Author Topic: Case Study - 2 late twentysomethings looking to be FI in 6-7 years  (Read 2943 times)

Crystal1588

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Hi All!
My husband and I have recently decided that we would like to be FI and in the rental business in about 6 years.  Could use your help to see if you think we're on the right track and to throw out any tips you may have!  We have 2 kids ages 1 and 3.

Income Info (gross)
Husband (29) works as a Software Engineer making $85,000/year
I (27) work as a Logistics Coordinator making $40,000/year
My husband owns an ebay business where he buys/resells items making around $5,000/year (low estimate)
We own a rental condo that brings in $400/month after mortgage, condo dues, insurance etc.
Total gross income: $135,000

Payroll deductions (pretax):  All out of my paycheck (better benefits and husband has no 401k match)
Health insurance: $52/month
Flex med and daycare: $250/month
401k: $825/month including match

Brings our net to: $7025/month

Expenses:
Mortgage: $1725
Daycare: $1000
Gas: $225
Cell Phones: $150/month total
Gas and Electric bill: $100
Groceries/houshold purchases: $500
Life Insurance: $75
Gifts: $40 (this includes Christmas, Birthdays, weddings and any other random gifts we have to buy)
Date night: $40
Slush (mostly entertainment/kids activities): $100
Clothes: $40
Donation to church: $100
Car Insurance: $75
Savings for misc home/car expenses: $75/month
Internet: $40

Total expenses: $4285

Savings:
For rental properties: $2,225/month
Vanguard taxable: $100/month
Kid's 529 plans: $175/month

Total savings: $2500
Plus 401k contributions of $825: $3325/month

We also get bonuses of about $5,000/year that go straight towards more rentals but since they are not guaranteed we don't count them in our numbers.

We have no student loans, no car loans (2007 Accord and 2009 camry) and no credit card debt.

Savings balances:
My 401k: $40,000
Husbands IRA (rollover traditional and Roth): $50,000
My IRA: $6,500
Rental Savings Account: $15,000
General Emergency Fund: $5,000

Our main strategy for FI is rental properties. We'll just keep accumulating them until they cover our expenses/savings goals.  Sounds a lot simpler than it is haha.  We live in the Milwaukee area and figure to get a 4 unit building we will need around $70,000/building.

Thoughts/ideas? My husband is looking for a closer job which would cut down gas expenses. 

ETA: I forgot to add back in the money we get back from Flex Daycare each month ($384).  This also goes into savings.
« Last Edit: October 09, 2015, 08:59:24 AM by Crystal1588 »

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #1 on: October 09, 2015, 10:11:45 AM »
The basic question, it seems to me, is whether the rental properties are going to throw off enough free cash flow to cover your living expenses -- after the maintenance and upkeep costs of the rentals.  After you've FIREd, and assuming that eliminates your day care expense, your monthly nut would be around $3000 -- PLUS health insurance cost.  So, for argument's sake, let's say that puts you back at $4000 per month.

Now, how much capital would you have to put into real estate in order to get that $4000 a month?

jollygreen23

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #2 on: October 09, 2015, 10:43:28 AM »
I would think Vanguard would give you a more reliable Rate of Return. Personally, I'd feel more secure if I moved some of the savings into good mutual funds.

Crystal1588

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #3 on: October 09, 2015, 10:53:00 AM »
I would think Vanguard would give you a more reliable Rate of Return. Personally, I'd feel more secure if I moved some of the savings into good mutual funds.

Do you mean our rental savings account (15k?). Since we want to buy in about 2 years (projecting when our savings will hit 70k), I figured it would be best to keep it in a safer account.

We are hoping to purchase 4 - 4 unit buildings netting around $800/month after expenses/vacancy etc.  Including our condo ($400/month) and $500/month from my husband's side business, we should be good. 

mozar

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #4 on: October 09, 2015, 11:16:39 AM »
Quote
I would think Vanguard would give you a more reliable Rate of Return. Personally, I'd feel more secure if I moved some of the savings into good mutual funds.

Some people would say the opposite, although I personally agree. What jollygreen23 is saying is that an index would have a more reliable return than the rental business. One can get to FI more quickly (but riskier) with the rental business. If the OP was to put that 3125 in an index fund with 90k current principal it would only be 400k in 6 years.

But no matter what you do, I think the way to get the most bang for your buck is downsize, and possibly move closer to the husbands job.
TBH I don't know much about Milwaukee but if it's the case that you are paying a $1770 mortgage (not including property taxes) at 4% then you bought your house for 375k. Why do you need so much house?

Crystal1588

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #5 on: October 09, 2015, 11:42:01 AM »

TBH I don't know much about Milwaukee but if it's the case that you are paying a $1770 mortgage (not including property taxes) at 4% then you bought your house for 375k. Why do you need so much house?
[/quote]

the $1725 is PITI.  We paid $300k for the house.  It is on an acre of land, which was important to my husband (he grew up on many many acres).  Our house is 1900 square feet, 3 bed/2 bath.

It would be an option to downsize, though. 

sirdoug007

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #6 on: October 09, 2015, 02:53:16 PM »
I would think Vanguard would give you a more reliable Rate of Return. Personally, I'd feel more secure if I moved some of the savings into good mutual funds.

Do you mean our rental savings account (15k?). Since we want to buy in about 2 years (projecting when our savings will hit 70k), I figured it would be best to keep it in a safer account.

We are hoping to purchase 4 - 4 unit buildings netting around $800/month after expenses/vacancy etc.  Including our condo ($400/month) and $500/month from my husband's side business, we should be good.

Are you expecting each quadplex is going to net you $800/month for $3200/month total?  Plus another $900 gets you $4100/month?

I'm not a real estate investor but this seems to good to be true.  You are talking about netting a 13.7% annual return without any leverage (9600/70000).  You probably need to post all of your assumptions on these properties to fully understand this but if everyone could get a steady nearly 14% return very few people would still be working.

In comparison, if you invested in stocks with a 7% long term real return and 4% withdrawal rate it would take you about 12 years at your current savings rate and current savings to get to the $960,000 nest egg to produce $3200/month.  There is another thread about "six figures lets you fire in 6 years."  The math on that one works out that you need to have a 80% savings rate to succeed.

Please post what you think you will get out of these buildings and what expenses will be and maybe we could help a bit but I'm struggling to see 6 years with ~$100k saved, $40k/yr savings, and a damn near $50k/year FIRE spending target.

Crystal1588

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #7 on: October 09, 2015, 03:26:09 PM »
I would think Vanguard would give you a more reliable Rate of Return. Personally, I'd feel more secure if I moved some of the savings into good mutual funds.

Do you mean our rental savings account (15k?). Since we want to buy in about 2 years (projecting when our savings will hit 70k), I figured it would be best to keep it in a safer account.

We are hoping to purchase 4 - 4 unit buildings netting around $800/month after expenses/vacancy etc.  Including our condo ($400/month) and $500/month from my husband's side business, we should be good.

Are you expecting each quadplex is going to net you $800/month for $3200/month total?  Plus another $900 gets you $4100/month?

I'm not a real estate investor but this seems to good to be true.  You are talking about netting a 13.7% annual return without any leverage (9600/70000).  You probably need to post all of your assumptions on these properties to fully understand this but if everyone could get a steady nearly 14% return very few people would still be working.

In comparison, if you invested in stocks with a 7% long term real return and 4% withdrawal rate it would take you about 12 years at your current savings rate and current savings to get to the $960,000 nest egg to produce $3200/month.  There is another thread about "six figures lets you fire in 6 years."  The math on that one works out that you need to have a 80% savings rate to succeed.

Please post what you think you will get out of these buildings and what expenses will be and maybe we could help a bit but I'm struggling to see 6 years with ~$100k saved, $40k/yr savings, and a damn near $50k/year FIRE spending target.

We are expecting $800/month TOTAL from the quadplex. This is conservative for our area.  We figure that after rent that out, we'll add the $800 to our $3325 savings making another quadplex happen in 18 months ($4125x18=$74,250)  Figuring that the 2nd one would also net $800/month we are then at $4925/month in savings which would get us the 3rd property in about 14 months.  The fourth one would only take 12 months. Basically the savings would snowball and it would get easier and easier to afford properties. 

First: Fall of 2017
Second: Spring of 2019
Third: Summer of 2020
Fourth: Summer of 2021

=about 6 years.  We would then be cashflowing $3600/month from the rentals and our expenses would drop as follows:

No more daycare = (1000)
Gas would drop significantly: ($100)
We would sell one of the cars since we would have no use for 2, insurance drops by ($40)
Expenses would be about $3150.  I'm not adding in my husband's ebay business, which has never netted below $500/month in the last 2 years.  I figure we have about $1000 extra to cover health insurance or other expenses. 

We could also work into the 7th year and bank our entire income or $85,000.
I'm definitely looking for suggestions on if this is completely unrealistic!!

use2betrix

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #8 on: October 09, 2015, 03:57:05 PM »
I think what's being asked is if you're planning on netting $800/mo on EACH property, or for all 4?

Then the point was brought up that on a 70k investment, 14% net on each property every year would be very tough to guarantee. Doable albeit risky.

I love your idea and I've though about it myself, however many would suggest a more diverse set of investments in case a certain sector of them goes sour. I.e. Maybe 50% mutual funds 50% real estate.

dess1313

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Re: Case Study - 2 late twentysomethings looking to be FI in 6-7 years
« Reply #9 on: October 09, 2015, 06:32:20 PM »
i'm looking but not sure of where i'm seeing savings set aside for maintenance on said rental buildings in the future.  Eventually you'll have a roof leak, a furnace break down or need to fix something essential to the house. 

you're also putting most of your eggs into one real estate "basket"  do you have enough emergency savings for empty rentals and such?