Author Topic: 235k Debt 45k Savings - Determined to FIRE in 5 yrs  (Read 1356 times)

OrangeSnapDragon

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235k Debt 45k Savings - Determined to FIRE in 5 yrs
« on: October 06, 2018, 07:42:15 PM »
I think I included all information.  Please ask for any clarification and thank you in advance for any advice!

Info: Married filing jointly, both age 31
 
Gross Income: Myself 44k, Mr.OSD 42k
 
Savings: Myself pretax 401k is 5,500/yr, company matches 2,500/yr.  Mr. OSD pretax 401k 6,500/yr, company matches 1,700k/yr, also 7k/yr into HSA.  TOTAL pre-tax 23,200/yr
 
Rentals: 3 buildings, 7 units (one single family, one duplex, one 4 unit) total income 47k, expected expenses including repairs and vacancy brings us to a net of 36k.  Depreciation is around 8k. We do all the work ourselves.
 
AGI: 112k
 
Taxes: last year we owed 1,000 at the end of the yr (700 federal and 300 state).  It gets complicated b/c I have bonuses come in that have higher taxation that offsets the fact that we don't pay income tax throughout the year on the rentals.  Usually we expect to owe about 1,000-1,250 every year all in with federal, state, local, and doing our own taxes online.
 
CURRENT EXPENSES (all tracked through YNAB)
 
DEBT
Loan rental #1 - 75,000 at 6% with payment of 1,003/mo (19 1/2 more years)
Loan rental #2 - 80,000 at 7% with payment of 620/mo (20 more years)
Line of Credit against residence - 37,000 with minimum payment of int around 155/month
Navient Student Loans - 34,000 at 4.5% int with payment of 355/month
Car Loan - 9,000 3.0% int at 212/month
TOTAL MIN DEBT PAYMENTS PER MONTH 2,345
 
RENTAL EXPENSES
1,300/month - this includes property tax for the yr, utilities, repairs, vacancy
 
PERSONAL EXPENSES (all monthly )
Groceries/Household - 440
Going out - 150
Alcohol - 85
Kitchen Equipment - 37
Home Ins - 85
Home Maintenance/Remodel - 450 (this will drop drastically in a few years, we bought a 'fixer-upper' that wasn't livable and are doing about 2 spaces per year ourselves.  We save money by doing DIY.  This also includes a remodel of a barn into a substantial woodshop, storage for truck and camper, and space to work on another vehicle all in the same space)
Gas - 140 (I work local so I walk, Mr. OSD has a commute but is applying for work from home so hopefully this will go down to 20-30/month, our car gets 40mpg)
Car Ins - 92
Car Maintenance/Inspections - 55
Pets - 140/month (dog is on a raw diet for health, cat and dog both have joint supplements they need, they will probably be my last full time pets. Plan to foster after they pass. They are 10 and 12)
 
Monthly Bills (electric, gas, water, garbage) - 162/month
Cell Phones - 34 (both republic wireless)
Internet - 69 (would be eliminated if Mr. OSD gets work from home position
Entertainment - 55  (this is mostly Mr. OSD's expense)
Garden - 50  (mostly vegetables, slowly adding perennials and raised beds, this too will drop off slowly)
Gifts - 22 (we mostly do homemade gifts, especially for Christmas)
Life Insurance - 52 (term policies for both of us)
Property Taxes - 30 (our house is currently values at 18,000, reassessment is not for another 6 years)
Travel - 75 (1 substantial trip and maybe a 3 day weekend)]
Clothing - 24 (I shop at good will for t-shirts and work pants, this is mainly a shoe budget)
Health - 74
Overflow - 150  This is for the misc overflow that can happen in each category each month. 
TOTAL - 2,593
 
TOTAL EXPENSES DEBT, RENTAL, PERSONAL - 6,238

Current Assets
Myself - ROTH 15,500 and 401k 13,500
Mr. OSD - 401k 16,000

Budget for retirement: 2,500 + health insurance

Liabilities  - see above in budget

Desired Retirement Age 36

Additional Info: Our current annual debt payments are about 50k after extra payments.  We are primarily using the debt snowball method because we want to improve our cash flow and it is far more motivating right now. Once we have a better cash flow we intend to max our 401ks.  We will use a ROTH conversion ladder after retirement.

We both plan to make some income after age 36.  We are both interested in woodworking.  Mr. OSD is interested in welding and casting. 

We want to retire with about 300k in investment accounts and have all debt paid off.  With the average monthly income from rentals being 3,000/month after expenses and making some random side gigging money we plan to continue to put money away after age 36.  Eventually we want to sell the rentals which currently have a value of about 305k.


Any advice is appreciated and I know this is a crazy goal!  However, we managed to go from making 32k/yr combined to pulling in about 130k/yr in only 5 yrs so we are all about the setting our sites high :D

marty998

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #1 on: October 06, 2018, 09:01:09 PM »
Ok that's very much a click bait headline considering the $190k of the debt is investment debt.

You seem to know what you are doing, but there will be a few responses here regarding the car loan and student loan.

Do you have any plans for kids?



OrangeSnapDragon

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #2 on: October 06, 2018, 10:07:58 PM »
Hello! 

I didn't mean to be 'click baitey', it was just the easiest way to summarize my situation.

No kids, never, nada.

For the car loan I was mistaken and it is actually 2.00% and we either had the option to finance or purchase our next investment property.  Also with the interest rate being so low it seemed foolish not to move forward with financing but I'm always interested for a different perspective.

Thank you!

twig21

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #3 on: October 07, 2018, 08:06:13 PM »
Seems to me like 5 years would be hard but not totally impossible if you plan to work part-time.

I'm not big on real estate/rentals but if it was me and I wanted rental property I would concentrate on paying down the rental loans and then the student loans.  It sounds like you are already getting the most your companies match on retirement and I wouldn't expect you'd get much higher of a return than the 6-7% you are paying on those rental loans.  Once those are paid off you should have rental income of $40K+ which covers your expenses.  Then you should only need enough other income to pay health insurance (or a part time job that provides benefits).  This would allow the retirement savings to continue to grow.  You would also have the rental properties to sell if you needed cash badly.

tralfamadorian

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #4 on: October 08, 2018, 08:35:59 AM »
Your rental loans' interest rates are pretty high. Could you look into a refi?

Laura33

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #5 on: October 08, 2018, 10:08:41 AM »
I think the way you are thinking about this is somewhat misleading.  My first question was why do you have so little savings with a 6-figure income -- but the reality is that you have been putting that extra income into buying investment properties, yes?  So your don't just have $45K in savings -- you have $45K in cash and over $110K in equity in those properties -- and they are cash-flowing at a rate that would cover your living expenses if you had no debt.  I'd say that's an awesome start in just a few years and you're well on your way to your own little real estate empire.  But I can't really tell for sure, because you have lumped together the business and personal expenses. 

So the first question is whether you are actually making any money on the rentals.  I assumed that the listed rental expenses included mortgage, but then you list the mortgage separately.  I would suggest breaking out each building individually, including both the projected income and all associated expenses, including finance costs.  That will give you a clearer picture whether those properties are cash-flowing enough to be good investments -- you can get some great advice on that front on the RE boards here. 

The next step is to do the other half of the equation:  what are your personal living expenses without the rental costs?  At first blush, your expenses seem pretty reasonable, especially given all of the work you are putting into the properties.  But I can't tell what your actual living expenses are -- is the $37K HELOC for your residence, and is that the only debt on your residence?  Or are you living in one of the rental units and the HELOC is for renovations to your particular unit?  If you can carve out the rental data from the personal data, that will help.

And then, really, you need to get some tax software or a tax-estimator spreadsheet and get very familiar with that, because many of your possible decisions will have tax implications, so you want the whole picture.  For example, paying off the mortgages on the rentals will improve your cashflow but will also cut your deductions for those rentals, thus increasing your taxes, so that is likely not the best use of your money (though I do agree with refinancing if you can).  On the flip side, any additional money you throw at your 401(k)s or IRAs will automatically reduce your taxable income and thus save you in taxes, leaving you additional money left to put towards another priority.

Unfortunately, I can't really advise you what to do with the extra money, because the linchpin is whether the rentals are good investments.  If they are, and you have other opportunities in the area, then your best approach may be to take the profits from your existing rentals and look for yet another unit, and keep doing that until your rentals are generating enough cash flow to support you.  If not, then you are likely best focusing on maxing out your tax-deferred investment options (401(k)/IRA).  And if cash flow is actually tight -- which it doesn't seem like it should be given your listed income/expenses* -- then you probably want to knock out the car loan first, since it is the smallest and will free up cash most quickly (but I would only do this if cash flow is really tight, because the interest rate is so low and so your money can be much better used elsewhere). 

*FYI, the "taxes" line is supposed to list the actual total taxes you pay so that we can see your net income after taxes -- it's hard to tell how tight your cash flow is just by comparing listed expenses to gross income.

OrangeSnapDragon

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #6 on: October 08, 2018, 02:31:53 PM »
Hello! 

Thank you all for your input, some additional info

Your rental loans' interest rates are pretty high. Could you look into a refi?

Answer: They are fairly high and part of the reason is that they are both 'personal mortgages'.  Which means we have an individual who holds each one.  These are contracts drawn up by an attorney and are registered with the state.  The really nice thing about both of them are that we avoided closing costs.  Because we believe we can eliminate all debt in 5 years the total pay off comparison of the higher interest vs the closing cost + lower interest of a bank loan comes out to only about a 1,000 difference.  Our currently loans also don't have any penalty for paying off early (not that most loans do now, we just wanted to be careful of that).

One personal mortgage came from the previous owner of our 4 unit we purchased, she wanted to avoid large capital gains in one year and we wanted to avoid closing costs with a bank.  The second personal mortgage which is 80k at 7% was from a friend who had the means to write out a check for 80k. This one we just started in September 2018.

We tried going the traditional route with the last mortgage but most companies will only allow fund 75% of the value of the home because it is a rental AND most of them have a minimum of about a 75k to make the loan profitable to them.  Our homes are overall valued just under 100k in most cases so we don't qualify for a majority of the loans. The area we live in is considerable low cost of living and low cost of housing. 

There are still some refinance options around though.  One local bank will do 50% of the value of the home and there is only a $200 one time set up fee and 0 closing cost, the last time I looked at the rate it was 4.5%.  Once we get the value of one of the loans down we will start looking into this again.

We also have a line of credit on our current residence that is at prime interest and if we get that paid off 100% and interest rates seem reasonable we may move a lump sum or anywhere from 10k-40k at a time onto this to bring down interest.

Thanks for the input!

OrangeSnapDragon

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #7 on: October 08, 2018, 07:17:45 PM »
First thank you for all the thoughts and questions.  Getting some extra eyes and brains on our plan is incredibly helpful.

QUESTION FROM LAURA 33
 My first question was why do you have so little savings with a 6-figure income -- but the reality is that you have been putting that extra income into buying investment properties, yes?

ANSWER: Yes, that is correct.  I inherited one home, then we saved for our 2nd property then rolled all those proceeds and whatever else we could save into the 3rd.  We have started increasing our 401k contributions mainly for tax purposes



QUESTION FROM LAURA 33
 I would suggest breaking out each building individually, including both the projected income and all associated expenses, including finance costs.  That will give you a clearer picture whether those properties are cash-flowing enough to be good investments

ANSWER: Great point, below is the breakdown of each property

Property #1 'SINGLE FAMILY'
Purchase price: inherited
Estimated Value: 95,000
Expenses (all annual)
  - Property taxes 1,504
  - Insurance 743
  - Utilities are 0 while occupied
  - 2017 expenses 338 for miscellaneous repairs and a dehumidifier for the basement
  - TOTAL 2017 expenses 2,585
Income 825/month or 9,900/yr
Other Info: We currently supply washer/dryer but plan not to starting with the next tenant.  This property is much lower on the profit/loss ratio than some others but it is extremely low maintenance and would be very easy to sell due to location and condition.  New metal roof 2017, new electrical 2012, new heater 2013.

Property #2 'FOUR UNIT'
Purchase Price: 105,000
Value: 120,000 (we have put a lot of man hours but not much money into a lot of improvements since purchase in 4/2016)
Expenses (all annual)
  - Property tax 1,582
  - Insurance 656
  - Trash 928
  - Water 1,140
  - Septic 115 (done for 230 every other yr)
  - 2017 expenses 652
  - TOTAL EXPENSES 2017 5,073
Income 1,985/month or 23,820/yr
Other Info: This unit is a lot more work.  We collect rent in cash from all tenants partially because it is a lower end apartment.  We also have about another 2k worth of materials needed to really make this place what we want and many more hours to put in.  However, all this work can be done over the next couple of years.

Property #3 'DUPLEX'
Purchase Price: 99,000
Expenses
  - Value: 99,000 (purchased 9/2018)
  - Property Tax: 1,742
  - Insurance: 725
  - Water/Trash/Sewer: 840
  - Estimated expenses: 600/yr for misc repairs
  - TOTAL EXPENSES estimated 3,907
Income: 13,500
Other Info: We just purchased this one and will need to invest about 2k worth of materials over the next couple of years.  None of the work is an emergency but we want to keep the property in good shape.  Also a giant reason we purchased this property is the large barn that is on the lot.  It will serve as our eventual wood shop, storage for truck/camper and one additional bay for another vehicle.  Our own lot is far to small for any of these items and this house is on our street so it is fairly ideal. 

TOTALS FOR ALL 3 PROPERTIES
Value: 314,000
Expenses: 11,565
Income: 47,220 (this doesn't include vacancies but it also doesn't include late fees which we usually collect 50-75 worth each month.  It also doesn't include the current interest on our investment at this time but because we plan to pay it all off in 5 years or less I'm having a hard time coming up with a good way to add that in as an expense)

Other Considerations: I know there will be years our expenses are much higher but because we are able to do 95% of the work ourselves our costs are mitigated considerably. Within reason we are also working to improve the value of these properties over time.


QUESTION FROM LAURA 33
The next step is to do the other half of the equation:  what are your personal living expenses without the rental costs? 

ANSWER: In the original post I have the budget for personal expenses coming out at 2,593 per month which is about where we want to keep our budget for retirement



QUESTION FROM LAURA 33
is the $37K HELOC for your residence, and is that the only debt on your residence? 

ANSWER: The HELOC is for our residence and is the only debt we hold on it.  We do plan to have this 100% paid off before we FIRE.  We considered the tax benefit of moving into a rental to fix it up but the reality is we couldn't rent our current residence out because we still have holes in the walls, studded walls, an entire room that is unusable etc.  We basically rent out our nice properties and are slowly chipping away at our residence.  That being said our kitchen, front porch, back yard and dining room are bitchin.  We haven't got to the others rooms yet.



QUESTION FROM LAURA 33
And if cash flow is actually tight -- which it doesn't seem like it should be given your listed income/expenses

ANSWER: Cash flow

INCOME MONTHLY 
Mrs. OSD Job after 401k (which is 15%) - 2,123
Mrs. OSD job bonus after 401k (which is 75%) - 125
Mr. OSD job after 401k, health ins, HSA (401k is 15%, HSA is 207 per check) -  1,928
Rentals average - 3,935
TOTAL 8,111

EXPENSES MONTHLY

DEBT
Loan rental #2 - 75,000 at 6% with payment of 1,003/mo (19 1/2 more years)
Loan rental #3 - 80,000 at 7% with payment of 620/mo (20 more years)
Line of Credit against residence - 37,000 with minimum payment of int around 155/month
Navient Student Loans - 34,000 at 4.5% int with payment of 355/month
Car Loan - 9,000 3.0% int at 212/month
TOTAL MIN DEBT PAYMENTS PER MONTH 2,345

PERSONAL - 2,593

RENTALS - 963

TOTAL MONTHLY EXPENSES 5,901

Other Info: This is very simplified because we pay as many bills annually as we can.  I have an annual calendar planned out with everything on it so we always have plenty to cover. 

CASH FLOW GOALS: We considered tackling the 7% loan first.  The concern was that it would take a long time to pay that off completely and we would like to work on increasing our cash flow sooner rather than later.  We decided to leave the car loan as is because the interest is so low.  This left us to tackle the student loans first.  We are also going to work on increasing our 401k contributions over the year which will be lowering our monthly income. 



QUESTION FROM LAURA 33
And then, really, you need to get some tax software or a tax-estimator spreadsheet and get very familiar with that, because many of your possible decisions will have tax implications, so you want the whole picture

ANSWER: I completely agree.  Mr. OSD is the tax guy in the house and between the 401k, HSA, rental deductions and depreciation we should be able to hit the 12% tax bracket for married filling jointly in 2018.


lhamo

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #8 on: October 08, 2018, 08:17:41 PM »
Are the units in the 4-unit all 1 BR/1BA?  Because I grew up on a septic system, and the thought of having multiple families all on one septic REALLY scares me.  With five people in our house, I remember ours getting backed up more than a couple of times, and my dad digging it out by hand. 

Since that one is more work/less profit per unit anyway, maybe consider selling sooner rather than later.....

OrangeSnapDragon

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #9 on: October 09, 2018, 06:20:23 AM »
Are the units in the 4-unit all 1 BR/1BA?  Because I grew up on a septic system, and the thought of having multiple families all on one septic REALLY scares me.  With five people in our house, I remember ours getting backed up more than a couple of times, and my dad digging it out by hand. 

Since that one is more work/less profit per unit anyway, maybe consider selling sooner rather than later.....

Hello!

They are all 2br/1ba.  The septic is very large luckily.  The previous owner had been doing the every other year for probably 40 years without issues.  When we had it done last fall we asked the septic company how the levels were and they said just fine.  Long ago the property was actually a business so maybe the put in a larger one from the start.

This building is a lot more work but the overall profit is the highest out of all our buildings, even if per unit it is lower.  It will be hard to decide which one to sell first but since that is at least 15-20 years away I'm not to concerned about that yet :D

Thank you for your input and thoughts!

Laura33

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #10 on: October 09, 2018, 09:30:09 AM »
Thanks for all the info!  So combined, it looks like you are really netting about $2300 from the rentals (because the loans associated with each property are also an expense that should be allocated to each property).

I would also suggest that you break those numbers out individually, because averages can really hide a lot of variability.  For example, properties #2 and 3 cost you about the same amount of money and have similarly-sized loans on them.  But property 2 nets you about $6K/yr, while property 3 nets you only about $2K/yr.  So is #3 the best use of your money?

I am also still not quite understanding the cash flow concern.  From the figures you posted, it sounds like you clear about $2K/mo. ($8K net income - $6K net expenses), or about 25% of your take-home.  That strikes me as pretty good cash flow, so why is that the top priority?  Are you trying to save up for something else specific?  Unless there is a particular need, you may be short-changing yourself by focusing on paying off a 4.5% loan instead of a 7% one (although this is where the taxes come into play as well).  That said, there are other benefits to paying off the SLs first (most particularly the fact that they are not dischargeable in bankruptcy), so if you decide to keep that up, fine.  Just do the math so you know what the actual cost of that decision is.

Generally, though, you clearly know what you're doing and have a very good start, I think.  So one final question:  do you have disability insurance through your jobs?  Right now, one of you being disabled and unable to work is the biggest threat to your plans, so good to cover that base as well.

OrangeSnapDragon

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Re: 235k Debt 45k Savings - Determined to FIRE in 5 yrs
« Reply #11 on: October 09, 2018, 10:33:14 AM »
Thanks for all the info!  So combined, it looks like you are really netting about $2300 from the rentals (because the loans associated with each property are also an expense that should be allocated to each property).

I would also suggest that you break those numbers out individually, because averages can really hide a lot of variability.  For example, properties #2 and 3 cost you about the same amount of money and have similarly-sized loans on them.  But property 2 nets you about $6K/yr, while property 3 nets you only about $2K/yr.  So is #3 the best use of your money?

I am also still not quite understanding the cash flow concern.  From the figures you posted, it sounds like you clear about $2K/mo. ($8K net income - $6K net expenses), or about 25% of your take-home.  That strikes me as pretty good cash flow, so why is that the top priority?  Are you trying to save up for something else specific?  Unless there is a particular need, you may be short-changing yourself by focusing on paying off a 4.5% loan instead of a 7% one (although this is where the taxes come into play as well).  That said, there are other benefits to paying off the SLs first (most particularly the fact that they are not dischargeable in bankruptcy), so if you decide to keep that up, fine.  Just do the math so you know what the actual cost of that decision is.

Generally, though, you clearly know what you're doing and have a very good start, I think.  So one final question:  do you have disability insurance through your jobs?  Right now, one of you being disabled and unable to work is the biggest threat to your plans, so good to cover that base as well.

Hello Laura,

Thanks for getting back to me with some additional thoughts.

Property #3 is absolutely not as profitable.  However, it has a large barn on the lot which we are going to convert into a wood working shop, storage for a truck and truck camper and still have space for another car bay (which we will rent out in the winter).  Our residence is on a small lot so we cannot really build anything there and property #3 right across the street from our residence.  Having a wood shop will not only be just for fun but will also help immensely with our upkeep on rentals and the remodeling of our own home.  We both also want to learn a lot more about it and I hope to make it into a small money making business after we leave our full time jobs.



Cash Flow: we have a decent amount of 'FU money' but I also want to have a 'FU cash flow'.  Both of us have some issues with the direction our jobs and companies are heading so I want to have enough positive cash flow to take the backlash if one of us decides to leave a job. 

That being said I used this calculator to do a comparison https://tools.doughroller.net/debt-snowball-calculator/account/988f3bccdc0201c534f86081

- Snowball is 69 months, total interest paid 45,341
- Avalanche is 67 months, total interest paid 38,687
- TOTAL DIFFERENCE 6,654

Not a small amount of money by any means but I know we will have ways to mitigate the higher interest along the way.  For example there are local bank will do 50% of the value of a rental property and there is only a $200 one time set up fee and 0 closing cost, the last time I looked at the rate it was 4.5%.  Once we get the value of one of the loans down we will start looking into this again.

We also aren't going to go 100% snowball mode.  We will keep paying the min on our car loan since it is a crazy low 2% int.

I really appreciate the push back on this and am going to consider a change of plans.  Maybe pay off 1/2 the student loans as they don't require a minimum monthly payment when you pay ahead and then tackle the 7% mortgage next.



Disability: we both have disability through work and as far as additional protection we are going to look into an umbrella policy as well for liability on the rentals.



It has been great so far getting feedback on the plan.  I absolutely have some additional options and information to consider.