Author Topic: Wanted advise to Financial solvency.  (Read 2284 times)

Diamondpick

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Wanted advise to Financial solvency.
« on: June 08, 2014, 08:05:40 AM »
Greetings. I am in search of advise from people who have like minds as MMM and Dave Ramsey. I am in a good profession, but it's financial landscape is changing. I figure I have 1 maybe 2 years left with good earning potential and I am working hard to boost income streams. I want to be prepared and retain my assets as best I can as I am fortunate and want security for my family. I owe 850k (3.3% 15y fix) on my primary residence and I have 3 investment rental houses. I owe 365k (3.25% 15y fix 3800/month mortgage rented short term and maybe break even or loose a little at end of year), 404k (3.625% 30y fix 2250 mortgage rented at 3600/mo), and 237k (4.5% 30y fix 1450 mortgage rented at 2150/mo)on these. I bought the 237k 6 months ago, so I need to hold for 6 months there. The 365k house requires more upkeep and I put it into a 15y fix mortgage 2 years ago which affects the bottom line as we were doing ok with 30y fix. I would like to buy a building for my business and am open to 1031 exchange with 365 house. I have basically 1 mil in the bank but want to keep 200k as buffer for my business as I run on about 55k/mo overhead.

What is my best route to be prepared? Shall I pay off the 365 house or the 404 house (and pay the 365 house mortgage with the earnings from the 404 house)? Do I secure my primary residence and have no debt there? I love what I do but want the option to continue to work or change professions, be prepared for financial change. I like the rental houses as an income stream particularly if my current profession gets to the point that is not financially feasible for the overhead.

That gets sticky in there, sorry about that. My basic question is, here is where I am, how would you move from here and retain assets and FIRE?
thanks,
dp

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Re: Wanted advise to Financial solvency.
« Reply #1 on: June 08, 2014, 09:24:53 AM »
The trick to FIRE is having assets that bring in a passive income greater than your expenses.  You seem like an expensive sort of person, so unless you and your family have a sudden conversion to mustachian frugal living it is probably going to take a lot for you to get to FIRE.

The quickest way to make yourself more secure is to live in a paid-off house, as that gives you the possibility of living off a very low income, should your earnings take a dive in the future.

You have told us what your mortgages are but not what your equity is - which tells me that you are focused on only one part of your finances rather than looking at them as a whole.  I'm not saying you have to give us the whole picture, but you need to make sure that you are looking at the whole picture, and I'm not sure at the moment that you are.

If you are looking to sell a rental property, it would make sense to sell the one mortgaged at 365k that isn't making you any money.  Your only return on this would be capital appreciation based on your gearing, and if you are looking to reduce risk then borrowing for a return on capital is not for you.  (Alternatively, move into this house, or one of your other rentals, and sell your current primary residence.)

£1 mill in the bank is losing value every day.  Those little green soldiers need to be working for their living.

Diamondpick

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Re: Wanted advise to Financial solvency.
« Reply #2 on: June 08, 2014, 11:38:52 AM »
FP. Thank you for your comments. You are correct, I did not put in the equity and I didn't want to addendum it, however I have that in mind as well. I have great equity: House 365 (545k), house 404 (400K), house 237 (95K) AND 850 (primary) I have 800k equity in. My main house is in a different state than the other 3 otherwise that is a great move and all is paid for. I work very hard and long hours and much like the guy from Seattle I am ready to spend more time with my kids and wife. I realize I am VERY fortunate and willingly and freely give back to the community, church and those in need as I think this is important. That said I have a gut feeling that I need to prepare and have the option to FIRE...although I don't see myself retiring, just changing what I do or the amount I do, develop other business and have more time autonomy. That is why I give my landscape and open up for thoughts on what the best way to consolidate or set it up to be able to do this from a group of people who I respect their money values like DR and MMM. I can buy more houses, pay off debt, put it in the stock market, buy a different business...but I feel I am safest with paying off my house. The rentals, as long as rented, will pay their way and I can work enough to provide my family budget which is presently at 3600/month excluding the house payment.

any thoughts are great for consideration and helpful for my decisions.

dp.

ch12

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Re: Wanted advise to Financial solvency.
« Reply #3 on: June 08, 2014, 12:59:52 PM »
The trick to FIRE is having assets that bring in a passive income greater than your expenses. 

The quickest way to make yourself more secure is to live in a paid-off house, as that gives you the possibility of living off a very low income, should your earnings take a dive in the future.

If you are looking to sell a rental property, it would make sense to sell the one mortgaged at 365k that isn't making you any money. 
+1 sell your 365 house to help pay down other properties
I have great equity: House 365 (545k), house 404 (400K), house 237 (95K) AND 850 (primary) I have 800k equity in.  I am ready to spend more time with my kids and wife. That said I have a gut feeling that I need to prepare and have the option to FIRE...although I don't see myself retiring, just changing what I do or the amount I do, develop other business and have more time autonomy. The rentals, as long as rented, will pay their way and I can work enough to provide my family budget which is presently at 3600/month excluding the house payment.

DP,
You are doing great. You've got $1 million in the bank and $1,040,00 in rental equity. You've got 800k equity in your primary residence, bringing your net worth near $3 million.

Places for improvement:
  • Your primary residence is insanely and unnecessarily expensive. Just like MMM, you have the opportunity to downsize while still maintaining a good quality of life. I'm reading about Jacob over at ERE buying his first house in Chicago for $100k http://earlyretirementextreme.com/update-5-we-bought-a-house.html, and here you are with a house worth more than 16x that. Unlock your equity and buy a nice middle class house as a primary residence with plenty of space for your family.
  • The rent from your two remaining rental properties (after you sell the one that's not really helping you) should cover your family's living expenses once you get rid of the house payment for your primary residence.
  • Involve your wife in planning to cut down the budget. Finances can be the source of a lot of marital stress. Explain to her that you're aware that the medical industry is changing right now, and you want to be in the most stable position possible so that your family is in a good spot whether or not you continue in your current job. Look at your current expenses, then list out needs, nice-to-haves, and embarrassing luxuries. Start cutting back on the luxuries. Once you live in a fully paid-off smaller house, some expenses (insurance, mortgage interest, property tax, etc.) will be lower. Mr. Money Mustache actually endorses living on $35k/year for a couple even with a paid-off house http://www.mrmoneymustache.com/2011/07/01/a-guest-posting-on-frugal-dad/ , which works out to $2,916/month. You're pretty close since you're spending $3600/month besides the house.

Theoretically, someone with $3 million in assets can plan on a 4% withdrawal rate, which works out to $120,000 a year. Even if you want to stay to a 3% withdrawal rate for safety, you'll still be able to pull $90,000 a year. That far exceeds your current expenses. The only tricky part is that your assets are tied up in real estate and pure cash. If you want to keep $200k to make you feel safe, do it. You have a family and there might be a black swan event where you have to repair all the houses at once. Just put the other $800k to work for you, instead of sitting in the break room.
Quote
Every dollar is actually a little employee that will work for you, 24 hours a day, for as long as you keep it. But you donít want your employees hanging around eating donuts in the smoking lounge of your zero-interest checking account. You will simply sweep these green paper employees to wherever they will work hardest for you.
http://www.mrmoneymustache.com/2011/04/10/post-4-what-am-i-supposed-to-do-with-all-this-money/

Diamondpick

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Re: Wanted advise to Financial solvency.
« Reply #4 on: June 08, 2014, 03:49:34 PM »
ch12.
right on. thank you. much appreciated. not sure how you knew the medical thing, but yes. I was looking at a building in our town to expand to but its 1.6 and needs 300k to bring it to standard. That depletes most of me and I stand for minimal reserve. Unfortunately most the houses in our town are just as much if not more (I bought this in foreclosure) and we have 40 acres in a 800 acre common space ranch that backs to forest...and I run and ride bike and ride horses here. My daughters are getting into horses more too and we have a very unique spot to do this in this town that has very little to offer in that way and my wife LOVES the schools. I would move 35 miles away for more spring and fall and better horse pasture, so this is still on the radar. So yes I think you are spot on and I have options to sell this and move on...and once they graduate that will definitely happen. I will sell or rent the heck out of 365. Keep an emergency fund and look into putting the green guys marching better. Thank you so much.
dp