Author Topic: Beginner Stachians needing some input!  (Read 3137 times)

Southern Stashian

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Beginner Stachians needing some input!
« on: August 12, 2012, 02:35:39 PM »
OK. We are beginner Stachians and have been following the MMM blog for a month or so and it is GREAT!!!. We are a family of five ages 39 (me), 37 (wife) and three kids ages 10, 7 and 3. We have a combined income of $8300 monthly (or @ $100k per year before taxes). We have great health insurance, benefits and have had longtime employment of 7 years for me and 14 + years for my wife.

These are our current monthly expenses:

$1000 - mortgage ($200k value, 7 years left)
$1176 - investment property (raw land - $150k value, 4 years left)
$800   - food and gas
$800   - child care & summer camps (2 years left)
$300   - 2012 Honda Accord (one vehicle - $15k down payment - 6 payments left)
$65     - car insurance
$140   - electric
$60     - water
$20     - gas
$15     - cable (Sorry but I work there and no it's not Comcast Mr MM! Lol)
$105   - 2 cell phones (IPhones w/ basic 500 min plan, 200 texts and 30% employer discount)
$100   - 2 credit cards (2 small $500 cards paid off monthly)
$60     - lawn service (includes cuts for BOTH of our properties, 5 cuts for $60)
$4641 - total monthly expenses

These are our current total assets:

$130K - house equity (7 years left)
$80K   - land equity (4 years left)
$20K   - emergency fund (just bumped it up to $300 weekly)
$35K   - 401K (10% w/ employer matching 6.67% plus starting a Roth IRA in November with an additional 10% from paycheck)
$20K   - employer sponsored pension plan
$285K - total assets

Now, I know we could be doing a lot better but it took us a couple of years of raising a family and the "school of hard knocks" to become financially responsible but I believe we are on the right track now. In six months our car will be paid off saving us $3600 per year + interest. In two years our childcare will end saving us $9600 per year. Two years after that our investment property will be paid off giving us $70k in added equity, saving us $12400 per year in payments and interest and giving us $150k in leverage to buy some rental properties. In addition, our two older kids have had their colleges partially paid for by the grandparents with the Florida Prepaid Plan.

So in four years our expenses will be $2509 monthly and our income will be at $11330 monthly ($136k per year after 4% yearly raises per person average). How would you see us for an early retirement by ages 45 and 43? I was thinking to wait to pay off our primary mortgage by age 46, keep working to squirrel away money after reducing our expenses to $1859 monthly and purchase @ 4 - 6 rentals against our raw land to generate some passive income before fully retiring by the ages of 50 and 48.

In seven years I'm planning on this to be our situation:

Monthly expenses

$350   - primary mortgage (only property taxes and insurance)
$0       - investment properties (positive cash-flow after expenses)
$800   - food and gas
$65     - car insurance
$140   - electric
$60     - water
$20     - gas
$15     - cable
$105   - 2 cell phones
$100   - 2 credit cards
$60     - lawn service
$1859 - total monthly expenses

These will be our total assets:

$200K   - house equity
$150K   - land equity
$150K   - emergency fund
$225K+ - Traditional and Roth IRA's
$90K     - employer sponsored pension plan
$150K   - rental property equity (assuming 4-6 rentals)
$965K - total assets plus @ $90K - $100k yearly income savings and $40k passive rental income

I know we have to adjust these numbers for inflation, changes in family dynamic (teenagers eat A LOT and cost just as much for car insurance), real estate market changes and account for federal income tax (no state in FL) but we just want a general idea if we could be doing something different. Are we on the right track? Thank you for your comments.
« Last Edit: August 13, 2012, 06:10:13 AM by Southern Stashian »

arebelspy

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Re: Beginner Stachians needing some input!
« Reply #1 on: August 12, 2012, 04:42:31 PM »
Sounds like a good general plan.

I'd change a few real minor things slightly personally, like locking in these current low mortgage rates long term, rather than paying off property, but that's a personal choice.

Probably okay to start getting more granular with your plan - looking at your asset allocation and investment vehicles, trimming current expenses (rather than assuming they'll be so much lower in the future).

Cash flow is not an "asset," so the rental income should be removed from your assets list.  It is the equity in the property that is providing that cash flow, and you are double counting this, basically. 

The 90k pension.. is that a 90k/yr payout on a pension?  If so, holy crap.  If you mean it's a pension where you could cash it out for 90k total, what would the monthly payout look like, and have you compared cashing it out to keeping it?  Is it COLA'd or not?

You will be heavily, heavily invested in real estate.  Your portfolio is (will be) ~70% RE.  That's not very diversified at all, especially if your rental(s) and home are near the same place.  You may want to consider a more balanced portfolio upon retirement.

Most people want 5-10% of their assets in real estate.  I'm planning on quite a bit more than that, but not as much as you.  I'd caution you to look into other investments for diversification's sake.

Good luck!
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Re: Beginner Stachians needing some input!
« Reply #2 on: August 12, 2012, 05:34:05 PM »
I have read the post twice and it raises too many questions to give a reasoned opinion.  There's not enough information.  To me, the first thing to do is an income and expense statement and a balance sheet.  Treat your family unit like a business, because you are in the business of becoming FI.

Here are a few initial reactions.

I don't understand the land purchase.  It produces no income.  Why did you buy this land?  Is it commercial or residential?  Are you holding it for resale?

You should grow your expenses at least at the same rate as you grow the income.  Child care will not go away entirely when the kids go to school.  There's after school, summers, and sick days.

How does the land give you $150k in leverage to buy rental properties?  Or do you mean the end of the land loan payments will mean you can cash flow mortgage payments on $150,000 in mortgages?

What's the interest rate on the house mortgage?  Once you pay off the car, would it make sense to throw money at the current mortgage?  How big of an emergency fund makes you sleep well at night?  Could the $300 be used for something else at some point?

Do you intend to live in your current house and buy rentals, or would it make more sense to convert your current house to a rental and take advantage of today's low prices and interest rates to buy another owner-occupied property?

I don't have any problem with more than 50 percent of net worth in rental real estate, as long as the rental income represents a decent return and is stable.  In you go that route, real estate investment becomes your ER business.  However, I agree with Arebelspy diversification is needed. 

At the time you think you will be ready to buy rentals, the market may tell you not to.  I would rather start building a diverse asset base today and make a habit of buying whatever asset class is on sale as time goes on and money is available.  You will end up diversified and you will have bought well overall.

Southern Stashian

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Re: Beginner Stachians needing some input!
« Reply #3 on: August 12, 2012, 07:01:02 PM »
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Cash flow is not an "asset," so the rental income should be removed from your assets list.  It is the equity in the property that is providing that cash flow, and you are double counting this, basically. 

Thank you for your input! Yes you are right and thank you for pointing that out to me. I'm getting ahead of myself!

Quote
The 90k pension.. is that a 90k/yr payout on a pension?  If so, holy crap.  If you mean it's a pension where you could cash it out for 90k total, what would the monthly payout look like, and have you compared cashing it out to keeping it?  Is it COLA'd or not?

The pension is a DB (defined benefit) guaranteed funds pension through my employer. As it stands right now is valued at @ $180 per month and is given a value ($20K) on our compensation statements. I believe I can cash it out (upon termination) and receive a reduced payout if I did not meet their requirements for employment length (I believe either 10 or 15 years.)

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You will be heavily, heavily invested in real estate.  Your portfolio is (will be) ~70% RE.  That's not very diversified at all, especially if your rental(s) and home are near the same place.  You may want to consider a more balanced portfolio upon retirement.

I've been considering a mix of RE - a few vacant lots for holding, a few single family rentals and a quad-plex or small apartment building to get started with and to diversify my RE holdings. I would also purchase some tax certificates and possibly look into a fishing camp rental in South Florida (Lake Okeechobee area).  I have a strong background in building homes and punch work (worked as a superintendent for a national builder years back) so the maintenance work itself is not a problem.

Quote
Most people want 5-10% of their assets in real estate.  I'm planning on quite a bit more than that, but not as much as you.  I'd caution you to look into other investments for diversification's sake.

What I'm thinking to do is to cut our emergency fund off at $50K - $70K and take the contributions and place them into something else. I'm hoping for no more than 30% - 40% in RE and to gain some different avenues for diversification along the way. We are new to this and the only ones in our entire family who have set themselves up like this. It's an awesome and addictive feeling to be working to FI!
« Last Edit: August 12, 2012, 08:15:17 PM by Southern Stashian »

Southern Stashian

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Re: Beginner Stachians needing some input!
« Reply #4 on: August 12, 2012, 07:51:28 PM »
First of all thank you all for replying. It helps us and energizes me to save even more!

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I have read the post twice and it raises too many questions to give a reasoned opinion.  There's not enough information.  To me, the first thing to do is an income and expense statement and a balance sheet.  Treat your family unit like a business, because you are in the business of becoming FI.

I realize we have made this post a "generalized" posting. We actually have income, expense and balance sheets and six month, one year, three year, five year .... goals with income, expenses and inflation built in. Thank you for the heads up! If we were to include everything, we would have a posting four pages long. Lol.

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I don't understand the land purchase.  It produces no income.  Why did you buy this land?  Is it commercial or residential?  Are you holding it for resale?

Yes it does not produce an income and is residential. We originally purchased it to build a home on or to sub-divide but decided to hold on to it as our plans had changed. Finding vacant property (acreage) where we are located is rare so we jumped on the opportunity to purchase it at a fair price for future use and/or subdividing.

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You should grow your expenses at least at the same rate as you grow the income.  Child care will not go away entirely when the kids go to school.  There's after school, summers, and sick days.

Understood. As it stands right now, child care will definitely be done in two years with some family (grandparents) building a home in the area and watching the kids after school. Hopefully as we work into FI we will be there also! Lol

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How does the land give you $150k in leverage to buy rental properties?  Or do you mean the end of the land loan payments will mean you can cash flow mortgage payments on $150,000 in mortgages?

Most likely we will cash flow the vacant property mortgage payments into our primary residence to pay it down quicker. If need be, we could sell the vacant property and look for a larger piece to purchase and subdivide, or sell the property and purchase a commercial piece or take the money we would have been paying into the vacant property and purchase two or three HUD homes (in a surprisingly nice area near by) for their $50k price tag (valued at $95k).

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What's the interest rate on the house mortgage?  Once you pay off the car, would it make sense to throw money at the current mortgage?  How big of an emergency fund makes you sleep well at night?  Could the $300 be used for something else at some point?

Our current interest rates on our home is 3.5% fixed and the vacant lot is 2.875% fixed. Yes I know they are great interest rates and why would you want to pay off a loan of @ 3%? We are the type of people that like to wake up with no loans or commitments, even if they are only at 3%. Sometimes piece of mind is worth more than leveraging your money to get more loans. Thats why we are working to pay them off early.

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Do you intend to live in your current house and buy rentals, or would it make more sense to convert your current house to a rental and take advantage of today's low prices and interest rates to buy another owner-occupied property?

What we plan on doing is to live in our home until the kids leave the nest. Over the next 10 years we plan on slowly reducing our hours at work and to convert our time into managing our investments. Afterwards, we will retire from our primary jobs, convert our home into into a rental, purchase a condo for cash and live the MMM lifestyle, hopefully while we are still in our 40's!

And BTW, thank you for the great reply. You really have us thinking!