I want to generate passive income. Is this too extreme?

[minimalistgamer]

Quick introduction

I am 36 years old, and my wife is 31. No kids at the moment but we are actively trying to start a family. We live in a paid off home.

Here is our current net worth - https://imgur.com/a/0dd4XmI

Our AGI last year is $90630, our taxable income is $66,630. We are making out the following accounts:

- 401k
- Roth IRA
- My HSA

The plan

I want to move out of my 4 bedroom home, and live in a 2 bedroom apartment, and rent out my home.

The idea here is that I will diversify my income, and I will work towards creating a life where I don’t have to work for money. If I move into a two bedroom apartment, the rent from my house will cover our basic living expenses (food, clothing, shelter, transportation). The rest of the expenses can be covered with my wife’s income, and my income will be untouched.

By renting out my place, I expect to be making around $1500 per month, or $1350 per month if I went with a property management company. I will be paying around $800 in rent for a two bedroom apartment in my area.

These are my goals -

1. Reach a net worth of $1 million ASAP
2. Live with a passive income stream which will allow us to travel
3. Start a family
4. Travel and take more vacations, enjoy life.

Is this a good idea? Does anyone here have any experience doing something like this? I am concerned about raising a child in a two bedroom apartment, simply because there won’t be a dedicated room for a child because the second bedroom will have to serve as an office. I did not have a room for myself growing up, so I don’t think it's a big deal, but I am wondering what the downsides are with limited space.

Any other feedback on this will be much appreciated.

[Freedomin5]

It sounds reasonable to me. We’ve rented out our place and are currently live in employer-supplied housing. We are a family of three and live in a two-bedroom apartment (about 600 square feet). When the kid is young, they could sleep in the same room as you (either in their own crib or co-sleeping). When DD was born, we were living in a one-bedroom.

The only downside is that we don’t often have guests because there isn’t enough space for people to sit and DD’s toys are everywhere. We can handle one or two guests but any more than that and people are sitting on the floor.

[minimalistgamer]

Thank you for the feedback.

I see that your location is China. Are you currently living there or are you from China living in the US?

[Another Reader]

Are you saying the rent will be $1,500?  If so this property will likely just break even over time.  You have not considered taxes, insurance, HOA if there is one, vacancy and collection loss, repairs and maintenance, or capital improvements.  Look up the 50 percent rule for rental homes.

[LifeHappens]

What does your wife think about this plan?

[minimalistgamer]

I will look up this rule.

Yes, I am saying my house can be rented out for $1500, and I will be paying $800 in rent for a 2 bedroom apartment.

What does your wife think about this plan?

She is open to it, just as I am. We are exploring options because it would be super nice to be able to spend a little bit more freely, and enjoy life. Our lives have been dedicated to work over the last decade, and we want to slow down a bit.

[terran]

You're using a lot of "I" and "me" words, so I think the big question is, what does your wife think about this plan? If you're both on board then go forth: reducing expenses will always speed up the path to FI.

Other than that, make sure you run the financials as a real business as if you didn't already own the house. As an initial screen, what could you sell the house for after subtracting closing costs? Divide that by 100: can you rent it for that or more per month?

[Another Reader]

You will not make any money on cash flow over time.  Your expenses will eat up half the rent as a rule of thumb.  Please have a look at a basic book about rental income, such as Frank Gallinelli's book.

https://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_1?crid=2Y8N93Y46E6BV&keywords=frank+gallinelli&qid=1552305304&s=gateway&sprefix=Gallinelli%2Caps%2C189&sr=8-1

If you do not understand how income and expenses work in rental property, you will be unpleasantly surprised if you do what you suggest.

[Freedomin5]

Thank you for the feedback.

I see that your location is China. Are you currently living there or are you from China living in the US?

I’m from Canada living in China.

[Valvore]

I've found on this forum when people ask "Is this a good idea" they are already leaning a certain way and want validation for their choice. My suggestion is do a ton a research and decide if its right for you. I've thought about real estate investing (that's what this is) a ton but can't bring myself to pull the trigger because I'm just not confident in the numbers and the way you have to treat it-like an investment/business. You would have to rent out your current home. Are you prepared for the inevitable damage tenants will do? Could you afford to immediately fix a plumbing issue, roof leak or AC failure? When something breaks now, you could take your time to fix it. With renters, you need to repair it right away. I've read alot about how property managers aren't as helpful as you'd expect. They help your find renters and do some basic communication but you've got to foot the bill for everything. Plus how often do renters really contact their landlords? A couple times a month at most? Is that work $150.

These are my goals -

1. Reach a net worth of $1 million ASAP
2. Live with a passive income stream which will allow us to travel
3. Start a family
4. Travel and take more vacations, enjoy life.

Is this a good idea? Does anyone here have any experience doing something like this? I am concerned about raising a child in a two bedroom apartment, simply because there won’t be a dedicated room for a child because the second bedroom will have to serve as an office. I did not have a room for myself growing up, so I don’t think it's a big deal, but I am wondering what the downsides are with limited space.

Any other feedback on this will be much appreciated.

Looking at your goals, these are my comments.

1. Why $1 million net worth? Net worth is useless. It's an imaginary number until you actually access it. You could own a $1 million dollar house and not have any money coming in or food to eat and couldn't live but you'd have a $1 million net worth.
2. This should be your #1 goal. Passive income is most important. That's really what FI is. You buy a magic money making machine that prints out dollars for you every year. There are lots of different ways to get passive income. The main way that people do it on this forum is reaching your FI number (25x your expenses) because that will, in theory, give your a passive income stream indefinitely. If you want to do it other ways, then I get it but just know that your FI number would be reduced.
3. Congrats! You want to start a family. You can do it any time as long as you do the research and evaluate your budget. There are a crazy number of posts about having a family and staying on track to FIRE. It will likely slow you down, but you can have it all. Family + FIRE.
4. Again, you can! How you get there is the question there. You could try slow FIRE, flex FIRE or some combination. It all depends on you and your personal preferences. I include travel in my budget so that I can travel and enjoy life while still getting to FIRE.

Your question about this change seems misguided. You seem to really want to get goals #3 and #4. You can do that by zoning in on #2. Are there other "less extreme" ways  you can get there first? You seem to have reservations about the move and so maybe explore other options before going to this "extreme" measure.

Good luck!

[Kayad]

First, congratulations on having a paid off home.  That is a great accomplishment! 

You are trying to leverage that asset to help you toward FIRE, and the fact that you are willing to think of something so often viewed sentimentally as an asset is going to help you get where you want to go.  However, I question whether your plan is the best way to use that asset (or even an advantageous way to do it-see the 50% rule of thumb, i.e., expect that expenses such as vacancy, make ready, maintenance, cap ex will consume half of rental income).  If your home is worth very much (say 200k+), renting would likely be an inefficient way to get value from that asset. (E.g., say home value is 200k, 50% of rent to expenses, that leaves 9000 in income, which is a 4.5% return on your 200k investment). 

There are a lot of other options to consider :  Can you get a roommate or occasionally Airbnb a room?  It might make more sense to sell and rent or downsize and just invest the remaining proceeds in the market.  You could get a heloc and use your home equity to fund the down payment on a rental property.

[radram]

If you live in a paid-off home, then why isn't that listed in your net worth statement? Would you list it once it became a rental property?

One thing you are not thinking about, is your plan can be temporary. Once you move to the apartment, it is at most a 1 year commitment. If you hate it, just move back into the home next year.

Real estate can be a great way to get passive income. There is also risk. Without hiring a manager, I also consider it passive(ish). As long as you are cool with that, it can work out very well.

I agree with others in that you will clear much less than your initial numbers indicate.

Keep us posted.

[BiggerFishToFI]

Congrats on your paid off house! One thing to note is this: what is the cost basis on the house? If you bought low you can only depreciate the amount of your cost basis + improvements. Everything on top will be taxed at your marginal rate.

If you go through with it, do everything you can to get the best tenants possible. I myself have been too trusting/nice with tenants and it has come back to bite me. Do a background check. credit score 700+, set up a direct deposit service and GOOD LUCK!

[Papa bear]

Is it just me or are we missing a whole lot of info about this house?

Outside of all the other questions in the thread, I want to know if your house is a good rental. If it is, then you can go for it. If it’s not a good rental, then back off fast and go buy a true cash flowing rental property.

So how about some numbers?  What’s the house worth? What are taxes and insurance?  HOA fees? Expected maintenance? Do you have any experience as a landlord?

What other rentals are available in the area? Any 2-4 unit properties?

If it’s anything at all like the other “is this a good rental” or “should I rent or sell” threads, then it’s probably NOT a good rental.  But let’s see some numbers!!!


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[FallenTimber]

Those margins seem a bit tight when you factor in the variables other folks have mentioned. You may make money some months, break even some months, and lose money some months. But the stress vs. income may not be worth it. Only you can decide that.

Having said that, I know exactly where you’re coming from because my wife and I do something very similar. So my question is, is there a way to increase those margins?

Could you rent for higher than $1500 per month? Our home would rent at between $1300-$1500 per month with a long term renter. However, we AirBnB the house and it brings in $5000-$6000 per month for half the year, which brings in $30,000 annually. We spend $2,500 on our housekeeper, and another $2,500 on free wine for guests, cleaning supplies, etc.

On the flip side: can you live for a place that’s less than $800 per month? We rent out our house for about 120 nights each year. Those nights are spent in our camper, either on our ranch, or traveling. We spent 2 weeks in Arizona, 4 weeks in San Diego, and 3 weeks in Moab. Our gas expense goes up, but we still stay well below $800 per month.

Just a couple options to consider.