More Family And Money: They Don’t Want It Back!

20130207-152458.jpg

Z here belongs to Mr PoP’s parents.

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.

  1. revolving rewards credit card balances (these are paid in full every month)
  2. mortgage on PoP primary residence, a 15 year loan (<14 years left!) at 3.25%
  3. 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.

We’re AAA!

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!

 

But How?

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…

 

39 comments to More Family And Money: They Don’t Want It Back!

  • Do what keeps peace in the family both long-term and short-term.
    nicoleandmaggie recently posted..You google the questions, we provide the answersMy Profile

    • Definitely – that’s part of why I’m all about keeping super clean books. I don’t want to have to show a spreadsheet with daily finance charges to prove that we’re paying exactly what we’re contractually obliged to. It’s totally worth “losing” a couple hundred bucks to keep things easy and clean with the in-laws. =)

  • I really like hearing about the details of your $50K loan since it was a win for you and your in-laws. You’ve figured out how to cut out the banks entirely which I commend you on. Sounds like a pretty solid plan.

    When it comes to >10% returns, I’m experimenting with Prosper (but that’s certainly a high risk venture) and then of course there’s energy efficiency. Clearly there’s a limit to how much you can invest in energy, but you might be able to get much higher returns than 10% with LEDs, dual flush, low flow shower heads, demand water heater, etc… (not investing per se, but a good place to put some extra cash)
    Ross recently posted..I’m taking on the Yakezie ChallengeMy Profile

    • It is a win-win! I once heard an investor say that there is always money available if the deal is good enough. In this case, the duplex was such a solid deal that the loan was a no-brainer for my parents. I’m intersted to see how Prosper turns out for you…we’ll be making some improvements in energy effeciency before the summer as well (new skylight).
      Mr PoP recently posted..More Family And Money: They Don’t Want It Back!My Profile

      • We’re finally going to replace the other skylight? Awesome =)

      • Installing skylights? The last time I did the math on skylight installation (in a commercial setting albeit) I came away with a payback period of something like 80 years. I’m not saying your math doesn’t work out, I’m just interested it what you’re doing? Are you just replacing an old skylight with a newer one that lets in more light, so then you don’t have to have lamps on as often?
        Ross recently posted..I’m taking on the Yakezie ChallengeMy Profile

        • admin

          Yes, we’re replacing a very, very, very cheap/old/broken/cracked/dirty skylight with something that isn’t. I need to take pics when I do it…the existing skylight is really horrible, especially for an area that is prone to hurricanes!

          • Not to mention the old one isn’t actually air tight. When we replaced the first one about a year ago, we found out there was a large air gap where we had been undoubtedly losing precious A/C in the summertime.

  • I’m still in shock that you can buy a whole duplex for $50K, haha. I don’t blame them for enjoying the return. They don’t have to do much to get it, which I’m sure is beneficial to them.
    Daisy @ Add Vodka recently posted..Kitchens and Eating at HomeMy Profile

    • In 2010, you could have bought a half a dozen for 50K per. I honestly don’t know what to tell my co-workers who are looking at housing right now; its very expensive in comparison to three years ago, but they are young, have money, and want to buy. These super low interest rates are driving prices through the roof again, maybe in the same way the no-doc loans did in 2006…
      Mr PoP recently posted..More Family And Money: They Don’t Want It Back!My Profile

    • Daisy with the exception of organizing the original contract, Mr. PoP’s parents have had to do no work whatsoever. They don’t even remind us of the payments – I just deposit the money straight into their account about a week or so before the due date.

    • Agreed – $50k is barely a downpayment here! You guys found gold in those parents of his :)
      eemusings recently posted..Same old same old money argumentsMy Profile

  • D5

    I like where your head’s at on this one. You’ve had a lot of success with the duplex, but if you’re unsure of the market as it stands then it makes complete sense to wait. Too many people start ignoring their instincts (as well as the math!) and you get into trouble.
    D5 recently posted..When is ‘Free’ Not Free?My Profile

  • Sounds like a great game plan! And how cool that you *could* get another loan if you find another great investment.

    And congrats on killing your car loan this month!
    Joanna @ Our Freaking Budget recently posted..It Took $15 to Fall in LoveMy Profile

  • Brian

    Safe and >10% typically do not go hand in hand. I have a feeling if someone knew of a safe investment that returned more than 10% they wouldn’t tell anyone and laugh all the way to the bank until the return started to decrease. Then they would write a book and teach seminars about how they made a safe 10%.

    That being said I think your plan is very solid and isn’t nice to know that the bank of Mom and Dad is able to pass a stress test?

    • Haha, you’re probably right. I’m interested in things like Prosper and Lending Club that seem to be able to generate relatively high returns. But for now I think we’re going to stay away from those until we get debt paid off.
      The timing was definitely right with the bank of Mom and Dad PoP… and I’m glad (knock on wood!) that it hasn’t changed our relationship at all. That’s important!

  • I have a guaranteed 25% on cattle, which was actually more around 40% last year. And this is after splitting profit in half with BF! I know you wouldn’t have animals to butcher but a good race pet could be an idea and you can sell the pups and get to keep a free pet. My mum also loves to let me money and is never in a hurry to get paid, so like you I wait until I have a good chunk or all the money to pay back and don’t mind too much the lost interest since there was no loan fee or credit check.
    Pauline recently posted..Friday recap, five chicks and a lighter site!My Profile

    • Mr. PoP’s dad actually used to raise and sell dalmations when Mr. PoP was a kid. But that stopped years ago.

      Sounds like you have a pretty similar situation with your mom. Has she ever been disappointed when you paid back since she was enjoying the interest payments?

  • I think you guys are rockin’ awesome! Paying down $50,000 + interest in a single year is a big goal. If you make it I’d argue the post that follows would be one of your most popular.
    Mandy @ MoneyMasterMom recently posted..Monthly Expenses for a Family of 5 – January 2013My Profile

  • Ivy

    It feels good to get rid of another debt, doesn’t it? I am itching to throw more money at our mortgage, which is currently scheduled to finish in 6.6 years, but we could easily get it down to 4-5. But my husband prefers us to invest the extra since the mortgage is at 2.75%. He is right financially but would be so nice to have 0 liabilities :-)

    On the main topic, it never ceases to amaze me how people in the US have these financial arrangements with interest charges between family members. Back home (or even within the immigrant crowd of friends we have here) any money exchange is either a gift or at most interest-free loan between friends. My mother would literally have a stroke if I had ever tried to give her or charge her interest. Oh, well, maybe one day we’ll adapt so much we’ll give the kids college loans with interest – but only if they are as savvy and diligent as you were with this duplex loan

    • Yeah, I’m with your husband. We’re not going to be in a huge rush on the mortgage (3.25%) even after the $50K loan is kicked to the curb.

      As for these kind of arrangements, in this case we can blame(?) the Supreme Court for interest charges between family members. In 1984 Dickman vs Commissioner basically said that interest free loans were actual gifts, and as such were subject to applicable (high) gift tax rates.

      If Mr. PoP’s folks had really wanted to avoid charging us interest, they probably could have finagled a way to do so legally, since the gift tax exclusion is $13K per person per year. So if each parent had given each of Mr. PoP and I $13K, that would have been $52K. But even that is apparently highly scrutinized. According to accountants we spoke with, the money could not have all come from the source that it did within his parents’ “pile”. It came from was an inheritance Mr PoP’s mom -only mom!- had recently inherited. Any gift $ from his dad would have needed to come from an account with (strictly – if I’m remembering right) his name on it.

      Complicated, right? It gets even more so. You see, Mr. PoP has a boatload of siblings. And that gets weird, too. We didn’t want there to seem like we had any sense of entitlement or that we had given his parents a raw deal. His parents are very particular about the siblings getting “the same” level of support, which in his family was through college, and the last thing we want is to give anyone an opportunity to feel like they’ve been gypped on free money from mommy and daddy PoP.

      Wow this is getting long… anyhow. In the end, I’m glad that we’ll have paid Mr. PoP’s folks the interest. I feel like we got a good deal, and they got a good deal, so it’s a win all around.

  • I think it’s pretty great that your loan with family turned out so well. I know several people who have borrowed much less from parents and had it cause a lot of tension and drama between them!
    The First Million is the Hardest recently posted..Investing Experts and the Herd MentalityMy Profile

    • I think having a contract and a payment schedule set out made a world of difference. I can see more casual arrangements becoming tense when one party thinks the other is living a little too high on the hog when they’re still in debt!

  • That’s too funny of a family dynamic! No bank would want you to pay back early, either, but they don’t have the pull on you that family does. I hope things work out for the best for EVERYONE in the end!!!
    femmefrugality recently posted..Because Super Cute Things Shouldn’t Break the BankMy Profile

    • It’s a little odd, but definitely not hurting the relationship. They’ll be proud of us when we pay it back early, too – especially that we’ll be paying it back without replacing it with another more traditional loan (which was the original plan).

  • Looks like your plan was well-carried. And your relationship with your family was so supportive of you.
    Sarah Park recently posted..How to Get a Low Mortgage RateMy Profile

  • Either way it’s good. Pay it back early, and there’s always the opportunity to go to the well for another loan.
    101 Centavos recently posted..Why Air Products and Not G.E.? A Heart Warming Dividend Story…My Profile

  • It’s good to hear that your venture into real estate is going well. I don’t know much about your area’s economy, but have you thought of commercial real estate?
    Justin@TheFrugalPath recently posted..You Don’t Have to Limit Your Investments to StocksMy Profile

    • Funny you should mention that Justin…I just spoke to a business broker on Friday and we touched on commercial RE. We’ll write about it soon, but he was pretty down on it (honestly, he was down on a lot of things!). Some of this plays into our so-called “five year plan” as well…we may want to stay as liquid as possible over the next few years so we can take a break from work for travel, start a small business, be beach bums for a year, etc.
      Mr PoP recently posted..More Family And Money: They Don’t Want It Back!My Profile

  • Travis

    Great job on paying down your debt. One thing I was curious about:

    “1. revolving rewards credit card balances (these are paid in full every month)”

    Do you pay off your credit cards before or after the monthly billing cycle closes? I like to have my expenses hit in the month I charged them, so I pay off my card before the billing cycle ends. When the card company reports my balance to the credit bureaus it always shows a $0.00 balance, so I have a 0% credit utilization.

    As for a place to get a decent yield, I would suggest starting out with a small Prosper account. I have been using them since their “dark days” when most people were losing money (I averaged 2.56% annual return from 2007-2008). From 2009 (when they changed their loan process) thru today I am averaging 7.07%. I’m still just using some “play money” in the account since I want to see how it goes over a longer time, but so far it is looking pretty good.

    • Thanks for the heads up on Prosper. I’ve heard of mixed reviews on their user interface, but good things about Lending Club, so I’m pretty interested to see where P2P lending goes. But I don’t think it’s right for us on the scale and time frame that we are interested in right now.

      As for credit cards, we don’t worry about it too religiously since we have a LOT of credit extended to us. Right now we have over $25K in combined credit limits across multiple cards, and our balance at any given time (across all) is usually less than $2K. We also now have $0 utilized on the HELOC line which has a $38K limit. So our utilization for cards is really low. That said, the way I do it is basically that I have alerts set on the cards that when the balance hits a certain dollar value ($1K on most of the cards), I go in and pay it manually. If there’s a balance at the end of the billing cycle, then I pay then too. It’s an old habit that’s probably less necessary since we don’t really think about what our credit scores are these days.

  • […] PoP from Planting Our Pennies presents More Family And Money: They Don’t Want It Back, and says, “Mixing family and money isn’t easy, but we’re trying to navigate that […]

  • […] PoP @ Planting Our Pennies writes More Money And Family: They Don’t Want It Back – Mixing family and money can be a delicate balancing act, especially when there’s a […]

  • […] over at Girls Just Wanna Have Funds included our post More Money And Family: They Don’t Want It Back in the Carnival of Personal Finance: In the Name of Love and […]

  • […] Mr. PoP’s parents would be A-ok with us keeping the $50K we owe them for a couple more years (they like those interest payments!) instead of paying them back on August 1, has been making us even more aware than usual of possible […]