Author Topic: Financially Independent in 5 years – cruise along or keep expanding?  (Read 3088 times)

EZcurrency

  • 5 O'Clock Shadow
  • *
  • Posts: 9
First time MMM poster, and was posting to get feedback for my ideas and Courses Of Action (COA’s) below.  Thanks in advance for reading and replying!  ;-)

Topic Title: Financially Independent in 5 years – cruise along or keep expanding? 

Life Situation:  Navy Officer on Active Duty in Hawaii, with 5 years left to retire (51 years old upon retirement).  Wife and 9 year old son.  Just purchased a 5 bd / 3 ba home in Oahu.  Purchased for $850k, with 3.75% 30 year fixed mortgage.  Home is set up as multifamily:  2 kitchens, 2 sets of washer dryers, etc. 

We live in the 3/2 in the front, and rent out the 2/1 in the back for $2100, which almost cuts in half our mortgage of $4300.  I have 2 more years on this set of orders, and will try to get follow on orders here in HI for 3 more years then retire.  Worst case is we leave for 3 years and then move back, but in the meantime rent out the 3/2.

Gross Salary/Wages:  $156k / yr ($13k / mo), but in 5 years after retirement pension is $3,750 / mo.

Pre-tax deductions:   IRA:  only $5,500, but will start adding $5,500 / yr.

Rental Income:  5 rental properties with monthly income (after property manager fees) as follows:
1)   $900
2)   $850
3)   $1,050
4)   $950
5)   $850
TOTAL:  $4,600 / mo

1 is paid off, 1 more paid off in Feb 2017, and I’m accelerating the payments and snowballing payments on all others to be paid off within 5 years (before retirement).

Total monthly income after retirement:

Rentals:  $4,600
Pension : $3,750
Rent of house:  $2,100
TOTAL:  $10,450

After retirement, all debt (cars, credit cards) paid off except primary residence mortgage.
Taxes:   currently FL resident, so 0 state tax.  This will change after retirement (HI resident:  4%).  Federal 15% (rental properties help a lot to reduce taxes).

Current expenses:   
car:  $9k balance, payments $215/mo, low interest (2%)
credit cards:  $45k balance, payments (I pay $2500/mo to pay off quickly), low interest (3%) from balance transfer specials.

Education costs for son:  Son’s college is paid for by Post 911 GI Bill, which covers all tuition and a housing allowance (area dependent, but here in HI its $3k/mo) for 36 months.

----------

COA 1:  Don’t work, and enjoy retirement and the good live in Hawaii going to the beach, hiking, paddleboarding, kayaking, SCUBA diving, etc.   Net income $10,450, with mortgage $4,300, so about $6k per month after paying expenses.  Plenty to live off of and still save, with the occasional vacation or new car or other big purchases.

COA 2:  Before retiring from Active Duty, but after the majority of houses are paid off, take a HELOC or fixed equity line from a property ($150k - $200k), and buy several more rental properties in low cost states (OH or IN).  Either buy for cash 2-3 houses and rent out, or take a mortgage and put 20% down and accumulate 4-8 more houses.  Continue living off of rental income as in COA 1.  Risk is more properties = more things can break and go wrong … and more debt.   Upside is more long term wealth creation.

COA 3:  Same as COA 2, but take out $500k or so and either buy cash, or mortgages for more investment properties.  Also after retirement from the Navy, take another job to earn more income, and use that to pay down debts faster.

Which COA do you guys / gals think I should do?  Also, any other additional things I should do?  I am also using LLC's for 3 of the properties, so as each LLC is making more $ (after mortgage paid off), I can put 25% of the income into a SEP, which will further reduce taxes.

Thanks all for your input!
EZcurrency


Shor

  • Bristles
  • ***
  • Posts: 480
  • Location: Orange County, CA, USA
Hmm.. well yes, you can leverage your assets further, take on more debt and expand, but to what end? What exactly would the extra income provide?
Are you looking to produce a RE empire? Or are you looking to downshift your life and enjoy retirement?
Mind you, there is no wrong answer. Plenty of people don't learn or just can't imagine pursuing trivial hobbies in their spare time, it's always more grinding, more working!

With what your current empire brings in, does that meet rental expenses including expected repair, maintenance, vacancies? What will more income do for you exactly, on top of the pension, on top of the current expected income?

Future thoughts:
Who will take over managing the business when you finally do decide to give it a rest? Any plans on end of life for these operations?
As mortgages get paid off, income increases, where does that go toward? Another job on top of the existing overflow of income? What exactly is your end goal?
And finally, are you really planning on spending $125k annually in retirement, hehe on what exactly? [listens to response] That sounds ridiculous! :D

sirdoug007

  • Pencil Stache
  • ****
  • Posts: 587
  • Age: 38
  • Location: Houston, TX
Doesn't sound like life can get much better than COA1. Enjoy your time man. You've earned it!


Sent from my iPhone using Tapatalk

redbird

  • Pencil Stache
  • ****
  • Posts: 534
Wow. Take option A.

You don't say how much your yearly or monthly spending is, but I used to live/work in Oahu. With that amount of pension and rental income per month, regardless of that mortgage, I personally would have PLENTY of income to be fine. I think you probably will be too, even if you spend more per month than I do.

Lindy

  • 5 O'Clock Shadow
  • *
  • Posts: 49
  • Location: Minnesota
    • Frugal Turtle
I'm with the others.  Option A all the way.  It sounds like heaven.  Why would you want to add more stress to your life when you're retired?  Enjoy your life!

EZcurrency

  • 5 O'Clock Shadow
  • *
  • Posts: 9
I'm think I'm with you guys ... COA 1.  We are all given only so much time on this Earth, so may as well enjoy it rather than working and trying to build the "empire" more ... which can lead to more stress.

After Shor's post, I looked at taxes (about $10k total for all rentals annually), and insurance (under $2k / yr total), so call it $12k, so $1k more per month in expenses. 

So now:
$10,450 residual income
$ 4,300  mortgage
$ 1,000  taxes/ins for rentals
-----------
$5150 left per month for living expenses, which is plenty, and also enough for repairs, maintenance, vacancies, etc. for rentals.

This assumes no change in rent, but actually 5 years from now when I retire, rents will be higher, so income higher.  Also we can move in the 2/1 unit in back (when son is out of the house), and rent out the 3/2 for $500 more per month, which helps.

Here is a side story ... now that I'm thinking of budgets and what it takes to live on.  Many years ago, I lived on a sailboat in a marina.  The previous owner lived on the boat for about 5 years, and 3 of those years he sailed it to Hawaii (to the Big Island) and lived there.  He was kind of a hippy dude and hated to spend money, so he anchored out to not pay slip rent for the marina.  He caught rain water to fill up the boat tanks, fished and traded fish for pineapples and food (and sold some at markets).  Did didn't drink (but smoked pot), so he grew his own pot, and traded fish for pot with his hippy friends.  Anyway, I asked him how much he spent over 3 years living in Hawaii on the boat ... he said he spent only $1500 ($500/yr)!!!  Pretty much all of the money was for diesel fuel for the boat, and gas for the tender. 

Now that's MMM to the Max!  ;-)

EZ

Dicey

  • Walrus Stache
  • *******
  • Posts: 9968
  • Age: 61
  • Location: NorCal
Go ask Nords, he will help you. The Great Nords knows all.

MoonLiteNite

  • Bristles
  • ***
  • Posts: 413
If option 1 is enough money, then just do that? Now if you want a bigger house, a better car, or better cars more often. Then you have to take more risks and more work.
I personally would love to have that kind of monthly income and would be just fine with it!

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5186
  • Location: Fayetteville, NC
is that rental income profit after paying all expenses ESPECIALLY SETTING ASIDE MONEY FOR REPAIRS or is it gross receipts less property management fees?

Because if it isn't the first case, your numbers are all wrong.

EZcurrency

  • 5 O'Clock Shadow
  • *
  • Posts: 9
The property manager takes out a bit each month, and puts it in a reserve account which would cover most repairs ... but anything beyond that I need to pay.  So accounting for that (extra costs beyond the escrow account for repairs), I would have less rental income each month ... but still I think fine financially.

I personally just need to start tracking all expenses more (down to the dollar), and try to minimize expenditures.  I don't mind cutting back to be more fiscally efficient ... its the wife that has a problem with cutting back spending!  ;-)

EZ

Nords

  • Magnum Stache
  • ******
  • Posts: 3175
  • Age: 58
  • Location: Oahu
    • Military Retirement & Financial Independence blog
Re: Financially Independent in 5 years – cruise along or keep expanding?
« Reply #10 on: August 28, 2016, 10:19:45 AM »
Welcome to the forum, EZ!

First time MMM poster, and was posting to get feedback for my ideas and Courses Of Action (COA’s) below.  Thanks in advance for reading and replying!  ;-)

Topic Title: Financially Independent in 5 years – cruise along or keep expanding? 

Life Situation:  Navy Officer on Active Duty in Hawaii, with 5 years left to retire (51 years old upon retirement). 
Have we met?!?  I swear I answered a similar question recently on the Sailor Bob . com SWO forum.

Total monthly income after retirement:

Rentals:  $4,600
Pension : $3,750
Rent of house:  $2,100
TOTAL:  $10,450

After retirement, all debt (cars, credit cards) paid off except primary residence mortgage.
Taxes:   currently FL resident, so 0 state tax.  This will change after retirement (HI resident:  4%).  Federal 15% (rental properties help a lot to reduce taxes).
[...]

Net income $10,450, with mortgage $4,300, so about $6k per month after paying expenses.  Plenty to live off of and still save, with the occasional vacation or new car or other big purchases.
You seem to be financially independent on cash flow alone without touching the principal.

Are you including your rental expenses/taxes in those estimates?  For example, Oahu rentals charge 4.5% excise tax on the gross rent in addition to the annual state tax.  If your rentals are on the Mainland then you may be looking at another state-tax bill for that income.

COA 2:  Before retiring from Active Duty, but after the majority of houses are paid off, take a HELOC or fixed equity line from a property ($150k - $200k), and buy several more rental properties in low cost states (OH or IN).  Either buy for cash 2-3 houses and rent out, or take a mortgage and put 20% down and accumulate 4-8 more houses.  Continue living off of rental income as in COA 1.  Risk is more properties = more things can break and go wrong … and more debt.   Upside is more long term wealth creation.
Regardless of what you decide to do with your rental properties, I'd recommend obtaining as much HELOC access as you can starting 2-3 years before retirement.  Once you retire your income will be drastically reduced (no military paycheck) and your lender will only consider cashflow (not assets). 

Your rental-buying thoughts get into the deeper question:  once you have "enough", how much more do you need?  How hard do you want to work?

After 14 years of retirement I still haven't figured out the answer to those questions yet, but I'd suggest setting yourself up with access to credit before you leave active duty.  Then, once you retire, take it easy for at least two years.  If you find long-distance landlording to be absolutely fascinating, challenging, and fulfilling then go do it.  (You should plan your real-estate exit strategy, too-- other than "probate".)  If you develop other interests then you can put the rental property plan on the shelf until you have more time (or interest). 

Personally, every year we've become wealthier without working any harder.  I get more challenge & fulfillment out of family, travel, writing, and surfing than out of working for more money.  I have a lot more autonomy, too, instead of managing properties & property managers.

Which COA do you guys / gals think I should do?  Also, any other additional things I should do?  I am also using LLC's for 3 of the properties, so as each LLC is making more $ (after mortgage paid off), I can put 25% of the income into a SEP, which will further reduce taxes.
Hopefully you've sought professional advice on the SEP.  I know from a CPA discussion that one rental property does not make me a "Real Estate Professional" in the eyes of the IRS's active participation parameters, but I'm not sure about the threshold. 

Another question would be why you're sheltering money in the SEP now, only to face RMDs later.  Your military pension is probably going to put you right into the 15% personal income tax bracket, and the rental income will put you into the 25% bracket.  You're certainly deferring the taxes but I'm not sure that you're going to avoid any taxes.  Perhaps it's better to maximize your contributions to your Roth TSP and your Roth IRAs now (while you're in the lowest income-tax bracket that you'll ever see) and not complicate your tax situation with the SEP.  But again... professional advice.

I'm on travel for another month, but we'll be back on Oahu in October.

EZcurrency

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Financially Independent in 5 years – cruise along or keep expanding?
« Reply #11 on: August 29, 2016, 01:04:08 AM »
Nords,

Thanks for the reply and advice!  We have never met nor communicated on forums, but I'd enjoy meeting for lunch or coffee when you are back on island in Oct.  I'll send you a PM.  Safe travels!

Regards,
EZ

patrickza

  • Pencil Stache
  • ****
  • Posts: 544
  • Age: 40
    • The Investor Challenge
Re: Financially Independent in 5 years – cruise along or keep expanding?
« Reply #12 on: August 29, 2016, 03:51:45 AM »
I also vote for 1. That's not only FI, but that allows you to increase the stache slowly but surely, which means you could then increase spending if you really wanted to in future. Go and enjoy your life!