan costs since this loan cost us precisely $0 to start. (Mr. PoP’s parents generously paid the LegalZoom fees to download the original loan contract!)
So that’s the game plan now. It’s a slight change from our original debt plan because we ended up killing the car loan first, but I think it’s a pretty solid.
What do you guys think of the game plan? Anything that you would do different? Anyone have any guaranteed safe returns (and high! say >= 10%?) that they want to share with us to convince us to invest elsewhere and forgo paying back Mr. PoP’s parents for a while?
* At the time of writing, which is February 2013…