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Learning, Sharing, and Teaching => Ask a Mustachian => Topic started by: mr_orange on June 06, 2015, 09:57:39 AM

Title: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 09:57:39 AM
MMM folks....this is my first post on the forum so go easy on me ;-).  I have been reading for a few weeks and enjoy the discussion so I thought I would start participating. 

About Us:
-Me: 36-year-old electrical engineer, work full time for a fortune 500 company, active real estate developer with 34 projects currently in process, 6 rentals and own current primary residence
-Job is flexible so I can work on business during the day and defer work to the evenings if needed
-DW: 35-year-old electrical engineer working full time
-Combined income a smidge over $200k annually from W2 including bonuses, etc.  (Has gone up from sheet attached herein)
-Development income from real estate projects likely to be $200k - $300k annually for next few years; hopefully more thereafter.  This is not steady income yet, but hopefully it will become steady the longer we're in business
-3 small children at home (Ages: 5, 2, 2....twins)
-Net worth: Currently around $1.07M
-Monthly expenses likely around $11k right now (more on this below); dominated by mortgage payment, food, taxes, and Montessori school for all three kiddos.  One will be going to public school later this year so this expense will drop considerably.  We're taking the difference and sending it to 529 plans for the kids
-Owe about $282k at 4.625% on our primary residence....cheap money in the grand scheme of things given we can get better yields elsewhere

I have been tracking our net worth gains for about 10 years now and they've been:

30.70%
39.00%
24.38%
23.65%
21.24%
16.43%
-5.21%
15.75%
16.65%
12.99%

Including this year the arithmetic and geometric means are around 20% annually.  This year I project around 25% and next year will likely be about the same. 

We're growing real estate businesses (development, crowdfunding, a hard money semi-blind pool debt fund, etc.) and it is pretty easy for me to get 20% or more return on our spare cash.  For a completely passive investment funding a hard money loan on one of the new sites will fetch north of 10%; or 10% at the lowest. 

I haven't done a great job of tracking our expenses because we're really busy and we have really focused more on growing our business and our income to keep our standard of living pretty much level.  We don't buy elaborate things and aren't spendthrifts, but we certainly aren't as frugal as the folks on this site.  We don't carry car payments, don't carry any high-rate debt, etc.  Overall I'd say we're pretty average with spending and could probably use a lot of work cutting unneeded expenses.  Feel free to disagree if this is untrue by Mustachian standards. 

I plan to start tracking our expenses more meticulously in the coming several months.  I did this several years ago over the course of 10 months and things averaged out like the enclosed spreadsheet highlights.  $11k/month was about the average, but things have probably gone up a bit with two other kids since I kept this sheet.  I'll be tracking this more in the coming months to try to figure out our new monthly surplus.

Questions:

1.  Where is a good place to look at cutting expenses first?  Our income is going up a lot in the coming years and we probably won't be doing drastic things like selling our house for a smaller one.  I'm sure there are other, smaller things we can cut though that will gradually get us more in the frugality mindset

2.  Based on the numbers presented and the information above what should we assume our SWR is?  I am thinking 6% or more.  If we can get 10% passively on crowdfunded real estate investments even if inflation is high 6% seems safe.  Thoughts?

3.  I figure a $10k/month budget is definitely something achievable without sacrificing much on our standard of living.  This would put our stache requirements at between $2M and $3M.  The right number is really a function of the answer to Question 2 above.  If we could bump it up to 7% the stache requirements drop to more like $1.7M.  Not all of our net worth is tied up in income-producing assets so there may need to be some conversion here to make this math worth right....feel free to lecture me on this if needed

My main goals are to:

4.  Have my wife be able to stop working and spend more time with the kids without dropping our standard of living
5.  Be able to quit working for the fortune 500 company and spend more time running our real estate businesses.  I like working and would hate sitting on the beach all day long.  I just want to work on my own terms and for our prosperity instead of someone else's

We both have nice jobs, but they're not particularly challenging any more and we just have other passions.  Thus we're not pounding on the table ready to "fire our boss," but we're not particularly fond of having someone else control our time either.  We'd really like to invest more time in other pursuits and be FI.

Thoughts and feedback are welcome.  Thanks for managing to get through reading the whole post. 
Title: Re: SWR For An Active Real Estate Investor
Post by: matchewed on June 06, 2015, 10:43:20 AM
1.  Where is a good place to look at cutting expenses first?  Our income is going up a lot in the coming years and we probably won't be doing drastic things like selling our house for a smaller one.  I'm sure there are other, smaller things we can cut though that will gradually get us more in the frugality mindset
I haven't done a great job of tracking our expenses

Well the answer is to correct the thing you're not doing a great job with. :)

2.  Based on the numbers presented and the information above what should we assume our SWR is?  I am thinking 6% or more.  If we can get 10% passively on crowdfunded real estate investments even if inflation is high 6% seems safe.  Thoughts?

The SWR is how much you'd be drawing down from your investments minus any other income you're receiving through other means such as real estate. >4% traditionally will lead to failure. So you need to break this down further into how much income is coming from your real estate and is it enough to cover your needs.

3.  I figure a $10k/month budget is definitely something achievable without sacrificing much on our standard of living.  This would put our stache requirements at between $2M and $3M.  The right number is really a function of the answer to Question 2 above.  If we could bump it up to 7% the stache requirements drop to more like $1.7M.  Not all of our net worth is tied up in income-producing assets so there may need to be some conversion here to make this math worth right....feel free to lecture me on this if needed

Not a question, what are you trying to ask?

Just a heads up, a bit about mustachianism is facepunches and calling people out when they may be living a wasteful life. 10k a month is a ridiculous expense for living with a family of five. Just warning you that people may raise some proverbial eyebrows very loudly.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 11:10:01 AM
No sweat...I can take the heat.  Everyone has to live their life differently and some choose higher consumption and standard of living over frugality.  To me a lot depends on how much you dislike your current living situation.   With flexible jobs my wife and I aren't pounding the "fire our boss" drum very loudly. 

The SWR in the studies I have seen is a function of a 7.5%ish blended portfolio of stocks and bonds.  SWRs north of 4% "fail" in those studies because this is how hard their money is working.  It seems to me that people could reduce their stache requirements by learning to invest better.  This blog focuses mainly on cutting spending, presumably because most people underestimate their ability to learn to invest better or grow their income through what I see here called "side hustles".  With flexible jobs the side hustles can be full-blown businesses. 

To me there is more than one way to skin the cat:

1.  Reduce expenses (Probably the easiest; but it comes with trade offs)
2.  Increase income (via business or other passive activities) and keep expenses level
3.  Learn to invest the difference better than the 7.5% blended rate cited in the 4% SWR studies cited

My real question is why not focus more on item 3 than on 1?  I understand both are important and don't argue with the fact that item 1 is probably easier for most people.  You don't have to pay taxes on extra income if you reduce expenses and most people can readily reduce expenses far easier than they can increase their investing prowess. 

However, since this is a self-proclaimed "advanced blog" about money I was hoping there may be other ways to explore becoming FI.  I'm not expecting to convince anyone to change their Mustachian way of thinking.  I was just wondering if others felt like investing better and/or growing income is equally worthy of focus. 

Fire away. 
Title: Re: SWR For An Active Real Estate Investor
Post by: MDM on June 06, 2015, 12:27:05 PM
1.  Reduce expenses (Probably the easiest; but it comes with trade offs)
2.  Increase income (via business or other passive activities) and keep expenses level
3.  Learn to invest the difference better than the 7.5% blended rate cited in the 4% SWR studies cited

#1 and #2 are on target.  #3, for those investing in equities, bonds, etc., is over-simplified.  "Doing better than average" is what active management is purported to do, yet the data says that most who try this, fail.  And even if you can do a little better than average, sometimes you will lose money due to global economic problems.  E.g, 2008.  See https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/: sometimes bad things - out of your control - happen.

If for #3 you are advocating "invest in something other than the stock and bond market" - e.g., real estate - that is a different issue.  Although real estate is not without its own pitfalls, you might indeed be able to do better than 7.5% as a result of your own hard work and expertise.  For those so inclined and able, more power to them.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 12:32:59 PM
For #3 if you're an accredited investor you can simply buy into a hard money loan on a crowdfunding site with 70% LTC or lower using an experienced operator and probably get north of 10%.  I'm not sure why anyone would invest so much in Wall Street equities if they can get better risk-adjusted yields elsewhere.

I also question whether or not the return on energy for cutting expenses reduces one's income if you're even a half-decent business person.  Not driving anywhere and riding your bike to "save gas" at the expense of running a business to increase income seems like biting off your nose to spite your face.  In theory income upside is unlimited in business; albeit with additional risk.  Cutting expenses has a logical limit and at some point will reduce your standard of living as well. 

Again, I support the whole Mustachian approach.  It just seems a bit extreme to me and possibly sub-optimal in many senses.  Focusing on all three of the items above instead of hyper-focusing on item 1 seems to be a better strategy to me.  Using only item 1 seems to be like having a football team with only a great defense instead of balance in all three phases of the game; offense, defense, and special teams. 
Title: Re: SWR For An Active Real Estate Investor
Post by: lostamonkey on June 06, 2015, 01:14:49 PM
The 4% rule is based on passively investing in stocks, and bonds.

You are not passively investing. You are a small(ish) business owner who is earning his income in the real estate business. SWR don't really apply to you.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 01:37:09 PM
What you wrote is true, but pretty much anyone can click the 'Invest' button on a crowdfunding site and get 10% passively if they just study hard money loans for a few days and have a reasonable amount of intelligence.  You don't need to be a small business owner to do that. 
Title: Re: SWR For An Active Real Estate Investor
Post by: NathanDrake on June 06, 2015, 03:30:48 PM
Quote
What you wrote is true, but pretty much anyone can click the 'Invest' button on a crowdfunding site and get 10% passively if they just study hard money loans for a few days and have a reasonable amount of intelligence.  You don't need to be a small business owner to do that. 

How is this any different than passively investing in boring index funds?

I think you're grossly underestimating the risks of whatever you're involved in. There is no free lunch, sorry.
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 06, 2015, 04:26:49 PM
You have failed to understand SWR here. And you are way, way done with working if you want to be, assuming your claims about your RE investments/returns are even close to reality. Hell, you're done working even if you never make any money on RE again if you want to cut back the crazy spending.

So really, you are asking the wrong questions. You are set for life. Now what do you want to do?

As an aside, I'm calling BS on the no-effort/low risk 10% crowdfunding real estate. Some of us remember this sort of thing from a decade ago...

-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 04:48:06 PM
Call bs if you'd like.  I never said there was a free lunch either as the post a few above implied.  You have to learn how to invest in them, but it isn't rocket surgery if you can pick good collateral, quality sponsors, and project with a low LTC.  If you're a real estate investor with a lot of experience investing in these product types it is pretty easy to find good risk-adjusted returns just like it would be for others with quality skills in product that is less liquid then what equities offer.  I really think the equities market is generally pretty efficient, especially with algorithmic trading and people front-running the market. 

The projects we're doing developments for won't necessarily be around forever.  They're cyclical, but we feel like we have pretty good risk management policies in place and we invest in a market with pretty good fundamentals.  We're toying with the idea of discarding the jobs, but given our risk aversion we'd like to see most of our inventory monetize before we pull the trigger on this.  The development projects are also definitely not passive; we put a good amount of work in them so it is like a well-paid other job. 

For equities we invest via AssetBuilder.  They use DFA funds from Schwab to execute Fama/French three-factor style passive investing.  Their Model 14 portfolio here:

http://assetbuilder.com/our_portfolios/model_portfolios/model_portfolio_14

Is how those assets are allocated.  The target is 14%.  Results along with risk measurements can be found here:

http://assetbuilder.com/growthofwealth/growth_of_wealth.aspx

and here:

http://assetbuilder.com/our_portfolios/assetbuilder_results

They started these funds at a pretty poor time so the results have probably under-performed others in the last 5 years.  Hopefully they'll do better in the coming 5 years. 

I don't understand how I've failed to understand the SWR.  Please elaborate. 
Title: Re: SWR For An Active Real Estate Investor
Post by: Another Reader on June 06, 2015, 05:48:55 PM
Safe withdrawal rates are for asset portfolios where asset decumulation is assumed.  Because you are starting with a relatively low yield and the paper asset markets are cyclical and do not grow consistently, you may at some point have to use some or all of the starting assets to meet the required withdrawals.

I don't believe you need to decumulate if you target assets with higher yields and more consistent income, like real estate.   Build a solid rental portfolio, add in some paper assets, and you won't worry about the vicissitudes of the various asset markets.  Worked well for me in the 2008-2013 downturn.

AssetBuilder hasn't been around that long, but DFA Funds are generally held in high regard.  AssetBuilder provides access to DFA products without going through the traditional advisor charging a 1 to 2 percent AUM fee.  You will see more a lot more discussion about Scott Burns over at early-retirement.org.  My guess is there are a number of threads over at bogleheads as well.  The AssetBuilder portfolios will need a few more years to see if they work out as projected.

If you are going to make statements about crowd-funded hard money loans, some examples would be helpful.  I am skeptical, because of the low level of knowledge of the typical investor and the need for the developer or buyer to turn to this source of financing.  At least with Lending Club, the investor gets easily understood information about the creditworthiness of the borrower.

A real estate developer would expect a 15 to 20 percent entrepreneurial profit for taking on the risk of development.  That's an active business, not passive investing.  Would NOT want to have been in that business during 2008-2012. 
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 06, 2015, 06:05:40 PM
I have another thread started in the investing forum about HMLs.  It may be better to talk about them over there to keep this thread more focused on my OP. 

Thanks for the feedback Another Reader. 
Title: Re: SWR For An Active Real Estate Investor
Post by: maizefolk on June 07, 2015, 09:07:16 AM
2.  Based on the numbers presented and the information above what should we assume our SWR is?  I am thinking 6% or more.  If we can get 10% passively on crowdfunded real estate investments even if inflation is high 6% seems safe.  Thoughts?

So TL;DR version: We don't have the data to solidly answer your question as written and I think you're missing that data is the difference between defining a safe withdrawal rate, and just picking a percentage.

You can pick whatever withdrawal rate you like to fund your lifestyle, with the understanding that higher withdrawal rates carry with them higher risks of running out of money. You can decide to retire and take 6% a year out of a stock and bond portfolio. Based on historical data, half the time you'll be fine, half the time you'll go broke within 30 years.

The concept of a "safe withdrawal rate" is based on studies using long term historical datasets collected over a century or more that can give you a statistical evidence for how likely it is your net worth will last a given number of years. Those datasets don't exist on the necessary timescales for the investment vehicles you're talking about (hard money loans and real estate developments) so no one can really tell you with any certainly what the safe withdrawal rate might be.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 10:36:34 AM
Yes...I have read the studies. 

They claim 7.5%ish yields over rolling periods of typical retirement durations.  I understand that there is not observable data on HMLs like there is with the stuff Wall Street sells.  It seems reasonable to think that if you're able to get 2.5% or more (10% - 7.5% == 2.5%...OR, simply scale by your preferred asset allocation in these assets) yield from non-Wall-Street investments that you can simply increase your SWR as well by the same yield and thus change your divisor for the multiple of cash you need to be FI.

It just seems like almost all of the discussion on the forums centers around stocks and bonds that Wall Street sells and there are few threads about investing in "alternative" (or really stuff brokers can't make money on) products.  People on these forums seem to be intelligent enough to pick winners in these categories, but I do understand that market cycles can wreak havoc on things.  Grasping for extra yield to me is a lot less work and has a lot less tradeoff than slicing my living standard in half.  I get trying to eliminate frivolous consumer waste, but when I see things like you shouldn't drive a car and you should grow your own food it seems like a pretty big lifestyle tradeoff relative to simply learning to invest a bit better. 

There is a concept on here I have read about called "complainy pant syndrome" or some such.  A not-too-distant cousin seems to be the "I can't do better than 7.5% on my portfolio so I will just punt and let Wall Street tell me what to do syndrome."  I for one don't plan on growing food in my back yard to save on groceries if I can simply study a bit and get better yield on my investments.  Most of the folks on the forums with a modicum of intelligence should be able to do the same as well. 
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 07, 2015, 11:16:24 AM
Let us know how it goes in 20 years. Based on what we know of your situation (highish dual incomes, mid-30s) your NW is not very impressive if you've actually been making 10%+ on your hard money deals for any significant period of time. Which tells me that you were in the right place at the right time but think you did it all with your amazing skill.

FWIW, cutting your spending in half would not require you to grow any food or live in a cardboard box.
 
-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 11:38:18 AM
Nope...never claimed to do it with amazing skill.  You made that up.  If you look through the thread you'll see that I said pretty much anyone could do it.  I'm not sure how you gleaned that I have amazing investment prowess out of that. 

And no...I have been doing development projects; not hard money loans.  The hard money loans are more passive than a development project is by a long stretch.  Our development deals do much better, but a lot of the profits have gone back into growing the business of late.  If you somehow counted the value of the business on an intrinsic basis our net worth would probably be higher.  I don't really count this though because we don't plan to sell it and it would be hard to estimate. 

BTW...I lived through the mortgage crisis just fine.  My job was gone, but our real estate did fine over the long haul.  So I have no illusions that it is without risk.  Anyone claiming that this is the case is manufacturing reasons to be pessimistic.  What we have gained is through pure, old-fashioned hard work.  Luck certainly has helped in recent years, but I wasn't feeling very lucky around 2009.  We still managed to work through it just fine. 
Title: Re: SWR For An Active Real Estate Investor
Post by: maizefolk on June 07, 2015, 12:19:17 PM
Clearly either you have not read the studies I am talking about (but have read other ones and are assuming those are the ones I have read as well) or you are still just missing the point. Because when you say:

"It seems reasonable to think that if you're able to get 2.5% or more (10% - 7.5% == 2.5%...OR, simply scale by your preferred asset allocation in these assets) yield from non-Wall-Street investments that you can simply increase your SWR as well by the same yield and thus change your divisor for the multiple of cash you need to be FI."

No, it does not seem reasonable at all. Defining safe withdrawal rates look at the sequence of returns over long historical timescales. Pure averages are not informative for this because the variability in return from year to year differs between different types of investments, as do the correlation between returns from one year to the next.

To take an extreme example of why this information is necessary:

If you start with $1M and spend $60k/year. Over the first five years, you achieve an average return of 10%. If your sequence of returns is -70%, -35%, 0, 75%, 80%, you will have run out of money after a little over four years and be $54,600 in the hole after five years. With stocks and bonds we have data on both variability and sequencing of returns.

With your investments we don't have the data. That doesn't mean you can't build a revenue stream around them and use it to quit your job (if you want) and spend your days sitting on a beach drinking margaritas (which you don't want) or coordinating housing developments (which you do). What you cannot do is have an informed conversation about safe withdrawal rates in the absence of data.

"For #3 if you're an accredited investor you can simply buy into a hard money loan on a crowdfunding site with 70% LTC or lower using an experienced operator and probably get north of 10%.  I'm not sure why anyone would invest so much in Wall Street equities if they can get better risk-adjusted yields elsewhere."
(Emphasis mine.)

I don't know what the history of the website you are using (or are you developing it yourself? it wasn't clear from your first post) but given that the WORD crowdfunding didn't exist until 2006, that gives us an upper limit of a decade (likely much less) which isn't nearly enough to estimate risk. So on what basis are you making the bolded claim?

There is a concept on here I have read about called "complainy pant syndrome" or some such.  A not-too-distant cousin seems to be the "I can't do better than 7.5% on my portfolio so I will just punt and let Wall Street tell me what to do syndrome."

It's not at all clear to me where your 7.5% "not real estate" return is coming from. If we consider just a plain S&P 500 index fund over the super long term, the CAGR is 6.9% inflation adjusted or 9.1% non-adjusted. If we consider just from the origin of the term "crowdfunding" in 2006 to the present, the "average return" (terrible terrible metric) for the S&P 500 index has been almost exactly 10%.
 
I for one don't plan on growing food in my back yard to save on groceries if I can simply study a bit and get better yield on my investments.  Most of the folks on the forums with a modicum of intelligence should be able to do the same as well. 

This is where your post started getting a bit too troll-y. Good luck to you.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 12:35:23 PM
If you start with $1M and spend $60k/year. Over the first five years, you achieve an average return of 10%. If your sequence of returns is -70%, -35%, 0, 75%, 80%, you will have run out of money after a little over four years and be $54,600 in the hole after five years. With stocks and bonds we have data on both variability and sequencing of returns.

That's the thing....You don't need fancy covariance data if you're doing direct placements.  These assets don't trade daily.  Some of the most successful investors in the world don't plan to sell the assets they acquire and worry about daily movements in securities prices.  Loans also throw off cash flows monthly and thus the value is pretty easy to assign with a simple discounted cash flow analysis. 

Quote
I don't know what the history of the website you are using (or are you developing it yourself? it wasn't clear from your first post) but given that the WORD crowdfunding didn't exist until 2006, that gives us an upper limit of a decade (likely much less) which isn't nearly enough to estimate risk. So on what basis are you making the bolded claim?

The website is completely inconsequential.  It is a vehicle for communicating purchasing decisions to the issuers of securities for hard money loans.  It also doesn't matter that crowdfunding hasn't been around forever.  Securities have been traded for well over 100 years and investments in private offerings have been around for decades.  Just because you can solicit for investors now it doesn't mean the underlying products are somehow new.  They're just different than what is cited in the Trinity studies. 

I do have my own site, but if we invested we'd invest in the sites of others because we'd do so with our SoloK or SDIRAs.  These would otherwise be prohibited transactions. 

Quote
If we consider just from the origin of the term "crowdfunding" in 2006 to the present, the "average return" (terrible terrible metric) for the S&P 500 index has been almost exactly 10%.

Again, hard money loans have been around much longer than crowdfunding.  See the passage above. 
 
Quote
This is where your post started getting a bit too troll-y. Good luck to you.

Not sure how this is trolly.  Hopefully I won't need the luck. 
Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 12:42:00 PM
To take an extreme example of why this information is necessary:

If you start with $1M and spend $60k/year. Over the first five years, you achieve an average return of 10%. If your sequence of returns is -70%, -35%, 0, 75%, 80%, you will have run out of money after a little over four years and be $54,600 in the hole after five years. With stocks and bonds we have data on both variability and sequencing of returns.

Arithmetic averages are meaningless.  That sequence of returns is a -9.3% average return rate, using the meaningful geometric average (also known as compound annual growth rate).
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 12:49:58 PM
Yup....I posted about our geometric average in my original post.  See above. 

I'm not sure how any of this really applies if someone is sending me a check each month and I don't need to sell the securities I purchase.  The reversion cash flow will eventually return my original investment assuming the investment works out. 

Efficient frontiers for portfolios are not really needed here.  Yeah...I learned about all of that too in business school after finishing up with my engineering degree. 
Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 12:57:38 PM
Yup....I posted about our geometric average in my original post.  See above. 

I'm not sure how any of this really applies if someone is sending me a check each month and I don't need to sell the securities I purchase.  The reversion cash flow will eventually return my original investment assuming the investment works out. 

Efficient frontiers for portfolios are not really needed here.  Yeah...I learned about all of that too in business school after finishing up with my engineering degree.

Yeah, I have no problem with how you're reporting results.  My point was that maizeman's example was ridiculous.  His point about sequence of returns risk is valid, but his example doesn't make that point at all.

I am interested in knowing what the risks in your strategy are.  With hard money loans there must be plenty of years with returns smaller than the "face value" - the question is when things go bad, what happens?
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 01:10:07 PM
When things go bad they can go really bad....bankruptcy bad.  Held up for years in court bad.  Foreclosure bad is probably less-bad, but how less bad depends on the state. 

You can hedge this though by spreading your investments out over operators and locales. 
Title: Re: SWR For An Active Real Estate Investor
Post by: Another Reader on June 07, 2015, 01:10:36 PM
The issue here appears to be comparing apples and oranges.  SWR is for a portfolio of paper assets, where a percentage, modified for inflation, is withdrawn every year.  If I recall correctly, Arebelspy used the term and a much higher percentage to describe his rental income in FIRE.  His use of the term is probably incorrect, as is the OP's.

Unlike a portfolio of paper assets, the OP proposes investing in various areas of the less efficient real estate markets.  In my opinion, this is more like running a business than it is like getting deposits in your checking account every month from your IRA or 401k.  Active management and skill are needed to do this.  Some folks succeed, some do not.  I applaud the OP for his conservative approach of keeping both day jobs until he is satisfied his business will succeed long term.  A wise and consciously made choice.

I think it's refreshing to see someone with a different approach here, as long as it does not turn into trolling or a way to advertise for investors in the OP's funds.  He's got the basic idea of making conscious choices down, but he is making different choices than most of the people here.  If you recall, a number of business owners here were convinced they needed their vacation homes, boats, motorcycles, etc. when they started posting on the forums.  Some have given their choices a lot of thought and changed their minds.   The OP states he is interested in being more efficient in his spending.  If you folks don't chase him away and he sticks around for a while, he may make different decisions as well.

Sol is a scientist.  It seems to me he gets the scientific method of proving whether a hypothesis is true or false mixed up with the choices people make about living their lives.  True or false (right or wrong) is not the appropriate standard there.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 01:21:00 PM
Don't sweat me being run off.  I'm far too stubborn for that ;-)

I do agree that active management is required to achieve above-completely-passive results.  My whole point is that one can generate sooner FI by placing educated bets in things they know well.  For me it is real estate.  For someone else it may be corn futures or something else.  Spending as much time and energy making your money work harder or growing your income is just as "optimal" as decreasing spending for those so-inclined.  This seems like common sense to me. 

Optimizing any utility function will necessarily require one to use some judgement and art.  One person's frivolous spending that either marginally increases utility or has no increase at all is another person's panacea.  That is why economics is a social science and not a pure, hard science.  Drawing sweeping conclusions of any sort regarding finances is hard to do. 
Title: Re: SWR For An Active Real Estate Investor
Post by: NathanDrake on June 07, 2015, 01:29:22 PM
I'd like to know how investing in an index fund is handing my money over to wall street. It's simply investing in businesses in a low-cost fashion, eschewing wall street fees in the process. Perhaps if I were investing in hedge funds, private equity, or high cost mutual funds you'd have a point.

Otherwise, I'm just investing in thousands of businesses across the world. As someone else mentioned, historically this has yielded around a 7% inflation adjusted return. This does not mean if I have a 100% stock portfolio that I should plan for withdrawing 7% annually. Sure, there's opportunity to chase higher yielding assets, but they do not come with a better risk profile, and many of them require active management.

The whole point of FIRE is to get to the point where you don't have to work or worry about finances. When I FIRE, I don't want to be busy managing a business. I want to spend that time pursuing interests I actually enjoy. And that's why I'm aiming to withdraw 4% or less which has a high success rate.

With your net worth, you could FIRE now if you truly wanted to. However, your expenses are astronomically high (more than 3X average household income). If those expenses are worth it to you, you'll have to keep working until you accumulate multiple millions in NW.
Title: Re: SWR For An Active Real Estate Investor
Post by: NathanDrake on June 07, 2015, 01:37:14 PM
Quote
I do agree that active management is required to achieved above-completely-passive results.  My whole point is that one can generate sooner FI by placing educated bets in things they know well.  For me it is real estate.  For someone else it may be corn futures or something else.  Spending as much time and energy making your money work harder or growing your income is just as "optimal" as decreasing spending for those so-inclined.  This seems like common sense to me. 

This isn't necessarily true. Investing in what you know can have pretty disastrous results, particularly if you're a fan of a specific brand and feel it has high upside potential and decide to throw all your eggs in one basket. The market doesn't always agree with your opinion or level of knowledge of a particular company. Which is why on average, active investment strategies yield less returns over long times (after fees) compared to passive investments in the market as a whole. The experts simply don't know what's going to happen, and experts often disagree with eachother. That represents the "market".

The problem with "investing in what you know" is that today's atmosphere does not forecast tomorrow. Plenty of wealthy business owners in oil & gas made poor decisions by getting rid of hedges late last year, expecting the oil market to rebound. These are people that have been in the business for decades and own billion dollar + companies.

I'm not suggesting that a more active approach can't work, but I feel for most people it's probably best avoided because there's a more proven track record for passive investment options, more liquidity and transparency, and it's easier to forecast a retirement path without having to devote a whole lot of time to.
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 01:54:05 PM
Sol is a scientist.  It seems to me he gets the scientific method of proving whether a hypothesis is true or false mixed up with the choices people make about living their lives.  True or false (right or wrong) is not the appropriate standard there.

I'm not even in this thread yet!

But I assume you've been following along in the other threads Orange has started, and with that context I'd be interested in your take on this issue.  I feel like Orange has missed the point of the exercise we're all participating in.  He's just the latest in a long line of new members who have shown up to say "spending more money is what makes me happy, and I'm willing to work longer in order to afford my bedpan and catheter."  These folks don't understand the benefit of voluntarily working harder at some things as a means of self improvement instead of seeking gratification through mindless consumerism.  They cannot see past their social conditioning to recognize what will really make them happy.

It's not a matter of right or wrong, it's a matter of personal happiness and this website espouses a particular flavor of pursuing that happiness.  Orange espouses a different one.  I'm sure there are other corners of the web where his message of mindless consumerism would be warmly embraced.  This is not that corner.
Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 02:13:33 PM
Sol is a scientist.  It seems to me he gets the scientific method of proving whether a hypothesis is true or false mixed up with the choices people make about living their lives.  True or false (right or wrong) is not the appropriate standard there.

I'm not even in this thread yet!


Obviously.

Quote
But I assume you've been following along in the other threads Orange has started, and with that context I'd be interested in your take on this issue.  I feel like Orange has missed the point of the exercise we're all participating in.  He's just the latest in a long line of new members who have shown up to say "spending more money is what makes me happy, and I'm willing to work longer in order to afford my bedpan and catheter."  These folks don't understand the benefit of voluntarily working harder at some things as a means of self improvement instead of seeking gratification through mindless consumerism.  They cannot see past their social conditioning to recognize what will really make them happy.

It's not a matter of right or wrong, it's a matter of personal happiness and this website espouses a particular flavor of pursuing that happiness.  Orange espouses a different one.  I'm sure there are other corners of the web where his message of mindless consumerism would be warmly embraced.  This is not that corner.

You're really reaching, or maybe projecting here.  Orange is not espousing a mindless consumerist philosophy at all - at least not in this thread.  He even specifically asks in this thread what are some steps to reduce his expenses.

Where on earth are you getting this "spending more money makes me happy?"  There's literally nothing in this thread to support that, and isn't the subject of the thread at all.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 02:30:21 PM
Quote
Where on earth are you getting this "spending more money makes me happy?"  There's literally nothing in this thread to support that, and isn't the subject of the thread at all.

Meh....don't let the facts get in the way of blind faith. 

Sorry for missing some posts above, but I don't have enough time right now to respond to all of them.  I'll try to post some more later. 

I'll offer this as food for thought for folks participating.  Would you rather:

1.  Grow your own food in the back yard and save a few hundred bucks a month.  I just went to the grocery store (in a....gasp!...vehicle!) and paid $1 for 5 ears of corn.  The tens or hundreds of hours I would invest growing my food would allow me to save say $2400/year with X hours invested.  I'm not a farmer so I don't know what X is, but let's be conservative and say 5 hours/month.  So 60 hours/year saves me $2400.  Let's recognize the tax savings as well and round up to an even $3k/month, or $3600 annually.  That's $60/hour for this activity; not bad

OR

2.  Invest the same 60 hours/year managing one development project that yields $30k net profits.  I'm not sure you need to be a rocket surgeon to execute on item 2.  That's $500/hour

Let's further assume that Sally Conservative executes on item 1 and she rides her bike to work, grows her own food, reads books instead of engaging in worthless cable TV watching, etc.

Jimmy The Stretch Spendthrift has all of those frivolous gas bills, cable TV bills, etc.  Let's go nuts and say he spends $1k/month on this stuff.

Who is better off? 

Sally Conservative - Saves $3600 annually inclusive of tax savings
Jimmy The Stretch - Is able to save $30k - $12k == $18k annually

But, but...not everyone can do item 2 you say.  Hogwash.  Anyone with a bit of get-up-and-go can do this and any number of other small business activities and grow a business while keeping their focus on INCREASING INCOME and having expenses flat instead of cutting expenses.  Seems pretty simple to me. 

My budget is right there in the OP for people to rip to shreds.  We're on page 2 of this thread and nobody has lectured me on the wasteful spending in it.  Admittedly it isn't itemized in as much detail as I'd like.  I'll be working on this going forward, but what I won't be doing is sacrificing new business income to cut expenses when it IS SUBOPTIMAL to getting me to FI. 
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 07, 2015, 02:31:42 PM
Read the other thread, B. Mr. Orange is the latest in a long line of forehead-slapping disbelievers who want to argue that they need to buy lots of stuff to be happy.

-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 02:43:17 PM
Quote
The whole point of FIRE is to get to the point where you don't have to work or worry about finances. When I FIRE, I don't want to be busy managing a business. I want to spend that time pursuing interests I actually enjoy. And that's why I'm aiming to withdraw 4% or less which has a high success rate.

No sweat...again, to each his own.  That's your choice.  If your goal is to get to the finish line faster and it is worth the lifestyle tradeoff more power to you.  FI exists on a spectrum though and just because you hit the finish line sooner doesn't necessarily mean it is optimal.  If you trade off significant lifestyle that would have made you happier while "optimizing" it doesn't necessarily mean you're happier. 

Quote
With your net worth, you could FIRE now if you truly wanted to. However, your expenses are astronomically high (more than 3X average household income). If those expenses are worth it to you, you'll have to keep working until you accumulate multiple millions in NW.

I'm sure there is plenty we can cut.  The question is if we can truly cut things without sacrificing our standard of living.  We spend $2500/month alone putting our small kiddos through Montessori School.  I'm sure many on here would consider that blissful consumerism.  To me it is money well invested. 
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 02:48:31 PM
Quote
This isn't necessarily true. Investing in what you know can have pretty disastrous results, particularly if you're a fan of a specific brand and feel it has high upside potential and decide to throw all your eggs in one basket. The market doesn't always agree with your opinion or level of knowledge of a particular company. Which is why on average, active investment strategies yield less returns over long times (after fees) compared to passive investments in the market as a whole. The experts simply don't know what's going to happen, and experts often disagree with eachother. That represents the "market".

For every case you can point to here I can point to other cases of small businessmen making money on their own.  Yeap...business has risks.  Yeap...investing in stuff you know has risks.  The key is taking good risks relative to reward.  I for one feel that the juice is worth the squeeze if it is something you know well. 

Quote
I'm not suggesting that a more active approach can't work, but I feel for most people it's probably best avoided because there's a more proven track record for passive investment options, more liquidity and transparency, and it's easier to forecast a retirement path without having to devote a whole lot of time to.
Agreed on MOST people.  This forum is chock-full of supposedly advanced investors though.  What you wrote above, to me, is the soft bigotry of low expectations.  The having to "not devote a whole lot of time to it" is laziness to me. 
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 02:49:27 PM
1.  Grow your own food in the back yard and save a few hundred bucks a month.

I don't think anyone here believes that growing your own food saves money.  We've even had whole threads devoted to this very observation.  Personal agriculture will never compete with industrial agriculture, for a whole host of really obvious reasons.  You shouldn't grow a garden to save money, you grow a garden because it is an enjoyable and rewarding hobby.  For some people with the time and inclination.  Where are you getting this idea that all mustachians are trying to save money by gardening?  I'm not even sure the MMM blog has ever talked about gardening.

Quote
what I won't be doing is sacrificing new business income to cut expenses when it IS SUBOPTIMAL to getting me to FI.

And nobody here would suggest that you do so.  Making more money is absolutely a viable path towards getting ahead of your finances.  In your case, you're already ahead so there's even less incentive.

But the activities that are associated with cutting expenses are all worthwhile in their own right.  Why would you spend money on a gym membership and a car to drive to the gym, when biking more places is free, better for you, and reconnects you with your community?  Saving money on the gym and the car is purely a byproduct of making the right choices to maximize your personal health and happiness.  If you're still stuck with the mindset that biking is a sacrifice, the pennies it saves will never be worth it to you. 

Much of the appeal of this philosophy for lower-income folks is that it offers a path out.  They've worked their whole lives in crappy jobs for crappy wages and they fear dying broke and alone because they can't see the connection between their current wasteful spending and their own future happiness.  MMM comes along and says something like "hey you know if you stop throwing away money on stuff you don't even enjoy, focus on the things that you really love, and invest the savings, you can have a comfortable and secure retirement doing things that you love" and the little light bulbs go off.  People just aren't accustomed to thinking of their spending as something that should be related to their values, so the blog seems like a revelation.

For folks like Orange, who make over $200k/year and spend about $11,000/month and already have over a million dollars invested, the message is more muddied but the path forward is just as clear.  Small changes in your savings rate will cut entire years off of your potential working career, by increasing the amount you save and simultaneously reducing the amount you need to withdraw from that nest egg.  The motivation to do so, for wealthy folks, is less about salvation from a horrible future and more about reclaiming control over your own future.  It doesn't matter how much money you make, if you spend more than that you're going to have a bad time.

Orange, if you like your work then by all means please continue to do it.  Many people here have jobs they like, and some of those are already FI and yet continue to work anyway.  You could be one of them today, if you trimmed your expenses a bit. 
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 02:54:36 PM
If your goal is to get to the finish line faster and it is worth the lifestyle tradeoff more power to you.

You're restating your fundamental misunderstanding of this website, again.  It's not a lifestyle trade-off, it's a lifestyle improvement to stop wasting money on things you don't enjoy.  Stop measuring your happiness in terms of dollars spent, and look at the actual happiness each activity or possession generates for you.

Example:  I read stories to my daughter every night, and this makes me happy and costs nothing but my time.  If I chose to work late to get a promotion at work, I might make an extra $20k/year but would have to give up story time.  Since the extra $20k wouldn't actually change my life happiness in any significant way, but losing story time with my daughter would, I've decided not to pursue the promotion.  The same logic applies to expenses I can cut, instead of income I forego.  Focus on the important stuff.

Quote
I'm sure there is plenty we can cut.  The question is if we can truly cut things without sacrificing our standard of living.

Yes.  Yes you can. 
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 07, 2015, 02:57:57 PM
Agreed on MOST people.  This forum is chock-full of supposedly advanced investors though.  What you wrote above, to me, is the soft bigotry of low expectations.  The having to "not devote a whole lot of time to it" is laziness to me.

Where did you get the idea that this is a forum for/populated by "advanced investors"? We get multiple posts a week asking why putting money in a 401k is a good idea, since "I can't touch it until I'm 60!"

You might be better off at seeking alpha or something.

-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 02:58:27 PM
Quote

You're restating your fundamental misunderstanding of this website, again.  It's not a lifestyle trade-off, it's a lifestyle improvement to stop wasting money on things you don't enjoy.  Stop measuring your happiness in terms of dollars spent, and look at the actual happiness each activity or possession generates for you.

Perhaps.  I thought that each person should be free to interpret the philosophy via their owns lens though. 

Quote
Yes.  Yes you can.

The budget has been right there to pick apart for tens of thread entries.  I'm all eyes. 
Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 03:02:38 PM
Read the other thread, B. Mr. Orange is the latest in a long line of forehead-slapping disbelievers who want to argue that they need to buy lots of stuff to be happy.

-W

Maybe he is.  But he isn't in this thread, and ganging up on him without listening to his point in this thread isn't doing anyone any good.

1.  Grow your own food in the back yard and save a few hundred bucks a month. …  Let's recognize the tax savings as well and round up to an even $3k/month, or $3600 annually.  That's $60/hour for this activity; not bad

OR

2.  Invest the same 60 hours/year managing one development project that yields $30k net profits.  I'm not sure you need to be a rocket surgeon to execute on item 2.  That's $500/hour

But, but...not everyone can do item 2 you say.  Hogwash.  Anyone with a bit of get-up-and-go can do this and any number of other small business activities and grow a business while keeping their focus on INCREASING INCOME and having expenses flat instead of cutting expenses.  Seems pretty simple to me. 

The real answer to your question, Mr. Orange, is that by the time someone on this site is an accredited investor, they've pretty much already retired.  What's the minimum equity for someone to take on a project with 30k potential payoff?  I'm not a real estate investor, but I'd guess it's well north of 100k.  To be properly diversified, how much should you have in any one project- 10% ?  Maybe less?  10 x 100k is $1 million.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 03:06:28 PM
You can participate in development projects with $25k or so.  For crowdfunded HMLs you could invest as little as $5k.

Neither one necessarily requires being an accredited investor, but your choices are far fewer as a non-accredited. 
Title: Re: SWR For An Active Real Estate Investor
Post by: NathanDrake on June 07, 2015, 03:07:15 PM
Agreed on MOST people.  This forum is chock-full of supposedly advanced investors though.  What you wrote above, to me, is the soft bigotry of low expectations.  The having to "not devote a whole lot of time to it" is laziness to me.

How is achieving a 7% real, after inflation return, considered low expectations? I find those types of returns to be superb when compounded over a long period of time. And for me, the liquidity, low cost, diversity, and ease in which I can regularly contribute fits my working lifestyle. With a business, as you mentioned, there's real concern of bankruptcy or regional market forces that are out of your control and can wipe you out. I'm not concerned about that at all, as my investments are spread out amongst a global market. My 4% safety withdrawal rate accounts for regular corrections.

I'm a full time electrical engineer in TX, like yourself, and have a pretty demanding job that consumes a lot of energy and time. It's not about being "lazy". If I had to devote my off-hours to business I'd have zero free time to pursue other interests.

Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 03:09:04 PM
You can participate in development projects with $25k or so.  For crowdfunded HMLs you could invest as little as $5k.

Neither one necessarily requires being an accredited investor, but your choices are far fewer as a non-accredited.

Can you provide some links or some places to learn more?  I'm always interested in learning about other investment options.
Title: Re: SWR For An Active Real Estate Investor
Post by: MDM on June 07, 2015, 03:11:35 PM
The budget has been right there to pick apart for tens of thread entries.  I'm all eyes.
Ok, I'll bite. 
  - At ~$1K/month for "bills/utilities", do you run a server farm for bitcoin mining?
  - Your federal withholding seems low for your W-2 income.  How much do you expect in itemized deductions, or other ways you reduce taxable income?
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 03:12:55 PM
Agreed on MOST people.  This forum is chock-full of supposedly advanced investors though.  What you wrote above, to me, is the soft bigotry of low expectations.  The having to "not devote a whole lot of time to it" is laziness to me.

How is achieving a 7% real, after inflation return, considered low expectations? I find those types of returns to be superb when compounded over a long period of time. And for me, the liquidity, low cost, diversity, and ease in which I can regularly contribute fits my working lifestyle. With a business, as you mentioned, there's real concern of bankruptcy or regional market forces that are out of your control and can wipe you out. I'm not concerned about that at all, as my investments are spread out amongst a global market. My 4% safety withdrawal rate accounts for regular corrections.

I'm a full time electrical engineer in TX, like yourself, and have a pretty demanding job that consumes a lot of energy and time. It's not about being "lazy". If I had to devote my off-hours to business I'd have zero free time to pursue other interests.

Fair enough...and that is your personal situation.  Others have more flexible situations that allow for small business ownership without 40 hours per week working.  So this fits the narrative that everyone's situation is different and a one-size-fits-all approach doesn't work. 

7% real yields are fine for passive activity.  My preference is for higher numbers and quasi active activity.  Again, there is more than one way to get to FI.  Cutting expenses isn't always the optimal path. 
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 03:14:24 PM
You can participate in development projects with $25k or so.  For crowdfunded HMLs you could invest as little as $5k.

Neither one necessarily requires being an accredited investor, but your choices are far fewer as a non-accredited.

Can you provide some links or some places to learn more?  I'm always interested in learning about other investment options.

If you're accredited there are many good sites:

-Fundrise
-RealtyShares
-Patch of Land
-AssetAvenue

There are many more.  We also run one, but I am not going to disclose it because I don't want this thread to seem like a commercial. 
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 03:17:27 PM
Quote
  - At ~$1K/month for "bills/utilities", do you run a server farm for bitcoin mining?

;-)

Not sure what all is included there.  I'll try to break down our current expenses here when my wife gets back since she handles these bills.  More to come later tonight.

Quote
  - Your federal withholding seems low for your W-2 income.  How much do you expect in itemized deductions, or other ways you reduce taxable income?
We have some pretty elaborate entity structures to reduce taxes.  In fact, today I found out our SoloK won't even help us much for 2014 (boo!) so we claim a lot of dependents to get our monthly withholding down lower.  We generally owe money each year and pay in October to use the cash longer because I can generate yields higher than the penalties and interest the gov-mint charges. 
Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 03:22:39 PM
You can participate in development projects with $25k or so.  For crowdfunded HMLs you could invest as little as $5k.

Neither one necessarily requires being an accredited investor, but your choices are far fewer as a non-accredited.

Can you provide some links or some places to learn more?  I'm always interested in learning about other investment options.

If you're accredited there are many good sites:

-Fundrise
-RealtyShares
-Patch of Land
-AssetAvenue

There are many more.  We also run one, but I am not going to disclose it because I don't want this thread to seem like a commercial.

And for the non-accredited?  After all, that's the rub: if you're accredited and on this forum, you're probably already retired.
Title: Re: SWR For An Active Real Estate Investor
Post by: NathanDrake on June 07, 2015, 03:32:27 PM
You can participate in development projects with $25k or so.  For crowdfunded HMLs you could invest as little as $5k.

Neither one necessarily requires being an accredited investor, but your choices are far fewer as a non-accredited.

Can you provide some links or some places to learn more?  I'm always interested in learning about other investment options.




If you're accredited there are many good sites:

-Fundrise
-RealtyShares
-Patch of Land
-AssetAvenue

There are many more.  We also run one, but I am not going to disclose it because I don't want this thread to seem like a commercial.

And for the non-accredited?  After all, that's the rub: if you're accredited and on this forum, you're probably already retired.


Bogleheads has some interesting comments:

https://www.bogleheads.org/forum/viewtopic.php?t=162319

The marketing material on those sites is laughable. Comparing S&P 500 returns starting at the peak of one of the worst bubbles to an ever inflating real estate bubble we've been in for the better part of a decade and a half.

I'll just stick to the REITs that happen to be a component in my index funds.

Even if their projected returns are true (12-14%, which I seriously doubt over the long-term), comparing this with 9-10% in index funds isn't going to make much of a material difference in the window of time between working and FIRE if you only intend to work for 10 years. Your savings rate will have a much bigger impact.

I feel much safer in index funds.
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 03:43:25 PM
The budget has been right there to pick apart for tens of thread entries.  I'm all eyes.

I don't normally participate in case studies, but you've intrigued me with your charming demeanor and dashing good looks.

I took the liberty of extracting the running averages for your budget categories from your spreasheet, just to make it easier to comment on.

 $2,407.56    Home
   $942.57    Kids
   $984.67    Bills & Utilities
 $1,294.00    Food & Dining
   $592.46    Auto & Transport
   $268.62    Shopping
   $759.37    Business Services
    $67.26    Uncategorized
   $497.45    Financial
    $30.55    Education
    $81.00    Health & Fitness
   $140.42    Entertainment
    $49.50    Fees & Charges
    $92.27    Gifts & Donations
    $13.69    Personal Car
     $0.81    Pets
   $280.10    Taxes
   $335.11    Travel

My family W-2 income is very similar to yours.  I also have three kids, though mine area  few years older.  Relative to your budget...

We spend about the same on our primary mortgage (plus repairs and maintenance and upgrades), for a four bedroom house in a HCOL area, in the best local school district.  On a 15 year fixed.

"Kids" is kind of a generic budget category.  Is that for Montessori and daycare?  If so, that's not a permanent expense you need to account for past about four years from now.  I'd add up the total amount you expect to pay for those services, subtract it off of your net worth, and remove it from your expense report.  It's a short term expense, not something you need to support from your investment portfolio.

Utilities for five people in my 20 year old 4 bedroom house in the PNW are about $175/month (averaged out over the year), including water and power and gas and garbage and sewer.  It might be 80 higher if we didn't have solar panels.  How are you spending over five times as much as I am?  Does Texas require constant AC for six months of the year, and then constant heat for the other six months?  Utility bills are mostly a function of climate, but yours are REALLY high.

You spend $1294/month on food, and we spend approximately half that.  But we do family dinner together most nights and save dining out for special occasions like birthdays and report cards and family visits and nights when we're short on time, which works out to about once per week.

You spend $592/mo on auto.  We spend more like $350, mostly gas for our enormous late model American made SUV.

Those first four categories alone look like you are wasting about $30,000 per year that my family is not, and my family already wastes a ton of money on stupid stuff.

Continuing down the list, you're spending another $4000 per year on "shopping and uncategorized" expenses.  That looks like pure waste to me, but maybe you feel like some of that is vital?  At the very least, I'd recommend reclassifying all of those expenses into the budget category they actually belong in (personal care maybe?) so you can figure out where you're leaking dollars.

Is the $497 for "Financial" like IRA contributions or something?  If so, that's savings and not an expense and I wouldn't list it here when trying to figure your expenses, because you will discontinue it when you retire and start living off of your assets.

$50/month for Fees and Charge sucks.  Are you bouncing checks to incur that kind of penalty?  About every six months I accidentally get a $2.50 ATM fee and it fucking pisses me off every time.  I would tear some shit up if I was paying $50 bucks a month for no good reason.

What's included in your $759/month for Business Services?  If that's expenses related to running your RE empire, then those should come out of your RE profits and be figured as a cost of doing business, not a personal expense.  If it's stuff like your gardener and your maid, well, then you need to decide how many more years you're willing to work to avoid mowing your own lawn and mopping your own floors.

The rest of that stuff looks pretty decent.  I wouldn't pay $81 for a gym membership, but maybe you have a really great trainer who has you in the best shape of your life and is totally worth $81/month?  Because if not, then for less than one year of gym fees you can assemble a totally kick-ass system of free weights for your home, allowing you to lift whenever you want.

I think that the $5700/year you're spending on travel and entertainment is a totally reasonable amount for someone in your (our) tax bracket to spend.  Yes it's wasteful, but the added utility of investing the extra few grand you could get by cutting back on these expenses probably isn't worth the lifestyle modifications for someone who is already saving and investing so much.  The above-mentioned $30k/year, on the other hand, feels like a more significant figure that is providing you with less value.

Title: Re: SWR For An Active Real Estate Investor
Post by: beltim on June 07, 2015, 03:44:50 PM
And for the non-accredited?  After all, that's the rub: if you're accredited and on this forum, you're probably already retired.


Bogleheads has some interesting comments:

https://www.bogleheads.org/forum/viewtopic.php?t=162319

The marketing material on those sites is laughable. Comparing S&P 500 returns starting at the peak of one of the worst bubbles to an ever inflating real estate bubble we've been in for the better part of a decade and a half.

I'll just stick to the REITs that happen to be a component in my index funds.

Thanks for the link.  I haven't checked out all these, but from a quick look it sure looks like LendingClub but for real estate: high returns promised, but I'd bet money that at the end of the day the average return doesn't exceed that of the stock market.  Fees and losses are significant drags on performance, and I don't see any historical data on them.
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 03:56:02 PM
If you subtract out your home expenses, taxes, business services that I'm assuming aren't personal expenses, and financial services that I'm assuming are transfers to investments, your actual daily expense rate is more like $5k/month, not the $11k you previously quoted us.

Even by traditional 4% SWR metrics, you should be able to support your current lifestyle with 1.25m and a paid off house, without making ANY changes to your extravagant spending.  If you believe in your ability to sustain more than a 4% SWR (I do, though for different reasons) then your nut shrinks even further.

Get your family's spending more line with mine by cutting out that $30k in waste I highlighted above, and you're down around the $1m mark, less than you already have.  You could be FI today just by aligning those first four categories I mentioned above with what my (very similar) family already spends.

Title: Re: SWR For An Active Real Estate Investor
Post by: Bob W on June 07, 2015, 05:09:11 PM
There are a number of ways to bump the dubious and highly optimistic SWR often quoted on this site.   If you do a dual momentum index fund approach you could get the projected SWR to 10.          If it hasn't been noted here yet,  your 10k a month habit is you biggest obstacle.   I assure you that my lifestyle is pretty awesome on 2k per month.    The extra 8k you're spending is not buying you a better life.   It is just a self made prison.
Title: Re: SWR For An Active Real Estate Investor
Post by: iris lily on June 07, 2015, 05:33:09 PM
If your goal is to get to the finish line faster and it is worth the lifestyle tradeoff more power to you.

You're restating your fundamental misunderstanding of this website, again.  It's not a lifestyle trade-off, it's a lifestyle improvement to stop wasting money on things you don't enjoy.  Stop measuring your happiness in terms of dollars spent, and look at the actual happiness each activity or possession generates for you.

Example:  I read stories to my daughter every night, and this makes me happy and costs nothing but my time.  If I chose to work late to get a promotion at work, I might make an extra $20k/year but would have to give up story time.  Since the extra $20k wouldn't actually change my life happiness in any significant way, but losing story time with my daughter would, I've decided not to pursue the promotion.  The same logic applies to expenses I can cut, instead of income I forego.  Focus on the important stuff.

Quote
I'm sure there is plenty we can cut.  The question is if we can truly cut things without sacrificing our standard of living.

Yes.  Yes you can.

Sol, I love you. Great example of living an authentic life.
Title: Re: SWR For An Active Real Estate Investor
Post by: sol on June 07, 2015, 06:02:00 PM
If you do a dual momentum index fund approach you could get the projected SWR to 10.

Even our most fanatical dual momentum advocates wouldn't make that outrageous claim, Bob.  Let's not exaggerate.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 10:13:19 PM
Get your family's spending more line with mine by cutting out that $30k in waste I highlighted above, and you're down around the $1m mark, less than you already have.  You could be FI today just by aligning those first four categories I mentioned above with what my (very similar) family already spends.

Thanks for taking the time to look through the expenses.  Yeah....this wasn't very scientific because it is hard work to go line by line with the expenses with all I have going on.  I asked my wife about some of the items tonight and she pointed me to where I can gather all of them.  My plan is to start doing this next week and get better data to examine.  Our AMEX (business expenses....some are "dual use" like food/eating out), our Compass credit card, and our debit card should yield all of our spending for the last few months. 

My accountant sent me a draft of our return for 2014 today and it looks like our bill for last year was roughly $43k in taxes.  I owe about $17.5k right now that I plan to pay in October.  This is easily one of my biggest expenses and I plan to purchase some more rental property to have depreciation expenses to offset some of this since the SoloK didn't help me given our tax structuring and personal situation.  The 2015 tax year will be far worse so that is really where a lot of my focus has gone in the last few months.  I focus A LOT on reducing taxes; which is logical because it is our largest expense. 

Something has to be wrong with the utilities category somehow.  I'd assume this should be gas, electric, water/wastewater, etc., but I am guessing I lumped other stuff in that category to avoid creating too many other categories.  I'll try to make this more precise when I do the deep dive budget scrub in the coming few weeks.  I doubt we spend much more on real utilities than you do, but there is probably some waste to get rid of in that line item once it is examined more .

My guess is our food bill has probably gone down since this budget was run.  We eat at home more now with 5 to feed.  I am pretty sure we only had one child when this budget was run several years ago.  I also can dual use charge some of the meals out because I generally am doing some sort of business when I eat out.  This probably should be segmented somehow so it is clearer.  I'll work on that in the coming few weeks too as best as I can. 

We did buy a minivan for the twins when they were born.  I tried to find something used, but the Odyssey we wanted didn't depreciate much for a few-year-old car so we decided to buy something new.  This is the first new car I have ever purchased.  We're paying it off next month about 3 years ahead of schedule.  This should free up a lot of cash and also cash flow going forward.  Much of the car expense is in gas.  I do a lot of traveling checking on my development projects so this probably needs to be broken out too.

Shopping plus uncategorized is definitely something worth attacking.  These categories are probably pure laziness on my part.  I need to do a better job tracking things.  We admittedly spend too much on the kiddos right now, but I rarely buy any material goods for myself.  I haven't shopped for cloths in several years.  The family generally buys me new clothes for birthdays and Christmas to keep me from wearing stuff with holes in it ;-)  Fortunately the grandparents buy the kids clothes all the time so that is covered.  Toys and such are a line item here, but we generally buy them on Craigslist or Facebook groups from nearby neighborhoods. 

Financial is probably contributions to retirement accounts.  Yeah....these shouldn't be expenses.  I was just trying to account for dollars out so I'll clean up this slop on the better-tracked report in the coming few weeks.  We currently contribute 18% or so to our Roth 401(k) accounts and $400/month to each of the kid's 529 plans.  This is probably up some from when this report was run. 

Not sure what the $50 in fees was for.  I do pay to maintain my SoloK, but I'll probably drop that now that I know it isn't helping me much presently.  I wrote a scathing email to Wells Fargo last week about junk fees they have been charging for a while and I was too busy to notice until recently.  This is something I need to take a look at and I agree that it is shameful that they're being charged.  No....we don't bounce checks.  This item is dumb/laziness tax right now.  I'll work on cleaning it up if it persists. 

Business services need to be broken out....I'll work on that. 

I do pay for a trainer at the gym, but $81 is not the correct number any more.  My gym membership is dirt cheap via my employer, but the trainer is more expensive.  This expense is something I feel like is a good investment though. 

It would be awesome to carve out $30k/year.  Let's see if that is something worth doing when I get the better budget in the coming few weeks.  Given our anticipated income this year ($300kish development income plus $200kish W2) $30k is only about 6% of our gross income.  That's nothing to sneeze at, but I hope folks can see why the focus has been elsewhere recently.  I have had more focus on growing income and working new projects.  Since we'll be in sell mode for the next several months it is a logical time to work on cutting spending.   
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 10:24:35 PM
If you subtract out your home expenses, taxes, business services that I'm assuming aren't personal expenses, and financial services that I'm assuming are transfers to investments, your actual daily expense rate is more like $5k/month, not the $11k you previously quoted us.

The real number is probably between $5k and $11k; probably closer to $5k.  It is pretty bad that I haven't tracked it well enough to know.  I'm going to work on correcting that in the coming few months. 

Quote
Even by traditional 4% SWR metrics, you should be able to support your current lifestyle with 1.25m and a paid off house, without making ANY changes to your extravagant spending.  If you believe in your ability to sustain more than a 4% SWR (I do, though for different reasons) then your nut shrinks even further.
Our house is pretty far from being paid off and I question the utility in paying it off if I can get better yields elsewhere.  It would be nice to own something they can't take away though.  In Texas your primary residence survives bankruptcy. 

Quote
Get your family's spending more line with mine by cutting out that $30k in waste I highlighted above, and you're down around the $1m mark, less than you already have.  You could be FI today just by aligning those first four categories I mentioned above with what my (very similar) family already spends.
We'll easily top $1.25M very soon.  I would be very surprised if we don't get there this year.  With what is in our real estate pipeline I am projecting about $600k - $650k in profits from July of 2015 to July of 2016.  Our projects are in Austin and the city has been booming of late; hopefully it will continue. 

This was a primary motivator to start posting on this site.  There are many potential uses for this cash:

1.  Pay off mortgage....not a fan of this one, but it is worth considering
2.  Buy more development projects (currently planned with part of this cash)
3.  Get W2 employees to help scale up development business...not a fan...we're scaling back and owning more equity on new projects
4.  Pay off debt on rentals we own (currently planned with part of this cash)
5.  Keep cash for liquidity and to satisfy compensating balances or covenants for guidance lines with small regional lenders (currently planned with part of this cash)
6.  Buy other assets outside of tax-advantaged accounts.  Of late I have increased our contributions here, but given that our SoloK won't help our tax situation it is better to keep the cash outside of retirement accounts because I can grow it actively at a higher yield than I can investing in projects passively with others (Not currently planned, but I am interested in exploring this one)
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 07, 2015, 10:28:07 PM
And for the non-accredited?  After all, that's the rub: if you're accredited and on this forum, you're probably already retired.

Non-accredited investors would have to find someone operating under the old 506(b) rules or some other exemption that allows for up to 35 non-accredited investors in the offering.  These do exist, but admittedly take much more energy to find. 

Even if you're already retired there is nothing wrong with getting more yield.  If your yield outpaces whatever SWR you selected you could increase your standard of living over time.  I can definitely see how the perceived risk would outweigh the benefit if you're already independent though. 
Title: Re: SWR For An Active Real Estate Investor
Post by: ShoulderThingThatGoesUp on June 08, 2015, 05:25:26 AM
Why are you keeping your day job if you'll make $600k on your development projects this year, which seems to be what you enjoy doing?
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 08, 2015, 08:05:29 AM
Right now because I haven't hit my target stache number and and I haven't actually sold them yet.  This time next year may be a different story. 
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 08, 2015, 08:07:17 AM
Yeah, you need to be thinking hard about life goals. Your finances are solid to quit anytime, and certainly will be in a year assuming you're right about your projected income.

I'd probably quit the day job now, though. You aren't going to get any of those days back.

-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 08, 2015, 01:38:47 PM
Hence the reason why I am posting and trying to figure out my real monthly expenses.  With a lot of dough flooding in for the next 12-14 months we are trying to figure out how to allocate it and how to best position ourselves for a more flexible arrangement running our own business.  Not that my current arrangement isn't plenty flexible enough.  However, the job is really starting to get in the way of our business growth so we're starting to spend more time figuring out how to be less reliant on it or completely free. 

My wife also wants to spend more time with our young children.  Making the right decisions should allow her to do this sooner while balancing it with maintaining the lifestyle necessary in order to fund college accounts and live comfortably. 
Title: Re: SWR For An Active Real Estate Investor
Post by: waltworks on June 08, 2015, 01:52:35 PM
Just allocate it all to boring/safe stuff. There is zero need for you to do anything high risk/yield. You are at the 4% SWR nut already. Win game = stop playing.

-W
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 08, 2015, 02:02:52 PM
Well the game can only be won if I know my run rate....and I don't currently know that very well.  That is an exercise for June.  I'm working on gathering all of the data right now. 

I also think funding the kid's accounts, etc. may keep me in the game longer.  7.5% is fine, but there are skillsets I have that can get me more with some portion of my portfolio.  The question is how much of it to risk seeking the yield to hopefully increase living standards during FIRE. 
Title: Re: SWR For An Active Real Estate Investor
Post by: Retire-Canada on June 08, 2015, 02:09:51 PM
... to hopefully increase living standards during FIRE.

You life isn't going to improve with more money. You are drowning in wealth and have no clue. More water in the pool ain't going to help.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 08, 2015, 02:14:20 PM
Using some napkin math with a $100k annual living standard (~8k/month) these were our "freedom point" (% toward FIRE goal) totals for the past decade and a pro forma for this year:

2005   1.83%
2006   3.73%
2007   3.08%
2008   3.76%
2009   4.47%
2010   3.84%
2011   -1.19%
2012   4.47%
2013   5.67%
2014   6.39%
2015   20.42%

2016 should be pretty similar to 2015.  The total above is 56.46% and 2016 would put us at roughly 3/4 to FIRE with $2.5M in assets needed to maintain a 4% SWR, which would yield $100k annually.  Choices:

1.  Cut monthly spending and lower annual expenses needed
2.  Grow income from business and discard job
3.  Work longer and grow both business income and W2 income
4.  Pay off mortgage for personal residence
5.  Pay off debt on rentals
6.  Invest in other assets (real estate, alternatives, boring old index funds, etc.)
7.  Buy rentals to increase depreciation expenses and decrease tax liability

Short term goals (Feedback welcome)
-Cut item 1 10% from whatever our current spending turns out to be
-Eliminate $50k for item 5
-Invest ~430k in items 6 and/or 7 in some allocation (some of the $600k will go to the tax man and some will go for the bullet above)

Appreciate any feedback. 
Title: Re: SWR For An Active Real Estate Investor
Post by: MDM on June 08, 2015, 02:24:48 PM
4.  Pay off mortgage for personal residence
5.  Pay off debt on rentals
For debt, you may get a better answer looking at it with a different perspective;
  - Don't include debt payments (P&I) in your annual expenses
  - Do add your current principal due to your calculated (annual expenses minus guaranteed income)/(Safe Withdrawal Ratio) and compare that total with your invested assets.

This assumes you will earn more by investing than by paying off the debt, and gives a conservative result under that assumption.
Title: Re: SWR For An Active Real Estate Investor
Post by: thd7t on June 08, 2015, 03:15:26 PM
What are you looking for out of FI?  You've discussed strategies for building wealth, but you haven't mentioned this.  The reason that I ask is that you mentioned reducing expenses, but you haven't had a chance to track them closely, yet.  I think that this is why you have been concerned about reducing your quality of life.  As you closely look at expenses, you might find things that you're surprised at or just not actually interested in.  Things fall through the cracks all the time.  Knowing why you want to be FI could help you decide what you really value in your quality of life.

In addition, you've mentioned the poor payoff of reducing expenses vs. increasing your income.  In doing this, you've created a false dichotomy (which may have just been for argument's sake), but you also haven't looked at the real value of reducing expenses.  At 4% SWR, reducing expenses by $1000/month is the equivalent of gaining $300k.  Not something to turn your nose up at.  At higher SWR, it is a little less generous, but still not too shabby.  I know that you are open to reducing expenses, but you should consider the full value of it before making it a lower priority.  I believe that tracking your expenses (as you've said you plan) will make this easy.
Title: Re: SWR For An Active Real Estate Investor
Post by: MidWestLove on June 08, 2015, 08:27:48 PM
"What are you looking for out of FI?  You've discussed strategies for building wealth, but you haven't mentioned this"

+1. I am not sure if you already described (or at least thoughts) on what _you_ want. what is that you desire? what makes you happy - time with your family/wife/children, travel, specific hobby, activity, something else?  money, investments, real estate, index funds, hedge funds ,etc - all means to an end, to fund some goals you may have. what you like doing, like _really_ like doing? what do you don't like doing? how can you do more of the former and less of the later?


for reference -I am your age (one year older at 37) , one kid and second one to be born this month, probably 2x liquid assets, no debts of any kind, and have been asking myself the same questions . financially we do not have to work anymore but still are figuring our own answers...
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 08, 2015, 10:34:43 PM
Fair enough folks...I accidentally posted this in the other thread because I am pretty wiped out from working on it all evening.  I'll post more on the details tomorrow, but here is some fodder for now:

I ran detailed budget tonight and there are a lot of things I had to estimate given how all of our spending is set up.   It appears we spend about $9900/month right now; or right around $10k/month.  This does not include federal taxes because a lot of my tax burden comes from my business dealings and thus it is hard to separate this from my W2 taxation.  I also did not include FICA + FUTA tax because absent a W2 these taxes won't be levied.  I also removed some other one-time things that came up during the evaluation of the last 2 months like the air conditioner going out, the tires needing to be replaced on a car after a flat, etc. 

When I get more energy I'll post in greater detail so folks can lecture me on how to reduce spending.  These are the top run rate items:

(Percentages Throw Taxes Back In Below)
1.  Federal Taxes - 24% of all expenses
2.  Childcare - 17% of all expenses (should go down later this year...woot!)
3.  Mortgage - 16% of all expenses
4.  Groceries - 8% of all expenses
5.  FICA + FUTA Taxes - 5% of all expenses

Those 5 items alone are 70% of all expenses I pay monthly.  Item 1 I'd like to get rid of ;-)  Item 2 is necessary if I keep working and the wife does too.  Item 3 can probably be eliminated within the next year, but it seems sub-optimal given the other things I could do with the cash.  Item 4 definitely has slop in it.  My wife does a lot of the shopping on the days she works from home (Mondays and Fridays) and I don't really participate in this activity much weekly.  Item 5 will go away when we stop working and having earned income, but it is here to stay for now.

I listed 32 total items for expenses.  The other 27 items make up 30% of the overall expenses.  I start to see slop immediately we could pare back:

6.  Entertainment, broadly grouped (think Amazon Prime, movies, UT football tickets, Redbox, Shutterfly, etc.)
7.  Gas for the car
8./9.  Dining out personal and business (our main vice)
10. Spending on the kids (swim class, activities, etc.)
11. Home supplies/maintenance
12. Car maintenance (oil changes, stuff breaking, etc.)
13. Maid
14. Health
15. Cable TV
16. Water/trash (utilities)
17. Medical (kids going to doctors, wife going to doctor/chiro)
18. Electricity
19. Home insurance (We have a lot of other insurance for the business so I had to estimate this)
20. Diet/health products
21. Lawn maintenance
22. Cell phone (mostly covered by the business...I estimated here)
23. Gas - house
24. Gifts
25. Pest control
26. Internet
27. Security system for house (I hate this one, but wife won't let me get rid of it)
28. Haircuts....probably priced wrong in my sheet...wife did some one-time stuff that is skewing this number some
29. Government fees (tolls, DMV)
30. Dry cleaning
31. Phone
32. Clothes

Regarding what I want.  I want:

-To be financially independent to have more time to work on my business
-To allow my wife to spend more time with the kids

Those are the main wants.  I am sure there are others, but just like the top 5 items above are 70% of expenses those 2 items above are at least 70% (probably more) of my motivation. 
Title: Re: SWR For An Active Real Estate Investor
Post by: Full Beard on June 08, 2015, 10:57:44 PM
Walt and several others......

You can lead a horse to water, but you can't make him drink.  It seems like the same things are pretty much being said on the other SWR for accredited investors thread.
Title: Re: SWR For An Active Real Estate Investor
Post by: thd7t on June 09, 2015, 06:49:32 AM
I'm glad you ran the detailed budget.  It appears to have clarified that you can make some cuts without impacting your quality of life.  It appears that some discussion with your wife will probably bring this further into reach. 

Regarding your goals, I'd say that, if you are confident in your business continuing to generate the kind of income that you've described, you should make the jump.  I think that that's all it would take.  If your wife wants to spend more time with the kids, she can do this.  You are in a position that you should be willing to go for it.  If you make some small steps, you should be able to control the safety of this move.
Title: Re: SWR For An Active Real Estate Investor
Post by: mr_orange on June 09, 2015, 08:42:22 AM
Regarding your goals, I'd say that, if you are confident in your business continuing to generate the kind of income that you've described, you should make the jump.  I think that that's all it would take.  If your wife wants to spend more time with the kids, she can do this.  You are in a position that you should be willing to go for it.  If you make some small steps, you should be able to control the safety of this move.

Agree on this pretty much.  We're close to taking the leap.  My W2 job is pretty flexible and posh though so it isn't an easy decision to take the plunge.  I probably work 20 (W2) hours/week at random times throughout the day, weekend, etc.  I support a lot of stuff overseas so it gives me flexibility to run our business during the day.  Things get very busy at times, but overall the average workload is probably 20 real hours per week. 

The other issue is that real estate development is cyclical and thus it isn't really a warm-fuzzy setup.  Things are going well now, but we have no confidence it will continue in perpetuity.  The positions we bought into post crisis are solid, but prices for dirt have gone up and thus we're diversifying to other types of income...like hard money loans and other asset types.  We intend to monetize our current assets and deploy them in a balanced fashion over the next 12 - 18 months. 

My accountant and I are working on reducing item 1.  Buying some more free and clear property would give me some extra depreciation expense.  My plan is to control anything we end up buying.  The last $200k in income will increase my effective tax rate roughly 6-7 points so this is definitely something I plan to focus on in the coming several months to reduce our largest expense. 

Childcare will be reduced by roughly a factor of 30% in August of this year when the school year starts.  The next 60%ish will go away in 3 years.  We'll probably continue to have some expenses here for a brief after school stretch unless we can convince the grandparents to watch 3 kids every day; which seems unlikely ;-)

The mortgage has a big fat bullseye on it, but it is pretty cheap debt.  Item 3 in my list is PITI so only the PI would go away if we paid it off.  The TI will persist.

Groceries can definitely be optimized.  We'll invest some effort there.

FICA taxes start phasing out after $118k or so (too lazy to look up exact figure) so any lift we get in earned income will eliminate either half of this expense or all of it depending on whether it comes from W2 or our personal business W2. 

Other items from 6-32 worth investing energy in reducing in the short term seem to be:

-Item 6....Not sure how this will go over with the wife, but we can check it out
-Item 7....A lot of this is business related so I am not sure it can be reduced a ton
-Items 8/9....huge bullseye here.  Worthy of study
-Item 10...Would lower our standard of living if we cut it
-Item 11....hard to get rid of the AC breaking on the house and stuff lik ethat
-Item 12....would probably go down in FI, but we use our cars now so they need to be supported.  We could probably change our own oil, but this is a low payoff activity IMO
-Item 13....could clean our own house during FI
-Item 14....could exercise more flexibly during FI so this could probably be chopped a lot
-Item 15...I don't plan to get rid of cable
-Item 16...Utilities would probably increase slightly if we were at home more
-Item 17...Darned kids getting sick really puts a constraint on my FI plans ;-)
-Item 18...Electricity would definitely go up if we were home more during FI
-Item 19...There is probably money to be saved on insurance.  Worth investigating
-Item 20...Money to be saved here for sure
-Item 21...Could cut our own grass if we had more time to do it.  Could probably do it now, but that would decrease time with kids on the weekend more
-Item 22...Mostly driven by business....hard to cut much here without sacrificing a lot more income
-Item 23...Would probably increase in FI
-Item 24...Pretty small expense.   I guess we could stop giving people gifts ;-)
-Item 25...This is a good cut target.  The wife likes this stuff....a battle worth fighting
-Item 26...Need internet access for our business
-Item 27...I'll try fighting this battle again....may lose
-Item 28...Pretty minor expense in the grand scheme of things.  May be worthy of energy later on, but probably not worth focus now
-Item 29...This will go down during FI
-Item 30...This was really an anomaly...I rarely have things dry cleaned
-Item 31...Ooma service is pretty bare bones and saves on cell costs
-Item 32...We spend very little on clothes.  I am surprised it even made the list

So....on the immediate hit list:

1.  Tax planning - Working on this right now....was working with accountant today on planning here
2.  Childcare reduced 30% in August
3.  Grocery reduction or optimization with eating out
4.  Investigate insurance in detail
5.  Investigate diet/health items
6.  Argue with wife over pest control expense
7.  Argue with wife over security system

I think we can pretty easily buy a few rentals to save $2k annually in federal taxes using depreciation expenses.  This will trade a bit of cash for this, but it can be minimized if we are patient.  Childcare is going down roughly $600/month using napkin math in August.  So these two items should trim $767/month or so from the budget. 

So to start out with I just need to find another $233/month to hit my 10% reduction initial target using items 3-7.  Estimates:

-Can probably save that alone looking at groceries and dining out.  Need budgets here and this is worth the effort given how much we spend here
-Can probably easily trim 10% off insurance costs.  We spend a lot on insurance for the business too so this is worth investigating
-Diet/health can probably be trimmed.  I already trimmed this some last month, but we can probably do more going forward
-Have battle with wife over items 6-7.   These two line items alone averaged $94.14/month in the last two months, which is almost half of the remaining savings needed

So this would get us from roughly $9900/month to closer to $8900/month as a first step.  As someone mentioned in either this thread or another one this would be the equivalent of roughly $300k in stache needed for FI assuming we can keep the budget monthly.  That's another just over a year's worth of managing development projects and is pretty low hanging fruit so the energy required won't be that high. 

All of this will likely take a few weeks to implement.  I'll report back on what I can work through or actually save so the numbers are more detailed and less fuzzy.