I discovered MMM recently and have been reading the articles and forum posts. There seems to be a lot of good people here who have knowledge and a good set of values, so I thought I'd maybe get some opinions/advice on the investment/retirement plan my husband and I currently are working on.
Background: The two of us are in our early 40's, with no children, and we live in Placer County, Northern California. We are total homebodies and only go out when we must (grocery, important appointments, running chores), and since we work at home, we only go out about twice a month on average. We rarely eat out (I'm a pretty mean cook), don't drink, smoke, or get high. We don't have expensive hobbies or wander lust (did plenty of traveling when younger, and no longer have an interest), although hubby does creative work so his photography/audio/tech gadgets are the only significant spendings.
Experience: We've bought and sold apartments and houses abroad a few times in the past, and have invested in stocks, bonds, gold, tea, etc, too, but we've only bought one house in the States (our current home), and have only recently started doing homework on investing in rental operties and stock investments for the U.S. market.
Income: Hubby currently does freelance work, and the money is not stable (used to be in the $40k~$55k range, but now due to growing competition, only around $30k, and will likely decrease with time). I'm a silent partner in a business that generates roughly $34k for my share a year, but this is also not stable, since the business fluctuates. Together, that's about $64k a year (if things are stable), and after taxes it's about $54k net for our household.
Current expenses:
Mortgage + Property tax + Property Insurance + Mello-Roos = $1,850
HOA (includes Internet) = $118
Food = $500
Utilities = $200
Car + Health Insurance = $300
Transportation = $100
Misc. = $200
Total monthly expense = $3,260
Assets:
One single-family house (current home), purchased in 2012 for $255k (now valued at $355k). We paid 20% ($55k) on a 30-year loan at 3.625% interest rate.
Two apartments abroad, valuing at $45k total (cash purchase), with 10% yearly return on rent.
Stock investment abroad, with roughly $390k that's generating about 11% yearly return (fairly consistent).
Insurance investment abroad, which is about to pay out $46k total.
Two Roth IRA's totalling $17.5k (we just started recently).
Liabilities:
Our current home has $196k remaining mortage. We have no other debts (we drive a used car about only twice a month, never owe any balance on credit cards, no other loans).
The question:
Is our plan listed below a good one, and what can be improved/changed?
Our goal is to attain total financial independence, with our assets generating enough income for a comfortable living (by our standards, which is only about $40k a year. But if we want to have some cushion, $50k would be better), so we never have to worry again about not making enough money through a job, or freelance gigs, or if a business stops being profitable. Hubby's passion is writing fiction/novels, and since the chances of actually making a decent living at it is extremely slim (overwhelming majority of the thousands of books you see in bookstores--they don't sell enough to even break-even, and only a tiny percentage of authors can make a living with writing). So it would be great if he could just focus on writing for the love of it, instead of worrying about whether the books will be top sellers.
Our current strategy for reaching financial independence is through buying rental properties and stock investments. The basic strategy we have right now is this:
-Sell our current house. We think the mello-roos at $3k a year is too high, and also we can use the money to split into two cheaper houses for greater equity gain. The house should net us about $140k in total gain.
-Sell the two apartments abroad for roughly $45k total.
-We'll use the money from selling the house ($140k) and add about $205k from our assets in stock (this includes the $45k from two apartments abroad), and then buy approximately 6 rental properties (with one of them as our new home) at roughly $230k each, all with 25% down payment, 30-yr loans, around 4.87% interest.
The 5 rentals should fetch around $1,430 on average for rent each. They will pay for their own mortgages, without much left, so we're mainly looking at the long-term equity gain, which is roughly 7% yearly gain on average (based on the past 50 years, though in the last couple of years, it's been about 20% gain each year, but then again, California is crazy like that).
(To put things in perspective, the houses in the area we want to buy, the average price was around $345k back in 2005~2006, and they're now around $230k, slowly recovering from the crash. Using the same historical average of 7% gain per year, they should be about $39.1k ten years from now. If we just look at the Bay Area, the housing prices are now already back to where they were pre-financial crash, and it only took about three years. Many houses are now getting dozens of buyers competing with cash. Our area isn't that crazy, but we're close enough to ride a little bit of that coattail. Our current house in Placer County went from $255k in 2012 to $355k currently. That's 39% increase in just two years, right after a severe financial crash.)
In ten years, we'll still owe $825k mortage on all six properties (including the one we'll be living in). If we sell off two of them (estimated to be worth around $391k each by then), we can take the $782k and also another $43k from our stock investment to pay off the $825k mortgage we owe on all six properties. So now, two of the six properties are sold and the other four are paid off. One we live in, three are still being rented out.
The rent from the three properties should be around $1,881 each (estimated for inflation ten years into the future, using the rate of 3% rent raise limit per year as a basic guideline), so that's $5,643k total a month ($67,716 a year), and if we subtract $20k of expenses a year, we'll be left with $47.7k net income a year from the three rentals.
-The $396k in stock investments--half of it we'd keep abroad, and the other half we'd like to move to the States to invest, using an investment management service (such as the new one Scottrade just started offering). I'm learning about index funds/Vanguard/S&P at the moment, but I don't know enough about them yet to be confident that I won't screw up, or that I could do better than an investment manager.
The stock investment abroad will continue to generate a steady 11% yearly return (for the time being. No idea when the laws will change in that country). In the States, the common consensus seems to be that 7% is a conservative estimate. We might do both conservative and higher risk, to see if we can match that 11% return from abroad. (The reason we don't want to just keep it all abroad, is because the relationship with the people we're investing with is a little complicated, and with human nature the way it is, it's safer to have full control ourselves.)
The money in stocks will basically act as our safety net, so when there's vacancy in the rentals, repairs, emergencies, or just not making enough money with our jobs/business, we can supplement with the 7% yearly gain, or when push comes to shove, dip into the assets to make ends meet.
-So with this plan, in ten years, we should be looking at the following summary:
Total value of all four properties (three rentals and the house we'll live in) should be about $1.564 mil.
Total assets ($356k in stocks and $1.564 in real estate) should be around 1.92 mil
The $356k in stocks, with 7% yearly return, which is $24.9k, and $47.7k yearly income from the three rentals. That's $72.6k income a year (debt free). For homebodies that live a somewhat frugal lifestyle, I think that's plenty enough even accounting for ten years of inflation?
Now, we're not experts in any of this. We're just using common sense and logic, and learning as we go. It's likely we might have overlooked or misjudged something. That's why I'm posting here, so I can get some help from people who are much more knowledgeable and experienced than we are. Any advice would much greatly appreciated.