Financial advice

[Shumdit]

I have a relative who is asking for advice, and since I am pretty much an idiot, I figured I would ask the smartest people I know, and that would be NSX enthusiasts like me!

He is selling some of his businesses, and told me he was going to try to pay off his home with the proceeds (not sure how much percentage he will have to pay in capital gains on tha business sale, so that might not really be possible, since the blalnce on the mortgage may exceed the proceeds after taxes). Anyway, let's say he owes $250K on his mortgage over the next 10 years (I think this is close). I told him if he got $250K in actual after tax money from the sale he might consider investing it and using the income from the investment to pay most of the payments, which would allow him to keep the $250K for retirement once the home was paid off in 10 years and would also allow him to take the deduction on the interest of the mortgage for tax purposes in the meantime. I know he will not generate the full amount of the mortgage with the interest on the $250K, but it would be a good majority of it if invested wisely, and he could get 7 or 8 percent returns on it. I know that might be a pipe dream, but since rates are rising it might be possible in the next few years. Anyone with actual education or experience want to help me out with this? I want to be able to help him get an idea of which way to go. I agree the paid off home sounds great, but I think holding on to the proceeds from the sale would be better long term.

 

[NSXFreak00]

IF his business investment is providing less than 5-6% returns a year (consider equity appreciation as well), then he should sell his business. Aside from that, the only other reason I would sell the business is if he had the opportunity to invest in something that would give even higher returns for equal risk(risk tolerance will depend on age).

If this person exits the business, what are his cash flows like? Does he still generate enough cash from his other businesses to sustain living expenses, mortgage expenses, and maybe even savings, or is his ability to make all payments contingent on how the $250k is used?

 

[Shumdit]

He does have other businesses to provide income. I think he is thinking since he will be losing the income from the ones he is selling it would be wise to eliminate the mortgage payment to compensate for it. My thought is keep the principal and use the interest off it to help pay the mortgage.

 

[CokerRat]

If he's concerned about making mortgage payments regularly without the income from the about-to-be-sold business, then his debt load is too high and by all means he should reduce it with the proceeds from the sale.

If making ends meet month-to-month is not an issue either way, then it's just a question of which makes more money at the end of several years. If he is sure he can get a better after-tax return from the investments than from paying down the mortgage, he should do so.

 

[SilverStone05]

I have a relative who is asking for advice, and since I am pretty much an idiot, I figured I would ask the smartest people I know, and that would be NSX enthusiasts like me!

He is selling some of his businesses, and told me he was going to try to pay off his home with the proceeds (not sure how much percentage he will have to pay in capital gains on tha business sale, so that might not really be possible, since the blalnce on the mortgage may exceed the proceeds after taxes). Anyway, let's say he owes $250K on his mortgage over the next 10 years (I think this is close). I told him if he got $250K in actual after tax money from the sale he might consider investing it and using the income from the investment to pay most of the payments, which would allow him to keep the $250K for retirement once the home was paid off in 10 years and would also allow him to take the deduction on the interest of the mortgage for tax purposes in the meantime. I know he will not generate the full amount of the mortgage with the interest on the $250K, but it would be a good majority of it if invested wisely, and he could get 7 or 8 percent returns on it. I know that might be a pipe dream, but since rates are rising it might be possible in the next few years. Anyone with actual education or experience want to help me out with this? I want to be able to help him get an idea of which way to go. I agree the paid off home sounds great, but I think holding on to the proceeds from the sale would be better long term.

imo....sell the business...invest the 250K in funds.....make payments off of the dividends/appreciation. this way he still has control of the money and can still use his mortgage interest as a tax deduction. Its all about options and he'll have less if he gives up his lump sum by satisfying the mortgage. With my recommendation, he'll still have the 250K when he retires as well as a paid off home.

He could also find a good money manager (me :biggrin: )to employ a rolling options strategy for him. The market is relatively flat and has been for a quite a while and covered calls have been generating a lot of income for some people.

Good Luck.