Advice and Evaluation of a New Mustachian

[mrigney]

Hi! I'm new to the Mustache seen. I've always been somewhat of a personal finance geek (b/c I"m a numbers geek), but don't know if I'd ever heard of the concept of early retirement (other than the allusion to something of the sort in Dave Ramsey's mantra about living like no one today so you can live like nobody else tomorrow (or however that goes). I've been a pretty religious keeper of the budget using You Need a Budget's software (www.youneedabudget.com if anyone is looking for something that has worked better than Mint for me). But, now I want to move forward from just getting by month to month, normally a little bit ahead, to actually demonstrating some badassity and living like a Mustachian. I was hoping that I could lay out my situation and then get some input on my prospects for FI and what you think my next steps should be.

Situation: I'm a scientist/engineer/software developer (in that order) who recently took a year out of the job market to work at a church. As such, the last year hasn't been filled with a bunch of huge paychecks and my wife and I didn't do a whole lot (i.e. any) savings over the last year. I recently took a job as a software developer, but in the transition in essence missed a paycheck.

Basic Life Facts: 28, married, 21 month old daughter, probably a second baby sometime in the next 10-15 months (and that will most likely be the last).

Income: $61k, take home = $3867/month (that is before any contributions to 401k).

Debt: ~$10k in student loans at 2.5%; ~$2.5k in credit card debt (might be closer to ~$1k as I'm waiting on all of my moving reimbursements from my employer to come in and not sure how that will all play out). The CC debt is mainly due to not getting a pyacheck in Feb. as I was transitioning jobs.

Savings: We have around $9k in cash sitting in an ING savings account. Most of it is "earmarked" for various things. We have a rental property (get to that in a minute), and about $3k is earmarked as a rental "slush fund", "$1k we're in the process of investing into a 529 for our daughter's college, and the other $5k is for a house down payment in theory.

Assets: My 403(b): ~$12k, 1 rental property (used to be our primary residence until we moved away for a year. Now we're back in the same city as we were previously, but are planning on keeping this as a rental and buying a cheaper property). Rental property's appraised value is about $160k (slightly above average for this part of the country; 4 years old, new section of town, 3BR/2BA house), ~$150k owed). PITI + PMI = $984, currently renting it for $1195, but paying 10% to a management company since we had been living out of state.

Spending: I could get a breakdown for you if it's helpful. I don't have the numbers beside me. I looked at our 2012 spending after finding MMM and remember thinking that our coffee + eating out was way too high (about $2200 together), our groceries weren't bad for a family of 3 ($4900, although we could do a little bit better), and we had the dreaded "Miscellaneous" category in the budget (everything from household items at Target to rent deposits) for $3100. I probably also spend too much on books.

From the macro perspective, what should I be doing at this point? Take some of the money from the house down payment earmarked funds to get rid of any and all CC debt? Would you keep renting out the house if you were in my shoes (I suspect rent could be a little bit higher given we had 3 applications and 10 people look at the house in the two weeks it was on the market last April). Would you ditch the management company? I'm a little fearful of missing something in the screening of applicants or not having the ability to market the house as well as a management company. We're currently in an apartment paying $685 in rent. I think we can get total expenses down to about $2500/month while we're here. We're also looking to buy a house (long story, but we're getting in a particular neighborhood, houses are about $110k...we're not going to have the 20% down, but at that price, 15 year mortgage at 2.875%, should only be paying PMI for 1.5-2 years even if we put 5% down).

Am I missing anything? Advice? Can someone with a household income of $60k and 28 years old hope to be FI in 15 years? I feel like I don't have the huge income to get the massive savings, although I can probably expect steady 1.5-3% pay raises each year plus a company guaranteed bonus. Should I always max out my 401(k) before doing any other savings (company matches 50% up to 6% of my salary; after a year, I'll have stock options which the company will match 25% of what I buy)? How does my 401(k)/403(b) balance count in my stash? Does it just get added to whatever I have in "normal" investment interests? What would you do if you were in my shoes with the rental property? My thinking is to keep it long-term. It's in an area of the city that is rapidly growing, great schools. It should appreciate over the next 5-10 years. If only I could get rid of the damn PMI on it.

Thanks so much for your help! I'm looking forward to being part of this community! And apologies for the novel of a first post.

Matt

[gooki]

1. Yes pay off the credit card with your savings.
2. Make sure you get the maximum 401k match
3. A 50% savings rate would be a good target to aim for. Maintain this for 17 years and you'll be F.I.

http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

[Another Reader]

In your shoes, I would move back into the house I owned when the lease is up or I would sell it.  On your salary (you don't mention any income for your wife) and with such a short time on the job, I would not buy another house - it's too risky.  How would you cover two mortgage payments on your net income if there were an extended vacancy?  Suppose the furnace gave out and you had to spend $4,000 to replace it?  What would you do if the job did not work out?

After tax considerations, the $984 house payment might not be much more than the apartment rent.  You would probably have to bring money to the table to sell it, so I would lean towards moving back in.  I would not put any money in a 529 plan - your income level with two kids means there should be some financial aid when they get to college.  Fund your retirement before you fund the kids' college.

I would roll over the 403b into an IRA and get that money working for me ASAP.  Pay off the credit card and see how much you can afford to contribute to 2012 IRA's for you and your wife out of your income and savings.

I would contribute at least up to the match amount in the 401k when I was eligible.

The student loans are at a low interest rate.  I would pay them off over time.

If you post your actual spending, you will get lots of suggestions.  With your income, cutting spending will be very important to your success.  You haven't included cars or transportation, that can be a big expense with a lot of room for improvement.

[mrigney]

Thanks for the feedback, guys (gals).

Regarding income: Currently it's just my $61k. Stable job, though. Risk of layoff or something happening in the next two years are slim to none (big engineering firm and I'm on a project that has grown by 10-15% over the last year). Don't want to factor in potential pay increases, but should be a pretty steady rise. Wife doesn't work and on her teaching salary, we would barely break even after daycare.

Regarding the owned house: Selling it probably would mean bringing a little bit to the table (I'd guess $0-2k) based on the market around here. Cap rate on the house is high (at $1200-1250/month, that puts me at 9-9.5%), so I almost hate not renting it out. The house is new, so I've hedged on the HVAC, 30 year architectural shingles, or plumbing not having catastrophic failures in a < 4 year old house (perhaps my daredevil coming out there). It could sit empty for several months, but I guess I don't expect it to; at least not w/the management company marketing it for me. If it did, we have the ability to pay 3+ months of the mortgage w/the slush fund. Buying the 2nd house has some other factors at play besides finance which probably aren't worth getting into, but guess we just felt that in a stable job where we could potentially save MORE money short term by getting into an area of town we want to be in at a lower pricepoint than we currently own, we might be able to get ahead in the long run even if it does put as at higher risk. Good to hear your perspective, though. Would love more thoughts (b/c this is by far the least clear area for us on what we should do).

Agreed about the 529/retirement. Most of what is in the 529 was a gift to our daughter from a grandparent specified for college, but youre right about continuing to save at this point (we've been putting 25-50/month into the 529).

Here's a broad breakdown of our spending from the past year (again, don't have all the numbers in front of me, but these should be close) on a per month basis.

Charity: $325
Groceries:$410
Restaurants: $130 (I know, too high)
Coffee: $55 (way too high...I spent a large portion of 2012 working out of coffee shops, though, which explains a little of this...but still)
Rent: $1380 (yeah, we were living in a place where rent was nuts); now it's $685
Electricity: ~$90
Garbage: $20 (apartment mandated valet waste...stupidest thing ever)
Water: $40 (no way to change this in the apartments)
Rental Insurance: $12
Cable & Internet: $90 (although we've cut the cable again and are down to $37 for just internet as of this month)
Netflix: $8
Health related: $30 (mostly copays for our 21 month old + prescriptions for her for the ocasional ear infection, cold, etc)
Gifts: $25 (wedding, birthday, baby shower, etc)
Miscellaneous (mainly household supplies, but also rent deposits, pet deposits, etc): $260
Clothing: $25
Pets: $90
Daughter Misc. spending (clothes, baby stuff): $10
Fitness: $15 (part of a home crossfit gym "co-op". Me and 4 buddies share a garge gym and contribute $15/month for maintainance/replacement and new equipment).
His and Her spending money: $40
Entertainment (mainly dates for the wife and I): $30
Car Payments: $0
Gas: $200 (I'm about to start carpooling w/a friend...he'll sell his car if we buy a house in their neighborhood where we've looked at buying and we'll split costs on my commuter car...gas, insurance, maintainance).
Car Insurance: $80
Car Repairs: $50
Student Loans: $35 (that's the minimum payment at least).

Again, sorry for a long post, but now you have our spending to go along w/everything else:-)

[Another Reader]

9 to 9.5 percent is NOT the capitalization rate of this property.  The capitalization rate is the anticipated net operating income divided by the market value of the property.  You start with the anticipated gross income, subtract the anticipated vacancy and collection loss, and then subtract all the operating expenses.  Didn't spend anything on repairs this year?  You will next year or the year after.  Budget for maintenance and repairs.  Operating expenses also include management, taxes and insurance.

If market rent is $1,200, vacancy and collection loss is 8 percent (think one month between tenants), management is 10 percent of collected income, repairs average $100 a month, taxes are $1,500, insurance is $900, and the value is $160,000, the cap rate is about 5.2 percent.  And I think that's optimistic.

[mrigney]

Sorry, should have said "potential" cap rate. Considering dropping the management company and doing it myself.

Market rent = $1200 (x11 = gross of $13.2k if I drop management company, would be $11880)
Taxes = $825 (gotta love living in a low property tax area)
Insurance = $800
Reparis = $100/month average over the next 10 years, but probably not $100/month over the next 3-5 years (although it admittedly could be. We can go w/it, though).

That gives something like 5.5% if I keep the management company, 6.4% if I drop them. Not 9%. Forgot about the operating expenses:-), but I don't think 5.2% is "optimistic" (mostly because of the extremely low property taxes). I'm still pretty new to the whole landlording/real estate game, so forgive my ignorance on some of these things (e.g. the idea of rental property in an LLC was completely foreign to me until I started reading some of the real estate sections of the forums). Thanks for bringing me back to earth on this number!

[Another Reader]

Having been a landlord with multiple properties for around 17 years, I will tell you that on average, your cap rate is optimistic.  Think water heaters, faucets, toilets. paint, carpet, blinds, termites, landscape watering systems, garbage disposals, dishwashers, and so on.  Maintenance, repairs and capital improvements are all part of the expenses you will experience.

Others will tell you to think like an investor buyer and include management as an expense even if you self-manage.  With less than a year under your belt and no experience acquiring tenants, I'd think twice about dropping the management company this year anyway.

[mrigney]

Right. That's my hesitation with dropping the management company. I have no experience. But at the same time, I realize that WITH the management company, it's not a super investment (just happens to better than selling at this point). I think my Schedule E for 2012 had about a $3 or 400 loss.

My time investment over this first year has been very small (probably < 5 hours, even though my arrangement w/the management company makes me an active landlord). We've had zero repair costs to the house this year. Obviously that's unsustainable in the long run.

I really appreciate your perspective. I don't have any resources/people who have been landlords to get perspective and advice from. Just kind of winging it and learning as much as I can.

[arebelspy]

Welcome.  Prepare yourself for some face punches, because you have a ways to go.  :)  But at least you're starting early.  ER in your 40s is feasible (if you make some changes).

First, that rental's gonna cause you a lot of headaches and heartaches.

Only you can decide if the gain you get from it (a TIPS like investment, essentially, since it'll be cash flow neutral at best and you're left banking on appreciation, likely 0% real) is worth it for you.  For myself, I wouldn't buy at those numbers (160k house for only 1200 rent).  Rent would have to be about $800 more per month for me to be happy with it.

Any particular reason not to move into it or sell it?

I see some places to trim on the budget. 

Your spending totaled 3450, or 41k/yr.  Making 61k gross, paying taxes, then spending 41k leaves you with a very low savings amount and percentage.

No, ER in 15 years under that scenario is not possible.

If you want to ER, you'll need to cut spending and/or increase income.

You say "Wife doesn't work and on her teaching salary, we would barely break even after daycare." -- however most people who say that don't run the numbers, and are just trying to justify a stay at home parent.  I'm doubting daycare would cost in the 30-40,000 range she'd make working as a teacher.  If she (and you) want her to stay at home, great!  Do it.  But be honest with yourselves about it, there is an opportunity cost to it, you are giving up income (even if at a very low hourly rate after daycare).

Some things to think about.  Best of luck!

[Another Reader]

That's TWO landlords coming to the same conclusion.....

[Gerard]

Depending on the details of your situation, your partner might consider staying at home and taking in a couple of neighbour kids, either as full-time daycare or after school. Especially with what I assume is professional teaching experience and training. Something like a "homework club" or "enriched experience daycare" could pull in better bucks than the average plunk-them-in-front-of-Nickelodeon home care. Your kids have more playmates, your family gets more money, your partner keeps the resume active, and you write off part of your housing expenses. If you do decide to give that a try, it might affect your decision about what to do with the house.