I really appreciate all the comments and like the different perspectives. Please forgive the length of my response while I try to address inquiries.
If depreciation is included, and is ~$10K/yr ($270K value over 27 year straight line depreciation), then you are ever so slightly cash flow positive on the rental. Yes, you apparently lose $300/mo. excluding taxes, but you recoup 0.33*$833=$374/mo. from the IRS due to the rental loss, for an overall gain of $74/mo.
To be honest, I’m having a hard time figuring out whether there is a tax advantage or not. The monthly negative cash flow is obvious. The yearly consequence is buried in a lot of tax chicanery that I didn’t quite follow last year.
You have self identified as enjoying lifestyle creep. No Frugal awards for that. If you spend $15K this year on furniture, you're not allowed to judge others anymore on frugality. I judge frugality on multiyear spans, a single year of small budgets isn't enough.
I deserve that. Judging on the multiyear spans, in 2010 and 2011 my savings rate was 54% and 60%, so I know I’m capable of much better. I’d like to get back to that level.
The idea of renting out an $850K house for $4500/month is ludicrous. Every last one of your eggs in one basket...There's a reason people diversify.
I think I am diversified, but please offer thoughts. Some people would say I should only have one strategy, but I’m trying to fill up 4 baskets simultaneously.
I currently put $1600/month in a Schwab Index. This account represents ONLY payments that I have received in rent and is held separately to help me identify the difference between paying off mortgage early vs. investing. I understand the logic for investing vs. paying off, but resisted it emotionally. This is my way to deal with irrational behavior. My intent was to let that grow and then pay down the mortgage on that investment. But as I experience the reality, I’m satisfied leaving it there. Each month that passes, I see more reason to keep it invested rather than paying it off. That attitude may change when the ARM increases. The point is, that account is earmarked and correlated to that property. Loan managers told me I didn’t need the money from a rental to afford both properties, and I wanted to be sure they were right. This is my version of hedging bets.
I max out my $401k, and my company matches up to the corporate limit. Those funds are invested now in Index funds. Last year I switched the company 401k plan to a more expensive option that allowed me better investing choices including Vanguard, Schwab, Fidelity, and other index funds. Previously, every 401k plan I was ever a part of didn’t offer index funds. I made poor choices and panicked, losing money at bad times. I’ve learned a lot in the past few years and now, thanks to having a solo-401k and counting the employer portion, I’ve stashed more in my 401k in the past 5 years than I did in the previous 18. That part makes me sick to my stomach for wasted time, but also proud that I am now on track for success.
I put additional funds into a non-tax advantaged account at Vanguard. I think if I reduce my spending, I can increase this amount to $50 or $60k per year. That would get me to FI quickly. (this is dependent on keeping my current contract for another 8 years).
I put $1k additional to my primary residence mortgage. Again, I’m hedging my bets. I’m just thinking that if I fail to do #1,2,3 above, then at the very least I’ll get the house paid off 10 years early (by age 64) so I won’t have to work forever.
You seem like a person who can handle criticism well, I respect you for that. I hope you keep your open attitude
Thanks Prairie. I know a lot of younger people on this board look at higher incomes and are disgusted by spending like mine. I hope they understand how envious I am of young people who have their whole lives ahead of them and the power to grow small amounts into fortunes by the time they are my age. I’m sick about how much time I’ve wasted and how I’ve thrown away so many opportunities without even realizing it. I also think about how weighed down I am because of my love for this house and all the material items that go inside of it. I’m just so glad I’m learning about “early” retirement before I’m in my 70’s and comments from well-meaning MMM’ers will only help me get there faster.
1. Find a way to save at least 50% of your income -- for the rest of your working life.
2. Consider getting a roommate if your job goes away, fast.
3. Maybe...start living off that 200+K by moving some of it into your checking account every month. Take all your current income and invest in Vanguard funds every single month - you'll be dollar cost averaging your way in while maintaining your large E-fund, which isn't TOO bad considering how risky your job seems to be.
Great advice SunshineGirl. #1 is going to have to be my priority. Today was definitely a wake-up call for me and I think I can make some changes starting today. Thank you!
If your contract is renewed, is it for just one year, or multiple years? If mulitple years, you can make some really substantial dents in your savings and paying down mortgages in the next few years.
I get renewed one year at a time, and every year about this time my stomach has been in knots. This year is a little worse than previous years. Part of that may be due to the financial conditions in my industry. But I think part of my nervousness also stems from deeper insight into my finances and comparisons to Mustachians. The analysis into my spending scares the crap out of me.
Economically, a great place to put most of that $220k in cash would be into an investment fund. BUT, in your OP you mentioned staying where you lived as a very high priority. That money could make a serious dent in your primary mortgage. That would be a strategy more for your emotional well-being, but you'd get an automatic 3.875% return on investment. Not great but not horrible. Certainly better than loosing money via inflation every year.
My after-tax investments are building up to the point where (if contract is renewed indefinitely), I could pay off one or both mortgages in 8 years. That was a goal a year ago, but if I get and stay on track, in 8 years I may realize the folly of paying off a 30 year 3.8% mortgage and think better of it. Not only that, but that’s the only money I have that’s not my “old-man money”. So I’d still have to work to live.
Reston Town Center is a lovely area - Metro was supposed to arrive in Tysons in 2008. Then 2012. Now 2017, they promise!
Did I miss something? I’m still reading July 2014 for Tysons. Reston is 2017/2018. No one can be that far behind, can they? If I am wrong on this, then my strategy is completely flawed.
(Note: I waited until I decided that you could handle the face-punching to post. You passed my test, hopefully I didn't misread you.)
Ha. No, I can take it and I know I deserve it. I promise to improve.
Some should be invested in index funds. It's also a good idea to put some toward your mortgage, but I'd think about putting that chunk of it toward your rental mortgage. That mortgage is an ARM, so it's much riskier than your primary mortgage. It has a lower rate now, but that won't last for long. Or you could even put some towards both mortgages if you wanted to.
I must have done a poor job of describing my assets. 90% of my retirement and investment funds are in currently in Index funds. I originally was directing the extra principal payments of to the rental because of the ARM, thinking of the snowball strategy, but the longer I’m away from it, the more I think that is an investment that I may not want to hold on to. The HOA fees there are beyond my control and that bugs me to no end. If I had to “walk away” from an investment, the condo would be dropped. So if something does happen with my job situation, I don’t want my cash tied up in it.
I have a lot to think about tonight to start turning these ideas into practices. You all will be glad to know I've just dropped my Satellite radio subscription for $208/year. Not much, but at least it's a step in the right direction and I'm turning off the desire to "auto-renew" things that have just been a part of my life for the past 5 years.