Am I there yet?

[BrianT]

For a number of years I have been following the simple principles outlined throughout the several blog posts from MMM. I've been contemplating early retirement and looked at my numbers. I'm 35 years old.

Rental property portfolio: ~$1,000,000 net worth (total value minus mortgages: ~$1,500,000 - $500,000)
Roth IRA + Traditional IRA + 401k: ~$260,000 invested in Berkshire Hathaway, Costco, and majority in Fidelity Total Market Index Fund
Savings: $135,000

Here's how I thought about it. My retirement accounts will likely balloon to well over $1,000,000 in the next 25 years (by the time I hit 60 years old). I need a way to last between now and when I turn 60. So I would just sell off my real estate and live off of that until I turn 60. I would keep the proceeds in a regular brokerage and have all the money invested in a total market index fund.

I live a pretty frugal and simple life. Only debt I have is the good debt on the rentals. Living off about $48,000 a year would more than likely be enough for me. If I am ever short on cash, I'd take on short term contracting work. I'm a systems analyst, and so far finding short term work for this field is not too challenging.

Thoughts? If I need to provide a bit more info, let me know. I really want to know what you guys think.

[LWYRUP]

Sounds good to me.  I am wondering whether you'd want to hang on to some of the properties for diversification. 

I also wonder when mustachians FIRE when single without kids whether any of them later regret it if they decide they want to have kids and realize that making the numbers work with kids can be trickier. 

Personally if I didn't have kids but was open to them down the road I would build a bigger buffer first, but that's just personal preference. 

[BrianT]

Another option is I sell the properties as needed. So I would sell one, live off of the profits, and sell the next one whenever the money from the last sale runs dry. I do run a risk of selling if the market is low...but then again there's similar traits to selling from your retirement account piece by piece each year.

Here's where my mindset sits now that I've accumulated all of this. I still work, but I don't feel like I need the job. I don't feel a need to move up the ladder just to earn more. I focus more on making sure I enjoy going into the office (or work from home) to do what it is I do, and don't worry about whether I need the money. I also am not afraid of being fired or laid off because I have more than enough to hold me over until I decide to look for something else. I feel my mind has left the mental prison that some folks face - think of those that put up with nonsense at work because they can't afford to lose their job.

[moneytaichi]

You are so young. Congs to get on FI path so early! My guess is that you will find passionate things once you no longer need to work for money. Keep up the good job!

[BrianT]

Can you not live off the cash flow from the rentals?  Or that plus a little side work?   I would be wary of a strategy that requires regular sale of the rentals to stay afloat, as you can't predict what the real estate market will be.

Unfortunately, the cash flow on the rentals is not enough at this point because of my mortgage payments. I bought one property too expensive and I barely break even on it, so most of my gain on that one will be in equity gains (assuming I don't refi). It can be worse if I have unexpected expenses; for example last year I had to redo the flooring on one unit and it cost me about $4,000, which eats up a big portion of the cash flow. Ideally, I think I'd unload one property per year over 4 years, hoping there is no housing crash, and put all the proceeds, minus whatever I need to live, into a total market index fund. I would need to talk to my CPA on how to best do this, but I thought of this as an initial strategy.

If lets say I do pay off the mortgages and dramatically increase my passive income, I think some level of side work in the gig economy is still necessary in case unexpected expenses come up.

[BrianT]

You are so young. Congs to get on FI path so early! My guess is that you will find passionate things once you no longer need to work for money. Keep up the good job!

Thank you!!!

[Evildunk99]

what do your monthly incomes vs. expenses look like, vs. how much you need per month to maintain your lifestyle?  One thought would be to sell the property that isn't breaking even, and buying multiple properties in a cheaper market that do cash flow.  That would add to your monthly income.  Look into 1031 exchanges to avoid tax problems for that property.  It sounds like you are on solid ground to me based on your account sizes.  Now you just need to convert those accounts into income that meets your needs.

[BrianT]

what do your monthly incomes vs. expenses look like, vs. how much you need per month to maintain your lifestyle?  One thought would be to sell the property that isn't breaking even, and buying multiple properties in a cheaper market that do cash flow.  That would add to your monthly income.  Look into 1031 exchanges to avoid tax problems for that property.  It sounds like you are on solid ground to me based on your account sizes.  Now you just need to convert those accounts into income that meets your needs.

Between the two of us, it's about 4K per month, so I'd need to pull out 48k per year to live comfortably (this conflicts with what I started with in the original post, so I will update).

[Lobo]

If you sold your real estate have you figured out how much you would lose to capital gains taxes?
I believe depreciation write-offs in previous years may also come into play if sold.

[BrianT]

If you sold your real estate have you figured out how much you would lose to capital gains taxes?
I believe depreciation write-offs in previous years may also come into play if sold.

You're totally right. I have to figure that out. It had crossed my mind a few days ago. I can probably get the most straight forward answer when I see my CPA next month.

[BrianT]

Sigh...not there yet IMO. At least not a comfortable amount yet based on what I think we need to live comfortably.

I did a raw calculation of gross profit before taxes, and it is $756,664. I got this number by calculating the following:
[what property is likely to sell for] - [current mortgage balance]

There's still capital gains taxes and depreciation to take into consideration that will eat into my profits.

So I think I realistically don't have enough to just retire and live off the RE profits for the next 25 years, assuming that I move all of the money to a total market index fund.

But I think I do have some interesting options, and I'm curious to what you all think.

Take an Extended Break
I think I have enough to take an extended break if I really felt like I needed some major time off from working. By extended break I mean 5 years at least, but likely no more than that give or take a few years. It's not enough to claim FI, but I think it's enough to not feel a large amount of pressure to keep my job if I wasn't happy. I work in IT DevOps, and jobs have been plentiful in this industry for quite some time and seem to continue to be so.

Really Push for FIRE
In addition to selling my properties at a rate of 1 per year after quitting my job, start transferring my Rollover IRA (~$214k) to a Roth IRA in staggered amounts. Also, move about maybe $80k from savings (Current total ~$138k) into the index fund.