How to balance the risk of owning one real estate?
I am about 45 years old and recently began to receive a US government pension, which I do not require for current expenses. The monthly payment is about a quarter of my living expenses, but due to my other employment the pension is "excess" and I want to save/invest it.
Half the excess will go to covering the expense of owning a house. The house is about 95% mortgaged at 2% annual rate until 2045, although it's rented out, the monthly cash flow considering all expenses is negative. Because of the 2% rate I will avoid making more than minimum payments on the mortgage, and not likely that selling the house is going to be sensible.
So, on the one hand I have a very stable known pension income, and on the other hand a large and growing sum completely tied in one property. I have a feeling that the location (Honolulu) may be more volatile or disconnected from US real estate markets but I'm not sure.
With the other half of my pension, at my age, what's a good strategy to hedge the real estate risk and ensure I have a stable retirement income in about 20-25 years.
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It sounds like, essentially, a 2% fixed-rate mortgage for nearly 30 years. That's extraordinary.
The payments on a 2% fixed-rate 30-year mortgage are more principal than interest from the start. Even if you are cash-flow negative, you're still building equity in the house, so hopefully that's still a gain overall, even if you don't see the gain in your bank account every month.
If you're 95% mortgaged, you would have private mortgage insurance, I'd suspect. If this is the case, once you get the loan balance down to 80%, request that this be removed; it will save you money each month.
If you don't have any other debts, have an emergency fund, and are otherwise investing in other vehicles, then paying down your mortgage is the next thing to do, regardless of how good the rate is. The payment doesn't go away until you pay off the loan in full. Then, things get a lot more fun.
all real estate is local, until it's not (2007 crash). Honolulu is particularly volatile. It will dump hard when Asia has a recession as much money comes into the area from Asia. Consider what would happen if China declares "no more foreign real estate investments." Poof, there goes a large buying segment.
One has to ask. If you have little equity and negative cash flow, why not get out while you can even at a loss? You're betting on better cash flow in the future but have negative cash flow now. That's a risk on top of a likely downturn in real estate. Consider what happens if the market drops only 10%. You're then underwater and it could take years to break even. A consideration is to get out at the top and remove risk from the equation. Invest your pension in something with a positive ROI.
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