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Learning, Sharing, and Teaching => Case Studies => Topic started by: Achshoe on October 09, 2019, 11:04:00 AM

Title: College for kids
Post by: Achshoe on October 09, 2019, 11:04:00 AM
I am currently looking to plan for goals in the short term and long term. I would like to find the best way to plan to retire, fund my childrenís education and buy a boat.
My two kids will be going to college in 3 years and 5 years, respectively.  I am assuming $30000/year in todayís dollars.  I would also like to purchase a $75000 boat. 
What will be the best way to achieve this? I know that I must sell or refinance the rentals, but what would be best? 

Income: $130,000, 3% increase a year

15% of my annual pay automatically added to my 401(k) with no contribution of my own. I am currently contributing 1% of my own money.
Profit sharing : 10% of yearly earnings

Traditional IRA/401(k): ~$350000
Roth: ~$400000
HSA investment account: $18000

Cash: $50000
Emergency fund: ~$40000

529 Plan: $22000/ each

Primary residence:
Value: $510000
Mortgage balance: $360000
Payment: $2200
Loan interest rate: 4.4%

Four rental houses:

Value: $302000
Mortgage balance: $165000
Payment: $1500
Gross rent: $1900
Loan interest rate: 5%

Value: $196000
Mortgage balance: $59000
Payment: $650
Gross rent: $1200
Loan interest rate: 5%

Value: $285000
Mortgage balance: $85000
Payment: $750
Gross rent: $1900
Loan interest rate: 5%

Value: $236000
Mortgage balance: $91000
Payment: $750
Gross rent: $1200
Loan interest rate: 5%

Edit: more detail

15 years from retirement.

HSA investment account $18000

I am currently investing ~ $400 month.  Due to the nature of my job, my income varies month to month and I add to my taxable account over that when I can. All other expenses covered.

I also have profit sharing from my company.  Typically 10% of my yearly earnings added to my retirement account. I am not contributing to my 401(k) for this reason because I have saved for most of my life and I want to live a little (hopefully, this wonít upset too many of the MMM crowd!)
Title: Re: College for kids
Post by: ericrugiero on October 09, 2019, 11:54:58 AM
It looks like none of the properties meet the 1% rule that is typically recommended for rentals.  Properties 1&4 in particular have a small margin for profit each month.  By the time you allow for vacancies, repairs, expenses, etc you are probably making very little if any on them.  On the other hand, you have pretty good equity in them.  Based on the limited info you gave I'd look at selling at least 1&4 which would allow you to pay for the kids college and/or invest the money for a better rate of return. 

In terms of retirement and boat you really didn't give enough info.  What are your annual expenses?  What do you estimate your expenses after retirement?  A $75,000 boat doesn't typically figure into a MMM style retirement unless you are living on it and living quite frugally besides that. 

The good news is you have $750,000 in retirement accounts and lots of equity in real estate.  Many people here could easily retire with that portfolio.  My guess is you don't have your budget dialed down to that level.  If you provide more info in that area you will get more help. 
Title: Re: College for kids
Post by: ysette9 on October 09, 2019, 12:06:44 PM
Why are you contributing so little to your 401k? In your shoes I would be maxing that sucker out. You only have so much runway until retirement and you are leaving sweet, sweet tax-advantaged space on the table every year that you donít max it out.

As many have said before, you can get loans for college (or go to junior college or go to college overseas or get scholarships or work) but you canít get loans for retirement. Put your own future first so you arenít a burden on your kids.
Title: Re: College for kids
Post by: Laura33 on October 09, 2019, 12:22:00 PM
We can't advise you on how to meet all three goals without knowing your expenses and how many years you have until retirement.  I'm assuming that since you are not putting much of anything into your 401(k), you're spending almost everything you make, minus whatever is going into the 529s.  The good news is that you have almost $1.5M in assets outside your primary home.  The bad news is that if you're currently spending say $100K/yr after tax, you're going to need $2.5M invested just to support your retirement.  So if you're only say a decade away from your target retirement age, then you need everything you've got just to support yourself; boats and college are pretty much right out.  OTOH, if you're spending only say $50K (because you just got out of debt or are aggressively prepaying mortgages or just started the 529s or whatever), then you already have enough assets to support your future retirement, and so you can afford to focus on restructuring investments/assets to cover college, and then maybe a boat once that is paid for. 

The reality is that you have done a very good job of accumulating assets, so you have done a lot of things right along the way.  But it's not necessarily "fund two college educations and a $75K boat" right.  The devil's always in the details.
Title: Re: College for kids
Post by: MoneyizHere on October 09, 2019, 12:29:24 PM
Nice balance sheet - don't know your expenses though - so i'll just shoot randomly from a optimizing perspective.

For the boat - finance it - since we're on MMM - buy used.  For the education - just roll with the 22k each that you have now - then let your kids figure out the rest - they could get deferred loans themselves.
Like other said - increase your 401k contribution to be 19k total of your own contribution.  If you're MFJ - then contribute to t-IRA as well to reduce your taxable income -taking advantage of that child tax credit. 

I'd de-leverage some of that property to increase cash flow if you're getting closer.
Title: Re: College for kids
Post by: Achshoe on October 09, 2019, 12:54:37 PM
I have edited my initial post with more detail.

I have 15 years until retirement. 

At my job I'll will be making considerably more money (~40% increase) in the future, ~5 to 7 years.

Regarding the rentals, I was considering refinancing some of the properties and taking out the equity but leaving the investment intact as a hedge against inflation and to be able to leave the kids a source of income going forward. 
Title: Re: College for kids
Post by: ysette9 on October 09, 2019, 01:17:11 PM
Ill caveat this by saying that I donít invest in real estate so I am not an expert.

It is really important not to get too emotional with real estate. Owning property can be very romantic. It is important to treat it logically like any other thing you could put your money towards. We see people all the time keep rentals that donít make sense financially because ďthe rent covers the mortgageĒ or ďit is a good hedge against inflationĒ or ďIíll have something to leave my kidsĒ, or ďIíll have passive income flowĒ or whatnot.

The truth is that there is an opportunity cost of tying up money in real estate investments and you must always make sure that it is not just an okay place to put your money but the best place. A broad stock market fund beats inflation, requires no work, and is a great thing to leave your kids if that is what motivates you. A REIT might give you the upside benefits of real estate investing without the work.

Iím not saying that your rentals are bad (though I think others have suggested that some of them arenít good), by please run the numbers and make sure there isnít a better use for your money.
Title: Re: College for kids
Post by: Laura33 on October 09, 2019, 02:15:51 PM
OK, so, that is helpful, but we still need more detail -- what's your take-home, what are your monthly expenses by category, what are the monthly investments, etc. 

I did a really quick income tax calculator based on @130K income, two kids, a spouse, and about $1500/mo mortgage interest on primary home (in other words, avoiding the whole issue of income/deductions from the rental properties), and that said you probably would have owed about $12K in federal taxes last year; that's going to be low because it ignores the rental income, but those properties also increase your income as well, so if anything, you'd have more left to spend once you add that money in.

So assuming that you pay about $12K federal taxes, and then you add in your state/local taxes and FICA, that brings you to around say $105-110K net.  You're saving about $400/mo on average, plus 1% in the 401(k) for another grand or two.  So that means that you're spending what's left over, or around $100K/yr. 

If that's close to accurate, then you're pretty much at my initial hypothetical:  you'll need about $2.5M to fund just your retirement.  The good news is that if you're 15 years away, your current investments should more than get you there by then, IF you have them in the market and the market manages anything near its historic returns. 

OR you can stay in real estate.  To do that analysis, you'd look at your net profit from all the real estate after costs (including maintenance/vacancy/property taxes/etc.), and subtract that from the $100K/yr you need.  So from your numbers below, maybe you're netting $20K/yr.  If you want to keep those properties, then you'd still need to cover $80K/yr, which means you need to get your retirement investments up to $2M in 15 years.  Or you could look to sell the underperforming rentals and put the money into better-performing units, which would decrease the amount you need in investments to cover the delta.

Whichever option you choose, I'd suggest putting your actual numbers into a retirement calculator to figure out exactly what you need to put away between now and then to reach your target retirement number, and to run it a couple of different ways to figure out whether it's more efficient to sell the rentals or stay in them (note that there are a lot of people here who seem to enjoy doing that for people, but they would need a ton more detail on the expenses and investments and taxes and all that in order to do so).  But the key is that this is your first step:  you must figure out what you need for retirement first, because you have no fallback for that.

Once you are confident you have a plan to cover your retirement, you can look at what's left and make a plan for college and boat.
Title: Re: College for kids
Post by: Gin1984 on October 19, 2019, 08:18:58 PM
I agree with selling some if not all of the rentals but I'd also refi the primary residence. The rate is a bit high.

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Title: Re: College for kids
Post by: Car Jack on October 25, 2019, 11:37:59 AM
I have two comments.

How much would it cost to rent such a boat?  I ask this as a former boat owner.  Once I looked into the cost to rent, I sold my boat.

Next, you need to think long and hard about leaving the kids rentals.  Talk with them a lot about this.  Why?  Because my dad did rentals.  He also had a business.  Neither my sister or I wanted anything to do with either.  He sold the business and sold the rentals.  He ended up passing away with the business building and one rental property.  My mom sold them off and even that was a pain.  Had I inherited either, I would have contacted a local real estate agent and asked what the price would need to be to get rid of in a week.....then I'd list it for that.  Not everyone wants rentals.
Title: Re: College for kids
Post by: waltworks on October 25, 2019, 09:45:51 PM
Your rentals suck, sell them all.

Boats are terrible. Rent one when you want to go out.

Title: Re: College for kids
Post by: Freedomin5 on October 25, 2019, 10:08:22 PM
Pretty much no one here is going to support you getting a boat, and definitely not selling income producing assets to finance a depreciating luxury consumer good that comes with loads of annual expenses. That being said, if you want to buy a boat, that is your prerogative. Just do the math and make sure that you can support the boat for the rest of its life (or until youíve gotten tired of watching the money go down the drain and decide to sell it).

Iím not saying this to be mean. Iím saying this from personal experience. I bought a cottage that makes no financial sense. No one here supported my purchase but I did it anyway because I wanted one. But Iím also accepting that it will net me a big fat zero at best (thatís with me renting out the cottage when itís not in use). And no one supported me in my decision even though my income level is three times your income level and my expenses are a fraction of your expenses and we have an 80%-90% savings rate. And the forum folks are correct. They shouldnít support me in buying a cottage.

Youíve had input from some of the smartest folks on the forum (ysette9, Laura33, waltworks) all of whom are well on their way to FIRE or who are already FI. Listen to their input even if it may not be what you want to hear.