Our road to financial independance

[acernigra]

Hi All,
My wife and I are constantly trying to plan and come up with the best financial strategy for us and we need 
some help deciding what is the best option for us.  I know this is probably a very common question around here and probably very boring but I would really appreciate some advice or ideas and I know you all have the knowledge.  So hopefully some of you will take the time. 

We both work full time but we have two young kids and really want for one of us to be able to stay home with the kids while they are young, and also so our life isn't so damn busy and complicated and rushed all the time.  Up until about a 
year ago I stayed home with our first child for the first two years.  Then I had an amazing job offer and I 
went back to work.  We didn't NEED the money that bad, but we weren't really saving as much as we needed to 
be and were slowly racking up debt here and there.  So, we thought I could go back to work and we could pay 
off our debts and invest a bunch and then maybe somehow I could quit again.  Now that we are a year into this plan, 
we've paid off all of our debts, have saved a bit of a nest egg and now we are ready to start investing in 
something that can hopefully lead to financial independance or 'early retirement' for one of us and future inheritance for our kids. 

Our idea was that we've since we've been very fortunate in that our jobs have paid us to relocate a couple of times, we've
ended up with homes that were bought as primary residences that we then turned into rental properties when we moved.  We now have 2 rental homes which are being rented and we were thinking we would try to turn this into a real estate investment business for me to do so I could quit my present job.  We were thinking that we could use my income that we have now to buy 2 or three more homes while I am working and then I quit and manage these properties and let them pay themselves off and then once  they're paid off, use that income to buy more and so on.  But now we can't decided if its better to pay off  the ones we have now, save for big down payments on new properties, or if this plan is even feasible at all and going to provide us with enough income and money to invest in more homes.  Here are some specifics:

Rental house 1: Valued at $145,000, we owe 92,000, our monthly payment is $710 and we rent it for $1,000/mo.

Rental house 2:  Valued at $200,000 we owe 170,000, our monthly payment is $1200 and we rent it for $1400/mo.

My wifes work pays for our house and utilities now and her salary can pretty much support us so we have about $7000 or
$7500/mo from my job we can invest towards this. 

For me to be able to quit in about 2 years, would it be better for us to use this money to pay off the homes we already own, or should we save up 30 -40k chunks as downpayments and buy more houses?  Which would be the best way to relative "financial freedom", where I can manage the real estate business and make it grow into a sizeable portfolio and my wife can work her job to retirement covering most of our living expenses?  We would want to reinvest most of the real estate income but would also probably need to use some of it..  What do you all think?  Sound like a reasonable plan?  Is this acheiveable?  Where is the best place to put our money now?  Anyone have any better ideas?

Thanks for your help!

[SunshineGirl]

What do you owe on your present mortgage? How quickly could you pay it off or reduce the principal and refinance? I think I'd focus on that over paying off your rentals or buying new ones.

You haven't mentioned how your other investments are structured, so I'll ask, are you putting all your eggs in one (real estate) basket? The bad thing about real estate is the lack of liquidity -- for instance, you're clearing only a couple hundred on each property and the equity's not available without considerable hassle. To earn that same few hundred dollars a month, if you put your $7000 into the highest quality dividend-paying stocks, earning an average of 3%, within 18 months, you'd be cash-flowing about $300/month in dividends, leaving the stocks to appreciate for years and decades (hopefully, but it's the same hope with real estate, no?). More liquidity, more diversity.

My advice is based on the fact that it's what I'm doing! So take it for what it's worth. Bought six rental units, cash-flow positive, 14 years ago, paid off primary house, am now building dividend portfolio rather than buy more rentals.
 

[SwordGuy]

There are some threads on this forum that have rental business book recommendations.  I HIGHLY recommend you check out a few of those books.

I suspect you aren't actually making money on your current homes.  You have a positive cash flow (for the moment) but I don't think you are making enough to cover short term repairs and long term issues like roof replacements, etc., much less make a profit to live on.

[SwordGuy]

What interest rates do you have on your three homes?  It makes a difference as to whether paying down debt or investing makes more sense.

[arebelspy]

There are some threads on this forum that have rental business book recommendations.  I HIGHLY recommend you check out a few of those books.

I suspect you aren't actually making money on your current homes.  You have a positive cash flow (for the moment) but I don't think you are making enough to cover short term repairs and long term issues like roof replacements, etc., much less make a profit to live on.

+1.  You need to start reading and researching if you're going to go from accidental landlord to real estate investor.

BiggerPockets.com is a great real estate site/forums, and let us know if you have questions, but right now it doesn't seem too feasible from where you're at.  I'd likely vote towards saving up the money for a down payment, rather than paying off current mortgages.  Rates are cheap right now, load up on the cheap debt if it's making you money (unlike, perhaps, those current accidental rentals).

[acernigra]

Thanks for the great and prompt responses, everyone! 

To answer a few of your questions/provide a little more input, yes, we are barely positive on the rentals, I know.  But, they have been paid off this much so far through this and we have good tenants and the houses don't need much work as we have already done loads, and a pretty sizable and stable income right now and if we need to pay those down we can.  I just wonder if our money would be better spent investing in MORE rentals so we have a bigger portfolio, start to pay them all off, put them in an llc and refinance, and then build from there.  I don't know what the best way is...  Basically, we have 100k/yr over the next two years to invest in something that will earn us a reasonable steady income which we can use to save and/or invest further and we have two rental homes that are currently rented and doing well.  What should we do?

We only have 2 mortgages and they are the two rentals.  The house we currently live in is rented for us from my wife's employer.  The interest rates on the two mortgages are 3.3% on the 145k property and 4% on the 200k house.

I've been on bigger pockets quite a bit lately, and it seems pretty informative.  I am definitely ready to read and research some more.  Any specific links or recommendations where to start or what books to get?  I'll check out the other threads you mentioned.

Thanks so much for your help.

[acernigra]

Oh, and as far as our other investments, we both also have 401k's, Roth and Self Directed IRA's.  Could use some help there too but they're not doing too bad.  Mostly in indexes.

[arebelspy]

What sort of real estate related job would you like?

Just managing long term rentals you already own is a part time one, at best.  Figure management fees of 8-10% of the gross yearly rent.

So for the two rentals you have right now, that's a side gig paying you a bit under 3k per year.  Another two rentals, double it.  (That's just for the management part of the job, hopefully the rentals themselves are earning you more than that as well.)

So do you want to manage other people's properties?  Do you want to fix and flip houses?  Do you want to birddog? Wholesale?

There's lots of real estate related jobs, separate from investing in real estate.  If you want to invest in real estate and retire (and optionally manage your own properties), that's quite different, and requires a different portfolio, than switching careers to have a real estate related job.  What exactly are you looking to do?

[DoubleDown]

I'd just like to say, please listen to whatever advice Arebelspy offers, he and a couple of other individuals on this site really are experts when it comes to real estate!

[arebelspy]

I'd just like to say, please listen to whatever advice Arebelspy offers, he and a couple of other individuals on this site really are experts when it comes to real estate!

I wouldn't go that far, but I do enjoy discussing real estate, and am constantly trying to learn myself. (Going to an 8-hour REIA meeting tomorrow, actually.)  Thanks for the compliments though.  :)

"Another Reader" on this site has quite a bit of experience and good advice as well.

Glad to see you've found BiggerPockets.  Real Estate can definitely be lucrative (especially over the last few years, and hopefully going forward at least a few more), and a lot of fun, but make no mistake: it is more work than stocks, and a full time real estate gig is nothing more than a job.  Sipping drinks on the beach comes only after years of hard work.

[Another Reader]

My experience does not make me an "expert," but I am happy to share what I know and help other people avoid the mistakes I have made.  As "Bawld Guy" Jeff Brown says, it's the answers to questions you did not know to ask that cause you problems. ;-)

[acernigra]

Sorry it took me so long to get back to you, its been another busy day.

I'm not sure what real estate job I want.  I guess that's why I'm here and what I'm asking.  I just want to use my current salary to invest in something that would provide future income and allow me to stay home with my kids some and get me out of my current desk job.  I love fixing up houses and being active, doing housing related projects and since we already have two rentals I thought maybe more along those lines might be a good way to go.  I know we're not doing great with the ones we have now, but its a start, and I thought since we don't actually "need" my salary for day to day expenses we can invest it and pay our current rentals down or use it to invest in new properties, and hopefully in a couple of years I can quit my current job and focus on those and grow from there.  I just want to know, given our current situation, what would be our best investment, and yes, I am interested in the real estate avenue since I like that kind of thing and we seem to already have a head start. 

BTW, we are not currently living in the town where we own the rentals, we live in Europe actually, and the houses are in the states, but we have a lot of family and friends that have been doing a great job helping us manage them so far.  And we make several trips back to the states each year and could go any time if we needed to close on a house or whatnot.

Thanks for your help and I'm very grateful to have such qualified minds offering advice.

[arebelspy]

Sounds pretty straightforward then: you want to invest in real estate, not have a real estate job.  Use your income to do so, then retire when returns from real estate are greater than returns from your job.

A number of ways to do that (hard money/private money lending, joint venture partnership, landlording, note holding, etc), pick your favorite.