pay off 165k business property loan?

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Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

pay off 165k business property loan?

Post by TarHeel2002 »

Currently situation:

40 yo married with 3 kids (9, 7, and 2)

Retirement investments (401k, HSA, Roth, brokerage) = 1,089k
Emergency Fund = 50k
New Car Fund = 40k
529 Funds = 133k

Debts =
144k home mortgage 30 year fixed 2.5% ($577 monthly payments) - 30 years remaining on note
164k business property 15 year fixed 3.8% ($1544 monthly payments) - 10.5 years remaining on note

Annual salary = 275k

Annual savings = 87k retirement + 18k 529

I will potentially have an additional 50k available to me this year. I was considering applying the entire 50k to my business property loan and then diverting some of my funds from my monthly retirement contributions to accelerate the loan payoff. I was thinking of reducing my retirement savings to 63k per year (currently 87k annually) so I could apply an additional 2k per month toward the business property loan. That monthly 2k currently gets invested into my brokerage account with Vanguard. If I go this route I could have the loan paid off in roughly 34 months. Just looking for advice / critiques. Thanks!
Last edited by TarHeel2002 on Fri Apr 09, 2021 6:51 am, edited 3 times in total.
annu
Posts: 1091
Joined: Mon Nov 04, 2019 6:55 pm

Re: pay off 165k business property loan?

Post by annu »

Personally would do the same if I had that high loan, did same with a 3% loan on home, so not exactly the same but close I guess :happy

One thing I will suggest, look into any implications of owning business property fully vs bank also involved, any effect on insurance, liability etc.

I do have a question for you, how are you doing 87k in retirements, the max i ~$57k, with backdoor roth. How are you doing 30k on top of that?
tashnewbie
Posts: 4284
Joined: Thu Apr 23, 2020 12:44 pm

Re: pay off 165k business property loan?

Post by tashnewbie »

Is the business property co-owned with another person(s)?
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

The property is a shared business property owned 50/50. We are here for another 15 years minimum I would guess.

My contributions are as follows:

19.5k 401(k)
19.5k 401(k) wife
5k 401(k) match
12k Roth
7.1k HSA
24k Vanguard brokerage account

Total 87.1k (roughly)
Valuethinker
Posts: 49031
Joined: Fri May 11, 2007 11:07 am

Re: pay off 165k business property loan?

Post by Valuethinker »

My only thought is how does interest on your loan affect your tax position?

What interest rate are you paying after tax?

Also how does you accelerating repayment affect your equity position vis a vis Co owner?

You don't want to be putting more money in that increases the value if his equity.

Setting all those considerations aside, a 3.5% guaranteed return pre tax looks pretty good to me when US Treasury bonds are offering 1.6% ?
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

I think my after tax interest rate probably hovers in the low 2% range on this loan. It’s on a schedule E on my tax docs, straight line depreciation plus the interest I pay on the note. I am squarely in the 24% tax bracket. We each paid about 200k for 50% ownership of the building (400k total). It’s probably not worth a whole lot more than that now; but it is where we operate our business out of. Partner has no outstanding debt on it. My main reason for wanting to pay it off is to increase my monthly cash flow. We each pay ourselves rent from the business of $2200 per month. My loan payment is $1544 per month so cleaning up this loan would increase my annual cash flow by about 18k which would be significant to me.

The other option is to drag out this loan over the next 10.5 years and add the lump sum 50k later this year to my brokerage account (VTSAX) which currently has about 91k in it. I am also adding 2k per month toward the brokerage account now.
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

I’m thinking of dropping 40k of the extra funds on the business property loan reducing my balance to around 124k. I’ll then split my 2k extra monthly funds going forward: 1k to VTSAX brokerage account and 1k extra to the loan each month. That will reduce my loan term to about 53 months. I’ll still be saving 75k year for retirement and 18k for 529.

Sorry just thinking out loud on this one. :D
babystep
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Joined: Tue Apr 09, 2019 9:44 am

Re: pay off 165k business property loan?

Post by babystep »

How much is the equity in primary home? Any bonds in taxable?
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

I’m this crazy market we probably have 300k in home equity. No bonds in taxable. VTSAX taxable has 92k in it.
lakpr
Posts: 11612
Joined: Fri Mar 18, 2011 9:59 am

Re: pay off 165k business property loan?

Post by lakpr »

I would use the additional money to pay off the mortgage on the primary home. The business mortgage is tax-deductible to the full extent, but the home mortgage is not. At $275k salary, assuming you are Married Filing Jointly, you are in the 24% tax bracket. That 3.8% rate would be an effective 2.9% rate after tax deductions.

That is still higher than the mortgage note rate even when comparing after-tax costs, but two things compel me to advise paying off the home mortgage instead.
1. You do not / will not own the business property completely
2. The airline analogy comes to mind ... secure your own oxygen mask first before helping others. Secure your own abode free and clear first

The $50k additional funds + $50k emergency fund + $40k "New Car fund" can be emptied, own the home free and clear, and with the improved cash flow replenish those funds again. With a $275k annual salary, replenishing the emergency fund of $50k shouldn't take more than an year, new cars CAN be purchased on a loan if absolutely necessary ...

Look to refinancing the business mortgage itself, I am not sure how business loans are structured and priced, so this is really an off-the-cuff suggestion.
JBTX
Posts: 11227
Joined: Wed Jul 26, 2017 12:46 pm

Re: pay off 165k business property loan?

Post by JBTX »

I would absolutely not reduce retirement account contributions to pay down a 2.9% after tax business loan. If you have extra left over after full retirement contributions then paying down with that is fine.

Keep in mind there are a lot of expectations of modest inflation so you may not be losing that much on a 2.9% net mortgage.
babystep
Posts: 775
Joined: Tue Apr 09, 2019 9:44 am

Re: pay off 165k business property loan?

Post by babystep »

It doesn't make sense to reduce 401k contribution and then pay 24% tax just to save 2.9% per year in interest.

If you want to pay-off the loan then I would take 40k from car + 50k additional available this year + 2k every month and then just pay-off the business loan over the next couple of years.
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

Thank you for the responses. I definitely will not reduce any annual tax advantaged retirement contributions in order to pay down this loan any faster. What I’m really trying to decide is whether to:

1. Continue to add excess cash (50k lump sum + 2k per month) to my brokerage account (VTSAX)

or

2. Pay down the 3.8% business property loan faster that is co-ownered, will not be sold anytime soon, and has certain tax advantages associated with it.

I like the idea of having the loan gone for increased monthly cash flow ($1544 per month) but I also like the idea of beefing up our brokerage account which currently has 92k in it.
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

Bump for one more look with the weekend crew. :sharebeer
Trader Joe
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Joined: Fri Apr 25, 2014 6:38 pm

Re: pay off 165k business property loan?

Post by Trader Joe »

"Pay off 165k business property loan?"

Yes, definitely.
harikaried
Posts: 2613
Joined: Fri Mar 09, 2012 2:47 pm

Re: pay off 165k business property loan?

Post by harikaried »

Have you made prepayments on this loan before? We have a commercial loan that allows for some partial payment without penalty. The Note should have the details.
Topic Author
TarHeel2002
Posts: 429
Joined: Sun Jun 17, 2012 2:14 pm

Re: pay off 165k business property loan?

Post by TarHeel2002 »

Only prepayment penalty is 2% of the original loan balance so 210k * 0.02 = $4,200 if I pay it off in less than 4 years which I wasn’t really planning on doing anyway.
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