Author Topic: Looking for some advice on my financial plan  (Read 4731 times)

Ryal

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Looking for some advice on my financial plan
« on: March 20, 2016, 10:59:08 AM »
So I'm a 28 yo guy with a very stable US govt job pulling in $54k a year. My wife is a stay at home mom with our 4 kids. The last one was a bit of a surprise and we need a bigger house. I know that's not something that this forum will agree with right away, but our current place is just 1600 sq ft for six people. I'm following Dave Ramseyís Total Money Makeover. Here are my current stats:

$1000 mini emergency fund in place
Debt  free excluding house.
$20k in TSP(10% including matching)
Two paid off cars.
House is $970/month into escrow for home loan, property taxes and insurance.

All expenses come to $1595/month including home.

Occasional extra income from VA for schooling that I can apply to any part of my plan, but its sporadic so I donít use if for actual planning, just as a sweet bonus.

What Iím starting now is saving up for my recommended 3-6 month emergency fund at a local credit union.  I know after that he says to put all you can into 401k(TSP for me) and Roth. But what I would really like to do is do some minor work on the house Iím in (roof, interior paint and small fixture changes) to make it rental ready. Then save for a bigger house for the family, then once moved in, resume the plan that Dave Ramsey has set out, while adding rental income to the equation, to put us on our target sooner.

This is where Iíd like to have you guys weigh in. What terrible boneheaded mistakes am I making? How can I improve this plan so that I can move forward to FI? My goal is to obtain a few rental properties after renting out my current home for a year, to see if itís something I really want to do.
Thank you guys in advanced.

Kaikou

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Re: Looking for some advice on my financial plan
« Reply #1 on: March 20, 2016, 11:10:15 AM »
I have heard Dave recommend to other listeners that they can start saving for a house after their three to six months

Kaikou

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Re: Looking for some advice on my financial plan
« Reply #2 on: March 20, 2016, 11:13:19 AM »
What's the equity?

Ryal

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Re: Looking for some advice on my financial plan
« Reply #3 on: March 20, 2016, 11:19:53 AM »
What's the equity?
I'm not sure on the actual amount. The loan was $158K, lived here over 3 years. Loan down to $149k. Does that mean I have 9k in equity?
I'm making bi-monthly payments to help cut down on interest and shorten the loan.

Ryal

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Re: Looking for some advice on my financial plan
« Reply #4 on: March 20, 2016, 11:20:23 AM »
I have heard Dave recommend to other listeners that they can start saving for a house after their three to six months
Shoot, guess that's all the validation I need.

Kaikou

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Re: Looking for some advice on my financial plan
« Reply #5 on: March 20, 2016, 11:58:58 AM »
What's the equity?
I'm not sure on the actual amount. The loan was $158K, lived here over 3 years. Loan down to $149k. Does that mean I have 9k in equity?
I'm making bi-monthly payments to help cut down on interest and shorten the loan.

I think that's what it means (I know little, very little about houses).  But if you were to sell it you would break even with closing cost etc.

Maybe do a formal case study so we can see everything? How much are the cars worth?

DR recommends paying off your personal residence before rentals.

Ryal

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Re: Looking for some advice on my financial plan
« Reply #6 on: March 20, 2016, 12:55:59 PM »
I can see the merit behind paying off your own house before getting into rentals, but since I already own the house and being pretty sure it'll make a good rental, I'd rather hold onto it and use the cashflow to pay for either more rentals, or pay off my new house faster. I don't know if id break even or not, but I have a great loan rate(3.2 VA Loan) on it already, so I think keeping it is the way to go. I'm going to use the guides on here for evaluating rentals and see how the numbers look.

SwordGuy

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Re: Looking for some advice on my financial plan
« Reply #7 on: March 20, 2016, 01:25:44 PM »
I have some links to more info, and some advice.

First, the links:

https://www.drcalculator.com/mortgage/


The above link is to a mortgage calculator.   Put in the starting date of your loan and the terms, and it will calculate your equity.  If you've paid extra, you'll need to put that in, too.    You will have paid almost nothing on your loan balance on a 30 year mortgage in 3 years.  If you got a shorter term loan it will look a bit better.

Second, a book that carefully explains how to run the numbers.  Read it.  Really read it.  Really do the math in it.   Rental property is a great way to lose money or to make it.  If you won't do the math you will likely lose your shirt.

http://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_fkmr1_1?ie=UTF8&qid=1458501483&sr=8-1-fkmr1&keywords=real+estate+investors+numbers+gallinelli

Now for the advice.

Just because you won't be living in the house anymore does NOT mean it is suitable for renting.   Assuming it's a neighborhood and a house that regular people would want to rent, it totally depends on the numbers.  You need to do some research and find out what it could rent for.   Gallinelli's book will tell you whether the numbers are good, assuming you do a good job of determining what the rent and costs will be.

Do your homework, do the math until it's second nature and you really understand it, and then you'll have a pretty good idea whether it will work.

If you really need the extra space - and I doubt you REALLY need it, you probably won't need it until your latest one gets a bit older.   Personally, I think having to deal with siblings in their space (and vice-versa) is good for kids.  It teaches them boundaries and the consequences of being an ass, which is something more people need to learn before they are legal adults.

If you really, really, really need the extra space, you might want to consider adding on a room.  Might be way cheaper, especially if you do much of the work yourself.  (And those skills you learn will come in handy when you branch out into rentals.)

Ryal

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Re: Looking for some advice on my financial plan
« Reply #8 on: March 20, 2016, 01:57:36 PM »
Yeah, I understand that we've not even dented our mortgage yet. I just feel that were already invested after a few years, so if its profitable I'd like to keep the place. I know it'll rent out well, I just need to work the numbers to see if it's profitable and worth it. Plus I can do the work while living here without loosing money on vacancy, while prepping it for renters.

I entered my numbers into the calculator and its not really showing an equity block. The loan was for $159000(and its still valued at that), the balance is $149000, so I'm guessing that means I have about $10000 in equity, but its probably less since I'm not taking into account taxes or insurance.

The book is in my cart, I'll order it when I get home and start running the numbers and see what they look like.

I'm pretty sure we need the space. The little one is still a baby, but she has her own room since she is such a light sleeper and that leaves three boys in one room. Its cramped for them, and I think having a four bedroom house would work out for us. I'm not going to add a room to our house, because that would end up making us the only four bedroom house in our immediate area and I don't want to do that. I would also like a larger yard so that the kids can spend more time outside. Even with purging a 1580sq ft house seems cramped for us.

SMCx3

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Re: Looking for some advice on my financial plan
« Reply #9 on: March 21, 2016, 06:35:40 AM »
You should do a full case study. You will get some more definite answers.

If you are sticking with Dave Ramsey, make sure you are saving 15% of your income for retirement.  I would also get a stash of at least 20% cash to put down on my next home.  If you are making ends meet and find yourself in this position, I would pursue selling or renting your current home. 

One step at a time.  Go ahead and tackle the roof, paint etc. around the house.  This will help in the future and make you fell more comfortable at home until you are Ina better position to purchase a new home.

Ryal

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Re: Looking for some advice on my financial plan
« Reply #10 on: March 21, 2016, 06:46:49 AM »
You should do a full case study. You will get some more definite answers.

If you are sticking with Dave Ramsey, make sure you are saving 15% of your income for retirement.  I would also get a stash of at least 20% cash to put down on my next home.  If you are making ends meet and find yourself in this position, I would pursue selling or renting your current home. 

One step at a time.  Go ahead and tackle the roof, paint etc. around the house.  This will help in the future and make you fell more comfortable at home until you are Ina better position to purchase a new home.

Is there a section for case studies that I'm just not seeing? I'd definelty like to hold onto the house, the location is prime. I just want to make sure the numbers work out.

FrugalFan

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Re: Looking for some advice on my financial plan
« Reply #11 on: March 21, 2016, 06:48:49 AM »
I agree that doing a full case study is a good idea. As for the equity, don't forget to include the down payment.

thedayisbrave

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Re: Looking for some advice on my financial plan
« Reply #12 on: March 21, 2016, 07:38:38 AM »
Okay, first off, equity is not just how much you've paid down the loan.  That's part of it, but the way I would calculate it is the value of your house (go online, look at some recent sales in the area that are similar to your home in size, # bedrooms, etc. - or you could even contact a Realtor who will do it for free, I do them all the time), subtract about 10% off of that to account for any realtor/closing costs, and then take THAT value and subtract the amount left on your loan.  That's your equity.  No more "guessing". 

You need to know the value of your house and how much it would rent for.  Don't fall into the classic trap of "oh I'll just rent it out and make some extra money."  DO THE MATH.  Look at what it costs to maintain the house (including a repair reserve for emergency repairs), vacancy, property manager if you'll use one, PLUS taxes, insurance, principle and interest payments.  Will the rent coming in each month cover all those and give you a little extra? If the answer no, then don't rent it out.  Just sell it and move to a bigger house when you are ready.

I'm telling you this because I see people make this mistake all. the. time.  Primary residences typically do NOT make good rentals unless you bought them with the end goal of turning them into a rental in mind.  Primary residences are bought because of their features, and emotions associated, not because the math works out.

Post all the #s of your primary residence in the Real Estate forum and we'll tell you if it'll make a good rental or not.

I just don't want to see you buy another house thinking your first one is now an 'investment' because you have decided to call it one, and then being responsible for TWO houses and not able to keep up with either.

Sorry if that was harsh. 

Edit to add: basically everything SwordGuy says ^^.

Ryal

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Re: Looking for some advice on my financial plan
« Reply #13 on: March 21, 2016, 12:01:18 PM »
You should do a full case study. You will get some more definite answers.

If you are sticking with Dave Ramsey, make sure you are saving 15% of your income for retirement.  I would also get a stash of at least 20% cash to put down on my next home.  If you are making ends meet and find yourself in this position, I would pursue selling or renting your current home. 

One step at a time.  Go ahead and tackle the roof, paint etc. around the house.  This will help in the future and make you fell more comfortable at home until you are Ina better position to purchase a new home.

Is there a part of the forum that's specially for case studies, or are yall just saying email MMM?

mozar

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Re: Looking for some advice on my financial plan
« Reply #14 on: March 21, 2016, 12:17:18 PM »
Case study is a way to lay out your numbers. A breakdown of assets, liabilities and expenses. There is a link on how to do it at the top of the ask a mustachian forum.

FrugalFan

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Re: Looking for some advice on my financial plan
« Reply #15 on: March 21, 2016, 12:19:56 PM »
There is a stickied post at the very top of the "Ask a Mustachian" forum that explains how to write a case study.

Ryal

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Re: Looking for some advice on my financial plan
« Reply #16 on: March 21, 2016, 12:39:34 PM »
Case study is a way to lay out your numbers. A breakdown of assets, liabilities and expenses. There is a link on how to do it at the top of the ask a mustachian forum.
Outstanding, thanks.

Kaikou

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