[quote=EconProf]Since early retirement and I both live in Santaluz and face Mello-Roos fees, we met up today to compare notes. It turns out the decision of whether or not to pay off the MR is not at all clear cut.
I brought my tax bill with me so we could crunch the numbers to see if it is worthwhile. I also called earlier today, the number on the tax bill to learn my cost to pay it off, and got additional information about MR.
My bill contains two MR payments, CFD#2 for $2108 per year, and expiring in 2030, and Poway Unified, CFD#4 for $904 per year. I only called the number for the first, which revealed that my cost would be “about $30,000” to pay off (exact amount would cost me $500 to find out, but would apply as a credit to the payoff). That means if the amount stayed the same for the next 17 years, I would pay a total of about $36,000.
It clearly appears I should NOT pay it off, given that I could invest that $30,000 today and have it double assuming a mere 4.2% annual ROR compounded. Of course the unknowns are 1) Will that $2108 stay the same for 17 years, and 2) Will that expiration date of 2030 stay the same.
The guy I talked to on the phone was reassuring on both counts, but I do not share his confidence. Still, changes in 1 or 2, or both, would have to be pretty major to prompt me to pay it off. And the hurdle of 4.2%, (or 5%, or 6% depending on assumed changes in 1 or 2) should be pretty easy to beat with alternative investments, or paying down my other mortgages, of which I have many.
Early retirement and I also determined that the two MR fees are based on different factors. It seems the first depends on square footage, and the Poway Unified one depends on property value. Interesting.
Anyway, I am not paying off the MR, based on this information, unless someone here can bring other evidence to bear.[/quote]
EconProf,
It was great as always to catch up with you. We really need to meet up more often.
Yes, EconProf’s example was a good one that it might not always make sense. It was interesting to see that his CFD #2 was about half of what I was paying. I forgot that they base the tax based on size of house rather than value for CFD #2. My house is almost double the size of his so I get hit much harder on the CFD #2. I also was fortunate that I bought pretty much at the absolute bottom and I also negotiated a great price. So my % CFD tax exposure relative to my purchase price was high compared to his.
On the CFD #4 as he mentioned, I don’t think it’s solely based on sq. feet because his was just a bit under what I was paying. I paid just under $1,000 IIRC a year and my house is much bigger than his. So I guess I’ll have to see exactly how CFD #4 is calculated. It’s like we said before…all of this is kind of murky.
I still think that one would be worthwhile to pay off but I agree with him that maybe CFD #2 is not so compelling if your house size is smaller. But still, I tend to stay on the conservative side and although I’m sure I can probably make returns higher than that, my attitude is end the tax obligation forever while it’s on the table.
As well, it’s a GUARANTEED rate of return. I consider myself a pretty darn good investor and done very well. But I always try to be humble in the fact that I can NEVER any year say that I know with 100% certainty that I can make X% ROI. However by me paying it off and knowing I will stay in my house I could say that.
But it was really interesting seeing my CFD #2 was almost double his.
The one thing as I mentioned today EconProf are that (a) I would NOT assume that $2,108 will stay the same the next 17 years. They have taken advantage of some of the lowest interest rates in history and they can’t refinance lower so my attitude is the payments will only go up. I believe by law they can raise it a maximum of 2% a year. So I would expect them to keep raising it 2% per year until it’s paid off.(b) Although I think it’s not likely they would extend out CFD #2 past 2030, my philosophy is who knows?
I’ll have to go back and look at my exact notes but for what it’s worth, EconProf, I did recall that CFD #4 was going up the maximum % each year. So you can probably assume that rate will keep going up 2% a year until 2041 or beyond (if it gets extended). But one thing is for sure, the tax obligation will NOT end until 2041 at the earliest. And I DO think that it will keep going up 2% each year. PUSD won’t leave any money on the table, IMHO.
I certainly would NOT trust the judgement or advice of the third party administrator that handles tax payments for the city. LOL. Because the longer the taxes go on the longer he has a job. 😉
As well, much of the factor to me just depends on if you know that you’ll keep the property for the long-term. In my case we won’t sell the property in the next 15 years and probably even after that. I tend to buy properties and hold on to them for the long term. If I don’t live in them I turn them into a rental property. So that’s a factor to consider as well.
