As of April 7th I am a home owner! I purchased the home that I mentioned in my previous post – sign unseen. Very risky, I know, but it seemed like an amazing opportunity. Before you begin lecturing me, I know that this is how lots of people got into trouble – buying homes that they really couldn’t afford, but I’d like to think that I’m smarter than the average bear. Let me run the numbers for you.
I purchased the home for a little over 22K. I could have used that money to pay off a few bills. Sigh. Anyway I borrowed most of it from my 401K as a 3 year loan at a rate of 4.25%. I know that the 401K loan represents an opportunity cost so if the market goes up and returns a rate higher than 4.25% (plus some other compounding) and my money isn’t in there I shot myself in the foot. I borrowed about 3K from mom which I intend to repay with 10% interest ($3,300) over the next 6 months. Hey, mom is a loan shark and her money doesn’t come cheap.
There is a tenant in the home currently paying $525 per month in rent. Her lease expires in another month or so and I intend to present her with a new one year lease at a rate of $550. I plan on inching her closer to market rates. She pays for all of her utilities except for sewer charges. About 75% of her rent is paid for by a non-profit program since she has a terminal condition. I have already opened an account where the rent will be deposited to separate that money from my other income.
I intend to use the rental income to repay my mother and then bank the balance to use to pay off my 401K loan. Unfortunately the 401K terms doesn’t allow me to add smaller payments to the payroll deductions so I intend to save, save, save. The loan terms will only allow me to pay the balance in full so if I have a 3 year term, between my paycheck and what I save to pay the loan I estimate that I should be able to pay off this loan in a tad less than 2 years.
The way that I calculate it, I should break even in year 3 of collecting rent. That’s not too bad. I’m might consider getting a HELOC to pay off the 401K loan. Depending on the cost of the loan it might work out because I would then be able to deduct interest payments on my taxes, but I need to crunch the numbers on that. I don’t want to play with adding any debt to the property.
I’m surprisingly very calm. I guess I should go take a look at the home now. I don’t think that I should tell anyone that I purchased this home without actually looking at it, should I? And I haven’t forgotten about you guys. I’m still thinking of what to offer you for my birthday this year. It has to be something good because you, my dear reader, deserve only the best of the cheapest thing that I can find.
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