Author Topic: Case Study - 32 Looking for advice on FIRE since career change  (Read 4245 times)

Swish

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Been lurking for a while.

Currently there is a $6,743 per year hole between our income and bills. ($561.92 per mo). Last year I made a base salary of $119k and this year my salary declined to $86k from taking a new job. The new job is within walking distance so I lost a 2-hour daily commute.When we financed our mortgages it was under our assumed previous income so we went fairly aggressive on the payments to get out of debt sooner. The idea was that once we paid of one mortgage we would redirect the same payment amount to pay down the next one.

The Stats:

Life Situation: Age 32, Married, Three kids 2, 4, 6, from Canada and spouse is staying at home.

Gross Salary/Wages: $86,274 Single income

Individual amounts of each Pre-tax deduction: CCP, EI, Work ins. included with taxes

Other Ordinary Income: Child Credit Benefit(CCB) $711x12= $8,532

Qualified Dividends & Long Term Capital Gains: Currently averaging 6.53% yield ($8,752 ish) and gains of $12,814 ish less loan interest of -$1,550 - $2,218 = $17,798

Rental Income, Actual Expenses, and Depreciation: House 1 Rent = $1,300*12= $15,600, House 2 Rent = $1,100*12=$13,200 Total Rent $28,800 Less exp $5,210 Tax less interest $8,040 nets $15,550
Both homes are in good repair so maintenance is minimal. Currently we have not been depreciating the homes.

Adjusted Gross Income: $86,274+$17,798+$15,550 = $119,622 (CCB Is not taxable)

Taxes: Federal, Provincial (included pretax deductions from above here): 32.48% or $38,853

Subtotal: $89,301

Current expenses (Budgeted):
House 1    $ 16,847     $ 1,403.96
House 2    $ 9,987     $ 832.26
House 3    $ 0            $ 0
Home    $ 24,509     $ 2,042.39
Mort Subt    $ 51,343     $ 4,278.60
H Tax    $ 11,520     $ 960.00
H Ins x 4    $ 2,371     $ 197.58
C Ins x 2    $ 1,380     $ 115.00
Gas            $ 600    $ 50.00
Pension    $ 8,694     $ 724.53
Food            $ 4,200     $ 350.00
Phone    $ 900     $ 75.00
Internet    $ 924     $ 77.00
Debt Pmt    $ 4,651     $ 387.55
Electricity    $ 1,236    $ 103.00
Nat. Gas    $1,608    $134.00
Water    $ 1,200    $ 100.00
Netflix    $ 168    $ 13.99
Shopping    $ 2,016    $ 168.00
Eating out    $ 600    $ 50.00
Kids Activ.    $ 2,412    $ 201.00
Misc            $ 221    $ 18.42
            $ 96,044     $ 8,003.68
      

We average very close to this number with the categories adjusting slightly each month. (April was $7,074 but March was $9,332 as a result of five weekly mortgage payments instead of four; expenses have been pretty steady for last two years). On the pension my employer matches another $6,955.49 per year but money there is locked up til 2036. Fund averages 6.2% return per year.

For mortgage payments:

House                   Princ        Int              Tax              Act WK Tot
Home   2.80%    $ 311.72     $ 159.60     $ 100.50     $ 571.82
House 1    2.75%    $ 104.39     $ 87.67     $ 53.72     $ 245.78
House 2   2.59%    $ 257.04     $ 66.95     $ 46.49     $ 370.48

Owe $295,796.27 on home paid off in 14.8 yrs, $165,566.25 on House 1 paid off in 22.2 yrs and $133,907.58 on House 2 paid off in 8.94 yrs. They all can be renegotiated in 2021.

Expected ER expenses: None, Canadian

Assets:

Home: Paid $362,500
House 1: Paid $174,900
House 2: Paid $235,000
House 3: Paid $22,000
Bank Acc: $59.67 $1318.27+$24,620.00+1,536.49=$27,474.76 from Margin Acc/TFSA transfer + Did some landscaping last weekend $4,049.81
Pension: $51,585.46$52,079.51
Margin account: $25,087.67 net equity$3,999.67 - Options contracts -expire between now and Jan 2019 -No Leverage
TFSA: $1,916.25$306.24
RRSP: $66,107.69$65,535.38
Truck: $5,000
Van: $3,600
Trailers/Equipment: $10,000
Subtotal: $957,756.74$962,395.56 $ 938,970.61

Liabilities:

Home:    $ 295,769.27$ 295,455.99
House 1: $ 165,566.25$ 165,461.12
House 2: $ 133,907.58$ 133,649.56
House 3: $ 0
LOC 6.7% int only pmt: $16,100 $16,300 $0.00
RRSP Loan 2.7%: $56,770.54 $56,509.06 PMT of $387.55 / mo 15 yr term
Credit Card: $2,122.00 $2,423.29 $826.29 (Clear this balance every month)
Family Loan: $5,000 (Pay back whenever possible no interest) $0.00
Subtotal: $674,974.16 $674,799.02 $651,902.02

Net Worth: $ 282,782.58$287,596.54 $287,068.59


Discussed Side Hustles:
   Side Business Have some equipment 1-2 weekends per month for 5 months @ $500 per day = $5,000 potential
   Exchange Hosting: $500 per mo x 10 mo = $5,000 potential
   Finish Basement at House 2, Cost estimated at $12,300: Increase rent $400 per mo = $4,800 potential
   Demo house # 3 and build new Cost estimated at $280k, would tie up spare time for 8 months, and could bring in approximately $2,400 in rent / mo
   Renovate house # 3 Cost estimated at about $85k, would tie up most spare time for 3 months, Could bring in approximately $1,000 in rent / mo

Specific Question(s):
1.   Any general advice on how to approach our finances differently?
2.   Best way to tackle our debt to hit goal: Retire in ten years (set at 31)? Re-financing debt?
3.   In nine years the first mortgage is paid off, should we switch rent towards investing or debt?
4.   I have $55k ish in TFSA room and $27k in spousal RRSP room. Theoretically I should be able to get a similar term to the RRSP loan. Should I take out another loan and invest it?
5.   Any thoughts/discussion on side projects or budget are welcome.
6.   Can we retire in 10 years?
« Last Edit: June 22, 2018, 03:26:41 PM by Swish »

marty998

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Re: Case Study - 32 Looking for advice on FIRE
« Reply #1 on: May 10, 2018, 03:50:09 PM »
At what age / income level does the child care benefit cut out?

You may need to budget for that when it happens, because without it you might find yourself in a bigger hole.

I'm not going to scream "sell the rentals" or anything like that - the interest rates are low and houses appreciate in value, and you are eating into the loan balances quite quickly too.

But I worry that it is all on you, and if you lose your job for whatever reason you are fucked. Liquidating the leveraged equity portfolio in a time of need will only buy you a couple of months breathing room. Liquidating House 2 appears to be the emergency plan?


Swish

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Re: Case Study - 32 Looking for advice on FIRE
« Reply #2 on: May 10, 2018, 04:38:27 PM »
The benefits reduce at age six by about 1/3 then then are cut completely at age 18. As you earn more it reduces the benefit.
"families with three eligible children: the reduction is 19% of the amount of AFNI between $30,000 and $65,000, plus 8% of the amount of AFNI(Adjusted Family Net Income) over $65,000"

I have not built those benefits cutting out into my projection so thank you for calling that out.

I think you nailed the anxiety I am feeling. Our plan is entirely based on my employment and our lack of an "emergency plan".

I have not considered liquidating one of the houses but am open to anything in a pinch. The plan would be to liquidate the equity portfolio. You are right it is not very much buffer. I do have the option to reduce my pension matching by $360 per month. If I did that I could put that money towards either investments on my own or towards paying down debt. The only reason I would even consider this is that the money that I put into the contribution plan cannot be drawn out until age 50. I would be walking away from free money to have more flexibility in a fund I control. Not sure what the right call on this is though. Part of my deductions are for employment insurance and I believe it tops up to 55% of base salary for a couple months while looking for a job. I have never used it before though and am unsure how reliable it would be.

Once we hit 2021 and I can convert the mortgages from closed to open it will provide more room to adapt. If I lost my job I could refinance the rentals so that they become cash flow positive. This obviously would hurt the current FIRE plan but we would have a lot easier time surviving.
« Last Edit: May 10, 2018, 04:45:03 PM by Swish »

Hirondelle

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #3 on: May 11, 2018, 02:01:43 AM »
First of all I'd like to compliment you on your expenses. Your non-mortgage expenses are very reasonable for someone with such a (formerly) high income.

It sounds like you've put a lot of pressure on yourself by taking up 3 mortgages on an aggressive repayment schedule. Your gap is only $500/month so that doesn't sound too high. You could have another critical look at expenses, but I don't think that gonna get you the full $500 unless you'd maybe drop one of your cars (which does sound feasible with you working within walking distance and your wife staying at home).

Regarding your side hustles; it sounds to me like all of them would be your job. Some require quite a high investment so I wouldn't jump into that as you're already having negative cash flow. Is there an option for your wife to have a little hustle? You don't say anything about her previous job/education, but could she maybe work some hours in the evenings/weekends (if you're able to watch the kids) to cover the $500 gap? Even daytime babysitting for 1 child 1-2 days/week could probably already get you to back into positive cash flow. What's meant by "exchange hosting" as a side hustle?

How are chances that your income at new job will increase over time (i.e. how temporary is this situation)? Does the gap need to be covered for just a year of 2 or all the way until house 2 is paid off?

-- All this advice assuming shit doesn't hit the fan and you don't suddenly have a job loss or health disaster. In that case I'd just immediately liquidate one of the houses. But in your current situation I think there's other approaches that should/can be explored first.

Ben Kurtz

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #4 on: May 11, 2018, 09:16:21 AM »
First let me congratulate you on getting rid of a soul-crushing commute. Even at a substantial cost in lost wages, that will likely improve your life a great deal.

Also, your basic balance between wage income and savings is also very good even with the pay cut -- on your numbers it seems you have a savings rate of about 60%+, which if you were starting from scratch would give you an 11 year horizon for early retirement on the typical assumptions used around here. But you already have a net worth in excess of $280,000, which means that 9-10 more years is fully realistic and perhaps even conservative. 

But now for a bit of face-punching on the subject of your investment strategy: You are extremely levered up in real estate -- your overall LTV ratio is around 70.5% -- and you are currently running cash-flow negative even with very reasonable personal living expenses. I see what you are trying to do here in terms of building net worth, but you are running very substantial risks that are probably not worth running. Any one serious disturbance and you'll quickly go cash-flow insolvent and likely be compelled to start selling assets at sacrifice prices, which is a very fast way to undo all the hard work you've been doing so far. My strong suggestion is to slow things down by a few notches.

Also, I don't understand how you can consistently realize $17,798 of investment gains per year (dividends + capital gains) on less than $150,000 in securities investments, counting pension and retirement accounts. Unless your margin brokerage account with $25,087.67 in equity value is heavily leveraged as well, which likely only adds to your over-levered balance sheet.

In my view, the right answer here is to sell Rental House 2, apply the $100,000 net sale proceeds to paying down (1) the family loan, (2) the LOC at 6.7% interest, (3) the RRSP loan at 2.7% interest and (4) either the primary residence or the Rental House 1 mortgage. Hold back about $10,000 as an actual cash cushion. After that, open a HELOC on the remaining property which has the greater equity cushion.

If you don't do the above, at the very very least, open HELOCs on Rental House 2 plus your primary residence, repay the high-interest LOC out of that, and start making a couple hundred dollars of monthly mortgage principal repayments out of a HELOC. To some extent you're shifting debt as opposed to paying debt down, but you'll probably save several points on interest relative to the LOC, and you need to build some kind of actual cash buffer in a basic checking account given the monstrous fixed obligations you've set for yourself, and you're still paying down mortgage principal to some extent.

A mortgage charging you 2.7% or a HELOC charging you let's say 3.50% or even 4.0% are not high priorities for immediate paydown. You are better off clearing away the higher interest loans and building up your unlevered investments a bit than you are paying down those mortgages faster, especially at the expense of locking yourself into fixed monthly payments that are higher than your actual cashflow. Another thing to look into would be to remortgage these properties again but with loans that lock you into somewhat less principal paydown each month. But I still think that leaves you over-levered. 

Also, stop leveraging your investments in marketable securities if that's what you've been doing in your regular brokerage account. Ever hear of margin calls in a down stock market? How do you think you are going to meet those? And if you fail to meet them, you're forced to sell your stocks into a 2008-09 style market crash, even if personally you would have preferred to hang on to them on the notion they would eventually recover.

In terms of the tear-down Rental House 3 that you bought for $22,000 cash, clearly the best bang-for-buck strategy on the numbers you present is the shorter and lower-cost renovation, rather than teardown and rebuild. The more expensive project is 10% ROI (before ANY operating costs are factored in) while the less expensive project is 14% ROI. If you can get permanent financing at something like 50% LTV with reasonable rates then your cash-on-cash return after expenses and vacancy will probably be quite good. To get from here to there, if you can get a non-recourse construction / renovation loan to cover all those costs then God bless you. Under current conditions I don't see you having enough borrowing capacity to carry even the cheaper renovation job off safely. If you sell Rental House 2 as suggested above then there might be a way through involving some kind of construction / renovation loan secured by Rental House 3 combined with draws on a HELOC and a very patient general contractor who'll wait on his final progress payment until the house is finished and eligible for some kind of permanent loan financing (which pays off the renovation loan, the final contractor payment and, to the extent possible, the HELOC draws). Even that scenario still leaves you highly levered, so the right move might be to sell one of Rental House 1 or Rental House 3 at that point to reduce leverage.

Given your earnings rate and your basic living expenses rate, you don't need to take such extreme risks to achieve FI/RE within the next 10 years. Your biggest risk is that you are spread too thin with all this leverage. More houses increases the odds that a roof suddenly needs replacing (or some other cash need comes up), decreases your maneuvering room with high committed monthly payments, leaving you with a contingency plan that involves the prompt liquidation of volatile assets. This is a recipe for the prompt destruction of your net worth. Develop a simpler, lower leveraged, more flexible investment strategy (ideally involving some good chunk of you net worth placed in liquid passive investments like stocks and bonds) and stick with it. With that, you'll be fine in the end.

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #5 on: May 11, 2018, 11:28:50 AM »

If you don't do the above, at the very very least, open HELOCs on Rental House 2 plus your primary residence, repay the high-interest LOC out of that, and start making a couple hundred dollars of monthly mortgage principal repayments out of a HELOC. To some extent you're shifting debt as opposed to paying debt down, but you'll probably save several points on interest relative to the LOC, and you need to build some kind of actual cash buffer in a basic checking account given the monstrous fixed obligations you've set for yourself, and you're still paying down mortgage principal to some extent.

I have never thought of this. Thanks for the suggestion. I have always felt like money sitting in my bank account or emergency fund is not working for me so when ever I get a balance I tend to use it to pay some thing off or find another investment to throw it at. So given my lack of experience here:

How much $ should I have given the current situation?

Lots of typical advice is 3-6 mo bills but that seems like an absurd amount of money just sitting around.
« Last Edit: May 14, 2018, 08:17:13 AM by Swish »

Ben Kurtz

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #6 on: May 14, 2018, 12:08:57 PM »
Under your current circumstances, I'd say $10,000 in cash plus HELOCs from two different lenders on two different properties with good-sized equity cushions would provide adequate liquidity support. Given your fixed commitments I wouldn't advise relying entirely on HELOCs, because banks can close those lines on fairly short notice if bad things happen (either to you or the economy at large), so there needs to be a cash component of over one month worth of cash flow needs to buy you at least a tiny bit of breathing room if you run into problems.

If you really want to do something with Rental House 3, I think you really need to sell off Rental House 2 to provide the necessary liquidity and relief from one of the mortgage obligations. There is no way you can safely pull that project off on current leverage levels and your current cash flow profile.

You need to be safely under 50% LTV and be substantially cash-flow positive (including after committed principal-reduction paydowns as part of your mortgage payments) to be playing around with investment real estate. You are far outside those parameters and need to bring things back under control before the next recession or financial downturn takes place.

You also need to avoid leverage, margin loans, option strategies and everything else like that in your brokerage accounts if you want to play the property game. Right now, in addition to your massive leverage, you have four jobs and it's more than one person can properly handle: father to your family, your salaried day job, your landlording responsibilities and your securities trading activities in your brokerage account. Be a good father, stick with your day job, de-lever your real estate portfolio, and stop pretending to be a Wall Street quant. The whole point of the blog behind this forum is that becoming financially ready for FI/RE in 10-15 years is actually pretty straightforward for folks with regular jobs who happen to be in the upper half of the North American income distribution. Don't over-complicate things, and in so doing, set yourself back needlessly. Earn a good salary, control personal living expenses, invest reasonably, and enjoy life with your family and friends.
« Last Edit: May 14, 2018, 12:10:44 PM by Ben Kurtz »

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #7 on: May 14, 2018, 02:07:41 PM »
@ Ben Kurtz

Thanks for the sober advice. I often feel like I have to many iron's in the fire and am a little debt drunk. I sold off the margin account this morning. Plan is to pay back the family loan and LOC this week and should have roughly $4,000 towards that $10,000 buffer so it is a start.

In 2021 when I can renegotiate my mortgage terms would it make sense if I re-amortized the mortgage over 30 years and then took the payment difference and added it to the investing/savings side??

At that time If I did this my cashflow situation would reduce from $4,278/mo in mort pmts to an estimated $1,908/mo giving $2,370 in flexibility every month. Essentially I could sock away another $28,440/yr in savings. 

I estimate my debt should be down from $674k to $550k in 2021. If I lock it in at the same pace for another 5 years at that time, in 2026 my estimated debt would be down to $283k.

This would slow down the debt repayment but substantially improve the cashflow.

Ben Kurtz

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #8 on: May 15, 2018, 07:47:15 AM »
I am all in favor of lowering your committed monthly monthly mortgage payments as much as possible, all things being equal. Of course all things are never equal -- a longer amortization period or maturity date on a loan (or interest only structure with bullet repayment at the end) generally leads to higher interest, a variable rate, or some other cost/risk, so you need to see what the yield curve is at the time you take out the loan and then find the most comfortable amortization / maturity period given your cash flow needs.

I am reasonably comfortable with the notion of taking on debt of the sake of investment (not for the sake of consumption) and living with investment debt long-term, but it is a tool to be respected and used carefully. Read some short books on accounting, investing and finance in order to develop a deeper understanding of how all these elements fit together -- pick up anything reasonably sane that you find at your local library. You need to control leverage, which is the ratio between the value of what you own and the value of what you owe, profitability, which is the measure of how much your investments are earning and gaining over time, and cash flow, which is the measure, over time, of where your cash is coming from and where it is going. Each of these three key concepts (which directly map onto the three major types of financial statements in corporate accounting, by the way: the balance sheet, the profit & loss statement, and the cash flow statement) are distinct yet interconnected. One of the most crucial points to keep in mind (of many) is the distinction between profitability and cash flow. Your rental houses could be insanely profitable, combining high rents with minimal taxes, insurance, repair bills, etc., but if you've committed to a very aggressive mortgage paydown schedule, all that profit is locked up and unavailable to you in the form of ready cash, which can cause serious headaches.

On the leverage side, if you are playing at the landlord game, I suggest keeping your loan-to-value ratio at no higher than 50%, long term. With $950,000 in assets, you should aim to have no more than $475,000 in debt outstanding at any given time -- mortgages, car loans, margin loans, etc. Between closing out your brokerage account and selling a rental house, you'll probably get things well under 60% LTV, at which point you can pause for breath but not get too comfortable. Getting your balance sheet down to $700,000 in assets and $420,000 in debt would be a good start. You'd have the same $280,000 net worth as at present, but your leverage and risk profile would be a whole lot saner, and as a byproduct it would probably improve your cash flow situation a whole lot.

On the profitability side, the one thing to keep in mind is that it would be a damned shame if you spend all this time working on rental properties only to long-term consistently underperform passive stock-market investments. So run your numbers carefully before jumping into each investment or project.

On the cash-flow side, the model to strive for -- at least during the accumulation phase while you still have your day-job -- is to have your real estate investments be at least cash-flow neutral after debt service and committed mortgage paydowns (and, obviously, after regular operating costs). All the profitability can be swept into the illiquid appreciation of the underlying asset and the declining mortgage balance, since your wages put food on the table, but you don't want your ability to keep ownership of your investment portfolio to be contingent on your uninterrupted employment at your day job. Being dependent like that adds a vast amount of stress and risk to your life which is simply not worth running. That's the boat you find yourself in today, and you need to get out of it. Once you quit your day job, you'll need to tweak things a bit in order to extract cash flow for living expenses from the real estate portfolio. But you can deal with that part later.

Given your personal spending habits, you could easily FI/RE on a paid off house, $1,000,000 in stock market investments and absolutely no debt (see: 4% safe withdrawal rate). With good rental properties, you could probably knock a few hundred grand off the total required net worth and sustain a little bit of leverage. These are not difficult numbers to reach within the next ten years on your earnings. I would also counsel you diversify your investments. Many people do very well with aiming for something like $400,000 in a very simple stock-and-bond index portfolio in their retirement and brokerage accounts and $400,000 of equity locked up in lightly leveraged rental properties. Having your whole nest egg locked up in one asset class in one specific geographical area carries risks of its own. Remortgaging so you can have some free cash flow, and then directing that into good passive investments, would be a very good idea.

Finally, re-reading your posts, perhaps the first real estate project to embark upon is finishing the basement in Rental House 2. If the tenant is willing to pay more rent, then it will probably boost the re-sale value as well. Worth checking around to see if the boost in re-sale value is substantially higher than the cost of doing the work -- there is a good chance it will be. If so, get a HELOC on that house, draw on it to finish the basement, and then proceed with the plan of selling one of the two operating rental houses, then renovate Rental House 3, then probably sell a second rental house, and then build liquid savings for a little bit before buying your next rental house.
« Last Edit: May 15, 2018, 09:05:35 AM by Ben Kurtz »

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #9 on: May 15, 2018, 11:01:39 AM »
Thanks again for taking the time to hash this out with me @Ben Kurtz. Most of my friends/peers think I am a weirdo because we do not spend much/drive expensive cars.

If:
L=(R-(1-N)*C)/N
L= Leveraged Return
R= Yield (on purchase price)
C= Cost of Borrowing
N= % of Equity

House 2
Yield   5.6%
Interest Cost   2.59%
Equity %   14.0% ($33,000 DP/subsidy from paycheck)
Lev. Ret.    24.1%

If Renovation is completed (Could use family loan again and have 0% interest or payments for a while)
Yield   7.7%
Interest Cost   2.59%
Equity %   14.0%
Lev. Ret.    38.7%


House 1
Yield   8.9%
Interest Cost   2.75%
Equity %   2.9% ($5000 down on this house)
Lev. Ret.    218.4%

I don't know of any stocks/indexes that consistently spit out returns like this except say options contracts. Typically with my investments when I use leverage I measure the ROE or the leveraged return. Take house #1: My $5,000 outlay has a payment of $1,065.05/mo Princ int and tax and insurance of approx $50/mo. This property builds me over $10,920 in net worth every year assuming I collect the full $15,600. House #2 is not as good but still beats the market earning me $7,953 in net worth even though it is cashflow negative (yes I realize that each year this is negative CF the yield declines as I sink more into it, this is just snapshot of today). This does not take into account any appreciation of the asset as I don't really feel comfortable assuming a higher value based on perceived market growth on a fairly illiquid asset.

Given the above returns at what point would you assume the associated risk of owning the rentals (leverage) are not worth the returns?

My personal home carries a much higher debt level with no income generation. Maybe it would make more sense to rent that home out rather than sell the rentals. It would fair about $1800 per mo in our current market.

Theoretically if I can survive for three more years by 2021 my LTV will be much healthier as our fixed payments are so aggressive. At that point I could renegotiate my mortgages to free up cashflow and redirect the payments to savings to help even the distribution. I absolutely 100% agree that I need to shift my % of portfolio more to stocks/bonds/savings to diversify from real estate.

Do you think FI/RE by 2027/2028 would still be feasible with this approach?

Is this analysis is whacked?
« Last Edit: May 15, 2018, 11:13:19 AM by Swish »

Ben Kurtz

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #10 on: May 15, 2018, 12:16:36 PM »
I don't know of any stocks/indexes that consistently spit out returns like this except say options contracts. Typically with my investments when I use leverage I measure the ROE or the leveraged return.

Just from an ROE point of view, the issues here are scalability and the cost of (your) management time. You can invest in stock index funds for the rest of your life with literally zero effort after a couple hours signing up for the account and setting up your automatic paycheck withdrawals. If you get fancy and rebalance once a year it's still a trivial effort. And you can invest as much or as little as you want. These houses cost you time and effort, which should be deducted from the returns at a reasonable hourly rate, which will lower your "passive equivalent" ROE, and there is a pretty severe limit on how much additional equity you can invest in those properties and still get those juicy returns on equity. To scale up further, you would have to get more houses, which would stretch your cash flows even further.

I've already identified your heavy fixed cash flow demands as the key weakness in your setup. Obeying healthy LTV metrics and avoiding over-leverage very frequently helps to improve the cash flow situation, which is one reason I recommend it. Opening HELOCs is another way to provide liquidity support without deleveraging -- it's not a complete solution but it's helpful.

It's not worth getting more rental houses, even rental houses with really high leveraged ROE, if either (a) you are leveraged beyond 50% LTV or (b) your investment portfolio is not robustly self-sustaining and at least cash flow neutral. I'm a fairly conservative guy, I invest in both stocks and real estate, and those are the limits I'd set for myself (in reality, I keep leverage far below 50% LTV because I don't feel a burning need to lever up for higher returns -- I've got plenty to keep myself busy as it is, but if I felt as motivated as you seem to be then I'd set the aforementioned limits for myself).

Your personal home is a personal decision -- if your family is happy to downsize to a smaller / cheaper residence in order to rent out the current primary residence, then you're effectively consuming less and investing more. Nobody here would argue with such a decision. But at the same time, nobody here will give your family too hard a time over keeping your current arrangements. The value of your primary residence does not seem excessive relative to your income and net worth.
« Last Edit: May 16, 2018, 05:21:06 AM by Ben Kurtz »

Prairie Stash

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #11 on: May 15, 2018, 12:59:13 PM »
H Tax    $ 11,520     $ 960.00
H Ins x 4    $ 2,371     $ 197.58

Over half the tax is rentals, so $6000 in property tax, $1200 in insurance, $8000 in interest. You collect 28,800 in rent, so you get $13,600 after expenses. You spend nothing on maintenance on those 2 homes? You can afford it, I'm just not loving the accounting trick where you don't have an associated cost.

For Americans reading - the interest rate will be increasing in 2021, its not fixed for 30 years. If rates rise by 2021, back to 5%, that changes interest from $8000 to $16000 (you may want to argue your principle is decreasing, keep reading). I believe this was called an ARM down in the states before the housing crash. My crystal ball can't predict your rates, its a scary thought. How much room do you have for increased rates within your budget, luckily you have time to figure it out. 

Question #3 Answer
Here's help, house #2, Paid $235 and owe $134K, all interest is tax deductible. Main house is $362 owe $295 - non deductible interest. Why are you paying off the tax deductible loan prior to the non-deductible loan? Stretch the rental loans out in 2021 to 30 years and put the extra free cash against your primary residence. Your primary house should be the first house paid off, not the investment houses.

You have over $105,000 in TFSA room. I'll just mention that part and let you think about it more. If you ignore your spouses TFSA, you're ignoring an advantage you have.

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #12 on: May 15, 2018, 03:19:32 PM »
@Prairie Stash

AWESOME!!! I overlooked something in my budget thank you for pointing that out. The rental house taxes are $3479 combined and their insurance is is $1432. The taxes on the principle residence are higher right now as we have been paying double to catch up the amount we were short the first year of ownership. That bill should reduce to $292.50 per month ($3510.01/yr) from the current $565.37 in July this year. That is a pretty big part of the bleeding we are trying to stop.

Most of the major fixes have been performed prior to purchase. The current tenants are long term and keep up the places. You are right that eventually there should be some. The point though that I should probably budget an expense even if I am not incurring any right now. B.K. already highlighted the need for an emergency fund to cover unexpected events.

What you are suggesting in #3 is the agreed approach.  In 2021 refinancing the rentals so I have stronger cashflows then redirecting the money towards savings and reducing non-tax deductible interest loans (princ mort & RRSP loan).

The facepunch is necessary. We had a very different situation when we got into all this mess and have only been plugged into mustachian ideas for a short time although we have a long way to go.

@Ben Kurtz

I think those are some pretty reasonable limits to set. I see what you mean re being scale-able: If I wanted those higher leveraged returns I could probably borrow another $200k for $10k down but then I'd just be further exasperating my fixed obligations when I am already cashflow negative.

I am glad you think that our home is not excessive based on our numbers. It is the most expensive thing I have ever purchased and the payments have started causing me a fair amount of anxiety since my career change.   

So going forward my goals look like:

a) Burn Debt - maintain a less than 60% max LTV (ideal >50%)
b) Hustle - free up cashflow less debt $1000/mo & more income $500/mo
c) Save Money - increase my market investments to $400k

Plan to get there:

1. Close out stock positions in margin account - DONE
2. Pay of LOC and Family loan by Friday - DONE
3. Build $10k emergency fund by October 30, 2018 (have $4k)+20k LOC buffer-Down to $1000, moved $3k into RRSP
4. Hustle up $6k over summer for 3. - Incomplete earned the 6k but had a vacancy and repairs at rental from tenant damage :(
5. Divert $272.87 from taxes to emergency fund then Spousal RRSP -This is actually $433.33/mo now going to principal house repayment
6. Figure out $500 monthly income to get to 2021 - try exchange hosting/home-care -DONE ($600/mo)
7. Grind it out til 2021. Refinance debt to make rentals cash-flow neutral
8. This is where it gets fuzzy do I pay down non deductible debt first, max rrsp/tfsa's? I lean more towards maxing out my investments as the interest rates on the houses are substantially lower than an expected return. By 2026 I project work pension and other RRSP's to be at approximately $400k but I cannot access the work side until 2036 even though it is a contribution plan.
9. FI/RE (2026)
10. Let debt dwindle down and use it to invest in future income opportunities.

See any tweak's issues above?
« Last Edit: October 23, 2018, 04:12:16 PM by Swish »

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #13 on: May 15, 2018, 04:04:02 PM »
My crystal ball can't predict your rates, its a scary thought. How much room do you have for increased rates within your budget, luckily you have time to figure it out. 

Missed this on first response. If rates went up to 5% I am estimating a monthly cost of $1235 to keep principle payments the same in today's $ or $1029 based on expected debt in 2021.

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #14 on: May 15, 2018, 04:18:42 PM »
Here is an image of what the current debt projection looks like keeping rates the same.
« Last Edit: May 16, 2018, 12:05:54 PM by Swish »

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #15 on: May 16, 2018, 09:09:28 AM »
Swish: Can you get a HELOC for house 2? This could be used for a) Smith maneuver investing (google it), B) your emergency fund.
Taking the extra principal out will allow you to repay all bills and have your emergency fund at any time.

Your new investments should be going into the RRSP and TFSA, as you will not be paying 38% taxes during retirement. TFSA= Free work no taxes, RRSP = Take out a chunk of your current taxes and increase your CCB amounts.

Also, you might want to update the first case-study in order to get up to date advice (just modify in red to show the improvements)

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #16 on: May 16, 2018, 11:55:55 AM »
Also, you might want to update the first case-study in order to get up to date advice (just modify in red to show the improvements)

@Canadian Ben Updated!

As for a HELOC I probably can get one. House number 2 is a rental so the interest is already a tax deduction. My accountant told me to do exactly this just to use the HELOC to pay off the RRSP loan to make the loan interest deductible. He said the time to do it is if the interest rate is less than my non deductible rate+ my marginal rate ie(2.7%*.34)+2.7=3.618% Basically if the HELOC has a rate that low it is a break even. If the rate is lower than that I am saving money on the tax deduction. Mentioned I should do the same thing for a spousal RRSP of $27k ish get the $9k rebate and invest that as well.
« Last Edit: May 16, 2018, 12:01:59 PM by Swish »

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #17 on: May 16, 2018, 12:00:26 PM »
You could use the HELOC to remove the LOC at 6.7%...

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #18 on: May 16, 2018, 12:03:38 PM »
@Canadian Ben Yes I sold the Margin account off on Monday to settle the 6.7% LOC so by Friday that balance should be $0.00 as well as the family loan. See my updated bank account.

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #19 on: May 16, 2018, 12:35:38 PM »
Liabilities:
LOC 6.7% int only pmt: $16,100$16,300

I got confused by that :D

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #20 on: May 16, 2018, 01:01:44 PM »
Sorry had a bill and only had $59 in my account last week It was a small change. I am embarrassed... The LOC is still there as the transfers from brokerage have not cleared the account yet.
« Last Edit: May 16, 2018, 01:27:17 PM by Swish »

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #21 on: May 17, 2018, 05:20:27 AM »
By the way, This isn't an expense: Pension    $ 8,694     $ 724.53  (It's forced savings that you will access somewhere in the future!) ; same thing for home principal payments. You should only have the interest/tax payments in your expenses sheet in order to figure out what your actual expenses are.

Expenses: Shopping    $ 2,016    $ 168.00 easiest one to reduce

In the future, I'd personally bring down the mortgage payments the most possible (not-agressively paid) because i'd rather have liquid money than fully invested in houses, at which point the money is no longer doing anything for you apart from the mortgage returns. (Check out the thread "don't payoff your mortgage"). This would allow you to max out RRSP and TFSA, while the rentals continue to slowly get repaid.
« Last Edit: May 17, 2018, 05:25:36 AM by Canadian Ben »

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #22 on: May 17, 2018, 10:30:08 AM »

Expenses: Shopping    $ 2,016    $ 168.00 easiest one to reduce


Almost $80 of that is diapers 1-2 boxes per mo. Still worth having a look again though. Made the mistake a few years ago of recommending reusable to SO. They are a pretty cool person but I think there may have been a poisoning attempt that night. 4 yr/old is done potty training finally this year so it should start coming down. My daughter had it figured by two but the boys have been slower on the uptake. Its a shit expense.
« Last Edit: May 17, 2018, 11:43:40 AM by Swish »

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #23 on: May 17, 2018, 12:07:03 PM »

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #24 on: October 23, 2018, 04:28:37 PM »
I am happy to report that we are now cash flow positive. Here is the monthly breakdown:

$262 - property tax adjustment
$600 - Exchange student hosting
$ 80 - YOUNGEST IS POTTY TRAINED!
$230 - CCB Increase
$1,172 - Total

This has left us with approximately $600 of positive free cash flow. Currently $433 per month is going against home but plan is to shift this to emergency fund and TFSA's in January 2019.

Lews Therin

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #25 on: October 23, 2018, 04:37:42 PM »
You've done some excellent work! Want to reconsolidate into a new post with where you are at, and what you are looking for? (Hard for me to figure out exactly what to optimize right now with all the changes.)

Swish

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Re: Case Study - 32 Looking for advice on FIRE since career change
« Reply #26 on: October 25, 2018, 10:42:53 AM »
Thanks, this was just to provide a final update to this post that we got out from being underwater every month. I have been thinking about starting a journal to sort out and track my thoughts so maybe I will post our current state there.