Case Study – Risk business and move to LCOL area and/or Househack? Both or neith

[SingleMomOnFire]

Life Situation: 44F, Head of Household, 7 year old daughter, live in HCOL area – Bay Area. Single mom. Dad is local, helpful but daughter is much closer to me and I have her 80% time and all nights. Never married. I am a business owner.

Gross Salary/Wages: It’s my company, so I am taking a 75k salary and another $50k in self employed income for 2017 (net 25k self employed income). Next year will likely be the 75k plus up to 108k in profit and my business partner believes we can grow at 10% per year or more. (Gross receipt around $520k and expenses at $420k)

Individual amounts of each Pre-tax deductions: Simple IRA contribution this year of $12,500. If I’m not making too much money I will contribute to an IRA or Roth in addition and next year I plan to go back to an HSA healthcare plan to be able to make a full family contribution for 2018, although I periodically do have some chunky health costs due to chronic illness.

Rental Income, Actual Expenses, and Depreciation: Business expenses are high due to payroll and paying off a note but we still expect profits to grow over time.

Adjusted Gross Income: Might be as high as $82,000 this year, may be higher in coming years.

Taxes: Last year AGI was $103k, total federal was $33k and total state was 4k. Self employment tax do take a bite. But last year was all sole prop. This year will be mostly S-corp.

Current expenses:

Category   Average   Annual Rent    1,650     19,800 Groceries/Office Supp    749     8,990 Childcare    854     7,527 Health Insurance & Med/Dental    566     6,789 Household    473     5,628 Vacation & Airfare    555     6,665 Vet/Pet Care    337     4,092 Dining Out/Meals & Ent    220     2,635 Disability Insurance    208     2,500 Car Insurance    164     1,966 Self Care    152     1,826 Life Insurance    106     740 PG&E    89     1,071 Gas    82     986 Internet    69     831 Gifts    64     766 telephone    59     706 tax accounting    57     686 Clothing    43     513 cloud backup? What would MMM do?    41     489 Auto Service & Transportation    38     458 Garbage (32)    34     408 Fun Money    32     389 Water bill    27     327 Total Annual       76,787 Monthly       6,399

Sorry, I can't get the table to insert like a table. I’m sure these expenses look high to many. Some can be brought down fairly easily (like summer camp costs). Besides the dad there is no family in the area to help with childcare. It’s been difficult for me to meal plan and buy groceries strategically due to exhaustion and overwhelm. Advice on ways of cutting expenses I haven’t thought of is welcome.

Assets:
Personal Checking and Savings: $57k
Business Checking: $92k
SEP IRA: $147k
Roth IRA: $29k
Business value: Around $540k (this is my share, the total is split with partner)
Cash amounts are high due to cyclical nature of business and the need for a good cash cushion for hard times or cash flow problems. Asset allocation is more like permanent portfolio which would be seen as conservative by many Mustachians, but I’m comfortable with my asset allocation and not really looking for advice there.

Liabilities: Only debt is the business loan currently $162k balance at 3%. Financed by seller who would like the payments to be sped up but we want to be sure of cash flow before committing. Currently the 6 year amortization schedule would mature 2020 but seller/financer wants paid off by 2018 if possible.

Specific Question(s): I would like to speed up process to FI without sacrificing my daughter’s childhood to do it. After listening to podcasts by Coach Carson, I am considering a househack, but where I live currently there is an extreme real estate bubble which may only go flat for awhile rather than truly pop as the area is so crazy. I would like to get into real estate to diversify and annuitize income. There are many considerations. Below are the three I most consider.

1)   Move to Chicago where there is family and buy a duplex/triplex/quadplex in good school system near them.
a.   Pros – Much more reasonable housing cost, near supportive family, would net approximately $22k in lowered housing costs if I can break even on househack.
b.   Cons – Deals I’ve seen listed in bigger pockets don’t look like positive cash flow from day one, slow growth in the area and Chicago metro has had people moving away the last couple of years, away from daughter’s father during the school year, could need to be away from daughter for weeks to do business back in the Bay, travel and AirBNB costs (which are figured into the net number), I could be limiting growth of my business that could net much more than $22k by not being physically available year round – this last is an unknown how much or little effect this could have.

2)   Stay renting in the Bay and just invest remotely in real estate.
a.   Pros – I can invest anywhere that makes the most financial sense and therefore hopefully more likely to have higher cash flow deals, don’t risk business.
b.   Cons – Rent costs would not go away or go down, the risk of renting and having the property sold and kicked out and being unable/unwilling to afford to stay in daughter’s school system is a real concern (SFRs currently rent for $4k in my town).

3)   Try to househack in the Bay Area?
a.   Pros – If I could make it happen then I would have security of staying in a school system with hopefully lowered home costs, don’t risk business.
b.   Cons – May not be possible/profitable at current values, may or may not be able to find a deal in a good school system, most multi-family properties are listed at 1.2million and up and rare in my town. I may have to wait for unknown length of time for a good deal to show up and the down payment and financing would likely be a larger more undiversified position than buying several properties in more reasonable parts of the country.

Any thoughts/suggestions/things I haven’t considered would be so appreciated. Thanks so much!

[MarciaB]

What jumped out to me is the idea of moving to the Chicago area and leaving your business, then returning for periods of time to oversee it. Big red flag for me! Businesses with absentee owners do not fare well (in my experience), so be sure to weight that heavily in the decision. Because what would you do if your business floundered, move back? Let it die and then try to restart it in Chicago? Start something else? Etc.

[Morning Glory]

It seems a lot easier to just reduce your spending than to do any of your proposed solutions. Separating your daughter from her dad would be worse for her childhood than any spending cuts.

Some of your expenses seem like they are for the business and not you personally (cloud backup, tax accounting, office supplies). You need to separate your accounts from the business' accounts and pay for things out of the appropriate pot.

Some ideas:

I'm not going to be too hard on you about the groceries, as prepared food from the store is cheaper and healthier than takeout.  You might be able to save by switching to generic brands or a less expensive store. You could also try cooking double batches on weekends and eating leftovers during the week.

What is the $473/month on "household"? Seems like an easy place to cut.

 $152 for "self care" needs some explanation. I am assuming this is hair, nails, etc. and is somewhat necessary for your profession, but there are ways to accomplish this more cheaply. There are many threads on here about how to save money on beauty treatments.

Why is "fun money " separate from "entertainment "? And do you really enjoy the dining out or do you do it because you are tired or stressed?

$337 for pet care is too high as well. Does this include boarding your pet for vacations? If so could you trade pet sitting with a friend? If there are meds/special food involved then could you find them cheaper online?

Your car insurance is high. Can you increase your deductible or drop collision entirely? I am not as familiar with self-employed health/life/disability insurance, but you might be able to save by shopping around. You could also look for cheaper services for phone/internet/etc.

Your travel budget is also high. How important is this to you? Can you get in the same amount of travel while spending less? Maybe do fewer, longer trips instead of many short ones.

[BlueHouse]

Like others have said, I would focus on your business and stop trying to hack your housing situation.  It seems as if you are in a great place to grow that business and improve your finances based on smart and conservative choices.  (I'm conservative with money and would suggest that way for you too because you have a child).  So I recommend a mindset change to get rich slowly instead of get rich quickly. 

Here are the areas I would focus on based on the info provided.

1.  Work on unraveling business from personal expenses.  Open up a business-only credit card (this doesn't have to be a business card...can be personal, but use it ONLY for business expenses).   Same for bank account.  You shouldn't have office supply costs mixed in with your groceries.
2.  As an S-Corp, you'll now be able to divert huge sums into tax-advantaged accounts (up to $54K per year, depending on your income).  I would invest in a 401k in a mix of stock/bond index funds rather than trying to invest in real estate.  You can make the same return without the additional work, risk, worry.  If you know what you're doing with RE and your business is RE-focused, then maybe my advice would change.  But if not, I'd wait until you have a big fat investment account before branching into other investments.
3.  Push as many of your expenses onto the business side as possible.  You may be able to claim some or most of your telephone and internet costs as business expenses.  Don't cheat --- it's not worth it.  But don't cheat yourself either. 
3.  There's a lot of fat in your budget.  $330 per month on pets?  Do you own an elephant?  Can't imagine how you can spend that much on a pet.  Rethink priorities here.  Self care, household, are too high.
4.  Get the daughter to help you with meal planning and prep.  Do once a week batch meal prep TOGETHER.  This will help her in future years and will help both of you by being together.  My go-to meal is crockpot meal 101:  Chicken thighs, black beans, salsa (or diced tomatoes & jalopenos), and a bunch of spices in the crock for 8 hours.  So easy and delicious for all ages.  Google "Chicken Taco Bowls slow cooker" for spice mix and then adjust based on your tastes.  Great fun because it makes a ton and you can make different meals out of it (with rice as a burrito bowl, in tacos with a bit of cheese, or on a salad).  Your daughter is old enough for crockpot cooking.  Please spend a few hours now to give her this skill.  Or ask her to help you figure it out.  Wish my mom had done this for me rather than doing everything for me. 

Good luck and keep updating. Sounds as if you have a lot of possibilities in front of you.  !!

[MarciaB]

My go-to meal is crockpot meal 101:  Chicken thighs, black beans, salsa (or diced tomatoes & jalopenos), and a bunch of spices in the crock for 8 hours.  So easy and delicious for all ages. 

Throw a sweet potato in there as well and maybe a red pepper (this is my #1 crockpot recipe as well - never fail, and a real crowd pleaser).

[Miss Piggy]

...
b.   Cons ... away from daughter’s father during the school year, could need to be away from daughter for weeks to do business back in the Bay...

These two things combined would make the move to Chicago a no-go for me. Doing so would mean your daughter is away from both Mom AND Dad, sometimes for weeks at a time. That sounds extremely stressful for a kid, not to mention the stress on whichever family member cares for her during those times.

[Goldielocks]

Looking at this, I too, would think your real "gold" is in cutting some expenses and keeping the business running.  Partly because of access to Dad, but also because your business is how you make money.
Some thoughts on expenses.

Current expenses:
Category   Average   Annual
Rent    1,650     19,800
Groceries/Office Supp    749     8,990
This is very high for 1.5 people.  She is 7?  You have her 4/5 days only?  This should be under $450 even with some convenience foods.

Childcare    854     7,527
Seems high for a 7 year old.  What will this year bring?  Is this mainly about summer camp or during the school year too? Do you split costs with DAD at all??

Health Insurance & Med/Dental    566     6,789
Household    473     5,628
Household is Very high for a renter, how many sheets, pots and pans, etc can you buy? what is going into here that is more of a want or a hobby that you can eliminate?
Vacation & Airfare    555     6,665
Only you know about this one, but it is a lot PER YEAR.  Try to cut this by more than half.

Vet/Pet Care    337     4,092
Whoa,  !!  Needs a rethink.. if this was a one time "fix broken leg" vet bill, fine, but it looks like a monthly cost for what, exactly??

Dining Out/Meals & Ent    220     2,635
Disability Insurance    208     2,500
Car Insurance    164     1,966
Yeah, this is quite high..?  One car?  Should be closer to $1k.  Why so high?

Self Care    152     1,826
?? Therapy??

Life Insurance    106     740
PG&E    89     1,071
Gas    82     986
Internet    69     831
Gifts    64     766
telephone    59     706
tax accounting    57     686
Keep business costs separate

Clothing    43     513
cloud backup? What would MMM do?    41     489 Keep business costs separate
Auto Service & Transportation    38     458
Where is your car monthly fuel bill, why so much paid for insurance but you don't drive anywhere? Are you missing something?  Is it under the business, and you never drive for personal use?  If so, why is insurance listed here,,??

Garbage (32)    34     408
Fun Money    32     389
Water bill    27     327
Total Annual       76,787
Monthly       6,399    This is a lot for a 1.5 person household

[Dee18]

Looks like you are doing well in your HCOL.  Others have pointed out some areas for saving, but overall it seems that you have reached a point where you are on track but just want to speed up the FIRE process.  Keep in mind the years 7-13 may be the years you have the most lasting influence on your daughter.  (I say this as a single mom whose DD is now in college.) The idea of cooking with her is a great one, as well as including her in DIY projects, trip planning, etc.  I do not regret money I spent on eating great food with my daughter, but I do regret how frequently I bought mediocre takeout because we were tired and hungry at 5:30, and that I didn't teach my daughter more about cooking when she was young and liked helping. (I did a better job teaching her to travel..she was comfortable flying alone internationally at 18.)  Shopping at Aldis and crockpot cooking really cut my food costs once I discovered them. As for travel costs, etc, I thought it was funny that friends and family seemed to think my costs would be less than their couples' travel.  As a single parent you buy two plane tickets, still rent a car, etc.  Air BnB has made travel less expensive now and you should check out the Southwest companion pass when you are planning a couple years of domestic travel. I didn't see a plan for college funding in your budget, perhaps I just missed it or perhaps it is already taken care of. Seems like if you just stay the course you'll have a solid future....oh, and for cheap entertainment you can watch Gilmore Girls with your daughter, though maybe when she's a bit older.  It glorifies mother/ daughter families in a way that delighted my daughter.

[SingleMomOnFire]

Hi all!

Thank you all so so much! The reflections are very helpful.

I think part of this is that I have been working so hard and am so exhausted that I want to super charge the FIRE path because I don't know how long I can keep this up, but I have also been coming to some of the conclusions you've all had. Risking the business for more limited gains might not be all that wise financially, but especially in terms of the downsides for my daughter - are not worth it. And actually being told not to worry about real estate actually feels quite freeing. It is not a strength of mine and while I will likely still research, a househack would be years off anyway, but not feeling like a failure because I haven't made it happen today feels good.

I also have been looking at the preciousness of the next 7-12 years with my daughter and thinking that it might be better to slow down (and appreciated by her) and not go super hard core on expenses during her formative years. But that being said there is a ton of fat to cut. And she somehow has the idea that any toy store in sight means she is going to get another toy to add to her room overflowing with toys (partly due to dad who buys her something every time he sees her). And to be clear, she doesn't do any overnights with her dad and spends a total of around 12 hours per week with him. So all the expenses and administration are mine not his. So I will keep lowering expenses while trying to deal with my exhaustion and disillusion with being an overwhelmed business owner.

I am working on many of the things you've all brought up. And yes, the combining of business and personal makes it confusing. I have separate accounts and credit cards, but I guess I want to bring down both so are lumping some of them together, which I shouldn't. Most of the dining out is for business. My daughter and I don't eat food outside of the house beside a periodic bucket of popcorn. But even so, I spend way too much on groceries due to a lack of meal planning and strategic buying. I heard about "Deals to Meals" from ChooseFI and have signed up and tried to meal plan this last week for the first time ever. It felt really difficult. I have no idea what I'm doing. But I can already see how I will get better at buying an appropriate amount of food and foods that will actually go together.

Childcare FAIL was mostly due to going crazy with summer camps. I was paying $500/month for aftercare and then spent over $4,000(!!) on summer camps. Insane. And my daughter seemed to not notice the difference among the more expensive ones and the cheaper ones. So I found one that had a discount for $1600 for the whole summer and have it on my calendar to sign up in Feb. And her new school’s aftercare is $288. So boom, childcare gets cut in half.

Household expenses are definitely a blackhole. It's entertainment like movies and netflix and every random Amazon purchase. I upgraded my house this year which I don't regret, but many of these expenses are one timers. I will continue to really closely monitor these.

Vacation costs are including a lot of business travel, so I should separate that. But fewer but longer trips to family in Chicago is a great idea. If I can stand it without going crazy.

The dog, the dog, the dog - albatross. She has very bad separation anxiety. She ate a hole through the wall when my daughter and I went to the grocery store for half an hour. Because of the terrible separation anxiety, I feel like I can't do trades because I wouldn't put someone else through this. She comes with me in the car every day everywhere I go. If I have a day long meeting, I have to board her because I can't leave her at home. On hot days we can't go to the pool or the movies because the dog can't survive in the car.  So most of that cost is boarding for trips plus the health problems she gets from the stress when we are away and $84 per month in pet insurance. Anyway, lots of feelings about it. But my daughter loves her. They are very bonded. I am hoping for a shorter life for the dog - although I know dog lovers everywhere will gasp in horror. But I'm in expensive dog jail. And I won't give her back to the rescue place, it's my responsibility. But I'll be damned if I'm going to get another dog. Any suggestions are welcome.

I'm meeting with state farm next week to see about getting the car insurance bill down (which also includes renters and umbrella policy). I was told that state farm was one of the few insurance companies that would do renters and umbrella for a half pitbull. If there are other suggestions, let me know.
And yes, self care = therapy and massages. Which have mostly stopped since I've become more focused on FI.
And yes, we are doing a Simple IRA this year, but I am doing research on switching to the 401k for next year to up the contribution to as much as I can.

Thanks again, all!