Author Topic: Fire at 26?  (Read 1772 times)

FiredUp321

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Fire at 26?
« on: May 20, 2017, 02:20:01 PM »
Hello Mustachians,
This is my first post so please be gentle. So I am 26 and have more than enough passive income to RE, which I have been for a year now and just now found this blog.
I have a wife and 2 kids ages 5 and 2. The problem is that with me being so young, I dont feel comfortable RE. My wife wants to work soon and that will help out a bit. We also have free medical through VA and kids& wife have college paid for through VA and hazelwood.
So far I have been paying off debt and am down to my duplex(50k) and main house(150k). Should I continue to save 50% of my income after I pay those?
Thanks in advance!

Axecleaver

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Re: Fire at 26?
« Reply #1 on: May 21, 2017, 08:39:13 AM »
One of the things we get better at doing after the age of 25 is evaluating risk. Your brain is just beginning to integrate your experiences to process what risk mitigation is, and how to predict the likelihood and severity of risks that may happen.

It sounds like you're invested in cashflowing real estate, which is great. But what would happen if one of your tenants runs into problems, and stops paying? What if you have to go through an eviction, or there is damage to the property? What if there is a fire?
 Real estate in particular carries some unique risks, all of which can be planned for and managed. Are you setting aside a maintenance fund to replace the roof, or a furnace, or rehab and refresh the apartments on a regular basis?

So the benefit of saving half your income is that you can diversify out of real estate to some other investments - equities would be ideal at your early age. Do you have an emergency fund? Have you set up IRA's?

FiredUp321

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Re: Fire at 26?
« Reply #2 on: May 21, 2017, 09:22:17 AM »
Thanks for the reply Axecleaver!
I have been managing the property since I was 22 and unfortunately, have gone through evictions and minor damages so I know the process but usually once I start the process the tenants comply. I also poured maybe a little to much money into it so I shouldnt have to for awhile. I actually lived in one of the units for 3 years and just recently moved out. I have a 20k emergency fund, however I dont qualify for IRAs. Should I pay off the mortgages before starting to invest? Both interest rates are abt 2.6% my income alone is 7200/mo net(all passive) btw
« Last Edit: May 21, 2017, 09:23:51 AM by FiredUp321 »

Axecleaver

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Re: Fire at 26?
« Reply #3 on: May 21, 2017, 06:20:55 PM »
Paying off your mortgage vs. investing is a hot topic around here. You need to weigh the emotional satisfaction of having no debt, and improved cashflow, against the math that says investing at a higher rate of return is a better deal.

To make that decision, realize that inflation averages about 3% per year. Recently inflation has been pretty low, the last four years it has been under 2%, while the first quarter of 2017 was 2.5%. http://www.usinflationcalculator.com/inflation/current-inflation-rates/

Equities average 10% per year. After an average inflation of 3%, you net out at 7% gain. Compare that against a mortgage of 2.6%, and an average of 3% inflation, the bank is paying you to loan you money. Use your investment properties as leverage, take as long as possible to pay them off, and build some diversification by investing in some broad index funds like VTSAX.

Missy B

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Re: Fire at 26?
« Reply #4 on: May 21, 2017, 07:22:13 PM »
Hi FiredUp- congratulations.
You don't say much about your income source. If it's primarily rental income, it's especially important to diversify, grow your passive investment income from dividends. As Axe pointed out, this makes very good sense from a return perspective as well.
Given the low interest rate environment, it doesn't make sense to prioritize paying off the mortgage. Instead, I'd funnel free cash flow into a bigger investment portfolio AND a bigger cash buffer. 20K is not very much if someone in your family has a health issue, especially if part of your income stream is interrupted at the same time.

FiredUp321

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Re: Fire at 26?
« Reply #5 on: May 22, 2017, 11:53:08 AM »
Great responses, I am trying not to be emotional about anything and just stick to numbers. I dont know anyone in my immediate family or community that speaks well of the stock market they basically bought in, went through a dip and sold taking a loss. I know that you are better off leaving it in and can make an average of 7% or so, therefore can make a living after inflation with the right amount.
That is another issue I have is calculating how much I need. My income is passive now since it is through the VA and rentals so I will get it (hopefully) forever. My step daughter also gets SSA survivors benefits for her father passing.
I feel comfortable with 20k emergency fund but I could go larger to maybe 30.
I will do that and then invest as much as possible. I live in a LCOL area so can easily live on half my income even with the mortgages and without really depriving ourselves of anything. I will probably feel comfortable after 500k invested, but it would be nice to make the 7 figure club!
« Last Edit: May 22, 2017, 03:10:52 PM by FiredUp321 »

FLBiker

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Re: Fire at 26?
« Reply #6 on: May 22, 2017, 01:45:41 PM »
Use your investment properties as leverage, take as long as possible to pay them off, and build some diversification by investing in some broad index funds like VTSAX.

+1