Posted: 12/4/2012 3:31:47 PM EDT
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I am seeking some financial opinions...
My wife and I own a piece of property (24.2 acres) that was originally purchased in 2007 for $417,000. We owe $168,000 now. We could probably sell it for between $200,000 and $250,000, but it might take a year or two. Our house is free and clear and the only other debt we have is for the wife's car, which has a 0% loan or we would've paid cash for it. We have $105,000 in cash, and $123,774 in IRAs/annuities - all currently in bonds. There is also $37,167 in a cash value life insurance policy. We have been discussing cashing in the IRAs/annuities and using some cash to pay off the land debt. This will remove a good amount of pressure from us on a weekly and monthly basis, since I don't make nearly what I used to, but it would place all our investments in essentially one basket- real estate. The obvious downside is that we take the 10% penalty for early withdrawal and then pay taxes on the money now. I don't have a problem paying the taxes as we would've owed them anyway, and there are some things we have done this year that are allowable at reducing the amount that would get hit by the penalty. Also in our minds is the tax rate increases that will go into effect on January 1. The total amount we'd be cashing in would put us in the highest bracket, which is set to increase. This option would leave us with about $70,000 in cash and no debt, but no retirement for me. I'll be turning 40 in two weeks, so I still have another 25 to 30 years (God willing) that I can work and contribute to a retirement plan. So then, My question is this: should we attempt to sell the property, possibly taking a $200,000 hit, or should we take the hit on the IRA penalties and pay off the debt? I wish I knew what the future value of the IRAs would be versus the land, but I can't recall how to compare the two. It may sound like my mind is made up but it's not. If I could see a mathematical reality, I'd adhere to it. TL:DR - sell at huge loss or take hit on IRA penalties and pay off debt. Edit: I suppose I should add that we need to do one or the other - either sell the property, or liquidate the IRAs to pay off the debt. The drop in my income has resulted in paying the land debt partially from our savings almost every month. |
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Cashing out your retirement is perhaps the dumbest thing you can do.
Why do you have to ditch the property? Did I miss that part? You've already taken a bath on that property in lost value. Just continue the mortgage payments and see if you can get the equity out in a decade or so. |
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Quoted:
I would pay off the land. That is something that will come back in value and you will not be able to replace. You have plenty of time to build your retirement next egg. Taking a 40% loss on your nest egg, is absolutely stupid. Hell, refinance your property. At $165k @ 3.5% is $730 a month. |
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Dave Ramsey
I'd call into his show. He will tell you exactly what you need to do. And I for one, would listen intently. |
| I don't think cashing in retirement is good idea, especially with the penalties. If you are able to keep up with debt payments without too much pain then why not keep going? Chances are good the land will increase in value once again somewhere along the line. 24 acres is a sizeable chunk of property too. Is it raw land and are there any income producing opportunities that could be created with it? |
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Do not cash out the IRA's. Taking a 10% hit is pretty stupid. Not only do you lose out on the 10%, you miss out on any potential earnings that may be had. The future value of your $123K in 25 years, assuming an 8% annual return, is $842K. That doesn't even take into account that you will be adding to it during those years. From the sound of it, the increase in taxes won't really affect you much, certainly not to the tune of the 10% penalty and loss of potential earnings.
As suggested by others, refinancing your property to a lower rate will save you a bunch. I would look into that before cashing out. ETA: the most powerful factor in investing is TIME. You can always add more money, but you don't get more time. For example to accumulate the $842K in 25 years starting from $0 would require annual savings of $11,500 per year. ETA2: For what it's worth I'm a CPA |
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Do what ever you need to do but 1. Do not sell the land. 2. Leave your savings alone.
Deliver pizza if you need to. Find some way if possible to make the land pay for itself. 20 to 30 yrs may seem like alot but it will hit you quicker than you think. I had land in FLA that was listed as a tree farm that kept the taxes low. I sold that land and regret it to this day. GD |
| Is the land in a good hunting area? It's not big acreage but in the right area you might be able to lease it and cover some of your payment during hunting season. Know anybody with a tractor? Start turning out some hay or maybe even some crops? Any way to make the land help pay the bills? |
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Don't sell the land nor spend your IRA/savings. You are doing the right thing. Stay the course!!! Heck, you need to be GIVING financial advice. Not TAKING it!!! My only advice is that you need to diversify a bit. You need more than bonds and land. Find a bit of stocks, gold, silver, guns... find something that YOU are comfortable with. Be careful with these investment experts - especially these investment "advisors". Some of these guys will "advise" you to buy things that will put money in THEIR pocket with commissions. |
| You've already realized a $200k loss but you don't want to see it. Unless you strike oil that property will probably be no where near the stupid inflated prices of yesteryear. So you could just continue to develop and use the property and let the utility value outweigh monetary value or sell it if you ain't doing shit with it. What good is 24 acres if you don't use it? Hoping for break even? Know when to cut losses. |
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If it comes down to cashing out the IRA's or selling the land, I'd ditch the land unless you have very clear and specific plans for it in the future or you expect a lot of growth in the area.
Assuming that you get 225,000 for the land you're looking at a loss of approximately 187,000. And unless I am mistaken you should be able to recoup the some of that loss thru taxes in the form of Capital losses. In addition there are the additional property taxes and carrying cost on the land that you're shouldering right now that would go away. Run the numbers in terms of asset appreciation; in 5/10/15/10 years what do you think your net worth will be under either scenario? Now go with the bigger number. |
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If you refi you'll probably be in a better payment than you would selling and buying. Not sure where you are in FL but that's not a ton of house in much of the state.
If you are asking less than appraisal amount and not more than you owe you can probably refi at no cost and no hassle. |
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What are the terms of the loan for the land? Is it raw land or is there a house?
Any possibility of the land paying for itself - potential pasture, timber, hunting lease? How close are you to the land? How much does it cost to maintain it (mowing, fence repair, etc) each year? |
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OP - I don't claim to be an expert, but FWIW: 1) Do you honestly think the property won't increase in value in the next 10 years? You've already taken a "potential" beating on the property value... if you sell now, you will lock it in and miss any possibility of recovery/appreciation. 2) Do not liquidate your IRA/savings. Stay invested. Get more stocks - get away from annuities/bonds unless you really need steady income from them. If this is the case at your age, you really need some professional financial guidance. 3) For the near future, consider a 2nd job (maybe the wife works, too). It sounds like you may be facing some difficulty, but budgeting and a little more income can do wonders. Good luck! |
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First take all the cash value out of the whole life insurance then dump the policy and buy term. Whole life is the worst investment ever and not whole life to top it off. Pay the cash value from the life insurance and about half of the $105K onto the land balance, knocking it down to about $80K. Refinance it for 15 years for about $400 a month. Keep $50K in the bank for security and leave the retirement in place. Income will likely go back up at some point, If you can make the situation manageable without taking any huge hits, that is what I would do. YMMV |
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Thanks to everyone for the great advice! I have new options to consider that I hadn't thought about much before. This I being GD, I expected more wife pic requests than useful info and you all came through.
To answer some questions: The land is about 1 hour from me. It's in a pristine, old Florida area near Fish Eating Creek that has remained unchanged since I was in high school. We bought it for hunting, camping, fishing, shooting - general recreation. It was always been a dream of mine to move out there eventually. My boys love it, but they understand financially reality. The only thing that may have an effect on the value of the property, other than time, is a new sports park that's in the works in the general area. I take care of all the maintenance, mowing, etc - and I really enjoy working outside, so it's something I look forward to. The loan is 4.5% because we borrowed through a bank where most of our business is done. Someone mentioned using the cash value of the life insurance policy, replacing it with term, and some cash to pay down the balance and refi. I think that sounds good. I'll rerun the numbers using the future value of the IRAs/annuities versus the loan amount over the life of the loan. Thanks again, everyone, for the great info. 
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