Author Topic: Need advice on retiring early - rely on stocks or real estate?  (Read 14401 times)

Gary123

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Need advice on retiring early - rely on stocks or real estate?
« on: December 01, 2015, 11:13:59 PM »
I recently left a high paying job rather unexpectedly.  We were planning to retire in 5 years so have the following assets-

1.  ~575,000 in Traditional IRA and still 9 years too young for penalty free withdrawl

2.  ~$2 million in real estate with about ~$1 million equity however 15 year loans means cash flow is only around $2,000 per month while they (7 properties) rapidly pay down.

So how can we retire on this nest egg?  If we pay-off real estate loans than IRA gets hit for both high income taxes and 10% penalty.  If we sell real estate (to hit critical mass in IRA for 72T) than again taxes take a large portion do to the income being active (previous decision).

So high net worth without real income to live on.  any badassity advice will be helpful!


MDM

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #1 on: December 01, 2015, 11:29:01 PM »
I recently left a high paying job rather unexpectedly.  We were planning to retire in 5 years so have the following assets-

1.  ~575,000 in Traditional IRA and still 9 years too young for penalty free withdrawl

2.  ~$2 million in real estate with about ~$1 million equity however 15 year loans means cash flow is only around $2,000 per month while they (7 properties) rapidly pay down.

So how can we retire on this nest egg?  If we pay-off real estate loans than IRA gets hit for both high income taxes and 10% penalty.  If we sell real estate (to hit critical mass in IRA for 72T) than again taxes take a large portion do to the income being active (previous decision).

So high net worth without real income to live on.  any badassity advice will be helpful!
Gary123, welcome to the forum.

Can you live on ~$48K/yr (the $2K/mo from real estate)?  If so, you may be in better shape than you fear.  See http://forum.mrmoneymustache.com/investor-alley/how-to-withdraw-funds-from-your-ira-and-401k-without-penalty-before-age-59-5/.

Telecaster

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #2 on: December 01, 2015, 11:34:22 PM »
I recently left a high paying job rather unexpectedly.  We were planning to retire in 5 years so have the following assets-

1.  ~575,000 in Traditional IRA and still 9 years too young for penalty free withdrawl

2.  ~$2 million in real estate with about ~$1 million equity however 15 year loans means cash flow is only around $2,000 per month while they (7 properties) rapidly pay down.

So how can we retire on this nest egg?  If we pay-off real estate loans than IRA gets hit for both high income taxes and 10% penalty.  If we sell real estate (to hit critical mass in IRA for 72T) than again taxes take a large portion do to the income being active (previous decision).

So high net worth without real income to live on.  any badassity advice will be helpful!

I'm your huckleberry.

The IRS does allow IRA withdrawls before age 59 1/2 without penalty. The provision is called substantially equal periodic payments.   A bit of figuring how that translates to your case, but it can be done. 

https://www.irs.gov/Retirement-Plans/Retirement-Plans-FAQs-regarding-Substantially-Equal-Periodic-Payments

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #3 on: December 02, 2015, 12:44:20 AM »
Thanks Telecaster but my 72t or SEPP calculation comes in at just under $20,000 annually and right now we need probably $6,000 monthly.  That is why I mentioned that by selling the real estate I could boost the interest income to a higher level but there are tax consequences which deplete total net worth.

MDM the thread was very helpful because the pipeline to Roth IRA is something I had not heard of before.  Unfortunately, that would still be a solution for five years from now after the first money matures.

Some properties owe less than $80,000 so even with IRA penalty and taxes of an early withdrawl I could buy $1,000 of additional monthly income by paying of those loans first.  However, it means my net worth stops increasing as tenants are no longer paying down principle.

So here is a notion that I have been struggling with for a while.  Paying off a property now valued over $200,000 May get quick return only becuase we owe some 80,000.  But is that bad math?  Should I instead consider the rent against the property's total today market value as my return or only as a percent of what I originally paid for the property and compare that to a Vanguard index fund return?

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #4 on: December 02, 2015, 12:55:31 AM »
Perhaps it is better expressed this way.  I have two options to get near that income but not sure which is worse on taxes, risk etc...

1. Cash-out the IRA nest egg to pay off rental real estate to get maybe $70,000 annually in rents (as I don't have enough to pay it all off).  While the preferred option, it means not having cash (only income) when we are too old to work in 10-15 years and in case of catastrophic emergency like flood too dependent on one source of income.

2. Sell the real estate (I live close to Mr. Money Mustache so market is hot here) and invest what is left after realtors and taxes (for sake of argument ~$700,000 into Roth) and add that to income from a 72t on the Traditional IRA.  Of course, I would be vulnerable to another market crash but would be free to travel away from landlord headaches.


MDM

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #5 on: December 02, 2015, 01:02:40 AM »
... that would still be a solution for five years from now after the first money matures.

Some properties owe less than $80,000 so even with IRA penalty and taxes of an early withdrawl I could buy $1,000 of additional monthly income by paying of those loans first.  However, it means my net worth stops increasing as tenants are no longer paying down principle.

If you need to build a five year cash bridge - and if building such a bridge gets you where you want to go - then it might be better to look at a cash flow analysis instead of ROI.

E.g., you mention "buy $1,000 of additional monthly income by paying of those loans first."  From where is the money coming to pay off the loan?  Could you use that money for your living expenses instead?

Also don't understand "..net worth stops increasing as tenants are no longer paying down principle."  I could understand if the words "down principle" were not there, but as written...?

Ok, just noticed your most recent post - that helps somewhat, but it still might be worthwhile for you to think on the notes above.  Might be best if you used http://forum.mrmoneymustache.com/ask-a-mustachian/how-to-write-a-'case-study'-topic/ to get the whole story out.

Another Reader

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #6 on: December 02, 2015, 03:46:01 AM »
You had a plan that was based on you working a few more years to get the real estate loans paid off.  As you are finding out, net worth on paper has little to do with generating an acceptable level of income.  Given the position you are in, I would look for another job or I would significantly alter my lifestyle so I could live on a much lower income.  Needing $6,000 to live on - is that gross income or net?  If that is net income, you need a lot more than what you have to generate it.

I'm also concerned about the $2,000 cash flow.  What are the rents and expenses of these properties?  How long have you owned them?  Are they held in Roth IRA's? What are the true tax consequences of selling them?

In your situation and at your age, you may find the folks over at the early-retirement.org forums helpful.  It's an older crowd with some folks that have issues relevant to your situation.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #7 on: December 02, 2015, 10:49:12 AM »
MDM, yes generating income for another 5 years was the plan but may or may not be possible.  With a net worth of roughly 1.5 million is seems early retirement would be possible.

Another Reader - when I said "buy" $1,000 more income by paying off a rental the money would come from IRA and be taxed and penalized 10%.  Nonetheless, $100,000 could pay down maybe an 80,000 note balance.

Regarding the cash-flow, the rentals are newer, healthy and in desirable areas.  The only reason the cash flow appears small is because half are on aggressive 15 year loans.  So your question is relevant, why not just live on the IRA funds (penalties and all) while the property pays itself off.  This occurs to me as well since the rental pay-down increases each year and is now somewhere around $50,000 for all the properties.  a little bit more and the 72t (SEPP) would work.  However, that requires going backwards in the sense I would be depleting the savings too early. 



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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #8 on: December 02, 2015, 11:09:33 AM »
MDM, yes generating income for another 5 years was the plan but may or may not be possible.  With a net worth of roughly 1.5 million is seems early retirement would be possible.

Another Reader - when I said "buy" $1,000 more income by paying off a rental the money would come from IRA and be taxed and penalized 10%.  Nonetheless, $100,000 could pay down maybe an 80,000 note balance.

Regarding the cash-flow, the rentals are newer, healthy and in desirable areas. The only reason the cash flow appears small is because half are on aggressive 15 year loans. So your question is relevant, why not just live on the IRA funds (penalties and all) while the property pays itself off.  This occurs to me as well since the rental pay-down increases each year and is now somewhere around $50,000 for all the properties.  a little bit more and the 72t (SEPP) would work.  However, that requires going backwards in the sense I would be depleting the savings too early.

Have you considered a refi on some or all of the 15 year mortgages to 30 years? That could be a stop gap for increasing cashflow until you can get unfettered access to the IRA.

arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #9 on: December 02, 2015, 11:15:51 AM »

MDM, yes generating income for another 5 years was the plan but may or may not be possible.  With a net worth of roughly 1.5 million is seems early retirement would be possible.

Another Reader - when I said "buy" $1,000 more income by paying off a rental the money would come from IRA and be taxed and penalized 10%.  Nonetheless, $100,000 could pay down maybe an 80,000 note balance.

Regarding the cash-flow, the rentals are newer, healthy and in desirable areas. The only reason the cash flow appears small is because half are on aggressive 15 year loans. So your question is relevant, why not just live on the IRA funds (penalties and all) while the property pays itself off.  This occurs to me as well since the rental pay-down increases each year and is now somewhere around $50,000 for all the properties.  a little bit more and the 72t (SEPP) would work.  However, that requires going backwards in the sense I would be depleting the savings too early.

Have you considered a refi on some or all of the 15 year mortgages to 30 years? That could be a stop gap for increasing cashflow until you can get unfettered access to the IRA.

Not a bad idea. Or cash out refi on some to pay off others to give you boosted cash flow.  I prefer yoir 30-year refi plan myself, but I like holding long term low fixed rate mortgages. Given how the OP seems to want to pay them off, doing a cash out refi to get some free and clear might suit their risk tolerance better.

It may just be trading one for the other (cash flow from now paid off property versus higher payment on one that cashed out equity nets the same), but if there's significant equity, then no, because you only need to raise one mortgage to pay off several, perhaps.
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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #10 on: December 02, 2015, 11:21:51 AM »
Have you considered a refi on some or all of the 15 year mortgages to 30 years? That could be a stop gap for increasing cashflow until you can get unfettered access to the IRA.
My thought as well. A streamline re-fi with the existing lender is where I'd start. Switch to a 30 while rates are still low. If you hate it, you can always pay them off when you can access your money without consequence in a few years. Then I'd look for a job, any job, no, I wouldn't. I'd grab this opportunity and just make it work. Slash expenses, enjoy the gift of five unexpected years. You can do it.

Also, if all these homes are in the same area, you can move into them one at a time, and then sell them off over time with full tax benefits. Except for the depreciation you've taken, the rest of your profits will be tax-free. Until the tax code changes, ahem. Think of it as a rental property ladder, like a CD ladder, only far more lucrative.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #11 on: December 02, 2015, 12:32:43 PM »
Thanks everyone for your suggestions as it help to have people with similar goals look at the dilemma.  If there had been some warning I would have certainly tried the 30 yr. loan route first.

On the refi now there are road blocks.  So you may already know, conventional 30-year loans in the market need to be Fannie/Freddie backed to get reasonable interest rates (so bank can sell to secondary market) which is limited to 4 loans by most banks or require special exception by Fannie/Freddie.  Our 15-year loans are 3% and less interest and mostly what banks call "portfolio loans" or private depositor funds so not being sold to secondary market.  I know they can amortize them over a longer period (like 30 years) but that puts a balloon payment into our uncertain future.  We made $1 million on real estate even through the worst market downturn since WWII by avoiding exotic loans and not relying on appreciation to pay our debt obligations.

Absent an income, I am uncertain of the ability to get a loan on terms that make sense not to mention I already have my limit on the Fannie/Freddie backed loans.  So not saying that road is impassible just very rocky with its own set of roadblocks I haven't figured how to pass.

There were lots of good questions earlier I didn't answer so let me try to answer them now without turning this into a real estate blog.  We have enjoyed the Real Estate Professional exemption from passive loss limits which means our taxable income is reduced by any loss on the properties (especially the paper loss of depreciation) which was a huge tax advantage while earning a very high income.  Unfortunately, it means all the real estate income is "active" and not "passive" so regular income tax rates apply.  In other words, the same taxation level we pay on selling real estate as if taking out of IRA (less the 10% penalty).  We own the properties directly (no IRA) and in-fact still haven't rolled the 401K funds into a traditional IRA yet.



arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #12 on: December 02, 2015, 12:43:14 PM »
Just make the balloon payment after you can access ER accounts, 10+ years.

With the large amount of equity you should have lots of refi options at that point if you don't want to pay them off at that point.
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Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #13 on: December 02, 2015, 01:30:17 PM »
Agreed.  The wife is worried about any balloons in the future especially if an emergency or other unforeseen life event prevents a refi.  We heard lots of stories from formerly financially sound people who couldn't refi after 2008 so lost their home and it's equity when they came looking to rent. 

In fact, the radio show finance guy Tom Martino also got caught in the same scenario and lost everything.  As you know, assuming you can always borrow money again in the future carries with it some level of risk especially when a financial crisis hits.

Assuming badassidness comes with being in control, a date certain you need to pay-off a loan early may force our hand into a bad decision (like selling stock after a market crash).  In 2009 even people with over 50% equity still couldn't get new loans.  So, ceritus paribus, makes sense.

Thanks


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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #14 on: December 02, 2015, 01:37:44 PM »
OK, I'm either having an old folks stupid day or it's the weather.  First, I don't see any bank moving these to different loans without the job income that allowed the loans to be made in the first place.  Portfolio loans may have looser standards and some judgement may be allowed, but you still need a reasonable DSCR to borrow and I can't make the numbers I see so far work.  Maybe the high rate B2R folks might be licking their chops, but I would not lend in this scenario.

Second, my recollection is the rules for moving into a rental and selling it after a few years have changed.  You can't treat it like selling your primary home and just paying tax on the depreciation recapture.  My understanding is you will have to prorate the time between owner-occupied and rented.  If I'm wrong, let me know so I can call the moving company.  I suspect the gains on each of these properties even after living there a few years, which will be taxed at ordinary income levels because OP's participation is active, are going to kick the taxes up more than a notch.

I would like to see some more numbers before forming a plan for what I would do in your shoes.  From what I have seen so far, I'd be polishing my resume.


arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #15 on: December 02, 2015, 02:25:01 PM »
OK, I'm either having an old folks stupid day or it's the weather.

Or C) it's everyone else.  I don't see anything in your post I disagree with.

Though if he has a relationship with private lenders that lent at super low rates, they aren't necessarily institutional, and there may be more flexibility, especially if he has significant equity.  It's something to look into, at least.
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Gone Fishing

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #16 on: December 02, 2015, 02:42:41 PM »
What would cash flow/taxes look like if you sold half the property to pay off the other half?  I'll second a case study, there has got to be some fat in that $6k/mo.
« Last Edit: December 02, 2015, 02:44:57 PM by So Close »

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #17 on: December 02, 2015, 09:29:15 PM »
Another Reader you are correct.  Moving into rentals is no longer an option because only the appreciation AFTER you convert it to owner occupied is tax free when you sell.  In addition, those lenders cared a great deal about seeing a pay stub so maybe some private money is out there but not at terms comparable to what we already have.

Case study?  You mean the details?  We had our primary paid-off for many years but let an equity line get out of hand while kids were in college (we paid their tuition and expenses in cash) so consolidated some other debt and now have a 30 yr. mortgage around $1,200 per month on just over $200,000.  Paying that off only saves $1,200 but cost more than $200,000 which brought me to the idea of knocking out some rental property debt and generating over $2000 monthly for the same cost instead.

Regarding the monthly costs, you are right there is room to move it down.  Until we do this for a few months, however, I will not have a good handle on it and really know for sure.  My reluctance about accepting another position is it takes me out of the area back to areas where housing is outrageously expensive.  In addition, the move plus hiring someone else to manage our rentals creates lots of additional expenses which I will be working longer to pay.  For example, we do all our own maintenance but a property manager will want $40 per hour for repairs etc.....

Regarding the suggestion of selling some rentals to pay-off the others, I will need to run an excel sheet and get back to you in few days with those comparative numbers.  I have already done some analysis but it keeps boiling down to the same reality.  I can live on 5% of my net worth very comfortably but right now it is optimized for future growth and not cash-flow.  Any way I look at it I lose my critical mass to taxes and penalties trying to rebalance it for cash-flow.

We really appreciate all the help and have learned a lot from this blog!  The pipeline to Roth was completely new to me.

Bearded Man

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #18 on: December 02, 2015, 10:20:45 PM »
I think you are thinking about this the wrong way. Why not sell and put the money into cheap cashflow properties? Relocate, downsize. The world, not just Colorado, can fit into your FIRE plan.

cchrissyy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #19 on: December 02, 2015, 10:54:55 PM »
what would your rental profit be if the mortgages were paid off? enough to live on?

If so, I think you could approach this problem just as bridging the gap, spending down the IRA with equal payments over the years of mortgage paydown to avoid the early withdrawal penalty like somebody else mentioned. 

Just make sure first that the properties you're holding do truly make economic sense. If any don't, sell them and use proceeds to pay down others, or to live on during your gap years.

clifp

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #20 on: December 03, 2015, 01:36:38 AM »

Regarding the suggestion of selling some rentals to pay-off the others, I will need to run an excel sheet and get back to you in few days with those comparative numbers.  I have already done some analysis but it keeps boiling down to the same reality.  I can live on 5% of my net worth very comfortably but right now it is optimized for future growth and not cash-flow.  Any way I look at it I lose my critical mass to taxes and penalties trying to rebalance it for cash-flow.s probably too aggressive,  4% withdrawal is fine for somebody in their early 60s because in or

We really appreciate all the help and have learned a lot from this blog!  The pipeline to Roth was completely new to me.

The basic problem as I see it is that 5% of your net worth is probably too aggressive,  4% withdrawal is fine for somebody in their early 60s because in order
  to fail you have a fairly bad sequence of returns to run out of money in 30 years and you also have to live into your 90s.  That's two unlikely events.  I didn't see your age but I'm going guess it's ~50.  Frankly none of the calculators are really good at retirements of more than 40 year, but the safe number are in the 3-3.5% range for long retirements.

To make your situation worse most of your assets are tied up in real estate, where the value could be off by 5 or 10%, and transaction cost are very high.  Finally, you are subject to much higher taxes than the average retiree (No Roth, not much in saving in taxable accounts, passive income and depreciation recapture.) 

I don't think it makes sense to refi 3% loans, perhaps selling you least profitable property would  make sense as a bridge strategy.  But unless you are eligible for a very nice SS check or pension down the line, my real advice is cut back on expenses or get a job.
« Last Edit: December 03, 2015, 04:05:20 AM by clifp »

Kouhri

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #21 on: December 03, 2015, 02:20:43 AM »
[quote/] Need advice on retiring early - rely on stocks or real estate?
Quote
Why not both?

But seriously, you either need to get a bridging job (does it need to be in your previous field necessitating a move to a higher cost of living area or would another job be able to make up the difference between your current income from investment properties and your costs) or reduce your household costs or you could always sell your worst performing property to reduce debt servicing costs and increase cash flow.
Or a combination of the above.

hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #22 on: December 03, 2015, 07:18:22 AM »
You said there were 7 properties. I would sell one at a time(to be sure you can quickly convert equity to new rental) and do a 1031 exchange so there is no tax obligation. Once you have ~$1million in equity in rental property you should be making ~$10,000-20,000 per month! I am using the rule of 2% monthly rental income based on value. A more likely scenario is making ~1%-1 1/2% minus a few other expenses you should definitely be in the clear.
I have come close but never done a 1031 exchange or managed this much property, can someone verify this would all work?

arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #23 on: December 03, 2015, 10:28:02 AM »
That's only an option if there's a ton of untapped equity, which would open up other easier scenarios.

It would help if OP posted numbers (amounts owed, values, etc.), otherwise we're all just guessing at things that might work.
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 three kids.
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hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #24 on: December 03, 2015, 10:46:56 AM »
That's only an option if there's a ton of untapped equity, which would open up other easier scenarios.

It would help if OP posted numbers (amounts owed, values, etc.), otherwise we're all just guessing at things that might work.
see original post
"2.  ~$2 million in real estate with about ~$1 million equity however 15 year loans means cash flow is only around $2,000 per month while they (7 properties) rapidly pay down."

that's why i was saying just sell and have $1mil of paid of rental properties.

arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #25 on: December 03, 2015, 10:52:10 AM »
That's insufficient data for a meaningful conclusion.
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hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #26 on: December 03, 2015, 12:27:29 PM »
That's insufficient data for a meaningful conclusion.

Sigh.

...

2.  ~$2 million in real estate with about ~$1 million equity however 15 year loans means...

$1 mil equity. 1031 exchange into new rental properties. (can't just reinvest back into existing half since it has to be NEW like-kind property). After these transactions he should have ~$1million, paid for, rental investment income property, producing (if he does a decent job) at least ~$10,000 a month after expenses.

Granted, he is not giving a lot of details but given $1 mil in equity, it should not be that hard to get more than enough rental income to cover their personal expenses. Was there any other data you believed was necessary for this basic conclusion?
« Last Edit: December 03, 2015, 01:01:39 PM by hoping2retire35 »

arebelspy

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #27 on: December 03, 2015, 12:39:52 PM »
Yes.
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 three 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.

hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #28 on: December 03, 2015, 01:14:09 PM »
Yes.

...
He asked if anyone thought he could retire. I mentioned it would be possible with the equity he has and reinvested in other rental properties. In an earlier post you disputed this fact. However I was trying to demonstrate that he has more than enough equity to make this viable, despite additional details being given. Would you care to elaborate, possibly with an example? Something to the effect of "Depending if the borrower has an early pay off fee(unlikely in this situation but maybe you can conceive of another reason this is a bad idea) selling then reinvesting the equity would be an undesirable outcome."; or "Selling no more than one property per year and using the equity for personal expenses and additional investments, such as a Vanguard index fund, while stomaching the tax burden from theses sales could be a viable option" I await to hear your suggestion.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #29 on: December 03, 2015, 01:37:09 PM »
Yes, the 1031 route requires buying new like properties.  However, the current real estate market here is on fire and especially with income properties.  The capitalization rates are through the roof so the return on rentals very low if I buy into this inflated market.

For example, I have four nearly identical homes built in 2002 and purchased for between $125,000 to 145,000 from 2006-2011.  They each rent for $1,300 monthly but there is HOA and some other costs.  That return is great when you look at their purchased cost.  If I were to buy a new one today (through a 1031 exchange) it would cost me $220,000 but the rent is still $1,300.  It would be like throwing away my equity.  Nonetheless, each home has around $100,000 equity after real estate and transaction fees etc...

Here are some numbers-  4 properties are on 15 year notes (two of those mentioned above) while 3 are on 30 year loans which yield better cash flow.  The cash flows are $427, $128, $373, $172, $368, $547 and $292. 

Scenario #1

Sell the three properties with low cash flow to pay-off another two houses.  Why only two?  Becuase of taxes (remember active not passive income) plus realtor fees and of course closing and other associated costs means the three properties with approximately $100,000 equity will yield only $240,000 at best assuming 20% tax and other cost burdens.

Paying off another two provides an additional $1,900 income monthly but that means losing $938 of the current monthly $2,000 (138+373+427).  The three chosen are the oldest properties to sell plus other factors. 

This results in a monthly income of only $2,962 after selling three properties and having some cash on hand.  Liquidating real estate that contributes towards the monthly $2,000 means I am canibalizing the base of income thus not simply adding income. 

Scenario #2

Pay-off existing mortgages with IRA funds.  This I already looked at previously so fortunately had the numbers calculated.  Paying-off the largest mortgage payments first with the least balance (thus 15 year notes) gives most bang for the buck.  Starting with the simplest calculation, it will take $485,000 to pay-off 5 mortgages (they are 125,86,86 & 139 thousand rounded) when factoring in the 10% early withdrawl penalty.  The income than rises to $5,924 monthly or  $71,088 annually.

The problem is income tax on the withdrawl from the IRA.  Depending on how much is taken each year (plus other income) my tax bracket could easily destroy the amount available after the first $200,000 getting into a 28% bracket and 5% state income tax thus 33% loss on top of the 10% for a whopping 44% loss meaning you can nearly cut the monthly and annual in half to be more realistic.

Another big con to this approach is not having large funds available in the event of a major problem with the properties.  A series of sewer line connections or other large expense could quickly outstrip my capital needed to maintain them and keep them rented.

Scenario #3

Skim off the stash enough to get by and don't worry about the 10% penalty because I will enjoy a 15% tax bracket.  This may be my default position because each year the property loans are decreasing quickly (mature 15 year loans) thus my total net worth maintains status quo or even grows depending on the market returns and how much I need to live.

Scenario #4

A hybrid of sorts.  Pay-off one property per year to avoid the tax penalties while skimming off the top for living expenses of the IRA  Of course, send the wife back to work if possible and look for other income.

« Last Edit: December 03, 2015, 01:38:52 PM by Gary123 »

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #30 on: December 03, 2015, 01:54:25 PM »
Hoping2Retire35- I was typing when you posted so didn't get to read your comment prior to my last.

You are correct, in theory.  A simple calculation of the total equity with our cap rates at 10% could yield a comfortable return consolidating into a new paid-off multi-family for example.

However, our cap rates are ranging 5-7% for old buildings that maybe don't have 20 years left in them without major re investments.   Given the time sensitivity of 1031 exchanges and the competitive local market, I would be paying top dollar just to avoid the risk of not finding a replacement propery in time; if I tried to sell multiple single family homes to buy a few others but paid in-full.  Contingency buy contracts are not being accepted currently here.

Consolidating into a new paid property may make sense if any good deal were available.  Maybe the only solution is to move to Texas or some place where the numbers still make sense?
« Last Edit: December 03, 2015, 02:09:28 PM by Gary123 »

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #31 on: December 03, 2015, 02:04:57 PM »
You have expressed a lot of reasons that it is not feasible to go back to work.  In your shoes, I would look for work that did not require me to do the onerous things you list.  For example, can you start a consulting business that is primarily on-line?  Can you manage property in your current location?  Can you mentor agents and investors for a fee?  Do you have other marketable skills that could earn you the net income you need to bridge the period before the rentals are paid off? 

I'm a huge believer in diversifying income sources to minimize risks.  You have two sources - the rentals and your IRA's.  If you and the spouse can cobble together $40k in annual income from other sources, you would be set.  Surely there is a set of jobs and side businesses you could build that would allow you to do that.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #32 on: December 03, 2015, 02:11:58 PM »
Thanks, that is plan B.  I was hoping someone could help me figure out how to retire now.

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #33 on: December 03, 2015, 02:18:08 PM »
In your shoes, I would opt for semi-retirement as a good compromise.  You have more freedom and a lot less pressure, but with some cost cutting and some low stress work, you can achieve your original goal.  With a margin of safety, which would be important to me. YMMV.

hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #34 on: December 03, 2015, 02:35:12 PM »
http://www.mrmoneymustache.com/2011/09/28/get-rich-with-moving-to-a-better-place/
move

seriously, you mentioned that you did not want to burden by being a landlord so you could travel, so find an area and with good cap rates and buy a million in rental units and pay a manager. Or just study another market area. I am pretty sure that if I had a million in apartments i would never show up to work again and eat caviar everyday just to prove a point. The numbers people post sometimes utterly blow my mind. it's either "I've got $500k student loan debt!" or "Ive got $2m NW and not sure if I can retire?" I'm in a LCOL area and I don't make as much as most people on this site so this seems so bizarre to me. If i had three more apartments to rent i could retire today. Make you a deal, give me the equity and Ill send you a $10,000 check every month with 3% annual increase and we will both retire!

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #35 on: December 03, 2015, 07:49:19 PM »
Not me.  I enjoy managing rentals and have spent a career flying all over the world (literally millions of miles).  Maybe a pro of selling rentals is not managing them but certainly no issues being a landlord at all.

Your point is valid that the only way to benefit from that equity early is to acquire other property(s) using a 1031 exchange.  Something to consider but not without risk.  Moving to another real estate market is also tricky.  One must really understand the local rental and property values which takes time and resources.

Were it not for taxes and penalties, I would independently wealthy today.  Thanks everyone for your valuable inputs to my dilemma.  By the way, no student loans because I never went to college but I did pay for four university degrees in cash for my children and spouse.


bluecollarmusician

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #36 on: January 16, 2016, 05:34:26 PM »
Hi Gary 123-

First thanks for posting your interesting dilemma... I enjoy working these kinds of problems over in my head.

We also have some interesting questions in our life revolving our assets around spinning off income vs.  assets value.  It can be a tricky situation trying have to make "income" to live on even when you have a substantial net worth.  I think that this is one of the key misunderstandings people make- your net worth is "worthless"- the real things that matter are cash flow, and liquidity... and then in real estate transaction cost.  It is all well and good to have 2 million of real estate.  But after you sell and pay taxes you have 1.5 million ;)

First, great job on taking care of your family, and getting everything set in place for a successful future.


The first thing I thought (as I read through the thread) was figure out some way to refi the notes so that you can squeeze more cash flow... as others said.  Of course this would be more difficult to do now without your previous high income... and your concerns with interest rates are valid, but as long as you know you have access to the IRA in 9 years, I don't see that as being a particular hurdle.


Also, if I understand the math correctly if you 72t (SEPP) could give you 20k per year.  You have 24k per year in cash flow from rentals.  This leaves your cash flow deficit at less that 30k.  I know you were looking for options of "retire now."  As others have suggested, you could cut spending some (no idea if that is possible, we haven't seen your numbers) and maybe pick up a part time/consulting type situation.  If you were working full time in a high paying/high pressure situation you probably have skills that people will come looking for whether you want them to or not!

This has of course all been mentioned, and from your posts, you are well thought out person... I am just reiterating what immediately jumps to my mind.

And lastly- while you seem concerned about the taxes/transaction costs of the real estate- those costs will never go away with real estate  (although you could market it and sell yourself... we have done it before, as well as owner financing, it is doable...) It sounds like this may be an IDEAL time to sell some real estate.  When the price to rent/ratio is out of whack, it is a cue to me that it might be time to take some cash off the table (or at least of that table.)  Look at your cash on equity return... if it isn't something you are happy with now, that return is not going to get better as you sink more cash into it.  It sounds as if you have significant equity gains that you are not seeing any return on- i.e. almost no more rent on a property that has increased 100k in value.  As long as you hold the property, unless you refinance (or rents go up significantly) you will NEVER have real access to this part of you net worth.  No random poster on the internet can read through this handful of posts and really see the full picture of your financial situation- but the numbers I see here tell me that you have 2/3 of your net worth tied up in real estate that is generating on 2.3% cash flow (though you are gaining equity dollar for dollar...don't know what that amounts to you said 5-7% but is that on your purchase price or current estimated value?)

Stocks may not be the "thing" for you- and I understand your preference for Real Estate... we love it to.  But to a bystander... it looks like you have significant equity that isn't paying you... I will echo the chorus that it is all doable (and I think retirement is possible now) but will take a little flexibility... i.e. maybe sell one now, maybe take a little IRA money now.  I would focus on minimizing spending and (income) taxes and researching the most tax efficient ways to deal with your properties from here on out...!  Good luck... will be very interested with what you choose to do...
« Last Edit: January 16, 2016, 05:40:14 PM by bluecollarmusician »

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #37 on: January 19, 2016, 01:42:06 AM »
Blue collar musician- thanks for sharing your thoughts.

I am not sure the real estate equity is dormant in the way you describe.  Each year the loans mature they pay down even more equity so it is similar to a 401K portfolio that grows because you re-invest your dividends every quarter to grow the principle.  So refinancing would certainly pay higher cash flow today but cost me down the road because most of the smaller payments would be interest and not principle pay down.  So if I could refinance it would help today but certainly reduce not only later income but the total return on my investment since I would be converting pay-down to pay-interest even though the total payment is less.

Four of the rentals in the $200 to $220 thousand value return (after HOA fees) about $1,200 per month in rent.  My math tells me that would be an annual return of around 7% which is higher than my IRA which is hemmoraging this month.

So yes, I am doing some consulting and working on another recently acquired property for later rental or flip.  In the meantime, we are considering selling the homestead and living on a sailboat for the next 9 years by traveling.  I don't know if that is covered somewhere else but once you get over the boat costs and maintenance it can be a very cost effective way to travel the world.

hoping2retire35

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #38 on: January 19, 2016, 09:00:09 AM »
Blue collar musician- thanks for sharing your thoughts.

I am not sure the real estate equity is dormant in the way you describe.  Each year the loans mature they pay down even more equity so it is similar to a 401K portfolio that grows because you re-invest your dividends every quarter to grow the principle.  So refinancing would certainly pay higher cash flow today but cost me down the road because most of the smaller payments would be interest and not principle pay down.  So if I could refinance it would help today but certainly reduce not only later income but the total return on my investment since I would be converting pay-down to pay-interest even though the total payment is less.

Four of the rentals in the $200 to $220 thousand value return (after HOA fees) about $1,200 per month in rent.  My math tells me that would be an annual return of around 7% which is higher than my IRA which is hemmoraging this month.

So yes, I am doing some consulting and working on another recently acquired property for later rental or flip.  In the meantime, we are considering selling the homestead and living on a sailboat for the next 9 years by traveling.  I don't know if that is covered somewhere else but once you get over the boat costs and maintenance it can be a very cost effective way to travel the world.

eh. I would just worry about cashflow. I will eventually pay double on my townhome, but in the meantime i get pretty good cashflow from it.

bluecollarmusician

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #39 on: January 21, 2016, 04:55:52 PM »
Blue collar musician- thanks for sharing your thoughts.

I am not sure the real estate equity is dormant in the way you describe.  Each year the loans mature they pay down even more equity so it is similar to a 401K portfolio that grows because you re-invest your dividends every quarter to grow the principle.  So refinancing would certainly pay higher cash flow today but cost me down the road because most of the smaller payments would be interest and not principle pay down.  So if I could refinance it would help today but certainly reduce not only later income but the total return on my investment since I would be converting pay-down to pay-interest even though the total payment is less.

Four of the rentals in the $200 to $220 thousand value return (after HOA fees) about $1,200 per month in rent.  My math tells me that would be an annual return of around 7% which is higher than my IRA which is hemmoraging this month.

So yes, I am doing some consulting and working on another recently acquired property for later rental or flip.  In the meantime, we are considering selling the homestead and living on a sailboat for the next 9 years by traveling.  I don't know if that is covered somewhere else but once you get over the boat costs and maintenance it can be a very cost effective way to travel the world.



Selling the Homestead and sailing, or any other adventure that cuts your monthly outflows is the ONLY way to pay for your lifestyle now without affecting your future income... and I think it sounds pretty awesome as well!  (If you know how to sail!)


I totally get what you are saying about the equity pay down vs. paying interest with a refinance.  That was just one option that answers your question of how to get MORE INCOME RIGHT NOW from what you have. I understand if it isn't what you want to do.  I only mentioned it as it was the first thing that popped into my head when I read your post.  Of course, others mentioned it before me as well.

If you are clearing 1200 per month net of taxes, fees, maintenance, vacancy, and long term repairs. etc. it is a better rental situation than I understood and I misspoke.  If that is the case you are probably renting for 2k or so...I thought the 1200 was before you paid for everything.  In my experience a 20% cost of carrying is dirt cheap, and 30-40% is more realistic...so I was seeing that 1200 as maybe 700 in actual income- in that case I would rather have the 220k. 

I would advocate #1 safest/easiest way to retire now is to cut costs to the income you have now.


bluecollarmusician

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #40 on: January 21, 2016, 05:02:45 PM »
For example, I have four nearly identical homes built in 2002 and purchased for between $125,000 to 145,000 from 2006-2011.  They each rent for $1,300 monthly but there is HOA and some other costs.  That return is great when you look at their purchased cost.  If I were to buy a new one today (through a 1031 exchange) it would cost me $220,000 but the rent is still $1,300.


This is mostly what I was referring to - you bought for 125-145 and rented for 1300= good deal.

If you buy one today for 220 is rents for 1300= not nearly so good a deal.  I was just suggesting that it seemed that market has shifted some, and while your cost basis was lower, that 100k difference in purchase price hasn't gained you anything.  That is the dormant money I am talking about.  You have 100k more in equity and it isn't generating any income for you.

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #41 on: January 21, 2016, 05:26:43 PM »
We heard lots of stories from formerly financially sound people who couldn't refi after 2008 so lost their home and it's equity when they came looking to rent. 

Um. I don't think so.

Lots and lots of people who bought more house than they could afford to pay for, at inflated prices during a boom, couldn't refinance when the boom times ended.

That's very different from "financially sound".

I think you meant "appeared to be financially sound but were actually overextended".

I agree about being careful about taking on debt that assumes an ability to refinance!   

Bearded Man

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #42 on: January 22, 2016, 08:03:42 AM »
You had a plan that was based on you working a few more years to get the real estate loans paid off.  As you are finding out, net worth on paper has little to do with generating an acceptable level of income.  Given the position you are in, I would look for another job or I would significantly alter my lifestyle so I could live on a much lower income.  Needing $6,000 to live on - is that gross income or net?  If that is net income, you need a lot more than what you have to generate it.

I'm also concerned about the $2,000 cash flow.  What are the rents and expenses of these properties?  How long have you owned them?  Are they held in Roth IRA's? What are the true tax consequences of selling them?

In your situation and at your age, you may find the folks over at the early-retirement.org forums helpful.  It's an older crowd with some folks that have issues relevant to your situation.

Yep. I'd downsize to an small apartment/house/rv in a low cost of living area or party in Thailand for a few years while the houses finish paying off.


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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #43 on: February 09, 2016, 12:04:03 AM »
BlueCollarMusician-

Your carrying costs seem very high at 30-40% since we manage them ourselves.  The HOA fee is only $100 and covers the insurance and longterm maintainance for roof and siding repairs.  The tenants pay all utilities and yard work and any occasional maintenance I do myself.

Your point about the $100,000 increase not doing me any good is valid.  It begs the question whether I should calculate the return based on the purchase value or current value.  It is great by purchase price but terrible on current value.




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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #44 on: February 09, 2016, 07:42:15 AM »
We have the same problem - trapped equity.  The difference is I don't need the additional income on that equity today, and you do.  I can wait until the right opportunity comes up or the market shifts.  You need income now.  In your shoes, I would consider selling one of the properties, and living off the proceeds along with the remaining property income and whatever work income I could cobble together.  And I would sell only if I couldn't make the additional $40k net in consulting and other work. 

Backing away from the immediate problem, you were planning to work at your job another five years anyway.  If you can find a way to stay afloat for those five years, you can probably execute your original plan with some modifications.  You won't have as much stashed in tax deferred plans, but the real estate plan will be nearly the same.  Scenario 4 would probably be my back up plan, unless I opted to cash out one house.

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #45 on: February 09, 2016, 08:04:52 AM »
You said in a later post that your funds are in a 401k and NOT a traditional IRA. If this is the case, you can tap them without penalty at 55, not 59-1/2 as for IRAs.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #46 on: February 13, 2016, 08:18:53 PM »
Another reader- scenario 4 looks like a good back-up but it assumes my wife gets a job.  Right now just using savings while deciding how to proceed.  We also own an LLC for consulting so lots of opportunities for write-offs of business expenses so keeping the income bracket low.

Sunshine- If I wrote 401K earlier instead of IRA than that was my mistake.  Since that first post it was rolled into a traditional IRA.  Nonetheless, you can only tap your 401K penalty free if you depart employment AFTER age 55.  In my case, I was 50 so need to wait until 59 1/2 no matter where it is.

Good news is the Fed's Mid-term rate is higher in January allowing me to set-up a 72T withdrawl of substantially equal payments tax free until age 59 1/2.  Bad news is the market is down and doesn't seem to know the bottom yet.

Take Care

Gary

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #47 on: February 13, 2016, 08:43:40 PM »
There are portfolio loan options with some banks that do not conform or deal with Fannie/Freddie. Might take a mortgage broker with the right contacts to get you the best options. You may be able to get some of the properties into 30 year fixed with a mixture of portfolio options. Since you're in Colorado, Firstbank comes to mind as they have 5/7 year arm options at 30 year payments sub 4%(no dealing with fannie/freddie). That may just buy you enough time to pay off what you have and get into the IRA w/o penalty down the line. You just might be able to get creative enough with a mixture of different mortgages to keep everything and increase cash flow in the short term.

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #48 on: February 15, 2016, 10:34:39 AM »
In your shoes, I would opt for semi-retirement as a good compromise.  You have more freedom and a lot less pressure, but with some cost cutting and some low stress work, you can achieve your original goal.  With a margin of safety, which would be important to me. YMMV.

+1

I would also look at cutting some extraneous costs and looking for some low-stress work between you and your wife, just to bridge the gap between now and when you can start accessing some of those assets at an advantageous time. It would not take much, and could be any kind of work enjoyable to you: part time work at a coffee shop or Home Depot, walk some dogs, be a consultant, substitute teacher a few times a month, or anything else that you would enjoy. You wouldn't need to earn much, and the length of time may be small. You said you liked being a landlord, perhaps you could offer your expertise to others for a fee? Who knows, your local housing market could make a sale extra profitable soon, or stock market returns could pick up unexpectedly. Then, your need to earn extra money could go away entirely.

Gary123

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Re: Need advice on retiring early - rely on stocks or real estate?
« Reply #49 on: May 01, 2016, 08:08:08 AM »
Mountainstache7 - I know them well and have a couple of the 7 year fixed portfolio loans (great deals) but absent a pay stub to show wage income that door was closed.

As an update for everyone, I took the least likely option probably.  A large company recruiter called me and offered a high-paying position a long commute from our current residence so I accepted and am back in the rat race for now.  Of course, the spending that accompanies such a decision is rediculous as it also amped up our need to spend on certain items thus offsetting a healthy percent of the new income source.  Of course, accelerating the loans doesn't make sense anymore since tax avoidance is again the objective of the rental properties.

We are now looking into a blue water capable sail boat.  If this gig ends early we are considering living and traveling on a sailboat we will buy with proceeds from selling our primary residence.  While boats are incredibly expensive to maintain at a distance or for weekend sailing - we know a number of folks who have travelled extensively fulltime for very little monthly costs.