Author Topic: Strategy for the next 5-10 years  (Read 3396 times)

jrh

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Strategy for the next 5-10 years
« on: February 20, 2015, 10:34:19 AM »
Hey everyone,

I recently started reading MMM and have been super impressed by the level of practical life knowledge here!

I'd like to get some feedback and ideas on the best financial strategy for my life in the next 5-10 years.

Here is my current situation.

30 years old. Getting married in April.  My soon to be wife is totally onboard with MMM-type philosophies.
She is a nurse and I'm in sales.  Combined income will be $80k-$100k/year before taxes. Both of us feel very stable and satisfied in our current jobs, living in our current city in Nebraska.
Both of us have excellent credit and no debt other than my mortgage.
I bought a triplex house last year.  I live in one of the apartments and the other two units generate $820/month in rental income.  My mortgage (principal, interest, taxes, and insurance) is $835/month, so the rental income basically covers it all.
House is valued at about $100K.  I still owe about $70k on a 15 year mortgage with 4.0% interest.
I have $31k in a Roth IRA, $10k in an "emergency" fund that I have never needed to touch, and at the time we get married, we'll have about $10k or less in savings (weddings are expensive!!!).

We think we should be able to comfortably set aside $2000/month for long term goals after we're married.  The question is, how/when/where to put this money?

Upcoming goals/considerations:
Move out of my small basement apartment into somewhere a bit more modern and comfortable.  We'd love to have a small acreage on the edge of town, say, a small house on 5-20 acres of land, but don't know if or when we'll be able to afford this. These would be in the $200k-$300k price range in our area.

I enjoy being a landlord and would like to expand my long term rental portfolio, but I don't want it to consume my life and turn into a full time job.  Maybe live in another house or duplex for a year or two or five or ten, then move to an acreage?

We are not planning to have kids.  Maybe in a couple years we'll change our minds, but I doubt it.

Her parents are still working, but in their 60s and have done a terrible job of financial planning so basically have a net worth of zero, literally.  As they get older and their health eventually deteriorates, we want to be able to help them in some way, such as having some sort of home that they can live in close to us both for their physical and financial well-being. Could be a duplex next to us, or just a small home in the same city or something.

My parents are in excellent shape financially and will not need any help during retirement.

Still want to contribute to the Roth IRA.  Should I be maxing it out, even if it delays the purchase of more real estate?

I'm skeptical of the stock market right now.  I think it will flatten or slightly decline in the next year or two.  It's had a great run for the past few years and interest rates can't stay low forever.  When interest rates start climbing I think we'll see a drop in the market and obviously real estate will be harder to buy at that point.  Am I crazy?  Should this change my strategy at all? Would it be better to rapidly pay down my existing 4.0% mortgage?

Basically, if you were me, what would you be putting money towards?

Thanks in advance!

frugaliknowit

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Re: Strategy for the next 5-10 years
« Reply #1 on: February 20, 2015, 10:57:12 AM »
I would not buy a house yet.  You just bought the triplex (cool your jets...).  Live in one of the units (upgrade to a better one, if you wish).

A Roth IRA is a better investment than real estate, so if you can't swing both, just fill the IRA with stock index funds.  You might want to build some liquidity for a house downpayment down the road and/or for emergencies. 

mxt0133

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Re: Strategy for the next 5-10 years
« Reply #2 on: February 20, 2015, 11:33:59 AM »
If you're contributing to a Roth IRA why not a Traditional IRA and get the tax deduction?  There are lots of articles that show contributing and getting the tax deduction is superior to after tax contributions to a Roth IRA.  And yes you can access those funds tax free if you structure your income low enough in retirement.

If you are more comfortable with real estate vs stocks don't let anyone tell you otherwise.  There are various paths to FI and each one has their own path that suits them.  The worst thing you can do is contribute to stocks have it go down and then pull out, if you don't have the conviction to stay during a major down turn or will start to loose sleep if your portfolio drops then its not worth it.



mxt0133

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Re: Strategy for the next 5-10 years
« Reply #3 on: February 20, 2015, 11:38:44 AM »
Another thing with a combined income of 100k with virtually no rent/mortgage payment, no kids, and not maxing out your tax deferred accounts you could be doing much better than saving $2000 a month.

If you want to really increase your net worth, lowering your expenses will have a bigger impact than where you invest your money in.

Look at this calculator and play around with the savings rate vs investment returns and see how it impacts how many years until FI.

http://networthify.com/calculator/earlyretirement?income=50000&initialBalance=0&expenses=20000&annualPct=5&withdrawalRate=4

27y/oTennesseeRetiree

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Re: Strategy for the next 5-10 years
« Reply #4 on: February 20, 2015, 01:22:13 PM »
I think that your fiance should buy a house.

I know... Not exactly what you asked about, but if you are serious about being a landlord and being comfortable with it then you have an opportunity now that you won't have when you are married. Owner occupied financing gets the absolute best terms on a mortgage and like you said rates can't stay low forever. She can buy a place right now with 3-10% down and get an amazing rate.  The difference between a 3% rate and a 5% rate on every $100,000 over 15 years is $100 a month. With some MMM math and growth of 7% if you save this then it will be about $32k when your 15 year mortgage is paid off. On top of that your cash on cash return is amazing because you can borrow at a higher LTV.

If she is on board as a mustachian then she will get this. I would say either get one as close to yours as you can or go ahead and get that duplex you mentioned... Or a quad with an owners unit.

Making some assumptions. She gets a triplex like yours. You get married and move into one unit. Down the road you get that house on some acreage and you move into it. Then you have two triplexes that are making $1000 a month or so... 15 years from now you have 6 units that are making you $25k a year or so extra.

Also... I like Roth's better than Traditional IRA's. There is no forced withdrawal and I don't know what the tax rate will be when I am 59.5 or what tax bracket I will be in. My suggestion is continue to max this out.

What about other retirement program options? 401(k) or 457(b)?

You can do this! Keep it up!

jrh

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Re: Strategy for the next 5-10 years
« Reply #5 on: February 20, 2015, 01:53:37 PM »
I think that your fiance should buy a house.

I know... Not exactly what you asked about, but if you are serious about being a landlord and being comfortable with it then you have an opportunity now that you won't have when you are married. Owner occupied financing gets the absolute best terms on a mortgage and like you said rates can't stay low forever. She can buy a place right now with 3-10% down and get an amazing rate.  The difference between a 3% rate and a 5% rate on every $100,000 over 15 years is $100 a month. With some MMM math and growth of 7% if you save this then it will be about $32k when your 15 year mortgage is paid off. On top of that your cash on cash return is amazing because you can borrow at a higher LTV.

If she is on board as a mustachian then she will get this. I would say either get one as close to yours as you can or go ahead and get that duplex you mentioned... Or a quad with an owners unit.

Making some assumptions. She gets a triplex like yours. You get married and move into one unit. Down the road you get that house on some acreage and you move into it. Then you have two triplexes that are making $1000 a month or so... 15 years from now you have 6 units that are making you $25k a year or so extra.

Also... I like Roth's better than Traditional IRA's. There is no forced withdrawal and I don't know what the tax rate will be when I am 59.5 or what tax bracket I will be in. My suggestion is continue to max this out.

What about other retirement program options? 401(k) or 457(b)?

You can do this! Keep it up!

Thanks for the creative advice!

My fiance really has nothing to her name other than a few thousand dollars in a bank account (she's spent a considerable amount of money in the past few years supporting her parents' poor choices), so buying a house right now is pretty tough, but I am glad to hear I'm not crazy for looking into another property in the near future.  We might try to buy and occupy another property before interest rates go up yet still qualify for lower down payment because it would be owner occupied.  From talking to my lender, they don't seem to care about us acquiring rental property this way as long as we have at least 25% equity in the house and live in it for at least 12 months.

My fiance is maxing out her 401(k) at work.

I, being in sales, don't have any benefits other than paid time off.  No healthcare or retirement.  I've just been doing the Roth IRA for retirement and paying for my own healthcare out of pocket.  I'll be joining her healthcare coverage after we're married.

One of the big intangible benefits of my sales job is a VERY flexible schedule, which allows me to also be a landlord.

frugaldrummer

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Re: Strategy for the next 5-10 years
« Reply #6 on: February 20, 2015, 02:08:55 PM »
I don't see why you wouldn't buy a $200k property on the edge of town with acreage right now. 
 - your payment would probably be about $1100/mo
 - you would be getting an extra $400/mo from renting out your current apartment
 - so it would really only cost you about $700/mo - which you could surely afford on your combined incomes
 - you could plan to build a small home on the property for the in-laws; with housing costs covered, their social security will likely cover their day-to-day expenses?
 - you could save money on groceries with a truck garden
 - you would lock in today's low interest rates for your mortgage
 

mozar

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Re: Strategy for the next 5-10 years
« Reply #7 on: February 20, 2015, 09:06:28 PM »
My understanding is that you can't time the market, so it shouldn't matter if it's high or low as long as you are contributing. Real estate has lower returns but more stability and the stock market has higher returns but higher risk. I prefer the stock market but I don't enjoy landlording. YMMV.

mandy_2002

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Re: Strategy for the next 5-10 years
« Reply #8 on: February 20, 2015, 09:29:41 PM »
This is another one that's not exactly answering your question. Weddings don't have to be expensive. There are MANY options to learn the costs. Some of my favorite wedding receptions have been in the rec center of the church they were held in, with the food provided by (our at least prepared by) the people of the church. It only cost $300 to get married at a courthouse and have a keg in your backyard... If the two of you are truly in the MM groove, this large extraordinary day should be given some serious thought.