Author Topic: opinions on our FIRE ability  (Read 3246 times)

Alim Nassor

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opinions on our FIRE ability
« on: February 09, 2017, 12:14:22 AM »
Love the site, have learned a lot. About 2 years ago, we came ( late in life, I'm 55, she is 53) to the realization that we desired strongly to become FIRE and travel.  We had lived overseas for several years due to my job, and just absolutely fell in love with the experiences of actually living, not just visiting other cultures.

So, we began a fast sometimes brutal journey to downsize, cut back on debt, and aggressively start saving.  We piled up oodles of frequent flier miles that will help with our travel costs.   

Our FIRE goal date is the end of April, 2018.  Our main strategy was to become real estate investors, in SFH's.  We sold our beautiful, perfect place in the country (something we still ache over) and began buying Class C housing in our little town, where the rental market is exceptional.   We know own 9 rentals and a small house that we downsized to and have remodeled.   Our income from the rentals after expenses will be in the neighborhood of 2k per month.  My wife is already retired with a small pension and insurance.  Her pension is about 1k per month.  We are aggressively saving what we can until our FIRE date.  We don't have a lot of other assets, but here is what we expect them to be as of that date.  401l/IRA, 150k.  Taxable investment account, 50k.   Emergency fund, 15k.  Rental property maintenance fund, 20k, plus we will add about 500 per month to it, this was not included in the 2k per month of rental income.    I'll probably have another 10k or so in cash payout from unused vacation time and money I squirrel away.  I also have about 15k in precious metals sitting in the safe.

Our debts are ( not counting rental property mortgages)
Mortgage  575 per month
No car payments, no other bills except for an airline rewards credit card with a balance of about 2k.


Our travel plans are to take 1 or 2 trips a year of 2-3 months duration.  We can rent an apartment for a month much cheaper than a weeks hotel, and we will use frequent flyer miles to go back and forth.

So, to summarize, we'll have about 3k a month in income, pretty much tax free.   About 250k in assets, but 150k of that can't be touched until I'm 59 1/2.   Which is ok,  I count that as a raise 2 1/2 years after retirement.   Then Social Security for me in another 2 1/2 years.  Another raise, WOOHOO.  LOL

Doable?

frugalshrink

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Re: opinions on our FIRE ability
« Reply #1 on: February 09, 2017, 03:12:04 AM »
AN - New to the forums myself, but not new to the FI game. Do you have an idea of your current monthly expenses? Given your level of detail in the post, I'm assuming you're as neurotic as the rest of us, and have that on hand. That seems to be what will determine if your situation is do-able. I admire your use of real estate, but with 9 rentals, are you guys heavily leveraged with loans on those properties? I'm not sure where others would stand on this, but I'd be a bit uncomfortable relying on 2k of monthly passive income from a(n) asset(s) that is(are) heavily leveraged. Just some thoughts. Good luck with the journey.

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #2 on: February 09, 2017, 03:01:07 PM »
Since we started getting ready, we've been doing pretty well on 3k a month.  We have almost no debt. 

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #3 on: February 09, 2017, 05:25:27 PM »
Also, our leverage on the rental properties averages out to 65%.

waltworks

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Re: opinions on our FIRE ability
« Reply #4 on: February 09, 2017, 05:44:37 PM »
You are just barely, barely at FI, maybe kinda sorta.

But you have a heinous amount of risk with the concentration in rental RE - what if a big employer leaves town, or there's a natural disaster, or your maintenance ($500 a month for 9 Class C properties sounds VERY low to me) ends up higher than you thought?

How good are the rentals, really? 9 doors only turning $2k a month is pretty awful unless they're only worth ~$20k/door (which is possible, I guess). If you spent more than that, you should probably sell them ASAP and go read some RE investing books before diving back in.

All your other investments, rounding up a bit, will provide you with ~$800 a month using the 4% rule. So even if the rentals do as well as you think they will, your monthly expenses (without the travel) are more than your income. And that's setting aside the fact that you're depending on 9 units in one small town for 70% of your passive income.

A full case study would help here, but to me it sounds like this plan only works if you either plan to work a little on the side, cut expenses even more, or forget the slow travel thing. Or 2 or 3 of those combined. SS might be enough to bail you out, though.

-W
« Last Edit: February 09, 2017, 05:46:58 PM by waltworks »

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #5 on: February 09, 2017, 06:51:56 PM »
You are just barely, barely at FI, maybe kinda sorta.

  I kinda sorta agree.  LOL

But you have a heinous amount of risk with the concentration in rental RE - what if a big employer leaves town, or there's a natural disaster, or your maintenance ($500 a month for 9 Class C properties sounds VERY low to me) ends up higher than you thought?

We have 20k in the maintenance fund, plus the 500 a month we set aside.   I do almost all maintenance myself, so that helps.  So far, 500 a month seems to be doing it ok.  We have the worlds largest casino 20 miles away, I don't think it's going anywhere.  The area has quite a few large employers.



How good are the rentals, really? 9 doors only turning $2k a month is pretty awful unless they're only worth ~$20k/door (which is possible, I guess). If you spent more than that, you should probably sell them ASAP and go read some RE investing books before diving back in.

Hmm.  I figured 220 a month cash flow per house was pretty good.  Considering the amount of my money I have in them, the cash on cash return ranges from 18% to over 50%.  Am I wrong?




All your other investments, rounding up a bit, will provide you with ~$800 a month using the 4% rule. So even if the rentals do as well as you think they will, your monthly expenses (without the travel) are more than your income. And that's setting aside the fact that you're depending on 9 units in one small town for 70% of your passive income.

I will not be using the 4% rule, other than to try to earn 4% on the money.    Whatever the dividend or other return is is what we will withdraw.  I do not intend to draw down the principal at all.   I think you overlooked my wife's pension of 1k per month.


A full case study would help here, but to me it sounds like this plan only works if you either plan to work a little on the side, cut expenses even more, or forget the slow travel thing. Or 2 or 3 of those combined. SS might be enough to bail you out, though.

I do plan on some side money, my tenants all pay for lawn care, I can do it as well, and cheaper.   I may branch out into some light handyman work, if need be.  There are plenty of people who will pay 35 bucks to get a ceiling fan hung.  Travel will be the last thing we ever consider cutting out.  We can get there almost for free, I can certainly come up with a couple of months rent at 500-600 per month.  We wont be doing the expensive tourist stuff much, snorkeling is free and the cost of living in Penang or Bangkok is so low, we may even break even. 


Thanks for your time in answering.  I appreciate it
-W

skeptic

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Re: opinions on our FIRE ability
« Reply #6 on: February 09, 2017, 07:47:16 PM »
In a general, back-of-the-envelope way, it seems you are FI.

36-42k/year gross income seems like it ought to be enough to live on, even with some travel, although you haven't mentioned your expenses so I can't say for sure. I'll assume it covers them or thereabouts, otherwise you could hardly be asking this question. But it would be helpful to know your total living expenses.

There do seem to be some risks:

(1) Cost of health insurance and health care until you are 65.
(2) Heavy reliance on rental income, with you self-managing (I think) and doing most repairs yourself. How much income will the properties generate when they need to be managed and repaired by others because you are infirm, burned out, or traveling the world? It's possible that in that situation, they are only making 500-1000/month or less, which puts a crimp in your budget. Still, 24-30k/year is not necessarily too low to live on.
(3) How accurately have you predicted the income/expenses of the rentals? Assuming you already accurately accounted for vacancies, lost rent while you are waiting to get someone evicted, repairs, etc? Anyway if you predicted accureatly then there isn't any risk here. But many people do seem to have an overly optimistic idea of how profitable real estate will be. You seem like you're probably being reasonable since you already have a 20k fund and 500/month set-aside
(4) What is the cost of all this travel? Is it realistic that the flights will all be paid with miles indefinitely, or that the budget impact will be negligible?

Would you care to mention the estimated value of your 9 rental properties, how much equity you have, and the gross rents? That would give a fuller picture. Also what about the equity in your own personal home and years until it is paid off?

Mitigating these risks, you have a nice buffer: social security. Have you calculated/estimated what you are likely to get? Assuming it is 1000+ that will be significant. And I assume your spouse will eventually get social security too, since she has a pension.

Another possible mitigation would be if you have significant equity in the rentals or your own home. That would give you some nice extra wiggle room.

So, yes, looks FI to me based on the info given and making some guesses (like for your expenses... I'm assuming they are quite low) for the gaps.

Cheers!

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #7 on: February 09, 2017, 09:11:49 PM »
In a general, back-of-the-envelope way, it seems you are FI.

36-42k/year gross income seems like it ought to be enough to live on, even with some travel, although you haven't mentioned your expenses so I can't say for sure. I'll assume it covers them or thereabouts, otherwise you could hardly be asking this question. But it would be helpful to know your total living expenses.

At the present time we are managing quite well on about 3k a month  We will reduce that a bit more, looking at cutting back on cable expenses and other things.  I already ditched the expensive cell phones and we use Cricket now at a cost of $35 a month each, which includes all taxes and fees.   

There do seem to be some risks:

(1) Cost of health insurance and health care until you are 65.

My wife has insurance.  At the moment I am treading water, to see what happens with Obamacare or Trumpcare.   I'm probably going to just get a major medical.   I'm in good health and am getting every minor issue looked at and will get a full physical while I have healthcare.

(2) Heavy reliance on rental income, with you self-managing (I think) and doing most repairs yourself. How much income will the properties generate when they need to be managed and repaired by others because you are infirm, burned out, or traveling the world? It's possible that in that situation, they are only making 500-1000/month or less, which puts a crimp in your budget. Still, 24-30k/year is not necessarily too low to live on.


(3) How accurately have you predicted the income/expenses of the rentals? Assuming you already accurately accounted for vacancies, lost rent while you are waiting to get someone evicted, repairs, etc? Anyway if you predicted accureatly then there isn't any risk here. But many people do seem to have an overly optimistic idea of how profitable real estate will be. You seem like you're probably being reasonable since you already have a 20k fund and 500/month set-aside

I realize that vacancies can be an issue.  When I estimate the annual rental income for a house, I base it on 10 months per year, every year.  I can repair anything that needs repairing, unless the house needs a whole new HVAC system.  As I get older and less willing to do this, I'm hoping that rent increases will help cover this.  By the time I am 70, 8 of the 9 rent houses, and our residence will be paid for.


(4) What is the cost of all this travel? Is it realistic that the flights will all be paid with miles indefinitely, or that the budget impact will be negligible?

We have well over a million ff miles.   Most times the cost of a trip is the miles and less than 100 bucks in fees.  Budget will be a consideration when picking a destination.  We lived in Malaysia for almost 3 years and are very familiar with costs of living in a manner we find agreeable.  We also lived in Italy for a few months, and even in a high cost area like that, it is possible to rent a house in many areas for 4-500 a month.   We will want to be near a train station and within walking distance of shops, restaraunts  and other things to do.

Would you care to mention the estimated value of your 9 rental properties, how much equity you have, and the gross rents? That would give a fuller picture. Also what about the equity in your own personal home and years until it is paid off?

I just did a financial statement to purchase our last rental.  Total market value of the 9 is $787,000.  Our equity is about 275k.  Our residence has a market value of about 90k, and our equity in it is 35k.   All houses except one of the rent houses will be paid off in 13 to 15 years.   One rent house has 28 years to go on a 30 year mortgage.

Mitigating these risks, you have a nice buffer: social security. Have you calculated/estimated what you are likely to get? Assuming it is 1000+ that will be significant. And I assume your spouse will eventually get social security too, since she has a pension.

My SS at 62 will be 16-1700.   My wife will not receive SS.   Her pension is indexed to inflation though.

Another possible mitigation would be if you have significant equity in the rentals or your own home. That would give you some nice extra wiggle room.

In January of 2018, we are going to start living on just our rental income and her pension, while setting my entire paychecks aside, to make sure there are no surprises.   Plus that will be 4 months of socking away those paychecks.  And, I have a feeling, that once we know we can do it, putting a few extra months in on the job will be easy to do, since I will know I can walk at any time and tell my boss to take this job and..........


So, yes, looks FI to me based on the info given and making some guesses (like for your expenses... I'm assuming they are quite low) for the gaps.

Cheers!

Thank you for taking the time to answer   I appreciate it!

waltworks

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Re: opinions on our FIRE ability
« Reply #8 on: February 09, 2017, 09:15:33 PM »
~$60 a month is not much for maintenance over the long term on a rental house. You have a ton of stuff depreciating (roof, paint/siding, appliances, carpet, etc). I've had a lot of rentals (in "A" neighborhoods) and I'd say maintenance averaged about $50 a month NOT including replacing depreciating structural/big ticket items - that was just for appliances burning out and fixing a occasional plumbing issues, etc. In a "C" neighborhood I'd imagine costs would be higher just due to older housing stock and lower quality tenants, but I've never managed that kind of rental so I don't really know.

FWIW, too - casinos go belly up all the time. Usually with zero warning.

I think you're only covering short term expenses with that money. Major items like roof, sewer line, structural or cosmetic exterior issues, and so on will take quite a bit more per month, you just won't see those large expenses as often.

I guess the easiest way to ask this question is do the rentals meet the 1% rule? Or not?

Wait, new reply posted... GOOD LORD $787k of rentals generating $24k/year in profit!??! That is TERRIBLE.

Anyway, you're skin-of-the-teeth FI if everything works out well. If you are being optimistic about the rentals (and IMO you are, big time), you might have a very rude awakening at some point in the next few years.

-W

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #9 on: February 09, 2017, 09:20:44 PM »
Terrible.   That's a harsh word.  LOL  What would you expect a house worth 75k with a mortgage of $415 , taxes and insurance and maintenance set aside to generate?  We rent it for 800 a month and that nets us about 220 a month.  What, in your experience should it be netting?

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #10 on: February 09, 2017, 09:27:23 PM »
~$60 a month is not much for maintenance over the long term on a rental house. You have a ton of stuff depreciating (roof, paint/siding, appliances, carpet, etc). I've had a lot of rentals (in "A" neighborhoods) and I'd say maintenance averaged about $50 a month NOT including replacing depreciating structural/big ticket items - that was just for appliances burning out and fixing a occasional plumbing issues, etc. In a "C" neighborhood I'd imagine costs would be higher just due to older housing stock and lower quality tenants, but I've never managed that kind of rental so I don't really know.

Roofs around here get replaced by insurance pretty regular due to hailstorms, and I can roof a 1000 sq, foot house myself in a couple of days.  I paint them myself, I have a nice airless spray rig.   Appliances come off craigslist, all we furnish are fridges and stoves.  We have very little carpet in our houses, we have moved on to Allure vinyl planks and that seems pretty durable.  I do my own plumbing work, I've spent quite a few days in a crawl space replacing a vent stack and drains.

FWIW, too - casinos go belly up all the time. Usually with zero warning.

I agree, that is a concern, but if I stand around waiting for a sure thing, life keeps going.

I think you're only covering short term expenses with that money. Major items like roof, sewer line, structural or cosmetic exterior issues, and so on will take quite a bit more per month, you just won't see those large expenses as often.

We have a 20k fund, 500 a month added to it each month.  We have many months were there is no expense, so we just let it ride.   Sure, we will get stuck at some point for a 5k bill, but we hope to be able to absorb that and keep chugging along   Nothing is certain.

I guess the easiest way to ask this question is do the rentals meet the 1% rule? Or not?

By 1% rule, do you mean rent equals 1% of value or more?  They all do.

Wait, new reply posted... GOOD LORD $787k of rentals generating $24k/year in profit!??! That is TERRIBLE.

Anyway, you're skin-of-the-teeth FI if everything works out well. If you are being optimistic about the rentals (and IMO you are, big time), you might have a very rude awakening at some point in the next few years.

-W

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #11 on: February 09, 2017, 09:33:04 PM »
I guess what I should be asking, is where would I get 24 k a year in income from 275k in equity?  That's almost 9%.   And of that equity, only about 120k is actual money out of my pocket.   That's 20%.   

What should I be doing differently?

waltworks

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Re: opinions on our FIRE ability
« Reply #12 on: February 09, 2017, 09:33:50 PM »
If each place is worth ~$87k ($787/9) you need ~$900/mo for a RE investor to even *consider* them.

Put another way, your $787k of houses is only making you 3% in profits. And that's using your very generous maintenance assumptions.

RE investors will generally use the 50% rule as well - net is 50% of gross (before paying mortgage) on a rental. So if you are getting $800/mo, you have $400 after all the various expenses pile up (which they eventually will). That means by traditional RE investing standards you actually might be *losing* money.

I understand that you can paint, re-roof, etc. That's a job, though, not FI. And I'm not sure you'll want to know what happens to your insurance after a few re-roof claims...

Seriously, go post this in the RE forum, if you think I'm being harsh here...

-W

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #13 on: February 09, 2017, 09:44:28 PM »
What I have read of the 1% rule is the rent should be 1% of the purchase price.  Each of our houses exceeds this, some generate 1.5% or more.   

I appreciate your time and giving me food for thought.

waltworks

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Re: opinions on our FIRE ability
« Reply #14 on: February 09, 2017, 09:47:33 PM »
I guess what I should be asking, is where would I get 24 k a year in income from 275k in equity?  That's almost 9%.   And of that equity, only about 120k is actual money out of my pocket.   That's 20%.   

What should I be doing differently?

If you really could get away with $60/month in maintenance this would be true. I think your numbers are ludicously low there though.

And sure, you can self-manage and do all the maintenance yourself... except that YOU WON'T BE IN THE COUNTRY a lot of the time. Self-management (if you don't mind it) is great. It does not line up with your long-term travel goals at all.

-W


Alim Nassor

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Re: opinions on our FIRE ability
« Reply #15 on: February 09, 2017, 09:55:05 PM »
True enough.   I understand the risks in that.  I do have a good handyman I can call, and a plumber and AC guy, but there are those risks that something happens while we are gone.   Our plans are 1-2 trips a year of 2-3 months at a time.  We may have to make that one trip a year, or 2 shorter trips, but we only live once.   I try to make sure everything is in good working order after I buy, but you are right, you never know.   I guess I'm willing to take that chance that to be able to walk away from a job I hate.   I tell my wife, I can always go be the flower guy at Home Depot, those guys never know what will grow here.  LOL

I appreciate you taking the time to help me understand the risks, who know, maybe my SDOW short will pay off soon.  LOL 

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #16 on: February 10, 2017, 08:08:06 PM »
I guess what I should be asking, is where would I get 24 k a year in income from 275k in equity?  That's almost 9%.   And of that equity, only about 120k is actual money out of my pocket.   That's 20%.   

What should I be doing differently?

If you really could get away with $60/month in maintenance this would be true. I think your numbers are ludicously low there though.

Ok Walt,  I have to ask you about this.  I was perusing other topics and found a thread where you said that in your "real world experience" maintenance costs average 1% of the property cost.    I'm putting away 600 a year on each house and most of my houses cost less than 60k.   What gives?  Why is my set aside ludicrous, when your experience says it should be just fine?

And sure, you can self-manage and do all the maintenance yourself... except that YOU WON'T BE IN THE COUNTRY a lot of the time. Self-management (if you don't mind it) is great. It does not line up with your long-term travel goals at all.

-W

waltworks

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Re: opinions on our FIRE ability
« Reply #17 on: February 10, 2017, 08:33:25 PM »
The lower the cost of the property, the higher the maintenance cost as a proportion of the purchase price.

To clarify - if your basic 3/2 stick framed house in San Francisco is $800k, that reflects the cost of the land, not the cost of the structure (mostly). It won't cost $8k/year to maintain.

On the other hand a broken down 3/2 in Detroit might be basically free - but will cost $2k/year to keep functioning as everything is basically broken/falling apart.

$60k houses in C neighborhoods are going to require a lot of work in general, partially because they are probably older/in worse shape, and also because your C tenant is not going to keep things up as well as an A tenant (or you).

You can estimate some numbers:
-Replace all appliances every ~10 years
-Replace furnace/boiler every ~15 years
-Replace roof every 20-30 years
-Repaint inside/outside every 5-10 years
-New carpet every 5 years
-Replace concrete every 20-30 years

You can go on and on. That stuff will need fixing whether the house is in a ritzy neighborhood that rents for a fortune or a crappy one that rents for peanuts - so maintenance is a much bigger hit percentage-wise for cheap/low end houses.

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #18 on: February 10, 2017, 09:06:52 PM »
You can estimate some numbers:
-Replace all appliances every ~10 years
-Replace furnace/boiler every ~15 years
-Replace roof every 20-30 years
-Repaint inside/outside every 5-10 years
-New carpet every 5 years
-Replace concrete every 20-30 years



Ok,  so, I'm playing with this, based on my experience with costs and your frequency.  here's what I get.

Appliances every 10 years?   Maybe.  I get them off craigslist and only supply fridge and stove
300 bucks / 10 years = $30 a year

HVAC every 15 years.  Yeah, probably, but a few of my places have window units and gas floor heaters but lets do a HVAC replacement
2500 bucks/ 15 years = $167 a year

Roof every 20-30 years.  As I mentioned earlier, roofs here in North Texas rarely survive 10 years or more with a hailstorm.  I had 2 replaced last year and the roofer actually rebated me 500 bucks.  But lets assume a new roof every 30 years that I have to pay for.  My houses are mostly about 1000 square feet and would cost maybe 2500 to replace.  I know you mentioned insurance rates associated with this, but believe me, here in North Texas, that's already baked in.
2500 bucks/ 30 years =$83 bucks a year.

Painting?  every couple of years inside, every 10 years or so outside.  Say 1000 dollars over 10 years
1000 bucks/ 10 years = $100 a year.  2 of my houses have vinyl siding that should outlive me.

We don't do carpet anymore, but say replace some or most vinyl every 10 years.
1000 bucks /1000 years = $1000 a year.

Concrete?   Never heard of anyone replacing concrete ever.   

And lets see, water heaters.   About once every 12 years.  500 bucks
500 bucks/ 12 years= 42 bucks a year.

So, I've got 522 bucks a year.   I still have 78 bucks a year to handle the odd ceiling fan, drain cleanout or whatnot.  And several houses will NEVER have an HVAC replacement, I may have to buy a window unit occasionally but I get them off craigslist, usually for 75 bucks or less.  I keep 3 or 4 on hand all the time in case in an emergency a house needs one or 2 in the summer.

My houses may be class C, but I check them out carefully before I buy, and I make sure everything is in decent shape after my rehab.  And as I said, my maintenance fund is at 20k, the many months in a row with no spending will pad that nicely. 

In the past 6 months, I've had to pay a plumber to clear a clog my snake wouldn't reach.  90 bucks.  I replaced a fridge that no longer defrosted, 60 bucks off craigslist.  I replaced a kitchen faucet, 75 bucks at Home Depot.    That's it.

I know taxes and insurance are expenses and they are already figured into my calculations.   

Thanks again for the responses, I feel better about it after putting numbers down.   I know that's not what you intended, but I'm happy with it.

waltworks

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Re: opinions on our FIRE ability
« Reply #19 on: February 10, 2017, 09:27:51 PM »
To be fair, it doesn't matter. SS will bail you out in a few years even if the houses do terribly.

I think you will find that more stuff breaks than you think after you've had the rentals for more than a few years, but you're in the catbird seat regardless just with fixed income (SS, wife's pension) in the future.

I would think hard about the travel + self managing plan, though. The rentals aren't a good investment as it is, they are more of a handyman side-gig. Being out of the country 50% of the time makes that not work very well.

At the very least, keep an eye on housing prices/appreciation. I sold all my rentals last year after they appreciated so much they no longer made sense. It sounds like yours might get there as well, in which case you can just cash out, stick the money in index funds, and forget the stress.

-W

Alim Nassor

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Re: opinions on our FIRE ability
« Reply #20 on: February 10, 2017, 09:30:53 PM »
Sound advice.   Thanks