Financial freedom with $100k

[Bullseye]

I like theoretical, but realistic challenges, and got to thinking just how little money would a single person need to achieve financial freedom.  This is as close I can get...

$100k starting cash

Buy a $180k house (move, somewhere cheaper if you have to), with a big enough lot to park a tiny house on.  Buy tiny house (Tumbleweed-style?) for $20k.  Mortgage would be $100k.  Rent out house, live in tiny house in yard, with rent structured so tenant pays all utilities.  Here's how the monthly budget would look;

+$1,500 Rental income (10% gross return on house value, this is very realistic in many parts of US and Canada)
- $500 Mortgage payment (25 year amort, 3.5% rate)
- $250 Property taxes
- $250 House repair/maintenance fund
- $50 House insurance
- $250 Food and household (likely a mostly veg diet)
- $200 Misc (bus tickets, internet, travel, wine, etc)
-----
$0

You'd have to live car-free, of course, but this is doable if you choose a house near/in a small city or big town where everything is small in scale.  You could grow some of your own food, have chickens. 

Sounds realistic for a simple living type who knows how to cook, and enjoy life's free things.  Obvious risk would be tenant vacancies.  You'd need a fund for this, or a line of credit to cover it.  Eventually house would be paid off, and your income would increase $500/month!

Only way I could see having financial freedom cheaper is if you lived mobile, in a camper, boat, etc?  But then you'd lose some of the advantages listed above, and it likely wouldn't be much cheaper. 

[$_gone_amok]

This carries too much risk and not enough diversification. You shouldn't count rental income as your only source of revenue. I would still keep a job.

[menorman]

This carries too much risk and not enough diversification. You shouldn't count rental income as your only source of revenue. I would still keep a job.

Indeed, but it could be a good springboard to help hasten FI. Also, this could be an ideal plan for someone who might want to travel a lot. No need to pay for a big house that's hardly more than a crash pad for a couple weeks between trips that go on for months. All the while, money still flows in via the rent. Only slight problem would be if an issue arose with the rental that required interrupting the trip.

[Bullseye]

This carries too much risk and not enough diversification. You shouldn't count rental income as your only source of revenue. I would still keep a job.

Indeed, but it could be a good springboard to help hasten FI. Also, this could be an ideal plan for someone who might want to travel a lot. No need to pay for a big house that's hardly more than a crash pad for a couple weeks between trips that go on for months. All the while, money still flows in via the rent. Only slight problem would be if an issue arose with the rental that required interrupting the trip.

That was more the idea, a springboard.  It would provide a basic financial independance, from which you could add work or business income for any luxuries you might want. 

[arebelspy]

I love this post.  It's a great idea.  Plus I love rentals, and math.

I'm gonna quibble on some numbers, but in the end, it should actually come out in your favor.

Your numbers are pretty good (really close, actually, but I'd like 'em even more accurate, if possible.)

You shouldn't purchase if the rent isn't at least 1% of the purchase price per month (investors shoot for 2% or more, though that's often on multifamily; this is known as the 2% rule).  So you should be getting at least 1800/mo rent on a 180k house.  If you can't rent it out for 1.8k/mo, you shouldn't be purchasing for that much.

So in your numbers we can either tweak the house price down to 150k (and 1500 rent) or tweak the rent up to 1.8k.  I prefer the former, as it may be a bit more realistic for some reasons I don't feel like typing up, but go with me on it?  :)

Second: all expenses, etc. will add up to approximately 50% of the gross rent.  If you self manage, you can take off 10% management fee.  In this case, I think that's fine to do (but keep in mind that it's not a return on investment, but a job you're paying yourself for).

That should cover the maintenance, vacancy, insurance, taxes, capital repairs, etc. etc.  So let's budget 40% of the gross rent (again, assuming self managing) for that.  1500 rent = 600/mo for those expenses.  Many months you'll have leftover, stick that in an account for when maintenance, vacancies, etc. hit.

So on our house (that is now 150k), we'll put down 20%, or $30,000, and finance the rest ($120,000) at 3.75%, 30 year.  Monthly payments will be $556.

Purchase the tumbleweed home for 20k.

Total spent: 50k (30k downpayment, 20k tumbleweed home).

That leaves 50k.  I'd leave about 5k of that liquid, earning 1% (or $4/mo) for emergencies.  This will build up as you take excess of that 600 and put it away for maintenance and vacancies.

I'd put the other 45k into whatever your comfortable asset allocation is.  Let's KISS and say you get some dividend paying stocks that generate 4%, or 150/mo.

Monthly income:
1500 rent.
$154 interest.

Monthly expendatures:
600 maintenance/vacancy/insurance/taxes/etc.
556 mortgage

I would also get a home warranty in this circumstance.  Most of the time I wouldn't recommend it, but since you're cutting it so close and the house is your main (only?) form of income, it'd be a form of insurance for any problems with the house.  About $400/year.  Put in your lease that tenants pay the trade service fee (usually about $60) when there's a problem.

That will run you $33/mo.

That leaves you $465 for everything else.  If we assume 250 food, like you did, that leaves the "other" at 215 (real close to your 200).

Like I said, the numbers are close, but I wanted to get them a little more clear.

Health insurance is a potential issue.  And doing this you're basically saying "I can live on a budget of $465/mo, or $5,580/year if I have no housing costs and my utilities are covered."  That's tough to do.

This is a fun thought experiment though.

[arebelspy]

Was thinking about this more to see how it's scalable.

(As an aside, I'm surprised this topic hasn't generated more response, it's one of the more thought provoking threads I've read. Especially considering the number of folks here from ERE.  More on that in a minute.)

Basically the person in question has 100k invested.

They are getting a return of $315/mo on that money, which is a 3.8% return (after the maintenance, home warranty, etc.).  Very feasible.  Plus they have a property management job that brings in $150/mo, totalling $465/mo income.  They are also getting principal paydown (gaining equity) in the house, slowly.

The issue, naturally, is trying to live on 5600/yr.  Very ERE-esque.

[Gerard]

I was thinking, unless you really wanted a tumbleweed home, this could work better in a house with a basement or above-garage flat that you live in. Maybe even one where the extra flat is not entirely legal -- only a problem if you wanted to rent it out, which you don't -- and thus cheaper.

(And I'm assuming health insurance wouldn't be an issue as you're in Canada.)

[zweipersona]

The issue, naturally, is trying to live on 5600/yr.  Very ERE-esque.

Thanks for the clearer picture.

I think it WOULD be possible, but it would work best, as was said earlier, for a framework to jumpstart ER.  It would be very easy for an individual to get 100k in 3 years.  Another year of work and it would likely be a more comfortable living.  And let's face it, does anyone ever want to COMPLETELY stop working?

I think I like this idea though, because it's so versatile.  You could be extreme and live off this sum.  Or you could set this up and continue earning for another few years.

I hadn't really considered rentals until I came to this site.  With mortgages as low as they are, it seems they're an awesome source of income.

[velocistar237]

http://lackingambition.com/?p=829

This guy started with about $100K and bought several foreclosures with the money. I think he's up to three houses now.

The issue, naturally, is trying to live on 5600/yr.  Very ERE-esque.

With an HDHP, you would need assets to cover the deductible, which I suppose you would have, though digging into your stash would decrease your income.

This carries too much risk and not enough diversification. You shouldn't count rental income as your only source of revenue. I would still keep a job.

Indeed, but it could be a good springboard to help hasten FI.

Agreed. A job could cover health insurance, and your savings rate would start out at almost 100%, meaning you're already essentially FI, and you're improving your SWR, or you're preparing for higher expenses in a later life stage. I don't see this as thought experiment as a permanent retirement, except for the rare brave soul.

[Bullseye]

Thanks for the great feedback and analysis!  Glad to hear there are no major holes in the idea. 

A few notes....

I'm in Canada, so health care is not an issue.  Just have to pay for dental and prescrips. 

I like the suggestion to use what is already there on property, like a basement or garage apartment. 

My idea was to see how low you could go, a thought experiment.  My actual application would be different, as we are a family of four.  This means buying maybe a duplex and living in one half.  Or a property with two homes, or allowances to have two.  The challenge is that both of these are not easy to find in my area.  I'm expanding my search to further areas, which takes a bigger commitment to the lifestyle, as it means moving from family and friends we have established on our area. 

My most workable idea is likely to move somewhere not too far away, but where prices are cheaper.  Find something with a carriage house (garage apartment), and rent THAT out.  We'd likely be mortgage free right away, and then have about$1k per month in rental income to springboard a new lifestyle that is not career-based. 

But I do like the idea that one could live on $100k, if so inclined!  Probably more like $200k-$250k for a family. 

[arebelspy]

http://lackingambition.com/?p=829

This guy started with about $100K and bought several foreclosures with the money. I think he's up to three houses now.

Is the blog good/interesting enough to start at the beginning and read all the back posts?

[velocistar237]

http://lackingambition.com/?p=829

This guy started with about $100K and bought several foreclosures with the money. I think he's up to three houses now.

Is the blog good/interesting enough to start at the beginning and read all the back posts?

Maybe. Why don't you start and see? I joined early on, but I don't think I ever went back to the beginning. He doesn't post very often, so it wouldn't take much time to catch up. It is pretty impressive what he's done.

[arebelspy]

http://lackingambition.com/?p=829

This guy started with about $100K and bought several foreclosures with the money. I think he's up to three houses now.

Is the blog good/interesting enough to start at the beginning and read all the back posts?

Maybe. Why don't you start and see? I joined early on, but I don't think I ever went back to the beginning. He doesn't post very often, so it wouldn't take much time to catch up. It is pretty impressive what he's done.

I spent a few hours reading every post on there.  It was indeed worth it.

I didn't realize until about 2/3 of the way through that it is mikeBOS from the ERE forums.

It's weird to have read 100+ posts from someone (some quite personal, moreso than most blogs) and feel like you know someone, but have never spoke to them.

Anyways, that aside, it was quite a good blog, I'd recommend it to any ERE-type fan.

[2handband]

I would think achieving financial freedom with $100,000 starting cash would be very easy... I'm working on doing it and my cash on hand adds up to a little over $5000. But let me clarify: you're going to borrow $100,000? To me that sounds insane, if you're starting out with no debt. Do you have any money at all?

[arebelspy]

I would think achieving financial freedom with $100,000 starting cash would be very easy... I'm working on doing it and my cash on hand adds up to a little over $5000. But let me clarify: you're going to borrow $100,000? To me that sounds insane, if you're starting out with no debt. Do you have any money at all?

This is a hypothetical, and it's based on the idea of starting with 100k cash (and yes, using some leverage - i.e. a mortgage).

[SpendyMcSpend]

What about major home repairs and health insurance?

[arebelspy]

What about major home repairs and health insurance?

Do you have a specific question about them, or just the general idea of them?

If the latter, both have been covered and addressed.

[SpendyMcSpend]

The health insurance was covered by someone saying that you would need to get a full-time job.  Hence, not retired or financially independent. 

[2handband]

I would think achieving financial freedom with $100,000 starting cash would be very easy... I'm working on doing it and my cash on hand adds up to a little over $5000. But let me clarify: you're going to borrow $100,000? To me that sounds insane, if you're starting out with no debt. Do you have any money at all?

This is a hypothetical, and it's based on the idea of starting with 100k cash (and yes, using some leverage - i.e. a mortgage).

God, if I had 100k lying around I'd just buy a house, plant a garden, and give the rest of the world the finger.

[arebelspy]

The health insurance was covered by someone saying that you would need to get a full-time job.  Hence, not retired or financially independent.

...what?

Again, it was addressed. Sounds like you still didn't read the thread.

I mentioned health care as an issue, OP replied with the answer:

I'm in Canada, so health care is not an issue.  Just have to pay for dental and prescrips. 

[arebelspy]

I would think achieving financial freedom with $100,000 starting cash would be very easy... I'm working on doing it and my cash on hand adds up to a little over $5000. But let me clarify: you're going to borrow $100,000? To me that sounds insane, if you're starting out with no debt. Do you have any money at all?

This is a hypothetical, and it's based on the idea of starting with 100k cash (and yes, using some leverage - i.e. a mortgage).

God, if I had 100k lying around I'd just buy a house, plant a garden, and give the rest of the world the finger.

Time to go earn 100k then. ;)

[SpendyMcSpend]

Oh whoops. I must have entirely skipped over that post!

[2handband]

I would think achieving financial freedom with $100,000 starting cash would be very easy... I'm working on doing it and my cash on hand adds up to a little over $5000. But let me clarify: you're going to borrow $100,000? To me that sounds insane, if you're starting out with no debt. Do you have any money at all?

This is a hypothetical, and it's based on the idea of starting with 100k cash (and yes, using some leverage - i.e. a mortgage).

God, if I had 100k lying around I'd just buy a house, plant a garden, and give the rest of the world the finger.

Time to go earn 100k then. ;)

Dude, $40,000 would be enough.

[arebelspy]

Oh whoops. I must have entirely skipped over that post!

Ah, makes sense. I agree with you it's a potential issue for someone in the US, but it's such an individualized issue, it's hard to estimate for a theoretical plan.

[2handband]

Oh whoops. I must have entirely skipped over that post!

Ah, makes sense. I agree with you it's a potential issue for someone in the US, but it's such an individualized issue, it's hard to estimate for a theoretical plan.

Basically if you live here in the US, you either do without insurance or resign yourself to wage slavery. My wife and daughter are both on Minnesota Care (and no, I don't feel a damn bit guilty about that) but in order to get it for me I'd have to register with an employment service and take whatever job they found me. I'd rather take my chances than be a slave.

[arebelspy]

Basically if you live here in the US, you either do without insurance or resign yourself to wage slavery.

I disagree, as does MMM. Look for his blog post on health insurance. It's tough if you have a pre-existing condition, but for most people private health insurance isn't that terrible, it's way overblown as a problem.

[2handband]

Basically if you live here in the US, you either do without insurance or resign yourself to wage slavery.

I disagree, as does MMM. Look for his blog post on health insurance. It's tough if you have a pre-existing condition, but for most people private health insurance isn't that terrible, it's way overblown as a problem.

I assume you mean this:

http://www.mrmoneymustache.com/2011/09/21/i-can-never-retire-because-of-health-insurance-waaah-waaah/

Let's take a hard look at his numbers. The cheapest plan he found for his hypothetical family of four carries a 10k deductible, which means it's useless for routine medical care, or even minor emergencies. I, for one, do not have 10k or anything like it. It also has a 20% copay up to a measly 12k limit... meaning you're going to be in trouble anyway given a real emergency, because 12k gets eaten up in just a few hours of intensive care. The plan is useless for all practical purposes, will probably never have to pay out a dime for anything ever, and costs $240. Let me put that in perspective for you: my total living expenses for a family of three and two pets almost never exceeds $600. To me $240 a month sounds like a hell of a lot of money.

[arebelspy]

You'll have an HSA for the deductible, and 240/mo may sound like a lot to you, but you have to keep in mind two things:
1) It isn't all THAT much for most people (an extra 72k in their stache at 4% SWR. Not chump change, but probably only like 10% of their portfolio..maybe an extra year of working to cover healthcare for most)
2) Even if it seems like a lot to you, it doesn't make the statement "go without or become a wage slave" true at all.

[2handband]

You'll have an HSA for the deductible, and 240/mo may sound like a lot to you, but you have to keep in mind two things:
1) It isn't all THAT much for most people (an extra 72k in their stache at 4% SWR. Not chump change, but probably only like 10% of their portfolio..maybe an extra year of working to cover healthcare for most)
2) Even if it seems like a lot to you, it doesn't make the statement "go without or become a wage slave" true at all.

Given the sheer number of people unemployed, I think that amount might well be more of a burden for the average person than you think. I know families (and to be fair, most people I know personally are working class) in which both adults work full-time and one of those two people is working entirely for the health insurance. My sister is doing that, in fact.

As for me, I try to keep our expenses down to $500 a month so I can save the rest of my income (I'm pulling down $800-$1500 a month right now) can be saved up for a place to live. $240 is almost half of our total expenses.

[zweipersona]

You'll have an HSA for the deductible, and 240/mo may sound like a lot to you, but you have to keep in mind two things:
1) It isn't all THAT much for most people (an extra 72k in their stache at 4% SWR. Not chump change, but probably only like 10% of their portfolio..maybe an extra year of working to cover healthcare for most)
2) Even if it seems like a lot to you, it doesn't make the statement "go without or become a wage slave" true at all.

Maybe it's the european in me, but I'm not a fan of the health care as it is.  I understand the points my friends make when we debate it.  'You can choose the quality'  'You can choose how well you are covered'  But the simple reality is, there are many people who are going WITHOUT health insurance.  Now, most of here realize that a family making 40k should be able to work health insurance into their life, but some families don't know how to make those financial decisions.

Do we want those families to go without health insurance? 

But that's off topic.

As far as this topic goes, it's been addressed, and even in the United States, health care can be acquired.  If you have a pre-existing condition, however, it is NOT insured.  (Unless you're in Obama care, which can be costly...)  Still, one should also realize that those in the Medical field are not merciless people who want to stock you with a debt you'll never be able to pay back (They want their money too after all).  Most practitioners will find a way to by-pass the pre-existing condition clauses.

[strider3700]

Since the OP pointed out that he's in Canada I figure I should point out that there is no 25 year fixed mortgage out there.  The odds that you'll be paying 3.75% over the entire term are low.  10 years run more then that at this point I believe. 

 I'm assuming the healthcare premium changes depending on province  but in BC for my family of 4  it's something like $120 a month.  Way back when I was single  I think it was $90 a month.  Normally it's not a serious amount but your playing things pretty tight as is.       

[SpendyMcSpend]

It is not smart in any way to go without health insurance ever.

[2handband]

It is not smart in any way to go without health insurance ever.

Health insurance is a very recent invention, you know. Almost everything we've come to take for granted in the modern world is a luxury, not a necessity. Electricity is a luxury, running water is a luxury, cars are a (very wasteful) luxury... and health insurance is a luxury. It's one that's gonna go away, too. Look at what's going on around you; do you really think the average American is going to have health insurance in ten years time? I don't. And here's the bottom line: I'd rather go without insurance than work.

[velocistar237]

It is not smart in any way to go without health insurance ever.

Health insurance is a very recent invention, you know. Almost everything we've come to take for granted in the modern world is a luxury, not a necessity. Electricity is a luxury, running water is a luxury, cars are a (very wasteful) luxury... and health insurance is a luxury. It's one that's gonna go away, too. Look at what's going on around you; do you really think the average American is going to have health insurance in ten years time? I don't. And here's the bottom line: I'd rather go without insurance than work.

In the past, health costs were much lower. If something happened to you, it was less likely to completely wipe out your finances and put you in mountains of debt.

[2handband]

It is not smart in any way to go without health insurance ever.

Health insurance is a very recent invention, you know. Almost everything we've come to take for granted in the modern world is a luxury, not a necessity. Electricity is a luxury, running water is a luxury, cars are a (very wasteful) luxury... and health insurance is a luxury. It's one that's gonna go away, too. Look at what's going on around you; do you really think the average American is going to have health insurance in ten years time? I don't. And here's the bottom line: I'd rather go without insurance than work.

In the past, health costs were much lower. If something happened to you, it was less likely to completely wipe out your finances and put you in mountains of debt.

It's a huge problem, and growing larger as time goes on. Truth is, of all the problems our culture faces (and there are a hell of a lot of them) this is the only one I can envision no (realistic) non-catastrophic solution for. The entrenched interests that benefit from the system as it presently exists are simply too powerful; if the Obama-care debacle didn't demonstrate that no political solution is possible than nothing will. A lot of people are simply going to die needlessly before this gets sorted out.

[gooki]

With the debate around the cost of health insurance, has anyone considered moving overseas to a country that has very good public health care for a short period of time, becoming a permanent resident (or citizen) of that country and the moving back to your home country to live. In the event of a medical emergency you then simply save up enough money for airfare.

I know this won't cover all major health costs (emergency room stuff), but should cover some expensive stuff like cancer treatment, non urgent surgery, hip replacements etc.

[MrSaturday]

With the debate around the cost of health insurance, has anyone considered moving overseas to a country that has very good public health care for a short period of time, becoming a permanent resident (or citizen) of that country and the moving back to your home country to live. In the event of a medical emergency you then simply save up enough money for airfare.

I think you need to be a resident for 6 months each year to get these kinds of benefits.

But you can still take advantage of some savings by flying to a country with affordable health care when you need it.  It won't be free, but in many cases the flight and full bill may be less than the cost of the same care in the US.

[JR]

Basically if you live here in the US, you either do without insurance or resign yourself to wage slavery.

I disagree, as does MMM. Look for his blog post on health insurance. It's tough if you have a pre-existing condition, but for most people private health insurance isn't that terrible, it's way overblown as a problem.

I assume you mean this:

http://www.mrmoneymustache.com/2011/09/21/i-can-never-retire-because-of-health-insurance-waaah-waaah/

Let's take a hard look at his numbers. The cheapest plan he found for his hypothetical family of four carries a 10k deductible, which means it's useless for routine medical care, or even minor emergencies. I, for one, do not have 10k or anything like it. It also has a 20% copay up to a measly 12k limit... meaning you're going to be in trouble anyway given a real emergency, because 12k gets eaten up in just a few hours of intensive care. The plan is useless for all practical purposes, will probably never have to pay out a dime for anything ever, and costs $240. Let me put that in perspective for you: my total living expenses for a family of three and two pets almost never exceeds $600. To me $240 a month sounds like a hell of a lot of money.

I think this is one of the problems with medical insurance in the US.  Insurance shouldn't be for routine doctors visits or small emergencies (does your auto insurance replace your transmission if it goes out? no).  Insurance should cover major medical disasters that can't be self insured.  I don't see the point of expensive HMO plans because all you are doing is prepaying for doctors visits.

[HeidiO]

I read this question recently, if you could choose 1970's healthcare and pay 1970's prices, would you? 
Heidi

[arebelspy]

I read this question recently, if you could choose 1970's healthcare and pay 1970's prices, would you? 

Heck no.  The advances in modern medicine and technology over the last 40 years have been tremendous.