House will be close to paid off this year, need advice on moving to the Big Island (Keaau: rent, mortgage)

[WaikikiBoy]

Originally Posted by chadyo

It's been my wife and my dream for the past few years to move to Hawaii. We were there in 2011 for our honeymoon and she lived there for 4 years and we fell in love with it there.

I think our situation is a little bit unique, so I'm hoping I can get some good advice, here's some info about us.

- In our early 30s
- House will be paid off later this year or early next year
- We can probably sell it for around $130-140k
- I'm a programmer and might be able to work remotely. (will need reliable internet access)
- My wife is self employed hoop dance teacher for kids and has some passive income

We've worked so hard the last 4 years paying extra on our current house, I just don't want to get into a bad financial situation or wait and end up buying in another housing bubble, so I'm getting the feeling we should get the ball rolling soon. So if you were in our situation, what would you do? Buy land soon before prices go up any further? Pay off the house and save, save, save and buy the place of our dreams in a couple years? Buy a place with a legal Ohano and rent it on AirBnb or VRBO for extra income?

Also, what areas would you recommend? I think we want to rule out the east coast of the big island due to the rain and mosquitos. We don't need anything big but want some land for a garden.

Ideally, we don't want a mortgage at all which is why we've been paying extra on the house for a while. If we move sooner and get a mortgage we would want some kind of rental income that covers the remaining mortgage in case I'm no longer employed.

Thanks in advance!

I would take 20% for a down payment and buy your Big Island property now. Then rent out your Big Island property for awhile.

Use the rent from the new Big Island property while you stay where you are and finish paying off your existing mortgage.

You risk losing your current income if you go to Hawaii now. So keep the job because it generates extra disposable cash to allow you to pay off your existing mortgage.

Once you have that mortgage paid off, throw all the money you were paying on your existing mortgage toward the Hawaii mortgage plus the rental income from the Hawaii property as well. In a we years, you'll have 2 houses with no mortgage.

Then you can move to Hawaii and rent your current home for some extra income while living in Hawaii. You'll also always have a mortgage free place to move back to if you want.

Or, you could sell your existing house and not need to through that money into a Hawaii property because you got that one paid off with the double payments.

Sure, it will take a few more years to make the move but you'll be in far better shape to handle life in Hawaii. Especially if you need to get a new job because of the move.

[whtviper1]

Originally Posted by davephan

The market goes both up and down. Last week, we saw the market take a crash. Although over a longer term, such as 5, 10, or more years, the market is likely to rise. You need enough money out of the market to live on besides your money that may be tied up for 5 or 10 years in the market, waiting for the market to rebound.

Well - any half way decent financial planner should certainly do better than 8% return on investment regardless of how the stock market performs - and a 20% tax bracket is really low, I was using very conservative numbers.

There a wide number of options to invest and I certainly wouldn't put all my eggs in one basket such as only the stock market.

Index fund Bonds - real estate rental income - metals - Index fund equities - limited partnerships, etc....

[WaikikiBoy]

One thing you get by paying off your mortgage is freedom. For most people, no mortgage and no other debts, substantially improves their monthly cash flow position and gives them the freedom to explore options they may not have if they are trapped servicing a large mortgage.

[whtviper1]

Originally Posted by WaikikiBoy

One thing you get by paying off your mortgage is freedom. For most people, no mortgage and no other debts, substantially improves their monthly cash flow position and gives them the freedom to explore options they may not have if they are trapped servicing a large mortgage.

The other thing to keep in mind is the op said they were early 30's - putting a large chunk of cash in a house effectively only yields a 4% return (money saved by not having mortgage interest) - and no planner would ever recommend someone in their early 30's to have an investment target of 4%.

If they were retired or much older it would be easier to swallow this not having a mortgage theory.

[WaikikiBoy]

Originally Posted by whtviper1

The other thing to keep in mind is the op said they were early 30's - putting a large chunk of cash in a house effectively only yields a 4% return (money saved by not having mortgage interest) - and no planner would ever recommend someone in their early 30's to have an investment target of 4%.

If they were retired or much older it would be easier to swallow this not having a mortgage theory.

I agree that it is not a great long term strategy to build wealth or prepare for retirement. But, the OP is not asking about retirement planning or wealth building. They're looking to make a near term lifestyle change.

If they want a long term strategy to prepare for retirement or grow wealth, advice would be different.

[KauaiHiker]

Wow, I didn't think a house at 200K was realistic, even on the Big Island, but there are hundreds (330) of them on the MLS. Even decent ones like this one in Kapoho with a beautiful pond (I thought that area was really pretty):

14-4919 Waiopae Rd Pahoa, HI 96778 - MLS 257547

On the Kaua'i MLS, I see only one detatched house at 200K the MLS right now--and you know it's undesireable.

I second the advice of renting out your mainland house for income before you know if and where you want to settle on the BI. Landlording from a distance can be a pain, so set it up carefully (see if friend or family can manage it), and pick a good tenant yourself before you leave. If you end up staying and buying in HI, having a paid off house should help you land another mortgage here, and then you can decide if you want to sell the mainland house to pay off the HI mortgage or invest. I guess that assumes you have a bit of income to cover living expenses and a bit more savings for the downpayment. Without that, I guess you've have to sell first.

Originally Posted by whtviper1

Let's be conservative and say we get 8% on our investment.

I agree that investing can be better than paying off your mortgage, but I don't think 8% is realistic either.

[whtviper1]

Originally Posted by KauaiHiker

I agree that investing can be better than paying off your mortgage, but I don't think 8% is realistic either.

I agree - 8% is much to low but I was being conservative.

If you aren't getting at 10+% returns, you need to shop around for another financial planner.

[Fredesch]

One concern I would have is at 30, you won't be established in your career. If you loose your current job/customers you may need to take a job where you have to come in the office once in a while. It is unlikely that your employer will be on the big island.

If we learned anything from the 2007 crash, a house is not a financial investment. That is unless you are a general contractor that flips houses and uses the houses to fill slow periods of work. Sitting in your house does not make it more valuable, it just wares it out. I have heard to maintain your house you need to spend 1% a year on it. In temperate regions a house can last 100 years, in the tropics the life of a house is less than 40 years. How long do you metal roofs last? It costs money to keep termites and rot from eating your house.

They are actually growing new land on the big island and subdivisions created in the 50s and 60s are still only a quarter full. Please read the online version of the Tribune-Hearld for a few months and count the number of foreclosures. They usually come in bunches, but on a high count day you might find 9 new foreclosures. There are over 70 properties up for tax sale.

I have been looking at moving to the big island for over a year. But we are in a different place in time than you are. We are waiting for our last child to finish high school and I have been in the software industry for 30 years and have worked from home the last 10 years. We watched the value of our house drop $130k in 2007 and it is still $65k below its value in 2005. Luckily we still have a lot of equity in our house.

Good luck in whatever you do.

[chadyo]

Thanks to everyone for all the replies. I thought this forum would notify me when I got a reply, guess not.

To address the idea of keeping a mortgage in order to retain the mortgage deduction, I understand the motive behind that but I view the security of having no mortgage as more important than the possibility of making more of the money. You have to also remember that in the first half of a mortgage, you're paying mostly interest so it takes a while to pay down any principle...hence why so many people are under water.

Everyone provided great advice, thanks again. We actually booked a trip in early march and we're planning on taking a look at some properties and land to get a better sense of what we can afford and where to buy. I'm thinking the best idea is to buy some land first.

[davephan]

Originally Posted by chadyo

Thanks to everyone for all the replies. I thought this forum would notify me when I got a reply, guess not.

To address the idea of keeping a mortgage in order to retain the mortgage deduction, I understand the motive behind that but I view the security of having no mortgage as more important than the possibility of making more of the money. You have to also remember that in the first half of a mortgage, you're paying mostly interest so it takes a while to pay down any principle...hence why so many people are under water.

Everyone provided great advice, thanks again. We actually booked a trip in early march and we're planning on taking a look at some properties and land to get a better sense of what we can afford and where to buy. I'm thinking the best idea is to buy some land first.

Paying off the mortgage is sometimes better than attempting to earn unrealistically high interest rates. Properties can go up and down in value over time. However, if you hold the property long enough, usually they will recover. The market can go up and down in value. Sometimes investments go bankrupt and your money is permanently lost. Sometimes people that are attracted to unrealistically high interest rates are victims of ponzi schemes. The people that invested with Bernie Madeoff that lost millions wish they weren't attracted to unusually high returns. The same goes for the Minnesota version of Bernie Madeoff, Tom Petters. Both reside in prison now, probably for the rest of their lives. But the victims lost their savings, some lost everything. Don't invest all your money into one investment company that offers unusually high returns. Partition your investments into different investment companies and investment types.

If paying off the mortgage more slowly makes so much sense, why not get a 40 or 50 year mortgage instead of a 15 year mortgage? You typically pay for your home three times with a 30 year mortgage. You'll never pay off those longer term mortgages unless you are very young or you live to be very very old.

Living debt free is a great way to live.