Author Topic: FIRE fork in the road, Help me out folks  (Read 6615 times)

livelifewithoutfear

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FIRE fork in the road, Help me out folks
« on: May 03, 2016, 12:24:08 PM »
Hello!

I am a year out from FIRE and Christmas may have come early, we will see what you think.
 I am 34 years old, live in silicon valley with a wife and 3 little kids. $150k a year single working income. we spend $4500 a month on average (I know not as bad ass as I want to be.) Currently contributing $1k month to 401k  and $2,500 to Betterment with working income.   I have been working only 7 years in this career. net worth at start 10K , current net worth $2million. Self made frugal bad ass Real estate millionaire baby! Hard work, wisdom and a frugal soul, I've got a mustache in my soul brother!

50k in betterment
50k in 401
70k cash on hand
3 million worth of real estate and 1 million even in mortgages all 30 yr fixed

I was planning on stashing cash for the next year then traveling the country in an RV we already bought cheap and renovated fancy like.

We would live solely off of rental income here it is:

I spent every dollar I could on rental properties in 2009 and 2010 . I  own 2 duplexes in san jose and a 7 plex in auburn ca.  We live in one side and pay nothing to live there due to the rents on the other side.  These numbers represent me renting out my house and traveling the country, then the world, on  $4500 a month to spend. (way cheaper to travel than live in silicon valley)

Total monthly cost with principle, interest, taxes, insurance and  utilities  - $8000/mo

Total rents - $15,200 /mo

cash flow from rents $7200/mo
Side business passive income $440 month
Average cost of property maintenance averaged over 3 years is $1200 a month  ( I am also a badass that does all his own work)

Total cash flow including all sources and average maintenece - about $ 6440


If I only spend $4500 i should be in the clear for the rest of my life! FIRE!!!!

Now the opportunity is that I am getting laid off by my company in June and the plan is that another company will hire me doing the same thing at the same Pay  OOORRRR I could be laid off and take Unemployment insurance of an additional $1800 a month and just put that to savings for a year. 

Problems -

Taxes - I wont likely need to pay much because of the income source and I have 4 depended and no JOB!

Health insurnace - No idea what Health insurance will cost but I got some good ideas from this blog

Cash  - I know it isnt a ton for falling back on.

Rental market crash - unlikely

I really respect your opinions and I know I am terrible at written communication but if you have a chance would you give me your opinion on our situation.  Id be happy to answer whatever I didnt cover. 

keep working and saving for a year or CUT loose!?


Thanks

Tony Thomson
408-613-8227
livelifewithoutfear@gmail.com

Financial.Velociraptor

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Re: FIRE fork in the road, Help me out folks
« Reply #1 on: May 03, 2016, 01:35:45 PM »
Sounds like you are in pretty good shape.  I'd do some 'back of the napkin' calculations on long term real estate costs such as replacing a/c, furnaces, and roofs.  But it sound like you have more than enough cash flow to travel the world and live solely off rental income, even including a 10% vacancy rate.

You have a good management company or team that can manage the properties for you remotely?

acroy

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Re: FIRE fork in the road, Help me out folks
« Reply #2 on: May 03, 2016, 01:36:52 PM »
GO for it!
No fear! ;)

Mr. Green

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Re: FIRE fork in the road, Help me out folks
« Reply #3 on: May 03, 2016, 01:47:33 PM »
If all of your real estate is in silicon valley, you may wish to consider selling one of your properties to be a little more liquid. If it's a bubble out there and it pops, causing cash flow from rents to decrease substantially, will you still be comfortable with the liquid investments you have? Totally cool if you're comfortable where you're at, it's just a thought that popped into my head.
« Last Edit: May 03, 2016, 02:31:04 PM by Mr. Green »

RoseRelish

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Re: FIRE fork in the road, Help me out folks
« Reply #4 on: May 03, 2016, 02:16:23 PM »
Seems like you're good to go. Your withdrawal rate is ~2.5% today. I'd second Mr. Green and think about the risks of having 95%+ of my net worth in one area's real estate, but that's up to you. Good work and congrats.

livelifewithoutfear

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Re: FIRE fork in the road, Help me out folks
« Reply #5 on: May 04, 2016, 11:08:18 AM »
Thanks Team,

I just may do it! 

MR Green - I thought about that but I am trying to think of when Rents have ever decreased!?  I would think it woudl take mass silicon valley exodus for that to happen.  Also my 7 plex that generates 2500 a month in cash flow is in a town outside of sacrament so I am a bit diverse but you guys are right 2 duplexes are creating some serious cash flow for me.  one of them is rented out by the county under sec 8 so there is a possibility of economic collapse and they stop paying but hey we cant consider EVERY major disaster. 

After  2 or 3 years I will likely go back to work in some field to settle down and buy a house fit for a family of 5 .

Thanks you guys!

Tony

SwordGuy

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Re: FIRE fork in the road, Help me out folks
« Reply #6 on: May 04, 2016, 02:53:56 PM »
You may be the best ever repairman now, but I doubt you want to drive back to CA from your trip around the country/world to change at toilet mechanism.

So you need to factor in costs to hire that out.

And you will need to factor in costs to hire a property manager.

If it still works after you do that, go for it!

tonysemail

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Re: FIRE fork in the road, Help me out folks
« Reply #7 on: May 04, 2016, 03:05:23 PM »
have you considered the tax implications of selling now vs selling later?

I would run the numbers and see how much capital gains could be harvested through the homeowner tax exemption.

If the tax avoidance is large, then I'd favor locking in some of those capital gains since bay area real estate has appreciated massively since you purchased.

Livewell

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Re: FIRE fork in the road, Help me out folks
« Reply #8 on: May 04, 2016, 04:02:58 PM »
Great work Tony, you had the fortune of good timing and the willingness to take advantage of it!  Congrats!

I echo the thought of taking some of the real estate gains off the table, at least up to whatever you can take advantage of capital gains wise.  Maybe set up a home base in another of your properties to set up a second tax advantaged sale in the future.

I've been in SV for 20 years, and my take is we have a year or two more of appreciation before the next leg down.  Longer term a very safe place to own property (I do).  That said, do you want to manage properties while you raise your kids and travel?   Seems you are well set up for a graceful exit, or at least a large reallocation of your net worth, which will free your time up and simplify your post FIRE life.


JoJo

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Re: FIRE fork in the road, Help me out folks
« Reply #9 on: May 04, 2016, 05:02:41 PM »
I've never gotten unemployment but aren't there a bunch of hoops to go through to get it?  Like don't you have to apply & interview for a minimum # of jobs? 

bwall

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Re: FIRE fork in the road, Help me out folks
« Reply #10 on: May 05, 2016, 05:34:39 AM »
Managing rental property cannot be done long distance, so you will have to hire a manager. Also, there will have to be normal repairs as a result of time; roofs get old, trees grow and need to be trimmed/cut, droughts in CA mean it's best to get rid of the grass lawn, etc. Projects where it's best to have a lump sum available.

Also, paying the bills while on the road is a hassle, but I'm sure there is a work-around somewhere.

I'm a fan of the other posts suggesting taking a property off the table.

BBub

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Re: FIRE fork in the road, Help me out folks
« Reply #11 on: May 05, 2016, 10:20:05 AM »
Your rentals are sub-optimal based on the criteria most RE experts suggest.  At $3M, the properties should be grossing a minimum of $30k/month.  You could spend some time while RVing the country to look at real estate which would yield considerably more.  Also, I'll echo taking some chips off the table.  Put $1m into a securities portfolio, take the other $1m and leverage up to $2m to get a $20k/mo property.  You could 1031 to avoid the tax hit.  Pull the net cash flow of ~8-$10k off of that to fund the lifestyle, invest the surplus, give it away, whatevs.  You have options.  But you should strongly consider 1)optimizing your real estate holdings and 2)diversifying.

zephyr911

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Re: FIRE fork in the road, Help me out folks
« Reply #12 on: May 05, 2016, 10:31:40 AM »
Your rentals are sub-optimal based on the criteria most RE experts suggest.  At $3M, the properties should be grossing a minimum of $30k/month.  You could spend some time while RVing the country to look at real estate which would yield considerably more.
Nooooooo shit. Even without leverage I could easily retire on half that net value at Huntsville prices. (I plan to)
We run 1.2-1.5% here depending on condition. Leveraged returns far into double digits.

livelifewithoutfear

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Re: FIRE fork in the road, Help me out folks
« Reply #13 on: May 06, 2016, 08:51:38 AM »
Good stuff here guys other than 1 thing ,

BBUB - yes I have considered selling one property to take 600k or so to reinvest into another higher cash flowing property via 1031.  Thats how I got the 7 plex 3 years ago. The only problem is everything that I've looked at seems to be about the same type of cash flow but a much higher debt and risk. That's why I have stuck with a simple duplex that is high cash flow with very low debt. One of them is my home and I could take about 600 K in cash and reinvested into Securities or other Investments that you guys have talked about I just don't feel as comfortable as I am not as Savvy there as I am with real estate.

I would love love love to see what properties  these real estate experts are suggesting I buy to get to 30k a month gross. A few properties I saw could  get there with the gross rents  but it would only change my net by 2 or 3 k a month and signification leverage me with debt. 

Any links to send me on properties I should buy? I am all ears!

Bwall -  don't be afraid bro! I have been managing the 7 plex remotely and hiring out the repairs as well as tennant screening and leases all online and over the phone.  IT'S A PIECE OF CAKE! And I highly suggest not hiring a property manager. Do you own real estate and hire a manager??  I have 40k in reserves set aside for repairs as well as 3k a month dedicated  while only spending an average of 1200 a month over the past 3 years.

I agree with you guys suggestion of diversifying my duplex home and taking that 600k equity somewhere else but where???  It cash flows me 2800 a month Spendable when I am not it in and when we decide to live in it again I have no rent or mortgage over my head.  Im having a hard time seeing the better investment but I am not very savy in stocks, securities etc.

Hit me back,

Tony   


livelifewithoutfear

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Re: FIRE fork in the road, Help me out folks
« Reply #14 on: May 06, 2016, 08:58:34 AM »
Also I just realized if I took out the 600k cash by selling my home and taking the equity and putting it into some kind of other investment and do a 4% withdrawal rate that's only $2,000 a month. Right now the property allows me to spend 2800. I definitely agree with the idea of diversifying for the future I still just have a hard time seeing it and making the jump

Cassie

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Re: FIRE fork in the road, Help me out folks
« Reply #15 on: May 06, 2016, 12:44:56 PM »
You have to apply for a certain # of jobs every week while on unemployment.  There are also rules about being in another state while on it, etc.

MidWestLove

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Re: FIRE fork in the road, Help me out folks
« Reply #16 on: May 06, 2016, 01:48:11 PM »
"
Also I just realized if I took out the 600k cash by selling my home and taking the equity and putting it into some kind of other investment and do a 4% withdrawal rate that's only $2,000 a month. Right now the property allows me to spend 2800. I definitely agree with the idea of diversifying for the future I still just have a hard time seeing it and making the jump"

you may be confusing passive withdrawal rates with active business involvement aka real estate. when you deal with real estate you are taking on significant liabilities  (i.e. how many evictions have you handled? how many legal complaints (lawsuits) against you? how much police involvement you had to deal with because of your tenants?) just because it have not happened (yet) don't ever think it can not or is unlikely to happen - if you tenant(s) stop paying (they have hardship, medical issues, or any hosts), do you understand what it takes to get them out? willing to be the heartless b%stard  of the landlord (in the eyes of the community/church/whatever) to kick out starving children ? what happens if tenant or their guest falls down and claims you knew or should have known that your property presents a risk of X,Y,Z or simply because they see you as deep pockets? I had plenty of close friends dealing with real estate and learning these through school of hard knocks.  tenants had domestic issues, weapons were pulled, police called in , doors, busted down, tenants stopped paying ,etc. Now in Milwaukee suburbs you can buy houses for 40-60k so completely different price levels but do not kid yourself for a day that real estate ownership is in any form 'passive'. you are paying with sweat labor, with liability you carry 24x7 , and through active involvement. you do separate your real estate assets into some form of legal entity, correct? or is everything owned by you directly meaning that should there be a risk exposure all of your assets are at risk?

none of that exists with mutual funds, if major company (i.e. BP oil spill) does something stupid, you personally is not on the hook for anything, liquidity is way, way higher. no toilets to deal with, no drug busts, no non-paying tenants.

now, if you really want yield, there are REITs , various utility partnerships, close ends funds, and plenty of other security instruments yielding higher than 5.6% rate you referenced (2.8x12 / 600 =5.6%) . you take on higher risk, less diversification , but still much higher than real estate.. true you do not get depreciation , or any other benefits of real estate if you go that route..


bigalsmith101

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Re: FIRE fork in the road, Help me out folks
« Reply #17 on: May 06, 2016, 04:42:55 PM »
Good stuff here guys other than 1 thing ,

I would love love love to see what properties  these real estate experts are suggesting I buy to get to 30k a month gross. A few properties I saw could  get there with the gross rents  but it would only change my net by 2 or 3 k a month and signification leverage me with debt. 

Tony

If you brought that $600k to the pacific northwest, you'd be way further ahead in terms of return on investment. Or just ask ARebelSpy or any of the other successful landlords how much they could get in return for $600k in market value.

The duplex I live in currently, sold for $240k last year. Gross rents are $2400/mo to the land lord. Meeting the 1% rule, though it's a multi family residence and should thus hit an even higher return (Not too feasible here, near Seattle). Buy two $300k duplex's that meet that prerequisite and...

That 1% rule would gross $72k. $64,500 after 1.25% property taxes. I'll let you do the math on how much you'd like to take out of that for repairs, maintenance, vacancies etc, but I can all but guarantee that you wont fall $33,600/year in net income. And that is in the PNW where its hard as hell to find a 1% rule. Take the investment elsewhere and it's a WHOLE different story.