Author Topic: So close, yet so far - Net Worth high / cash flow poor / want to quit ASAP -How?  (Read 2681 times)

Earlybirdretirement

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Life Situation: Married for 1 year, 45 yrs old, 2.5 year old child, 35 year old husband, also have a MIL living with us who my accountant advised we will be able to claim as dependent this year. 
I discovered MMM/FI about a year ago and finally had the clarity for the journey I was seeking.

Gross Salary/Wages: 140k (me only).  My husband has had several health issues, but we anticipate a more regular income within a month or 2. 

Individual amounts of each Pre-tax deductions 401k, HSA, FSA, IRA, insurance, etc. -
30% 401k ~ 42,000/year
FSA ~ 5K/year
Health Insurance cost- 5.4k/year

Other Ordinary Income: Starting up a side passion business, but no income yet.

Qualified Dividends & Long Term Capital Gains: N/A

Rental Income, Actual Expenses, and Depreciation:
Duplex Property 1 income-38k, expenses - 30k
Duplex Property 2 income - 43k, expenses - 32k (currently evicting a nightmare, planning to try air B&b which may boost income to 60k

Adjusted Gross Income: This should equal the additions and subtractions above.
87.5k -W2
19k rental

Taxes: about 28% total, live in WA State. 

Current expenses:
Home - 3k - but have roommate income of 1.1k to offset
Car - 600 lease (I know! New cars were a weakness before discovering FI, I plan to TURO once I quit to offset to 0, I’m currently pre-paid for about 4 more months.)
Childcare - 2-2.5k dropping to 800 in September (I know, insane, but over in September!)
Utilities - 450
Car insurance - 150
Internet & phone - 200
Food - 700 - assuming I’ll be able to get this more under control w/less work
Diapers/Hair/clothes for mom & child - 100
Entertainment/eating out - 150
Gifts/mom - 100
Total:  $4550 starting in September

Expected emergency expenses: 15k new roof for rental #1, 19k new retaining wall & fence rental 2, 30k sewer line  & repairs at primary residence, 10k additional rental repairs & conversion to air b&b. TOTAL: 74K
Additional planned investment 60k for conversion of garage to air b&b


Assets:
Cash: 6K
Vanguard -17k
401k -504k (targeting not touching this till 59 to allow growth)
Primary Residence - 900k
Rental property 1 - 580k
Rental property 2 - 600k
Pension value - 139k if cash out now (assuming about 100k value after tax hit if I chose to take now)
Total:  2.746 m


Liabilities:
Primary mortgage - 490k/3.75%/30yrs/3k/28 years remaining. (purchased 2015)
Property 1 - 275k/3.75%/20-year/18years remaining (purchased 2011)
Property 2 - 260k/3.25%/15-year/12.5 years remaining (purchased 2013)
Visa - 18k (15K of this is for sewer, typically pay in full)
HELOC - 20k (pre FI discovery, I deposit my paycheck here, so it’s currently not a monthly expense)
Total:  1.025 m

NW: $1.7m

Specific Question(s):
I’m a late FI convert and realize I have a ways to go to get my spending further reduced. 
I’m very asset heavy in non-liquid RE, including a primary residence that has high expenses, but I plan to hack to get close to 0 mortgage.  The garage convert air b&b could easily earn 1-3k/month, but rough estimate of 1-year to get through all the work.
I’ve been hit with tremendous emergency expenses that I didn’t have appropriate cash reserves for and my FU runway money fund (17k) I started will likely be depleted to pay for some.
I’m very passionate to finally get started on some different work that will provide me more flexibility to stay home with my daughter, work less, and allow me to project manage converting our garage to an air b&b.  I think I could start earning 1-2k cash/month fairly quick, but want to estimate 0 for 12 months… 
My husband should be bringing more regular income soon, but I’ve been independent for most of my 45 years, it’s so hard for me to consider counting on it. 
I think I need to estimate about 1k/month for health insurance for family of 3, but again, hoping husband may get a job with Health insurance. 
I’m feeling so desperate to make the leap now, my step father’s health is failing and I want to be there for him and my mom.  I feel like I finally found passion projects/work I can truly enjoy and terrified I’ll let it slip through my fingers if I do OMY.   While I don’t HATE my job, I just feel very over it.  22 years at a corporate job…
I really want to try air b&b on one side of duplex and the other rental property is very stable - as you can see my interest rates are low, but the payments are high due to the shorter terms.  It just doesn’t feel right to sell when they’ve been appreciating well (12%!) and typically net cash flow.
I wanted to cash out pension to fund garage conversion….figure I can live with the tax hit as long as I’m essentially using it to start my pension now instead of 20 years from now…should I use it as runway money instead?  This seems terrifying to me, I want to make sure I invest it…
My main question is really looking for someway to make the FI leap ASAP without selling the rentals.  Should I do some cash out and re-fi even though rates are higher?  Should I go ahead and sell one duplex?  I do have the capability to split one and sell as a condo unit, but it just doesn’t feel like the right thing to do. 
Is there something in front of my face I’m not seeing?  I really appreciate any different perspectives or advice…
« Last Edit: June 24, 2018, 12:56:42 AM by Earlybirdretirement »

Earlybirdretirement

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Should I move this to ask a Mustachian?  I'm just really hoping for some ideas or opinions...I feel like selling 1/2 duplex seems like answer, but it feels so short-sighted...

Half Stached

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It seems like you have a few options...

First, do you want to stay in Seattle? If you sold out of everything and moved some place cheaper, your expenses drop considerably. 1.7m net worth converts to a very comfortable 68K/year at a 4% withdrawal rate. You've already expressed a willingness to eliminate the $600/mo car lease and not working would eliminate $800/mo of child care. This would reduce your expenses to $4550 - 1400 = $3150 +/- what ever the change in housing costs you incurred (probably a net gain, even taking into account paying for MIL). $3150/mo is equivalent to $37,800/year - after paying health insurance you would have about $20K extra every year, before even looking at other low hanging fruit (like reducing the cell phone bill and food costs). You could retire tomorrow!

You could stay in Seattle, and instead of retiring, become a full time landlord and do airB&B. It sounds like this is the path you are considering - is that correct? If so, I'll admit I have little experience/knowledge of this space. However, I bet others here on the forum can help.

If you truly want to retire but stay in Seattle, you end up in a similar spot to ours: we also live in Seattle, with a net worth of about 1.6m. We own a non-Mustachian condo (cheaper than your home, but not much). With this, I am intending to retire in 2019 and we are looking at increasing our net worth by 300K by end of next year to make this work. Some things I would think about in this case are:

 * Your properties are assets of 645K, and you are making 19K/year - a 2.9% return. However, it's unclear if this includes the short term expenses you see for these properties. If not, you are betting strongly on the continued growth of the market, but even that doesn't account for the headaches they seem to be creating for you. An index fund is much less pain, and more liquid. While it does sound like you have a fair bit of RE experience, I would be happier with this money in an index fund.
 * Consider how much of your emergency health expenses are truly one time, and how much recurs. We started down the FIRE path 3 years ago and we have needed to re-evaluate our expected out of pocket health expenses along the way. If your husband does have several health issues, I'd make sure your plan can handle some flexibility here.
 * A 60K investment to make 12-24K/year from an airB&B sounds amazing. However, it also sounds like you would be cutting into your safety net fairly significantly to get this started. How sure are you of this income stream? What are the risks associated with it? Perhaps one path to explore here is to cut back your work to half time to get this started. If it takes off, then great! If it doesn't, you have a safety net.

Earlybirdretirement

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Thank-you @Half Stached, I like that name :-).
Yes, I wasn't very clear about really wanting to stay in our primary home.  I know it's so expensive, but feel we can make it reasonable with the roommate & potential air b&b income and I'm really hoping to make it more of an urban farm as I transition to FIRE.
You make a good point on the return on the RE though.  I think I've lived through so many major market downturns that I like the diversity of income....need to look at the numbers a little more closely.
I think a big part of my issue is just fear. I think I'll make anything work, but the security of that job and having this old mental model of 'they pay me so much more than so many others...' It's just really hard for me to imagine quitting, even though it's all I want to do.

Thank-you for your input! 
Pam

Calvawt

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I would look at unlocking some of your property equity for the needed cash or see if a rental refi makes sense.  I know the low rate goes away, but even at 5%, it would help fund a project that should generate higher returns.

I wouldn't touch the pension.

Finances_With_Purpose

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I'll throw in a few quick thoughts.  But overall, you have a lot of options.

First, and most importantly, you're paying a lot for the privilege of living in a very specific location.  Your easiest maneuver would be to change your living situation by selling your house(s) and moving elsewhere. 

If you did nothing but that, you would have $2.746M in the bank (approximately), which would allow you an income of almost $110k at a 4% withdrawal rate, or $82k at a 3% withdrawal rate.

Either way, that's rocking!  You have enough saved to pull down an income almost equal to the average American household income - without ever working again.  This is a nice place to be.

The flip side of that is that you're paying a tremendous amount to live in a very specific place.  I'm all for valuing where you live - social capital - especially when family and social networks are at play.  But you might consider some in-between options, such as moving out to a more distant suburb.  You could then commute into the city once or twice a week for whatever draws you to the city.  And taking a new, more chill job farther out as well.  Combine those, and you might have a whole new, stress-free lifestyle that you really enjoy. 

I would get creative with your geographical options and see what appeals to you.  What would you do if not this job?  Would you still want to work at all?  Try working part time?  Could you negotiate something part-time or remote with your current employer if you decide that you're set on leaving?  You might be surprised what will happen once you tell them you're leaving entirely - it gives you a lot more bargaining power. 

Think those things through.  Explore options.  Invest in yourself in terms of figuring out what you want to go TO, not just what you're escaping from. 

I love this book as a means of doing that - basically career coaching in a book.  For now, maybe consider a mini-vacation to consider your options, get advice, and think about things?  It would also give you a break.

That book specifically talks you through the things we talk through on this forum, in more detail, such as how to spot the next thing, how to plan for the income change, and how to make plans so you're not just taking a flying leap into the unknown.  It's better than what anyone could type here in any reasonable period of time.

You mention that all you think about is quitting.  Knowing that, I would recommend you start taking steps to find out what's next (to get you past that mental block of "this job" or "nothing").  Find some things you want to pursue *more* than that job.  What would you do if you didn't have to get paid for it?

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Next, I'll offer a general suggestion, based upon my own life experience: you sound like you have a hard time making changes.  Many of us are like that.  I am, my wife is, and so on.  So I get the hesitance to embrace big changes or to make sweeping ones. 

Because of that, I suggest you really start looking into what's next re: geography, housing, and so on: just see what other options there are for you.  Then the picture may get clearer. 

Your net worth gives you options.  The one thing it won't ever give you: more time.  You can always get more money, but your time on this earth is limited.  I would be mindful about how I chose to spend my time: what type of life would you look back on with fewer regrets?  It sounds like you're considering that question, and it's tugging at you to make some changes. 

A wise mentor (with long with white beard) put it to me this way once: "I don't regret the things I did, I regret some of the things I didn't do."  We humans tend to have too much inertia...at least I know I do.

Since then, I have downshifted in my career in order to spend more time with family.  It's a decision that has only brought dividends to my life, and partly as a result of that, I like what I do now more than ever before.  It's easy to go to work every day when I know (1) I'll add some great value, (2) the value will be appreciated, and (3) I won't have to trade off my family/time with kids/parents/etc. in order to do it. 

Ironically, too, as I value myself and my time more, others are forced to do the same. 

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Next, I'll add this about the financial specifics: you have options.  I already mentioned this, but I would strongly reconsider your primary home and how you might unlock the equity there AND in your rentals.

Also, rentals can be akin to a job: they still require work. 

More specifically, though: do NOT think about cashing out the pension.  That's a bad idea no matter what way you go moving forward.  You take an irreversible 25-30% loss on that (taxes) plus a future tax on all returns.  And you get to pay those taxes in a high-income year, instead of one where you can withdraw only what you need to spend in order to get by. 

Moreover, your net worth is already around 80% real estate.  So it makes no sense to move more money that way.  You say you want income diversity, and if so, you should want to do the opposite.  For precisely that reason, in fact.  You're heavily weighted in a single asset in a single town.

As for real estate, I would do a post over in the real estate/landlording forum.  You need to get specific. 

I'm not a landlord right now, thankfully, but I don't see the value you're getting for your equity.  You're putting in hours of work, adding more capital, and you're still only getting a small return, if any.  I'm not convinced it's a good expense. 

Plus, are you budgeting out maintenance?  If so, are you budgeting enough?  Why is the roof an emergency?  Or the sewer on a credit card?  Those types of things are part of your rental budget, or if not, they need to be. 

You want to budget approx. 1%/year (roughly) for those things and have a sinking fund to cover it.  I'm concerned that you're showing emergency expenses out of your personal cash flow that should instead come from your real estate cash flow.  This implies that your real return may, in fact, be negative - you're paying to own these rentals, rather than them paying you.  At best, it's not very positive. 

You didn't give us all the details here, but anyone would need that info to give you much insight into whether these properties are worth keeping or not.  It sounds like you would be better off selling them all, but I won't say that affirmatively without all the info. 

You want to do a deep dive on your rentals, budget, maintenance budget, property management budget, and so on.  You may well be putting cash into these properties from your current income, and if that's true, you may really suffer if you try to retire without selling them first and then need extra cash flow to stay even. 

Finally, I recommend that you consider something: your net worth is 80% residential real estate in a single metro area.  You are really heavily concentrated. 

This isn't diverse, or spreading out risk.  You're making a very large wager about the future of that economy.  But what happens if the major employers all shut down or move?  (Say, because the city is taxing each of their employees, for instance.) 

I know in my case, my net worth would suffer (or benefit) as the market does, and I would continue owning what's left of those employers or probably own some of their successors and competitors.  But in your case, you might suffer a tremendous loss. 

We like to think we're going to get the same returns that we have before - which is why everyone is piling into the market *now* that it's on a historic rise, just like everyone is piling into real estate in really hot markets - but you might, in fact, be well-advised to cash out a lot of that real estate now.  You can't count on appreciation to make your cash flow work, or even to continue at the rates it has been at there - historically, those types of rates are an anomaly. 

Plus, you have an opportunity to cash out your appreciation and eliminate debt before you retire, which would make you more stable. 

I would be a lot LESS nervous retiring with a mixed portfolio that included stocks, equities, and other things, even if it included some real estate, than a portfolio almost entirely made up of one type of real estate in one single geographical location. 

Amazon, Microsoft, and Boeing could all go bankrupt today and I would have a bad day, but not the kind of bad day that you might have.  You've got a really large bet going that the City of Seattle won't implement ruinous policies or suffer other catastrophes.  If Seattle ever goes like Detroit, you wouldn't be financially independent anymore...and the job market won't be great either.  Best to have your eggs spread around a few more baskets...

Everyone thinks real estate is really secure because it's tangible, and I love that about it too (I'm helping a close relative buy some as an investment now, in fact), but it can take losses just as well as any other asset. 

In no case would I imagine myself taking money OUT of my small equity/pension portion to pile yet MORE into that real estate.  It doesn't make financial sense.  If your real estate isn't cash-positive now, *especially* in such a hot market, it's probably time to exit.  Even if it is, you may want to exit so that you're not unbalanced.  And even if you can do better, I would pull the cash from current cash rather than out of equities.  If anything, I would only add to real estate if you had cash left over AFTER maxing out tax-deductible accounts.  (If it were me, in any case.  YMMV.)   

Finally, you can't retire now if 80+% of your net worth is locked up in properties that aren't giving off good cash flow.  Unless they have some good cash flow, you can't use their value.  This is why I don't even consider my home value in my net worth for most purposes: I will need a place to live, this one is as good as any (and cost is reasonable), so at most, I would consider some transition.  Yours do not appear to have good cash flow, and possibly not even an adequate cash flow.  You didn't give us cash rentals that I see, so it's hard to fully assess, but consider that $1M of your net worth is locked up in things that are only bringing in a trickle as far as the numbers seem to show.

So, my net advice: consider a new job and reevaluate those real estate investments.  If you want to retire, you would do well to find ways to sell your real estate.  Do a deep dive and keep an open mind.  At a minimum, consider eliminating some of your real estate, relocating, or both.

I would focus most on life goals: what are your goals?  Better life balance?  More time off?  More time with family?  Then, adjust your finances to meet those goals.  Maybe that means a move.  Maybe less real estate.  Maybe a new job.  Maybe all of the above.  What it doesn't require is that you own Asset X or Asset Y; that's more of a preference (though perhaps a strong one).  I would deeply explore any such preferences and decide how much of your life energy they're worth giving up...how much time with kids, time with family, job stress (and related health concern), etc. you want to spend for it.  But on a positive note, you have enough equity to make moves and use your options.

Mon€yp€nny

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You are planning to make a lot of expenses for property 2, is that because you plan to make it a B&B mainly? A B&B is a lot of work and with all the expenses, I wonder when your investments will be returned.
Are you also sure you will have enough guests? Also when the economy would decline?
Maybe a more flexible side job?

Could you refinance the properties? When you bought your house, intrest rates were still higher. Isn't the US intrest rate around 2.25% now?

Do the yearly incomes for property 1 and 2 include all the mayor expenses you mentioned, legal fees for the eviction, other maintenance  etc. etc.
When you don't want to move, maybe you could consider to sell one property that won't do so well (get both inspected to get an idea of the upcoming costs and prevent surprises?). With that money, you could pay off other mortgages, which also helps when you want to refinance.
I would get the full financial picture for your properties for the next 10 years first, all the expected expenses (including risk of legal fees, risk of no rental income between tenants, risk tenant not paying, etc etc). Also look back, how much have you invested in them already  and than look at the return on them. 

Could you downsize?
« Last Edit: June 26, 2018, 05:36:50 AM by Mon€yp€nny »

reeshau

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If you did nothing but that, you would have $2.746M in the bank (approximately), which would allow you an income of almost $110k at a 4% withdrawal rate, or $82k at a 3% withdrawal rate.

Either way, that's rocking!  You have enough saved to pull down an income almost equal to the average American household income - without ever working again.  This is a nice place to be.

Sorry to fact check, but I just gotta.  This would be substantially higher than the median household income, which was $59,039 in 2016, the last year reported by the census bureau.  I think this fact reinforces the points you make, that moving to a LCOL area could open up a lot of options.

Villanelle

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Can you do a breakdown of the rentals?  All expenses (to include planning for periodic large expenses) vs income?  On the surface, it doesn't look to me like they are the best use of your money, but it's hard to say without details.  Also, I wouldn't like having so much of my income tied up not only in real estate, but in RE in the same market, so unless the properties were making money hand over fist, I'd be inclined to sell at least one anyway.

Also, have you researched running and AirBNB to make sure you know what you are in for, and that your projections are accurate  (including expenses)?

Chrissy

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Sorry to fact check, but I just gotta.  This would be substantially higher than the median household income, which was $59,039 in 2016, the last year reported by the census bureau.  I think this fact reinforces the points you make, that moving to a LCOL area could open up a lot of options.

Oops @reeshau !  The AVERAGE for a married couple was $117k.  The MEDIAN was $59k.

ScreamingHeadGuy

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 * Your properties are assets of 645K, and you are making 19K/year - a 2.9% return.... An index fund is much less pain, and more liquid.

Quoted for truth.

How are you contributing $42k per year to your 401k? 

You and your husband should be eligible for IRA contributions.  Why aren’t you doing that.

Do you have access to an HSA?  I would use that instead of an FSA, if possible- and max it out.

Lastly, just a pot-shot, $700 for food?  Come on, you can do better than that.

Chrissy

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My main question is really looking for someway to make the FI leap ASAP without selling the rentals.  Should I do some cash out and re-fi even though rates are higher?  Should I go ahead and sell one duplex?  I do have the capability to split one and sell as a condo unit, but it just doesn’t feel like the right thing to do. 
Is there something in front of my face I’m not seeing?  I really appreciate any different perspectives or advice…

Yes, sell the lower performing rental (Duplex 1).  Out of that money, do the maintenance and garage conversion, replenish your emergency fund, then invest the remainder.  I'm glad your rentals have appreciated 12%, but the S&P 500 gained 21% in 2017.  You've got too many eggs in one basket, and it happens to be under-performing. 

Quit.  At that point, your stash should throw off >$30k (@ 4% draw down).
Duplex 2 throws off >$10k.
Let's assume the garage pulls in at least $8k.

This leaves you with a shortfall of $7k/yr and possibly an additional $12k/yr for health insurance.  So, either your husband's take-home needs to be between $7k-$19k/yr, or you can go back to work after taking a long break, or you can work part-time doing ANYTHING.  You have options.

P.S. You and your husband need a little life insurance.  Not a lot, just a little.  Look at the SSN survivor's benefits, and figure out how much more of a stash you would need if either one of you died.

Earlybirdretirement

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All, just wanted to say, super appreciate all the input.  I do think the rental returns need to take into account that I re-financed them to 15 & 20 year terms a couple years ago, making my mortgage payments significantly higher.  And absolutely, I should have had better budgeting/emergency planning....  Let it be a lesson to any RE newbies, keep the finances separate and just don't touch the profit except for investing or other properties, it was too easy to start accessing that cash flow and go into the 'I deserve it' mindset and/or depend on it for personal emergencies.
I'm excited to report that I'm starting with selling 1/2 of one duplex, then plan to quit and I have the rough plan for what I plan to do in the next few years.  I'm likely going to get out of rentals all together.  I'm just feeling really done with them at the moment especially.  I'll set aside some proceeds to do the home air b&b in a few years to see if it really resonates. 
@ScreamingHeadGuy The 42k includes after tax.  I def need to study more what I should be putting into IRA instead, but this was my first year at the high rate and I'll likely quit before I hit 42k... And totally agree on the potshot, it's my #1 focus next, especially when I quit :-)
Also, as far as the HCOL area, I agree, the thing is, we love our family and community that is nearby, I've offset the mortgage with the roommates and I do have this vision of my future 'side' gig and it involves a studio that is a 1-block walk from my home.  My husband and I agree that selling this home is an option in the future if things just aren't working out.
Thanks mustachians...

Finances_With_Purpose

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Sorry to fact check, but I just gotta.  This would be substantially higher than the median household income, which was $59,039 in 2016, the last year reported by the census bureau.  I think this fact reinforces the points you make, that moving to a LCOL area could open up a lot of options.

Oops @reeshau !  The AVERAGE for a married couple was $117k.  The MEDIAN was $59k.

There it is.  I had $117k in mind - (good thinking @Chrissy ) and thought it was the median (which struck me as high; I should have double-checked).  I probably saw it misreported somewhere, or maybe I just misremembered it.  So good catch @reeshau .  But $59k makes a lot more sense.  So, OP could have the average for a married couple, or about *twice* the median income.

Thanks for the fact check.  It underscores the point, if anything; that's a good place to be, even with a some dependents.

And agreed with @Chrissy 's post.  She said it far more succinctly than me.  Start playing with the numbers, and you'll find you have a range of options - of which she noted a good one (that honors your preference to stay put, even). 

Earlybirdretirement

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I would look at unlocking some of your property equity for the needed cash or see if a rental refi makes sense.  I know the low rate goes away, but even at 5%, it would help fund a project that should generate higher returns.

I wouldn't touch the pension.
Thanks, I actually checked re-fi numbers this AM and they are so awful, that it helped me make my final decision on selling half to start. 

Earlybirdretirement

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Thanks @Crissy, your reply helped me get more matter of fact about it and try to take the emotion out.  I'm not following your exact advice due to some other factors, but this really helped!

reeshau

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Sorry to fact check, but I just gotta.  This would be substantially higher than the median household income, which was $59,039 in 2016, the last year reported by the census bureau.  I think this fact reinforces the points you make, that moving to a LCOL area could open up a lot of options.

Oops @reeshau !  The AVERAGE for a married couple was $117k.  The MEDIAN was $59k.

Fair enough.  That's exactly why median is generally used for "average" with large data sets.  You have to take the Gates , Buffett, and Bezos households out of the equation.  Averaging them takes quite a few people on the other side, and in aggregate you get the discrepancy that you noted:  a distortion of 2x.
« Last Edit: June 29, 2018, 01:29:24 AM by reeshau »

Villanelle

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I would look at unlocking some of your property equity for the needed cash or see if a rental refi makes sense.  I know the low rate goes away, but even at 5%, it would help fund a project that should generate higher returns.

I wouldn't touch the pension.
Thanks, I actually checked re-fi numbers this AM and they are so awful, that it helped me make my final decision on selling half to start.

If you are wanting to get out, are you open to selling the whole thing? (If I understand correctly you don't live in either half and you own the whole thing.) It seems like you could list is such that either half or whole is up for sell, and then you could see what buyer comes along first, willing to pay what you want. 

Dee18

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If you want to proceed with Airbnb, you might want to check out https://www.zeonamcintyre.com/
I met her at a Camp Mustache and was very impressed with how she has built a great business.