Re: [Help-glpk] A financial optimization problem

[Jeffrey Kantor]

I don't have time right now to provide much help, but I do something much like this on occasions when making personal financial decisions. It's very useful and helps significantly with the bank when explaining why you're doing something outside of their general experience. Based on your brief description I'd offer a few suggestions:

a. Consider using the present value of net worth as your optimization objective. Minimizing tax and debt service implies that your investment decision has already been made and its only a question of how to finance. 

b. Develop plausible scenarios.  Looks like you have a nominal scenario in mind.  What can go wrong and what would be your recourse?  You don't need a lot of scenarios, just a few that representing downside risk such as failure to realize the full income.

c. You'll need to model the before and after-tax value of the IRA.  Real estate also provides some tax benefits if you can deduct interest payments or shelter capital gains. You'll want to provide a common foundation for comparing alternatives which circles back to point a above.

d. Include an extra cash flow in the model to maintain future financial flexibility.  You'll want to retain some cash flow for the inevitable but presently unknown extras that come with these kinds of investments. Whatever you think you need consider doubling or tripling it.  Trust me on that one.

Jeff

On Wed, Nov 14, 2012 at 6:02 PM, Reginald Beardsley <address@hidden> wrote:

Can someone point me to information on how to setup the following optimization problem?  It seems to me a not unusual problem and there are a lot of smart people who follow this list.

I'm interested in buying an income producing property.  I currently have the purchase price in an IRA from which I can withdraw money w/o penalty.  However, I will have to pay income tax on what I withdraw.

An option would be to borrow money and then withdraw money from the IRA to pay off the loan.

Given:

current income
rental income from acquired property
tax rate schedule
withdrawal rate
interest rate
repayment schedule

Minimize:

sum of tax & debt service

Thanks,
Reg

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