Author Topic: Just stumbled upon MMM and my world is rocked and I need your advice!!!  (Read 4945 times)

KBall

  • 5 O'Clock Shadow
  • *
  • Posts: 4
So long story short, through a rabbit trail of blog reading the other day I came across Mr Money Mustache and my world has officially been rocked!  I and my wife are 33 and I have been working hard for the past 10 years with a focus on early retirement but until two days ago I didn't even realize there are groups like this and people out there talking about this.  I have been on my own journey, with my head down, without even having learned some of the basic concepts that I have just learned in 2 days of reading this blog like the 4% rule, etc.  I would LOVE your thoughts/advice on where I am at as I am just now diving into some calculators and running numbers from what I am learning on this blog and I am realizing I am a lot further ahead than I thought I was but still might need another year or two of planning before I can officially pull the trigger.

Quick details/recap.  For the past 10 years I have put all of my energy in to buying rental real estate.  I have been able to grow my portfolio to 16 units (mostly small multi-family and a few single family homes) which currently gives me about $90,000/year in cash flow before taxes.  In that real estate I currently have about $1.4 million in equity.  Outside of that I have not done any savings/investing other than max out my SEP IRA the last two years with a current balance of $123,000.  Since I can't touch that until "normal retirement age".  My real estate is all I have.   I do have not other investments and very little savings because anytime I have enough savings I buy another rental.  Or family (we have 4 young kids) expenses are about $75,000/year which includes out mortgage of $2500/month (Like Mr Money Mustache, I know our home is a luxury but it is our place of rest and much joy and worth working a little longer if need be to have this place to raise our family).  So based on a approx. 25% tax bracket my rental income after taxes is short of paying our expenses and leaves zero wiggle room or savings if I were to try and pull the trigger now and fully retire.  Lastly my income varies in retail real estate sales but I am averaging about $250,000/year after taxes the last couple of years and expect to for the next couple of years.  My wife does not work.

I guess my main questions would be:

-how much $ do you think I need to save and invest into a more traditional investment vehicle to be able to scale the rest of the gap mentioned above (about $10,000-$15,000 more per year) to last me until I can access my retirement account in about 30 years?

-Any recommended investment vehicles outside of real estate that you would recommend that would provide some income to live on?  Seeing that I may be within 1-2 years away from being able to pull the trigger maybe a bond heavy investment would make more sense?

-Since I cannot easily access the equity in my rentals would it make sense to sell one or two properties and move the $ into a more traditional investment vehicle where I can sell shares if need be but also receive dividends?

Any thoughts/advice on that or otherwise?  I would SOOOO appreciate it!!!  Thank you in advance!!!
« Last Edit: October 08, 2016, 09:27:31 AM by KBall »

matchewed

  • Magnum Stache
  • ******
  • Posts: 4334
  • Location: CT
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #1 on: October 08, 2016, 08:25:44 AM »
Post a Case Study.

And you should ask questions. Just pouring your situation doesn't really mean much. Ask specific questions and ask for specific advice.

You could also look into how to access retirement accounts prior to retirement age - http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/


KBall

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #2 on: October 08, 2016, 09:28:59 AM »
Thanks Matchewed!  My brain is just swirling a million miles a hour after digesting so much info.  I just clarified a few main questions at the end of my post. 

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8897
  • Location: Oregon
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #3 on: October 08, 2016, 09:37:42 AM »
As recommended, use the case study spreadsheet: http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/ It has a lot of really awesome functionality in it.

A couple potentially interesting blog posts to you, considering your situation and questions:
http://www.gocurrycracker.com/never-pay-taxes-again/
A must read: http://jlcollinsnh.com/stock-series/
Lost of good calculators and info on here, also recommend his podcasts: http://www.madfientist.com/
Real estate is not my area, but two articles on FIRE+ real estate: http://retireby40.org/rental-properties-retire-early/ http://retipster.com/surprisingly-simple-math-real-estate-retirement/
She's FI on real estate and it's a good blog: http://affordanything.com/category/real-estate/

Anyway, hope some of these are useful/to your liking! Looks like you're in a strong position already =)

KBall

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #4 on: October 08, 2016, 10:19:47 AM »
Thanks Bracken_Joy!!!  This is all great and I will dive into these links and the case study this weekend!  I see you are a fellow Oregonian!  I live just east of Portland in Sandy and word all around Portland/Metro during the day.  I see the MMM annual retreat in May of 2017 is in Washington.  I am considering attending since we live so close to where they meet.  Thanks again for your feedback and have a great weekend!!

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8897
  • Location: Oregon
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #5 on: October 08, 2016, 10:38:21 AM »
Thanks Bracken_Joy!!!  This is all great and I will dive into these links and the case study this weekend!  I see you are a fellow Oregonian!  I live just east of Portland in Sandy and word all around Portland/Metro during the day.  I see the MMM annual retreat in May of 2017 is in Washington.  I am considering attending since we live so close to where they meet.  Thanks again for your feedback and have a great weekend!!

Hey I love Sandy! Beautiful. And yes, there is a MMM portland group! Here is the link to that: https://www.facebook.com/groups/706232302826090/

There's lots of us PNW mustachians, so welcome to the group! If you decide to go to Camp Mustache, be sure to book EARLY, it always sells out like instantly.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28010
  • Age: -999
  • Location: Seattle, WA
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #6 on: October 23, 2016, 06:05:06 AM »
Welcome to the forums!  You're doing awesome.

Summary (correct me if I'm wrong): 90k net real estate cash flow minus taxes, leaves you with about 75k.  Your spending is about 75k.

Pretty great start to FI.

I don't see any need to sell anything.  You're earning 250k/yr.. so let that fund a healthy cash buffer and diversified equities portfolio.  Work another.. two years?  Save up ~450k (after taxes, plus investment increases in the meantime) in those two years, and FIRE.  Pretty simple.

Congrats on doing so well so far, without even having the FIRE concept on your radar as a thing people do.  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

human

  • Pencil Stache
  • ****
  • Posts: 791
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #7 on: October 23, 2016, 06:35:53 AM »
Are you making 250 or 340? (250 real estate sales + 90 rental income).

Assuming you won't have any more mortgages to pay when you retire it look like current expenses are 50k. That 1.25 million (50x25).

However do you want to pay for college are you saving for that? What are your goals etc. People above have already asked all that.

Seems to me though tyat barring some catastrophe with your rentals or a huge glut of units on the market, you could just live off of your rentals now.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28010
  • Age: -999
  • Location: Seattle, WA
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #8 on: October 23, 2016, 06:47:10 AM »
Assuming you won't have any more mortgages to pay when you retire it look like current expenses are 50k. That 1.25 million (50x25).

I wouldn't assume that.  Where would the money come from to pay them off (except from selling)?

Quote
Seems to me though tyat barring some catastrophe with your rentals or a huge glut of units on the market, you could just live off of your rentals now.

I think that'd be cutting it close unless they wanted to cut spending.

I'm assuming things like numbers are CFAT, and thus already counting depreciation and such.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

human

  • Pencil Stache
  • ****
  • Posts: 791
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #9 on: October 23, 2016, 07:16:37 AM »
Assuming you won't have any more mortgages to pay when you retire it look like current expenses are 50k. That 1.25 million (50x25).

I wouldn't assume that.  Where would the money come from to pay them off (except from selling)?

Quote
Seems to me though tyat barring some catastrophe with your rentals or a huge glut of units on the market, you could just live off of your rentals now.

I think that'd be cutting it close unless they wanted to cut spending.

I'm assuming things like numbers are CFAT, and thus already counting depreciation and such.

I can assume anything I want based on the limited info. Not sure what that 90k cashflow is net of. Is that after mortgages, before? Who knows . . .

People here retire with much less dough coming in, if all expenses are covered that 90k should go a long way.

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28010
  • Age: -999
  • Location: Seattle, WA
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #10 on: October 23, 2016, 07:37:12 AM »
Oh, duh, cash flow is obviously before taxes, I calculated that in my first post, then forgot that when I made the last post.

Quote
which currently gives me about $90,000/year in cash flow before taxes

I'm assuming the 90k cash flow is net of expenses, any mortgages, etc. but before depreciation.

So 90k in net real estate cash flow before taxes.  I would think depreciation would get that down quite a bit. 

Here is the big mistake though:

Quote
So based on a approx. 25% tax bracket my rental income after taxes

Huh?  :)

25% tax bracket?  Not even close!

With 2 adults + 4 kids you're looking at 4050 personal exemption/person = 24,300.  Standard deduction of 12,600. 4k in child tax credit (credit, not deduction).

Those, plus the aforementioned depreciation, should be able to take your 90k in real estate net income and reduce your taxes to around $0.

Heck, even if you had NO depreciation: 90k-24,300 exemptions-12,600 standard deduction = 53.1k taxable income.

That works out to $7037.5 (10% on first 18,550, 15% on next $34550--up to 75,300) minus the 4k in child tax credits = $3k due in taxes.

That's with zero depreciation.  If you have depreciation to knock that 90k cash flow down, it'll be quite a bit lower.  What was your claimed depreciation last year?

That means from your 90k cash flow, you pay 3k in taxes, leaving you with 87k.  Spend 75k, that leaves you with 12k to plow into reserves.

Still cutting it too close for me, based on my thoughts in this thread, and why you need to have a positive savings rate and be reinvesting income if you FIRE with real estate:
http://forum.mrmoneymustache.com/real-estate-and-landlording/4-withdrawal-rate-if-investing-in-real-estate/

But you're probably a lot closer than you think.  Knocking off 25% for taxes is silly, when my above calculations were about 3% in taxes (3k on 90k), and you'd likely be even lower than that with the depreciation.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

marty998

  • Walrus Stache
  • *******
  • Posts: 6481
  • Location: Sydney, Oz
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #11 on: October 23, 2016, 02:25:10 PM »
Anyone else stunned that a real estate agent earns $250,000? wow...

Nice gig... it amazes me how high the buying/selling commissions are over your way. Now I know where it all goes :D

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28010
  • Age: -999
  • Location: Seattle, WA
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #12 on: October 23, 2016, 04:09:51 PM »
Anyone else stunned that a real estate agent earns $250,000?

No.

Take 3% of a home price.  Now multiply by how many homes you can sell (or help people buy).  Minus expenses (mostly payment to broker, but if you're your own broker...)

:)

The biggest part is marketing/building up.. once you get it big, you can make serious money.  Just takes awhile to get there.  I'm impressed he's at this level by age 33 though!

Similar idea with a doctor, or a lawyer.  One of those professions earning 250, 300k, whatever after a few decades wouldn't surprise me.  Doing it by 33 though, that would be impressive.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

Dicey

  • Senior Mustachian
  • ********
  • Posts: 10845
  • Age: 61
  • Location: NorCal
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #13 on: October 23, 2016, 04:36:55 PM »
Following for the case study and a lazy way to find B_j's citations again.

Bracken_Joy

  • Walrus Stache
  • *******
  • Posts: 8897
  • Location: Oregon
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #14 on: October 23, 2016, 05:21:10 PM »
Following for the case study and a lazy way to find B_j's citations again.

Diane- if you message me your email address, I'll send you my entire cheat sheet I have saved in my ever note of all the links I put onto case studies =) Sharing is caring!

mikefixac

  • Bristles
  • ***
  • Posts: 313
  • Location: Brea
    • Uncommonly Brilliant
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #15 on: October 23, 2016, 07:36:11 PM »
Your story is very interesting. Honestly, I'd try and contact MrMM himself and see if he would be interested in doing a case study on you. I'd love to see what he'd write on your case study.

A few weeks ago, I looked at what I've made the last 11 years. Take away one year, my average income per year was $3K total. No joke. I just looked at my tax returns for last 25 years and saw what I was earning. Honestly, I was shocked. But I'm not a budget kind of guy so I just didn't know.

My money was also made in real estate. To say I started and ended at the right time is an understatement. But even making that small amount in my own business but with my real estate earnings, I'm retired, and I'll never have to work again. It's almost hard to wrap my head around it, but as you know, we live in a great country.

Since you found this website, and the lights have been turned on, I'd also recommend a forum called The Bogleheads, named after Jack Bogle, founder of Vanguard. Reading what you've written so far, I think you'd learn a hell of lot over there too. Lots of very smart/giving people there.

Also, I'd recommend patience with all that you're learning. In all your excitement, you might find in talking about MMM to others, you just get a deaf ear. And that can be frustrating. Of course here you're welcomed.

Also, you're very smart with what you've done already, but I'd recommend a book called The Simple Path To Wealth, by Jim Collins. He's written on the MMM blog and his book is something you'd enjoy.
« Last Edit: October 23, 2016, 07:40:44 PM by mikefixac »

SwordGuy

  • Walrus Stache
  • *******
  • Posts: 5750
  • Location: Fayetteville, NC
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #16 on: October 23, 2016, 07:51:45 PM »
Yes, please do a proper case study per the guidelines posted above. 

FYI, you are doing GREAT. 

Things I would want to know are how much you have in your sinking fund that you've set aside for maintenance repairs.  Ditto for the vacancy set aside.  I would want that fully stocked before I cut off my firehose of cash.

ARebelSpy made some very good points about depreciation cutting down your tax income.   Of course, your depreciation will also drop each year as you pay off the mortgages because your interest portion of it will get lower, so take that into account.

I would want at least a year's worth of expenses available to me in cash on top of those buffers and I would consider myself ready.   Or if you're real risk averse, pay off the home if it wouldn't take more than a year to do it.


arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28010
  • Age: -999
  • Location: Seattle, WA
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #17 on: October 23, 2016, 07:54:17 PM »


Of course, your depreciation will also drop each year as you pay off the mortgages because your interest portion of it will get lower, so take that into account.

Depreciation is fixed, so it won't go down. It could go up from longer term repairs (carpet, appliances, etc) that need to be depreciated rather than written off.

He will pay more taxes eventually, due to the interest you mention, and rents rising, but rising rents should more than cover it.
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with two kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.

KBall

  • 5 O'Clock Shadow
  • *
  • Posts: 4
Re: Just stumbled upon MMM and my world is rocked and I need your advice!!!
« Reply #18 on: October 24, 2016, 12:31:23 PM »
Thank you all for the responses.  This post was pretty quite and for whatever reason it exploded this past weekend so I am stoked to get all of this feedback!  @ Arebelspy, that is GREAT feedback on the taxes and an area I am still very grey on so thank you so much for breaking that down and calling out my erroneous tax figure.  In Oregon we pay approx. 8% state tax so I will try and calculate some of that into this case study as well.  And I will go back and reply soon with some numbers on my depreciation of the rentals (which is a HUGE deduction). 

Here are a few more answers to some of the questions that were asked to paint a better picture and I will review the case study worksheet and complete that very soon since there seems to be more interest in my case study. Thanks so much for your questions and feedback!  I am stoked to be so much closer to FIRE than I had realized!

-@ Human, The $250k is just from my real estate job before taxes but after all business expenses and the $90k is my net cash flow before taxes but after I pay all actual expenses including the mortgages on each property.  -@ SwordGuy, that $90k cash flow does not factor in any vacancy rates or maintenance costs so I definitely want to plan a generous buffer for both of those expenses and I plan to do some projections on that very soon.  Great question/point!

-@ Human, I donít have any future goals to help pay for my 4 kidsí college but my thought there is some of my rentals will be paid off by the time they are entering into college and if need be I could liquidate one or two rentals and keep my cash flow about the same as it is now after I factor in the increased cash flow from the free and clear rentals and rise in rental rates.  That's one of the beauties of real estate.  Most of these rentals have mortgages now so starting in about 15 years they will start being paid off in full and my PI payments will go right into my cash flow.  The last one will be paid off in 28 years from now. 

-And a quick fun update is after devouring all of this info these past 2 weeks I have decided to focus on what I know best and buy another rental.  I am making a offer on a duplex this week that will increase my cash flow another $1000/month putting me that much closer to FIRE. 

Thanks again!!!