Mustachians, Need Advice to Try and Hit FI in 3 Years!

[theclimbings]

Mustachians,
I would like to hit FI within 36 months.  My wife and I (no kids) have about $24k in annual expenses.  Prior to finding MMM, I was focused on buying rental properties and paying them off.  I am quickly realizing we could be putting our money to better use than pouring it back into these properties.

Here's a snapshot of our financial situation:

Rental #1 Value $115k (paid off): monthly rental income $1000
Rental #2 Value $175k (owe $112k): monthly rental income $600 after mortgage payment
Property: $20k
Combined Roth IRAs and 401Ks: $200k
Emergency Fund: $21k
Monthly Savings Rate: $3k

So, we have $198k in real-estate equity, $200k in semi-liquid retirement savings, and approximately $4600/month available to save/invest.  The magic number for us is about $600k.  What's the quickest way to get there?  Pay off rental #2?  Save up and buy rental #3?  Save $200k and drop it into a dividend producing Vanguard index fund?  Build a duplex on our property to rent out?

As a junior mustachian, I would welcome advice from those with a longer stache than my own.

Thanks!
Mr. Climbing

[MustacheNY]

Congrats on doing so well accumulating assets to be just about FI.  Looking at your situation, you seem to be a bit illiquid, in that all of your assets are tied up in real estate or retirement accounts.  It appears that you only have liquid assets of $21K.  It is great that you have an emergency fund of just about 1 years of expenses, but I would recommend building up a liquid diversified investment portfolio (like a few Vanguard Index funds), that you could access without some of the inherent limits you have with IRA and 401K assets.  This will be very important as you FI. 

Based on the numbers you provide, you will have over $165,000 in additional savings over the next 3 years.  You could put 100K+ towards and investment portfolio of index funds, and then pay down ~50k on the loan for your second property, so you do not carry as large a debt going into FI.  This would be sort of a more balanced approach.

Overall though you are doing fantastic.  I mean technically you are already FI.  $1,600 in rental income + ($200,000*.04 = 667)=$2,267 in current income.  Your current expenses are only $2K a month, so you are already FI.  Your choice to work another 3 years is simply about building up a bit more of a buffer and cushion. 

[theclimbings]

Thanks MustacheNY.  That's really helpful!  A lot of folks on these forums talk about how putting too much money down on real estate too soon actually lowers your rate of return.  So I've been concerned that we may have gone too far in that direction, but your advice about creating some liquid assets while also reducing debt as we move into FI seems very balanced.  Thanks!

[MDM]

...putting too much money down on real estate too soon actually lowers your rate of return.

One sometimes has to read closely to distinguish between "real estate as investment" vs. "real estate as a primary residence."

[MikeBear]

You really haven't given enough financial info on your present income to be any more specific, (what do you each make at your jobs?) but IMO, your best way to pull this off in only 3 years from where you are now, is to continue with the rental gig. Get more properties and get them rented out. Choose them wisely to produce enough NET (after all expenses) to at least equal the $24k annually. Leverage them to the hilt, don't just look at buying and paying cash outright. You'll run out of cash.

After you have that accomplished, you can focus on getting money socked away into accounts that can be built up to provide income themselves.

[Retired To Win]

... I am quickly realizing we could be putting our money to better use than pouring it back into these properties.

Rental #1 Value $115k (paid off): monthly rental income $1000
Rental #2 Value $175k (owe $112k): monthly rental income $600 after mortgage payment...

Crunching your numbers, it looks like you are generating $19,200 a year in income from $178K in rental real estate equity.  That's a 10.8% rate of return.  Plus the rental properties give you many tax-deduction opportunities that would not come otherwise.  So I would add a couple of percentage points to your net return to account for those tax deductions.  And that means that you're probably NETTING over 12% annually on your real estate holdings.

And you think you can reliably do better how?

[tomsang]

... I am quickly realizing we could be putting our money to better use than pouring it back into these properties.

Rental #1 Value $115k (paid off): monthly rental income $1000
Rental #2 Value $175k (owe $112k): monthly rental income $600 after mortgage payment...

Crunching your numbers, it looks like you are generating $19,200 a year in income from $178K in rental real estate equity.  That's a 10.8% rate of return.  Plus the rental properties give you many tax-deduction opportunities that would not come otherwise.  So I would add a couple of percentage points to your net return to account for those tax deductions.  And that means that you're probably NETTING over 12% annually on your real estate holdings.

And you think you can reliably do better how?

I can't tell if he is including real estate taxes, insurance and planned and unplanned maintenance.

[Retired To Win]

... I am quickly realizing we could be putting our money to better use than pouring it back into these properties.

Rental #1 Value $115k (paid off): monthly rental income $1000
Rental #2 Value $175k (owe $112k): monthly rental income $600 after mortgage payment...

Crunching your numbers, it looks like you are generating $19,200 a year in income from $178K in rental real estate equity.  That's a 10.8% rate of return.  Plus the rental properties give you many tax-deduction opportunities that would not come otherwise.  So I would add a couple of percentage points to your net return to account for those tax deductions.  And that means that you're probably NETTING over 12% annually on your real estate holdings.

And you think you can reliably do better how?

I can't tell if he is including real estate taxes, insurance and planned and unplanned maintenance.

The OP made a point of labeling his rental income "after mortgage payment."  That should account for all costs except maintenance and rental management.  And a lot of the maintenance gets capitalized into equity.

[MDM]

I can't tell if he is including real estate taxes, insurance and planned and unplanned maintenance.

The OP made a point of labeling his rental income "after mortgage payment."  That should account for all costs except maintenance and rental management.  And a lot of the maintenance gets capitalized into equity.

Unfortunately too many people conflate taxes and insurance with the actual mortgage payment of principal and interest, and call the whole principal+interest+taxes+insurance the "mortgage payment."  Thus one has to ask to know for sure....