Author Topic: Reader Case Study – need Mustachians critique of financial picture  (Read 8697 times)

MMM4life

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29 years old, single, needing the expertise of fellow Mustachians with much more knowledge than what I have already learned. I tried to give as much detail as possible so everyone/anyone can chime in with their area of expertise.

Edit: Added AGI
2014 – As of right now, if I max out my 401k contributions, I will be at roughly $118,794. Hopefully I can take another "loss" on my properties based on the work that needed to be done/depreciation/etc.

2013 – $129,423 (4 houses, same job) Took a 3871 loss on rental properties.
2012 – $108,817 (2 houses, same job) Took a 3570 loss on rental properties.
2011 – $107,636 (1 house, same job)
2010 – $95,191 (1 house, switched to higher paying job in Oct)

Monthly Income:
Job - $7607 (take home after all deductions)
   Average 401k contributions $700, not including employee matching
Military disability - $258
Rent - $5800 (from 3 houses)
Total income – $13,665

Current expenses:
Principle/Taxes/Interest - $4982 (4 houses)
HOA fees - $613 (4 houses)
Truck - $587 (ends Oct 2016)
Power - $83
Water - $18
Home insurance - $190 (4 houses)
Umbrella insurance - $23 (needed additional protection due to nature of business)
Truck insurance - $72
Gas - $200
Food - $250
Internet - $85
Cell - $88
Misc - $927
Total expenses - $8018

Assets:
Company 401k
$76k, average return 16%

Portfolio
Total $82k, average monthly increase $1043
   VHIAX- Total value $16,159, front-end load 5.25%, expense 1.26%
   IAAAX – Total value $35,593, front-end load 5.5%, expense 1.45%
   MLZEP - Total value $30,441, SX5E STEPUP ISSUER CS, STEP 20.00% SV 3,070.91, DUE 01/05/16

Roth IRA
Total - $17.5k, average monthly increase $190
        IAAAX – Total value $17,066, front-end load 5.5%, expense 1.45%
        Cash - $470

Total Retirement Accounts – $175,000

Properties
House 1 – Market Value $475,000 – minus outstanding mortgage – minus selling fees – Net $90k
Produces $230 additional rent after all bills paid
In 13 months, it’s been vacant for 3 days and 7 days. 1.5 years left on lease

House 2 – Market Value $220,000 – minus outstanding mortgage – minus selling fees – Net $44k
Produces $441 additional rent after all bills paid
In 2 years, it was vacant for 45 days.

House 3 – Market Value $220,000 – minus outstanding mortgage – minus selling fees – Net $75k
Currently live in, could produce $417 additional rent after all bills paid
Never rented

House 4 – Market Value $220,000 – minus outstanding mortgage – minus selling fees – Net $88k
Produces $418 additional rent after all bills paid
Had for 1 year, had tenant on closing date, have a tenant moving in on previous tenants move out date for unspecified time frame (should be 1-2 years)

House 5 – On the way, set to close in September, principle $40,000
Should produce additional $340 a month (not accounted for in total or rent below)


Total = $297,000
Rent = $1100 extra a month


Principle increases (as of Aug 2014)
House 1 – $615 (VA loan, minimal closing costs)
House 2 – $250
House 3 – $200
House 4 – $160
House 5 – $100 (Projected if we ever reach the closing table, gotta love short sales)

Total not including house 5 = $1225

Total Potential Assets = $472,000

Liabilities:
Mortgages – accounted above
Truck – $587, ends Oct 2016, needed for houses and lifestyle (used paid off jetskis and snowboarding)

Variables:
The housing prices are relatively modest since I live near a major base that is benefiting largely from the BRAC program. I could potentially see an additional $120-160k in market value.

My contract could end Oct 2015 and I am not looking forward to taking on another cubicle style job. I could sell all the houses and based on my projections from the previous few years, I should have roughly $290k in retirement accounts, $297k in principle, for a total of $587k, using the 4% rule having $1956 a month. I figure the taxes paid on the monthly distributions would be covered by the military disability.

Being that I will only be 30 years old in a year, “being retired” generally will be looked down upon and seeing how I have so much time left to live, I will need a job to occupy my time, and obviously something that I will love besides chasing the money. I figure I spend about $1500 a month not including a house payment. So as long as my new job can cover the difference between the mortgage minus the 4% rule, I am set.


Specific Question(s):
1) Obviously dump the two stocks that are killing me in fees (IAAAX and VHIAX). Probably a mix of Vanguard funds and stocks. This is what happens when you give money to financial advisers who aren’t looking out for your best interests. Any suggestions on mix percentage? (50% Vanguard funds, 50% stocks in strong companies with dividend payments or 100% in Vanguard funds?)
2) I can’t account for cost of children, healthcare, marriage, etc without having any of those. The way I figure it, those “additional costs would be passed onto the spouse” while I cover all the knowns (ie. house, electricity, water, internet, etc). Or is this assumption dead wrong?
3) Is there anything in there that blatantly stands out as red flags?
« Last Edit: September 04, 2014, 10:04:03 PM by MMM4life »

Pooperman

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #1 on: August 30, 2014, 04:50:40 AM »
1: Vanguard (or Spartan) ETFs are dead simple and have low expense ratios (VTI is 0.06% I believe). If you want something simple that you don't have to actually manage, check out the bogleheads website for some sample portfolios (http://www.bogleheads.org).

2: Best practice is to split shared expenses where possible. If she works and you work, then each should pay their share, including child expenses. If she doesn't work and has no income, the child expenses and everything else would be on you.

3: Looks like you are getting free equity on your properties (they generate virtually $0 in cash flow overall). This almost $0 in cash flow (income - mortgages - taxes -insurance) may hurt you when you lose tenants or some large repairs need to happen. Can't say without more info obviously, but that's what it seems like on the surface.

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #2 on: August 30, 2014, 10:58:41 AM »
1) I am waiting to see what happens with this new property before I start to move all my money around. Ya, it might be silly to wait but trying to reduce any sort of commission fees by buying all my funds/stocks at once. This way I actually know how much money I can move without over extending myself.

2) Ya, being that I believe in the MMM philosophy, I just don't see me dating someone who can't provide, especially at this age. Granted, there are always situations that can occur but hopefully that doesn't last too long.

3) The reason they generate low cash flow is I put 25% down (as required for investor properties). I could have bought out some properties but I figured I would see better returns in the stock market vs having all my cash tied to a single property. I also like to keep the rent as low as possible to generate quick turnover (as you can see by the average down time). And with the build up of the military base, in 3-5 years I plan on dumping all the properties to cash in on the higher property values.

But thanks for the input, the bogleheads website looks like a ton of information to sort through. Need to save that for a boring day at work lol.

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #3 on: September 03, 2014, 04:05:20 PM »
Just doing a quick bump seeing how this blog gets tons of traffic.

MDM

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #4 on: September 03, 2014, 08:36:16 PM »
MMM4life, good amount of detail in your post (and welcome to the forums!). 

Aggregating the rental units with your own home, however, makes it difficult to do tax calculations so the comments here assume your AGI is between $70K and $114K (i.e., above the tIRA limit but below the RothIRA limit):
  - Why not contribute the full $17,500/yr to your 401k?
  - Why not put $5500/yr to a Roth IRA?

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #5 on: September 03, 2014, 09:00:53 PM »
Thanks, you people are the only ones who I can talk to about this type of stuff without being judged harshly so thanks for having me :)

Well my situation is always changing from year to year, and whose isn't? But at one point I was closing on a new rental property every 6 months, I would relocate from one property to the next depending on living situations. I can look back over the past 2-3 years and see what my AGI is to maybe get a ballpark of what I take in and go from there but I would assume my AGI is above 114k since I make over 120k (sometimes around 140k per year, not including rental income).

1) I was doing that before but since I planned on retiring earlier than 65, I figured the money would be better suited in stocks, funds, etc. Plus, I reduced it to 6% of my pay to take full advantage of their 3% match, thus I was getting a "50% return" on my money versus somewhere much lower, ex. instead of contributing  $729 (17,500 / 24 pay periods) and only getting $150 match, I was only contributing $300 and getting the $150 contribution, hence already a 50% return. Hopefully that all made sense. Additionally, I need the liquidity of stocks/funds with the rental property business and the withdraw limits on the employee 401k are not exactly conducive to this business.

2) I thought I made too much and/or since I had a 401k employee plan I was unable to do so but once I get my AGI for the past 2 years, I might be able to see if I qualify for this. Will update once I look for my taxes for the previous years.

As always, thanks MDM for taking the time to look over this post and provide feedback. Much appreciated!!!




MDM

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #6 on: September 03, 2014, 10:34:05 PM »
I would assume my AGI is above 114k since I make over 120k (sometimes around 140k per year, not including rental income).
OP had "Monthly Income: Job - $7607".  $7607/mo = $91284.  Unless the $7607 is "take home" pay, after tax, 401k, etc. deductions from gross pay?  Also, is your net rental income (after all expenses, including depreciation) positive?

Quote
1) I was doing that before but since I planned on retiring earlier than 65, I figured the money would be better suited in stocks, funds, etc.
  See http://www.72t.net/72t/Introduction for a penalty-free way to get tax-deferred funds prior to age 59.5.

Quote
Plus, I reduced it to 6% of my pay to take full advantage of their 3% match, thus I was getting a "50% return" on my money versus somewhere much lower, ex. instead of contributing  $729 (17,500 / 24 pay periods) and only getting $150 match, I was only contributing $300 and getting the $150 contribution, hence already a 50% return. Hopefully that all made sense.
Yes and no.  You get a "50% return" on that first $300 no matter what.  Now consider what to do with the next $429:
1.  Invest all of it in the 401k and let it grow unimpeded by taxes.  Pay taxes only when withdrawn, quite possibly at a lower rate than now.
2.  Invest only 72% of it (because you paid 28% tax) to start, then pay taxes on all interest, dividends, and capital gains each year.

Quote
Additionally, I need the liquidity of stocks/funds with the rental property business and the withdraw limits on the employee 401k are not exactly conducive to this business.
That may be true.  If you are running that close to the edge in the rentals, however, then you might want to reevaluate your rental business model.

Quote
2) I thought I made too much and/or since I had a 401k employee plan I was unable to do so but once I get my AGI for the past 2 years, I might be able to see if I qualify for this. Will update once I look for my taxes for the previous years.
Google "backdoor Roth IRA" if you make too much to get in the front door.  Not the worst problem to have. :)

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #7 on: September 03, 2014, 11:16:09 PM »
1) Correct, take home pay after all deductions (taxes, 401k, etc) equals = $7607. While it is positive ($1100 in the positive per month not including depreciation or accounting for maintenance due to quality of houses and tenants, also because I don't have any figures to go off of but in the 2 years since being in the business, no more than $1000 total has gone to into 4 properties to fix them up due to the tenants normal wear and tear. My business model is really based off banking the proceeds from the sale of the properties when the market "peaks" in the next 3-5 years when the BRAC program finishes in this area. Keeping rent low keeps quality tenants in place with few/little turnover delays. I could probably squeeze a few hundred dollars in total out of the tenants, but not worth it in my eyes.

2) I've heard about it but couldn't find a guide where I was able to understand it but that looks like something I might be able to grasp so thanks for that.

3) True. Well now knowing that distributions are possible even through IRAs, pending I am actually able to contribute, it seems like the obvious choice would be to go this route. Looking at my numbers, since 3/2011 I have earned 16.15% returns and 31.48% if I include the employer contributions as gains, since technically they are. Looking at my portfolio, I have earned about 15% since 1/2009. So while the numbers are relatively close, the tax advantages of the IRA probably outweigh the portfolio option.

4) I liked having the liquidity due to the potential deals that I came across in regards to potential rental properties plus since I work for a contracting company, our contract could get cut in any year so I liked having cash on hand. However, since I don't believe I will be buying anymore houses (5 is enough with a full time job), looking at the numbers: 
current monthly debt = 8018 - 258 disability = 7760 final monthly debt, assuming all houses empty and no job, I could still survive for 10.5 months (82,000 portfolio / 7760 monthly debt). Not factoring in portfolio increases, highly unlikely to have 0 tenants and no job for longer than 2-3 months but it would be irresponsible to overextend myself so much so that a 2-3 month period destroys all that I have worked for. So while I might be playing it "safe", being roughly $780,000, soon to be $870,000 in debt, that could keep a few people up at night :) lol, especially being the sole bread winner in this single relationship and a 29 yr old punk kid with a job that could end any year.

5) Another thing I've heard about but was, to be quite honest, too lazy to understand it, but looks like it's time to put the big MMM pants on since no one is more willing to take care of yourself besides yourself.

Retired To Win

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #8 on: September 04, 2014, 05:59:58 AM »
MMM4Life,

You are in excellent position, especially at 29.

I did not see any reference to emergency reserve funds in your original post.  I would recommend maintaining such a reserve, if only for the peace of mind it provides.

In my case, I have opted to maintain 2 savings accounts; one with one year's worth of basic living expenses and one with an amount to cover my theoretical annual worst case scenario out-of-pocket health costs.  You might also (and may already) do well to have some kind of reserve account related to your house rentals.

Good luck.

MDM

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #9 on: September 04, 2014, 06:45:02 AM »
Thanks for the clarification on gross vs. net pay (and the other items - keep up the good work!).  You're far from the first not to report gross pay.  Thus the following is a generic comment made primarily for the benefit of any future case study posters:

As many parts of the tax code (e.g. IRAs) use Adjusted Gross Income to determine eligibility, case studies that go beyond "how can I reduce spending on ____?" should start with Gross Income.

Hannah

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #10 on: September 04, 2014, 06:48:45 AM »
You asked if your assumption in question 2 is dead wrong. My answer is that its only as right as you make it, but its not necessarily a normal expectation.

For the sake of my answer, I'm going to make the assumption that you are a hetero male because of your writing style and that you didn't mention adoption costs (forgive me if I'm wrong).

At your age, you could end up dating someone who is 22 or 23 and that would be totally normal. I wouldn't expect that person to have much in the way of assets even if they are hard working and frugal, so if you want your spouse to be retired with you, I would continue to work on growing that asset base and cash flow.

Likewise, if you want to have kids, you should probably further bump up that cash flow/asset base because the majority of women would like to take off a significant chunk of time off work when having a baby, and statistically speaking most women with children would rather work part time than full time. I say this to communicate the fact that you should not count on your baby mama to want to shoulder 100% of the expenses of child-rearing with her income or investments.

If you are thinking, "I would never date a woman like that", then your assumption is probably fine, just your pool of women is small. When you start to seriously consider marriage be sure you communicate your expectations.

frugaliknowit

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #11 on: September 04, 2014, 08:10:14 AM »
Red flag is too much real estate with too little equity (collectively) with too little in cash reserves.  Within the range of best case to worst case scenarios (market conditions, rental market, your luck with the tenants you rent to, your employment) you are vulnerable to both being deeply underwater and seriously short of cash.

You don't want to have a real estate portfolio (especially a large one) dependent on funding from your employment.

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #12 on: September 04, 2014, 06:49:20 PM »
Hopefully, I can try and answer everyone’s post.

Retired To Win:

My checking and savings accounts are used as my “emergency savings” and fluctuate anywhere from a low of $5k-6k (after directly closing on a house) to as high as $50-60k (waiting to close on a house). I typically am aware of pending shortfalls in income (ie. loss of a tenant, loss of contract, etc) which is why I try to maximize the potential earnings on additional cash. While some people might frown upon this, in dire situations I can use my portfolio as “emergency savings”. Having 48-96k (8000 a month x 6-12 months) in a savings account seems a bit excessive and not taking advantage of potential gains from investment vehicles. Luckily, I am in excellent health being that I am 29 yrs old and indestructible (kidding of course) and have been managing my own money since I can remember so I am able to reduce expenses pending any major blows to my financials.

MDM:

I figured it was better to report net since everyone has different taxes, deductions, credits, etc and this would let everyone know what I was left with after all bills were paid. Looking at my previous tax records I have an AGI of:
2014 – I figure I should be around the same AGI for 2013
2013 – $129,423 (4 houses, same job)
2012 – $108,817 (2 houses, same job)
2011 – $107,636 (1 house, same job)
2010 – $95,191 (1 house, switched to higher paying job in Oct)

Looks like I need to find more ways to reduce it by almost $15k+

Hannah:

Hopefully my statements didn’t come across as sexist/misogynist. I meant if we added up all our bills, any potential shortcomings from the bills that I am unable to cover/account for at this point in my life could be covered by my wife’s income. It’s just hard to know what you don’t know as everyone’s situation is different.

And what’s wrong with my writing style?!?!?!? Lol

Being frugal/dedicated/lucky/whatever you want to call it at my age, sitting at home for the next 60+ years could potentially be quite boring. I might take 1-2 years off once I hit my “financially independent” date, but after that I think I most likely will take a job that I love and not have to make decisions based solely on financial reasons.

Frugaliknowit:

I definitely agree with you, however I luckily have tons of military friends who are considered family so in a complete market collapse, I could rent out my house to another tenant (additional $1500 a month in a highly sought after area) which in addition to the other rent collected would cover all my bills pending I lost my job. Pending several tenants moving out at the same time which I believe is highly unlikely since I rent mostly to military who are on station for roughly 3 years (I’m aware of the military clause) and I generally like to take care of the properties since it’s a mutually beneficial relationship but in a worst case scenario I could tap into my portfolio. Lastly, if the world is on fire I could always sell a house after my savings accounts have been drained but seeing how I have roughly a year of savings I believe something major would happen (get another job/find additional tenants), I could always sell a house and receive roughly the 25% down payment.

Everyone:

All in all, I believe I have too many variables (or maybe I’m no different than anyone else on here) to account for. I have a “proven” track record of getting highly qualified tenants in relatively a short period of time so the rent is pretty consistent. I am in the epicenter of my career field and have the credentials to obtain a job in no more than 3 months (my guess).

Once again, thanks for all your input.

FIKristen

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #13 on: September 04, 2014, 08:30:55 PM »
How much equity are you building on the rental properties?  Did you finance them 30 year fixed, or a shorter period?

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #14 on: September 04, 2014, 08:43:37 PM »
House 1 – $615 (VA loan, minimal closing costs)
House 2 – $250
House 3 – $200
House 4 – $160
House 5 – $100 (Projected if we ever reach the closing table, gotta love short sales)

Total not including house 5 = $1225

House 2-5 all required 25% down payment, 30 year loans, around 4.5-5.25% fixed rate (ballpark, it's been a while since I looked at them but could double check if need be).

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #15 on: September 04, 2014, 10:48:35 PM »
MMM4life, good amount of detail in your post (and welcome to the forums!). 

Aggregating the rental units with your own home, however, makes it difficult to do tax calculations so the comments here assume your AGI is between $70K and $114K (i.e., above the tIRA limit but below the RothIRA limit):
  - Why not contribute the full $17,500/yr to your 401k?
  - Why not put $5500/yr to a Roth IRA?

Here is the most up to date info I was able to gather:

Edit: Added AGI
2014 – As of right now, if I max out my 401k contributions, I will be at roughly $118,794. Hopefully I can take another "loss" on my properties based on the work that needed to be done/depreciation/etc which will put me basically right at that cusp...

2013 – $129,423 (4 houses, same job) Took a 3871 loss on rental properties.
2012 – $108,817 (2 houses, same job) Took a 3570 loss on rental properties.
2011 – $107,636 (1 house, same job)
2010 – $95,191 (1 house, switched to higher paying job in Oct)

I guess once my taxes are "completed", depending on what my AGI is will show whether or not I can contribute the $5,500 for the previous tax year. Anything I'm missing with this?

MDM

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #16 on: September 04, 2014, 10:58:28 PM »
Edit: Added AGI
2014 – As of right now, if I max out my 401k contributions, I will be at roughly $118,794. Hopefully I can take another "loss" on my properties based on the work that needed to be done/depreciation/etc which will put me basically right at that cusp...
I guess once my taxes are "completed", depending on what my AGI is will show whether or not I can contribute the $5,500 for the previous tax year. Anything I'm missing with this?

From the OP you have no traditional IRA.  If this is true, you don't have to bother with adjusting AGI for the sake of making a Roth IRA contribution - simply see http://www.bogleheads.org/wiki/Backdoor_Roth_IRA and do that.

What you want to do with your AGI for other tax purposes is a separate question....

Hannah

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #17 on: September 05, 2014, 05:27:33 AM »

Hannah:

Hopefully my statements didn’t come across as sexist/misogynist. I meant if we added up all our bills, any potential shortcomings from the bills that I am unable to cover/account for at this point in my life could be covered by my wife’s income. It’s just hard to know what you don’t know as everyone’s situation is different.

And what’s wrong with my writing style?!?!?!? Lol


Not sexist at all, just that I was making some assumptions that might be unfair to your situation so I thought I better clarify.

And your writing style is great, just with masculine overtones.

chasesfish

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #18 on: September 05, 2014, 05:38:13 AM »
I've read through all the posts.

To sum it up, I think you're a few more years away from retirement and you seem to like the real estate game.  You're retirement plan is partially dependent on real estate price speculation.  I also think its a mistake to do 30 year mortgages right now, you pay 25% less interest on a 15 year (low 3's verses low 4's) and you have the cash flow to support a 15.

If I were in your position, I would hammer down the mortgage balances on the three smaller houses to zero and plan on selling the $475,000 rental house.   Unless you're pulling in $4,000/mo+ on the $475,000 rental house, its probably a bad investment.  Three free and clear rental houses plus a couple hundred thousand in retirement accounts, that's where you need to be for FI. 

I've been on the financing side of people with your plan and watched the real estate market bust on them.




frugaliknowit

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #19 on: September 05, 2014, 06:31:04 AM »
Tough love:

I definitely agree with you, however I luckily have tons of military friends who are considered family so in a complete market collapse, I could rent out my house to another tenant (additional $1500 a month in a highly sought after area) which in addition to the other rent collected would cover all my bills pending I lost my job.

Are you serious?  Wouldn't you just rather take care of yourself?

Pending several tenants moving out at the same time which I believe is highly unlikely since I rent mostly to military who are on station for roughly 3 years (I’m aware of the military clause) and I generally like to take care of the properties since it’s a mutually beneficial relationship but in a worst case scenario I could tap into my portfolio.

Heard of cutbacks? 

Lastly, if the world is on fire I could always sell a house after my savings accounts have been drained

Good luck with that...


All in all, I believe I have too many variables (or maybe I’m no different than anyone else on here) to account for. I have a “proven” track record of getting highly qualified tenants in relatively a short period of time so the rent is pretty consistent.

You're far from a fortress.

I am in the epicenter of my career field and have the credentials to obtain a job in no more than 3 months (my guess).

Don't count on it.

Hugs

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #20 on: September 05, 2014, 04:22:02 PM »
Not sexist at all, just that I was making some assumptions that might be unfair to your situation so I thought I better clarify.
And your writing style is great, just with masculine overtones.
No worries and that’s the tone I was going for? Lol

I've read through all the posts.
To sum it up, I think you're a few more years away from retirement and you seem to like the real estate game.  You're retirement plan is partially dependent on real estate price speculation.  I also think its a mistake to do 30 year mortgages right now, you pay 25% less interest on a 15 year (low 3's verses low 4's) and you have the cash flow to support a 15.
If I were in your position, I would hammer down the mortgage balances on the three smaller houses to zero and plan on selling the $475,000 rental house.   Unless you're pulling in $4,000/mo+ on the $475,000 rental house, its probably a bad investment.  Three free and clear rental houses plus a couple hundred thousand in retirement accounts, that's where you need to be for FI. 
I've been on the financing side of people with your plan and watched the real estate market bust on them.

I also agree that I am a few years away from FI. Also, aren’t we all using some sort of speculation for our plans? Is anything 100% guaranteed in the financial industry that doesn’t have a little risk? It’s all on what you consider tolerable for your specific situation. Correct, I do have the cash flow to support a 15 but since I would make more money in other investment vehicles (401k, IRAs, index funds, etc) and the ability to have less of a mandatory financial burden pending a setback that I was unable to account for (loss of job, loss of several tenants, etc), the 30 year mortgage actually seems like the better deal.

One of the reasons why I am in the real estate market is due to the strong economy we have in the DMV area (DC, Maryland and Virginia). Have we not seen mass amounts of people in the stock market where the market “bust on them”? If only everyone had a crystal ball, unfortunately we can only make choices based on what we believe the markets will do.

Tough love:
I definitely agree with you, however I luckily have tons of military friends who are considered family so in a complete market collapse, I could rent out my house to another tenant (additional $1500 a month in a highly sought after area) which in addition to the other rent collected would cover all my bills pending I lost my job.
Are you serious?  Wouldn't you just rather take care of yourself?
Pending several tenants moving out at the same time which I believe is highly unlikely since I rent mostly to military who are on station for roughly 3 years (I’m aware of the military clause) and I generally like to take care of the properties since it’s a mutually beneficial relationship but in a worst case scenario I could tap into my portfolio.
Heard of cutbacks? 
Lastly, if the world is on fire I could always sell a house after my savings accounts have been drained
Good luck with that...
All in all, I believe I have too many variables (or maybe I’m no different than anyone else on here) to account for. I have a “proven” track record of getting highly qualified tenants in relatively a short period of time so the rent is pretty consistent.
You're far from a fortress.
I am in the epicenter of my career field and have the credentials to obtain a job in no more than 3 months (my guess).
Don't count on it.
Hugs

Love the “tough love”. I guess from that post we could all just put our money in the savings account and be purely safe…. With a little risk there are better rewards, but thanks for your contribution ;)

Do I ever plan on it going to those scenarios? Of course not. Is it nice to have that safety net? Yes, how is that any different than having a "reserve fund"?

Mazzinator

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #21 on: September 06, 2014, 12:09:10 PM »
Could you provide more info on your rentals?

Can you breakdown each property...

1. Purchase price
2. Rent
3. Cash out of pocket (closing costs, down payment, any rehab etc)
4. P&I payment (principal and interest only)

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #22 on: September 06, 2014, 12:23:29 PM »
Could you provide more info on your rentals?

Can you breakdown each property...

1. Purchase price
2. Rent
3. Cash out of pocket (closing costs, down payment, any rehab etc)
4. P&I payment (principal and interest only)

Of course

House 1 - 1) 385,000 2) 2,700 3) 14,588 4) 1662
House 2 - 1) 224,000 2) 1,600 3) 61,917 4) 826
House 3 - 1) 180,000 2) live in 3) 51,193 4) 664
House 4 - 1) 160,000 2) 1,500 3) 49,469 4) 662

Number 3 really just consists of down payment + closing costs. The rehab was been so minor (few hundred dollars here and there) it's not worth it to keep track of IMO.

Mazzinator

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #23 on: September 06, 2014, 12:58:36 PM »
Could you provide more info on your rentals?

Can you breakdown each property...

1. Purchase price
2. Rent
3. Cash out of pocket (closing costs, down payment, any rehab etc)
4. P&I payment (principal and interest only)

Of course

House 1 - 1) 385,000 2) 2,700 3) 14,588 4) 1662
House 2 - 1) 224,000 2) 1,600 3) 61,917 4) 826
House 3 - 1) 180,000 2) live in 3) 51,193 4) 664
House 4 - 1) 160,000 2) 1,500 3) 49,469 4) 662

Number 3 really just consists of down payment + closing costs. The rehab was been so minor (few hundred dollars here and there) it's not worth it to keep track of IMO.

As a really quick calculation (50% rule) it looks like you are cash flow negative on your properties, except for house 4. This is a quick calc and is accepted by a good bit of real estate investors. Investing in real estate, primarily for appreciation is speculation and in my opinion (and many others) is very risky. You could be correct and come out way ahead in 3-5 yrs...or not... That is the biggest risk.

Something, like say s&p index investing, although not guarenteed, has a more calculated and documented rate of return. It is generally accepted that the index funds will return ~7% in the long term (more than 20yrs) See "rolling rates of return"

 
Quote
Correct, I do have the cash flow to support a 15 but since I would make more money in other investment vehicles (401k, IRAs, index funds, etc)

If you believe you would make more money in stocks, then why in the world would you buy investment properties?

I'm not saying you're going to fall flat on your ass, but i think your risk is very high, at least as you stand right now.

I'm thinking worse case scenario, the feds lower bah to 95% (there's been talks) your houses drop in value, a house or two goes empty a few months, your contract isn't renewed, and your other investements drop 50%... Do you really want to drain your investments at their low? You could to survive, but that woukd suck ass. And you may think i'm paranoid, but remember 2008 2009 ish...stocks and housing both dropped (A LOT) and unemployemnt went UP..all at the same time!

I would suggest, like others, lowering your risk..this could be more cash (most RE investors suggest $3-5k per house) lowering debt owed, more cash flowing properties (sell house 1 and buy two more like house 4), etc etc

http://www.biggerpockets.com/renewsblog/2014/06/14/how-to-calculate-cash-flow-rental/

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/20_year_rolling_returns.htm
« Last Edit: September 06, 2014, 01:04:15 PM by Mazzinator »

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #24 on: September 06, 2014, 01:39:51 PM »
Could you provide more info on your rentals?

Can you breakdown each property...

1. Purchase price
2. Rent
3. Cash out of pocket (closing costs, down payment, any rehab etc)
4. P&I payment (principal and interest only)

Of course

House 1 - 1) 385,000 2) 2,700 3) 14,588 4) 1662
House 2 - 1) 224,000 2) 1,600 3) 61,917 4) 826
House 3 - 1) 180,000 2) live in 3) 51,193 4) 664
House 4 - 1) 160,000 2) 1,500 3) 49,469 4) 662

Number 3 really just consists of down payment + closing costs. The rehab was been so minor (few hundred dollars here and there) it's not worth it to keep track of IMO.

As a really quick calculation (50% rule) it looks like you are cash flow negative on your properties, except for house 4. This is a quick calc and is accepted by a good bit of real estate investors. Investing in real estate, primarily for appreciation is speculation and in my opinion (and many others) is very risky. You could be correct and come out way ahead in 3-5 yrs...or not... That is the biggest risk.

Something, like say s&p index investing, although not guarenteed, has a more calculated and documented rate of return. It is generally accepted that the index funds will return ~7% in the long term (more than 20yrs) See "rolling rates of return"

 
Quote
Correct, I do have the cash flow to support a 15 but since I would make more money in other investment vehicles (401k, IRAs, index funds, etc)

If you believe you would make more money in stocks, then why in the world would you buy investment properties?

I'm not saying you're going to fall flat on your ass, but i think your risk is very high, at least as you stand right now.

I'm thinking worse case scenario, the feds lower bah to 95% (there's been talks) your houses drop in value, a house or two goes empty a few months, your contract isn't renewed, and your other investements drop 50%... Do you really want to drain your investments at their low? You could to survive, but that woukd suck ass. And you may think i'm paranoid, but remember 2008 2009 ish...stocks and housing both dropped (A LOT) and unemployemnt went UP..all at the same time!

I would suggest, like others, lowering your risk..this could be more cash (most RE investors suggest $3-5k per house) lowering debt owed, more cash flowing properties (sell house 1 and buy two more like house 4), etc etc

http://www.biggerpockets.com/renewsblog/2014/06/14/how-to-calculate-cash-flow-rental/

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/

http://moneyover55.about.com/od/stockmarketreturns/ig/Stock-Market-Performance/20_year_rolling_returns.htm

While I do agree with everything you said in there, here is my thought process and why my rents are low which throws off the 50% rule:

1) I am able to attract a larger pool of tenants. From there I select the ones that I believe are the best for my property = reducing your risk of damage caused to the property
2) Having low rents and larger pool of possible tenants allows me to get more cash in the long run. If it takes 3 months to find a tenant at 1600 (12 month period = 14,400) and only 1 month for a tenant at 1500 (12 month period = 16,500)
3) Having low rents with quality tenants has been a mutually beneficial relationship which so far has produced longer term leases = even more money on the long end.

So yes, I could squeeze out more money on the tenants to hit those formulas but I think some people might lose sight of the end goal.

Additionally, while there is speculation on my part (which some don't agree with) here is the reason why I believe my risk is lower:

House 1 - 1) Bought for 385,000, current market value around 475k
House 2 - 1) Bought for 224,000, current market value around 224k (admit it was a bad deal)
House 3 - 1) Bought for 180,000, current market value around 200k
House 4 - 1) Bought for 160,000, current market value around 200k

With an increase of 150k in gains (1.099m - 949k) and around a total of 177k in principle (a mix of my 25% down and their rent covering the mortgage payment) on a total cost of around 200k (closing costs, 25% down, estimating all updates), over a 3 year period, I am sitting somewhere around a ROI of 17%.

To be honest, not sure if that math is correct:
1) Didn't account for take home pay after all bills were paid on houses (ie. somewhere around 1200 a month)
2) Not sure if my deposit should be included in the numerator and denominator.

Regardless, if this math is correct I am definitely reconsidering this 5th house, seeing how I have been getting roughly the same returns in stocks (even with crazy fees) that produce much lower risk. Can someone with more experience than me provide the correct math to see my ROI?

Hell, I would love for someone to prove me wrong so that I can cancel the 5th house before it's too late. Hopefully no one takes these posts as me trying to argue with their opinion but just explaining my thought process of why I made the decisions I did because at the time that's all I knew.

Mazzinator

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #25 on: September 06, 2014, 08:15:05 PM »
Oh, i wasn't suggesting to raise rents. I very much agree with below market rent/your tactic. I was just pointing out a quick calc to help you proceed.

And i'm not trying to be snarky, but much of the US has seen an increase in housing prices and in stocks. And i still don't see how that lowers your risk. The risk is in you timing the sales of these houses before a big drop. You've only actually made the ROI if you sell now. Until then it is all paper gains.(same with stocks)

The biggest "flaw" i see in your ROI calc is that it is short term. Choosing between investing in stocks vs houses shouldn't be calculated in this short of term. (But maybe i'm worng because my investing strategy for RE is buy and hold for the long haul)

If i were you i would prob sell house 1, and buy 2 more that are similar to house 4. If house 5 will get rented at or close to 1% of purchase price i would prob continue on and buy it. I may never sell houses 2 thru 4, but instead keep them for cash flow. I'd also beef up your "cash" to $15k-$25k for long term expenses and as an EF.

Don't worry about arguing, we all need to bounce these ideas off someone and most of us don't have many people IRL to talk to. I'm fine with your tone too (maybe because i've been married to a military man almost 15yrs ;-))

Either way good luck!!!

MMM4life

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Re: Reader Case Study – need Mustachians critique of financial picture
« Reply #26 on: September 06, 2014, 09:42:35 PM »
If only there was a perfect formula that would show us a black and white answer versus a grey one. I’ve heard of that formula (1%) but it just never passed my smell test. I feel it doesn’t take into account several variables that highly affect your ROI, ie. HOA, taxes, assessments, etc. So while 2 houses might have the same sale price and same rent, a SFH with no HOA and no yearly assessments is grossly more profitable than a house with a $300+ monthly HOA and a $500 yearly assessment.

My “risk is being lowered” based on what I’ve seen in the infrastructure build up in this area due to the several hundred thousand jobs coming to the area all being produced by the government in an emerging field unlikely to downsize for the foreseeable future. I believe the construction will be completed sometime in 2017ish so hopefully my FIRE plan pans out. Obviously there can always be cutbacks, but that really isn’t any different than a world crisis affecting the markets. We can only make decisions based on speculation. Unfortunately, hindsight is 20/20.

Dollar for dollar, if 2 investments create the same percentage in returns over roughly the same time period, one would think stocks are the better fit due to being more liquid. 

House 4 was a deal unlikely to happen again; short sale with surface mold on kitchen cabinets and horrible carpet in a highly sought after area. No one wanted to put the sweat equity (1 weeks worth) into it. House 5 sale price is $120,000 and rent should be in the $1200s. The reason why I also like this condo is because worst case scenario I could also move in which would reduce my livable expenses by $200 (a reduction of $60,000 in FIRE plan number). I might also have a tenant lined up prior to even closing but we’ll see.

I’m all about bouncing ideas off this audience. Most have either been through the situation, educated themselves on it and/or will be doing it in the near future. It’s a shame I didn’t join earlier lol.

While I might be “overleveraged”, I factor in my age (lower age allows for greater risk), the belief that the housing market will continue to expand, along with several other options that I can take if encounter a major setback, I feel my leverage is just about right. Additionally, I have 171k in cash/401k/investment portfolio/IRA and 175k in principle in 4 houses. I feel my total portfolio is basically balanced, or I guess I should say I feel it is a risk I am comfortable living with.

Maybe I will make a new topic in the RE section IRT house #5 and see what those experts have to say.
http://forum.mrmoneymustache.com/real-estate-and-landlording/reader-case-study-proceed-with-closing-on-4th-rental-property/