Author Topic: My Story- Any advice much appreciated!!  (Read 5257 times)

millionaire-mindset

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My Story- Any advice much appreciated!!
« on: June 21, 2014, 03:01:31 PM »
I recently discovered this blog and have been hooked over the past couple days! What a great community with everyone being so supportive! I wanted to just go over my financial situation, and get any thoughts/suggestions to get to that goal of FI.

The basics:
I am a single 28 year old with no debt other than a mortgage I work in sales and have made around $120k/yr for the past 4 years and 60-80k for the first couple working years.

My primary residence is worth around 360k and I owe around $260k. I have owned this for 2 years.
I also own a duplex that I lived in for one year and have since rented both units. This property is worth around $425k and I owe around $260k. My rental income is $2,400 per month and payment with taxes and insurance is $1,650.

My company is great and pays for my vehicle and gas, so I do not have any expense there.

I just started my 401K this year and have $110k in taxable investments. My checking account currently has $30,000.

I automatically have $2,000 each month going directly into index funds and 3% of salary into 401k (to at least get the full match). My first few years of working i was working towards down payments, so most of my money has gone towards the two properties. At the end of the year, everything over $10,000 left in my checking account, I will put into the investments. I like to wait until the end of the year to evaluate everything before I put the excess cash in there.

I typically can save $40,000-$50,000 a year. I would say I am also spending too much right now on unnecessary things, and plan to cut back some. 

Do you fellow mustachians have any suggestions or advice to simply my situation. Home equity line on one property to pay off the other in the future or just keep paying towards both? I have rates under 4% on both. Best use of excess cash at the end of the year? Should I apply that to pay down the rental property instead of putting into mutual funds?

Thanks so much for any input!!

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #1 on: June 21, 2014, 03:09:33 PM »
Anything else y'all want to know, feel free to ask!

Blindsquirrel

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Re: My Story- Any advice much appreciated!!
« Reply #2 on: June 21, 2014, 03:47:58 PM »
   You are on a good track! A breakdown of your spending and goals would probably help.

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #3 on: June 21, 2014, 04:55:37 PM »
Right now my spending is not ideal, but I could easily cut back, and could eliminate some expenses if I were not working full time (lawn care and house cleaning). If my rental property and primary residence were paid off, I could comfortably live off of $3000 per month. The rental property would generate roughly $1,600 of this (after taxes/insurance/budget for unexpected expenses). This would mean I would need another $1,400/month from other sources. I also plan to work part time once I retire from the full time gig, so I will have additional income from that (but just don't want to have to rely on it.

Also, I am worried about putting more money into my 401(k) account. I do not like the idea of not being able to access it without penalties before 59 years old. I hope to be FI well before this point!

Any thoughts?
« Last Edit: June 21, 2014, 04:59:08 PM by millionaire-mindset »

marty998

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Re: My Story- Any advice much appreciated!!
« Reply #4 on: June 21, 2014, 05:09:14 PM »
I'm in a similar situation. Not as high income, but still saving $40-$50k a year.

My suggestion to you would just be to keep buying more investment properties.

Chrissy

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Re: My Story- Any advice much appreciated!!
« Reply #5 on: June 21, 2014, 05:21:06 PM »
With your mortgages under 4%, I can't see putting serious cash toward paying off either property early, because it would work harder for you in other investments.  On the other hand, peace of mind is priceless, so you have to decide this based on more than just math.

Have you thought about starting a ROTH IRA?  It looks like you couldn't contribute the full $5,500/yr with your high income (congrats!), but you could still contribute something.  Contributions can be withdrawn, just not the growth.

Also, a taxable (non-retirement) investment account is always an option.

brewer12345

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Re: My Story- Any advice much appreciated!!
« Reply #6 on: June 21, 2014, 05:21:40 PM »
Right now my spending is not ideal, but I could easily cut back, and could eliminate some expenses if I were not working full time (lawn care and house cleaning). If my rental property and primary residence were paid off, I could comfortably live off of $3000 per month. The rental property would generate roughly $1,600 of this (after taxes/insurance/budget for unexpected expenses). This would mean I would need another $1,400/month from other sources. I also plan to work part time once I retire from the full time gig, so I will have additional income from that (but just don't want to have to rely on it.

Also, I am worried about putting more money into my 401(k) account. I do not like the idea of not being able to access it without penalties before 59 years old. I hope to be FI well before this point!

Any thoughts?

If I were in your tax bracket I would be maxing out a traditional 401k in order to get the tax shelter.  You are right in the zone of taking it in the butt with the tax code.  Later on you can tap the 401k if you need to via a Roth conversion pipeline, 72t SEPP, and so on.  With the rental income and some part time work, you might not need to do so.

I also would not bother paying off the rentals ahead of required amortization.  The money is cheap and the interest is a tax deductible expense, so leave it be.  Ditto your home mortgage.  Instead I would max out 401k and funnel the rest into a combination of a taxable account and possibly more rentals if you want to do so.  I have avoided rental real estate quite happily and I can tell you that not having that hassle while working was important and not having it in ER is great.

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #7 on: June 21, 2014, 06:39:55 PM »
I would rather put the money into 401(k) and taxable investments than to prepay my mortgages. The only problem though, I would not consider myself FI until at least my primary residence (and ideally the rental) with both paid off. I can't wait 20 years for that to happen! I guess the best thing to do is keep pouring money into my taxable accounts, and just accumulate as much as possible over the next 10 years. Then evaluate at that point, and pay off the  mortgages early if i am able to do so.

At a minimum, my $1,200/month mortgage of my primary residence would need to be paid. At least the rental still has positive cash flow of $500/month while carrying the mortgage.

Reevaluating, I would need about $30,000 per year in income (and a paid off primary residence) to maintain a lifestyle I would be comfortable with. I would still be carrying the mortgage on the rental providing income of $4,000 per year.

Do you guys think this is doable by saving/investing $50,000 per year over the next 10 years and already having roughly $140,000 in savings and investments?

brewer12345

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Re: My Story- Any advice much appreciated!!
« Reply #8 on: June 21, 2014, 06:58:56 PM »
The only problem though, I would not consider myself FI until at least my primary residence (and ideally the rental) with both paid off.

What a strange statement.  Why is this, exactly?  There are a lot of reasons you might not want to prepay your mortgage ever.  I specifically chose to ER with 28 years left on my fixed 3.5% mortgage.

Thedudeabides

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Re: My Story- Any advice much appreciated!!
« Reply #9 on: June 21, 2014, 07:10:03 PM »
Nice work and well done!

Yes, you should definitely be able to do it in 10 years at that investment level. Assuming a 7% average return per year, you'll be able to amass the $750,000 required in your brokerage account to return $30k/year in about 7.75 years.

You'll probably be able to get there faster. You'll likely need less if you include your rental income and inflation will likely raise rents and your income. Given your income increases this will likely continue as well allowing you to contribute even more.

Including your rental income knocks a year off.

If you can find a way to save an additional $2k/month, you'll get there in five.

Once again, congrats! You're not far away.




Cressida

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Re: My Story- Any advice much appreciated!!
« Reply #10 on: June 21, 2014, 07:10:11 PM »
The only problem though, I would not consider myself FI until at least my primary residence (and ideally the rental) with both paid off.

What a strange statement.  Why is this, exactly?  There are a lot of reasons you might not want to prepay your mortgage ever.  I specifically chose to ER with 28 years left on my fixed 3.5% mortgage.

I think it probably depends on how much your mortgage payment is, compared to your other expenses. If you live in a relatively high COL area and your mortgage payment is also relatively high, you probably won't feel especially safe knowing that payment is due every month. I know I feel that way.
« Last Edit: June 21, 2014, 07:23:16 PM by Cressida »

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #11 on: June 21, 2014, 07:17:11 PM »
The only problem though, I would not consider myself FI until at least my primary residence (and ideally the rental) with both paid off.

What a strange statement.  Why is this, exactly?  There are a lot of reasons you might not want to prepay your mortgage ever.  I specifically chose to ER with 28 years left on my fixed 3.5% mortgage.

Well let me rephrase that....I would still be able to feel FI, but I would need an additional $1,200/month in income to cover the mortgage payment. So rather than needed $30,000/year to support a lifestyle I want, I would need $44,000/year while still paying this mortgage (which just seems like a much larger number).

Thedudeabides

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Re: My Story- Any advice much appreciated!!
« Reply #12 on: June 21, 2014, 07:31:14 PM »
44k less 4k rental income would require 1,000,000 in liquid. With 50k a year invested and 7% return it puts you at exactly 10 years.

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #13 on: June 21, 2014, 07:37:53 PM »
Do you guys think it would make sense to pull $100k in equity out of the rental property (with the plan of not needing to pay it off before ER) and invest that lump sum into my taxable account...Or even sell it all together and put the roughly $150k in equity lump in there. I know it is all personal preference, but just wanting some thoughts.

Another Reader

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Re: My Story- Any advice much appreciated!!
« Reply #14 on: June 21, 2014, 07:42:26 PM »
I'm concerned about your rental duplex.  The rent is only $2,400 on a $425,000 property.  That's 0.56 percent of value in rent, a gross violation of the one percent per month rule of thumb.  Your PITI is $1,650.  Overall, your vacancy and operating expenses over time should range between 40 and 50 percent of the gross income.  Forty percent if the taxes are low and you are managing the property yourself.   Once you subtract the principal and interest, I don't think you will see a lot of net cash flow on this investment as time goes on.

I would not even hazard a guess as to how long it will take you to be FIRE without a lot more detailed income and expense information.  I agree you should max out all tax advantaged accounts available to you, as those reduce your tax liability today, leaving more dollars for investment.  Not sure you can reduce your AGI to the point where you would be eligible for a Roth, but you might want to play with the 2013 numbers to see what the effect of maxing out the 401k would have been.

I think you are relying too much on debt elimination to get to FI.  Killing the $260k of cheap mortgage on the rental gets you an average free and clear cash flow of at most $1,500.  Plus you lose the tax benefit of the mortgage that makes the cost of money even lower.  Killing both mortgages makes even less sense.  I would rather take that money and invest it in better yielding assets.


MDM

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Re: My Story- Any advice much appreciated!!
« Reply #15 on: June 21, 2014, 07:56:17 PM »
Add one to the "maximize your 401k" suggestion tally.

For your situation, if you can afford to maximize your 401k early in your career it makes sense to do so.  Here are a couple of reasons:
1) If you leave your current employer, you can roll the 401k into a self-directed IRA and then use SEPP to access the money penalty-free before age 59 1/2.
2) If you stay with your current employer, you will likely have increased your income to the point that after-tax (and after fully max'ed 401k) investments will be significant enough to live off without needing to touch your ever-increasing 401k.

Are you familiar with the SEPP option?

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #16 on: June 21, 2014, 07:57:26 PM »
I'm concerned about your rental duplex.  The rent is only $2,400 on a $425,000 property.  That's 0.56 percent of value in rent, a gross violation of the one percent per month rule of thumb.  Your PITI is $1,650.  Overall, your vacancy and operating expenses over time should range between 40 and 50 percent of the gross income.  Forty percent if the taxes are low and you are managing the property yourself.   Once you subtract the principal and interest, I don't think you will see a lot of net cash flow on this investment as time goes on.

I think you are relying too much on debt elimination to get to FI.  Killing the $260k of cheap mortgage on the rental gets you an average free and clear cash flow of at most $1,500.  Plus you lose the tax benefit of the mortgage that makes the cost of money even lower.  Killing both mortgages makes even less sense.  I would rather take that money and invest it in better yielding assets.

So you are saying the monthly rent should be 1% of the property value? That does not make sense to me. Typical rent in a higher end area where I live on a $250,000 property, would at most be $1,500-$1600 per month (and more realistically in the $1300 range). So are you saying I should sell off the rental and invest that money into index funds?
« Last Edit: June 21, 2014, 08:09:16 PM by millionaire-mindset »

millionaire-mindset

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Re: My Story- Any advice much appreciated!!
« Reply #17 on: June 21, 2014, 08:01:19 PM »

Are you familiar with the SEPP option?
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Thanks for your input... Looks like I will be making some changes to my 401k contributions this week. I am not familiar with that option, but I will look into it!

Another Reader

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Re: My Story- Any advice much appreciated!!
« Reply #18 on: June 21, 2014, 08:12:06 PM »
You apparently live in a high COLA city and it often makes no sense from a cash flow perspective to invest in rentals in these areas.  I live in Silicon Valley and I could get between 0.3 and 0.33 percent of market value in rent for my house.  The only places you can make a case for low or non-existent cash flow are places where values and rents increase at high rates.  You would be speculating if you did that, but some investors are successful with that approach.

I do not know enough about your income and expenses to give you any advice, other than to suggest that you look into maxing out all the tax advantaged opportunities available to you.  It is likely your tax rate will be lower in retirement and there are ways to access this money before age 59.5, so the advantages are many.  I will say in general for someone at your income level, low consumption and a high savings rate will get you closer to your goals more quickly.  That's the basic tenet of wealth building - a high savings rate and a good income to point at savings/investment.

brewer12345

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Re: My Story- Any advice much appreciated!!
« Reply #19 on: June 21, 2014, 08:13:11 PM »

Are you familiar with the SEPP option?

Thanks for your input... Looks like I will be making some changes to my 401k contributions this week. I am not familiar with that option, but I will look into it!
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