4 years after finding MMM

[Cwadda]

I am turning 23 in a couple of weeks and have been a part of the MMM community for 4 years now. Unbelievable how fast the time has gone by! That being said, I'm always in need of improvements.

Income:   
W2 Income         $1760.00
Commission          $200.00 (this is viable, but averages around $200/month)
Side hustle           $700.00
Rental income    $3,615.00
Amazon income     $300.00
Total Income       $6575.00
Take home          $5589.00 (estimated)
   
Necessary Expenses   
Mortgage P+I      $1,665 ($343k loan 30 year fixed @ 4.125%, house worth $360k)
Home Insurance      $195
Property Tax           $550
PMI                         $237
Food & Groceries     $175 (includes all alcohol, too)
Electric                   $200  (covers electricity for 3 apartments that I rent out)
Heat/hot water         $60
Cable & Internet       $80  (covers 2 apartments)
Cell Phone               $30                       
Auto Insurance          $79
Auto Maintenance     $30
Auto Purchase           $0
Auto Gas                $130
Home Repairs        $310 (this is large because it covers a repair fund for the entire apartment building)
Pets                        $0

Total:   $3,781
   
Discretionary Expenses
Lawn + Snow removal    $50
Fast Food                         $0
Restaurant                     $20
Entertainment                $20 (PS4 and Netflix subscriptions)
Electronics                         $0
Clothing                       $30
Total                            $120
   
Monthly Additional Expenses   
Gifts                               $25
Travel                       $30
Charity                         $80
Total:                     $135

Total income: ~$5589
Total expenses: $4036
Excess cash to invest: $1553
Monthly savings rate: 28%

Assets:
Roth IRA $34,378 (100% VTSAX, already maxed for 2017)
SEP IRA $1,081 (100% VTSAX)

Cash:
$4,500 (emergency fund)
$800 in credit card rewards

I'm looking to FIRE as soon as possible. For excess cash I am planning on maxing my Roth IRA and save for another house downpayment. SEP IRA or early mortgage payments are also possibilities.

Any suggestions are welcome, thanks in advance for your help.

[Laura33]

Wow, you're in great shape.  What are future plans?  E.g., I take it your rentals are a single home vs. multiple different buildings -- do you plan to keep renting forever, or move out yourself and rent your current unit?  Kids in the future?

Just from the numbers, it looks like you can cover your expenses based on the cash flow from the rentals and your side hustle alone, so you could quit your day job any time you like (personally, I wouldn't, as a few months with an empty unit would really hurt -- I'd want a bigger 'stache or a bigger delta between the non-W2 cash flow and expenses).  But that also assumes that your expenses will stay the same.  You are still really young, so I'd plan for life to change many many times over the next few decades and for your desired expenses to go up some.

[neo von retorch]

Currently, your annual PMI ($237 * 12) equates to 4% additional interest on the $70,000 difference between your mortgage principal balance and the 78% loan-to-value point where PMI is automatically dropped. (You can often pay for an appraisal at 80% LTV to get it done earlier.) As your mortgage principal balance gets closer to 78%, that effective interest rate will grow. Maybe not worry about it right this second, but it is a bit of an anchor.

Not much in the way of low-hanging fruit. You're under 25, so maybe that's a good insurance rate. Do you pay for collision coverage or just liability? When was your last car insurance shopping trip?

[Cwadda]

Wow, you're in great shape.  What are future plans?  E.g., I take it your rentals are a single home vs. multiple different buildings -- do you plan to keep renting forever, or move out yourself and rent your current unit?  Kids in the future?

Just from the numbers, it looks like you can cover your expenses based on the cash flow from the rentals and your side hustle alone, so you could quit your day job any time you like (personally, I wouldn't, as a few months with an empty unit would really hurt -- I'd want a bigger 'stache or a bigger delta between the non-W2 cash flow and expenses).  But that also assumes that your expenses will stay the same.  You are still really young, so I'd plan for life to change many many times over the next few decades and for your desired expenses to go up some.

You're correct, the rentals are coming from a 4 family investment property. I live in the 4th unit and will rent that once I move out. This will bring cash flow to around $1100 per month. Then this profit will go towards another mortgage on another property, hopefully another multi family property. I'm definitely going to keep working my day job as long as I don't have kids (I definitely want kids). Work hard now so I can spend more time with family later. That's the plan, at least.

Another thing is the unit I'm living in is a 2 bedroom which is way too much space. So I'll be looking to get a roommate for another $500/month.

[Cwadda]

Currently, your annual PMI ($237 * 12) equates to 4% additional interest on the $70,000 difference between your mortgage principal balance and the 78% loan-to-value point where PMI is automatically dropped. (You can often pay for an appraisal at 80% LTV to get it done earlier.) As your mortgage principal balance gets closer to 78%, that effective interest rate will grow. Maybe not worry about it right this second, but it is a bit of an anchor.

Not much in the way of low-hanging fruit. You're under 25, so maybe that's a good insurance rate. Do you pay for collision coverage or just liability? When was your last car insurance shopping trip?

Thank you for this calculation. The major blip is that the home was purchased with an FHA loan, so PMI remains forever. I'll be able to refinance into a separate loan once I get to 20% LTV. For now, the plan is to just pay the minimum mortgage amount and save cash towards another downpayment. PMI hurts badly, but it's built into the cashflow and fortunately still works.

For insurance I'm still on my parents'. It was $200 a month when I shopped on my own, which is crazy because I've never had an accident or ticket. I believe the insurance plan (just got the policy in May) covers just liability.

[Scortius]

Currently, your annual PMI ($237 * 12) equates to 4% additional interest on the $70,000 difference between your mortgage principal balance and the 78% loan-to-value point where PMI is automatically dropped. (You can often pay for an appraisal at 80% LTV to get it done earlier.) As your mortgage principal balance gets closer to 78%, that effective interest rate will grow. Maybe not worry about it right this second, but it is a bit of an anchor.

Not much in the way of low-hanging fruit. You're under 25, so maybe that's a good insurance rate. Do you pay for collision coverage or just liability? When was your last car insurance shopping trip?

Thank you for this calculation. The major blip is that the home was purchased with an FHA loan, so PMI remains forever. I'll be able to refinance into a separate loan once I get to 20% LTV. For now, the plan is to just pay the minimum mortgage amount and save cash towards another downpayment. PMI hurts badly, but it's built into the cashflow and fortunately still works.

For insurance I'm still on my parents'. It was $200 a month when I shopped on my own, which is crazy because I've never had an accident or ticket. I believe the insurance plan (just got the policy in May) covers just liability.

I'm generally in the "don't pay off the mortgage camp", but in this case you may really want to consider accelerating your payments to get to 20% faster so you can refi.  The two main considerations are 1) your PMI is high enough that you'll be getting a good return on the extra payments, and 2) you may want to 'hurry up' to lock in a new rate before rates go back up (if you think that might happen).  Between the two factors, extra mortgage payments may save you a lot of money in the long run.  It would be interesting to do the math more in depth.

[TaraB]

I'm generally in the "don't pay off the mortgage camp", but in this case you may really want to consider accelerating your payments to get to 20% faster so you can refi.  The two main considerations are 1) your PMI is high enough that you'll be getting a good return on the extra payments, and 2) you may want to 'hurry up' to lock in a new rate before rates go back up (if you think that might happen).  Between the two factors, extra mortgage payments may save you a lot of money in the long run.  It would be interesting to do the math more in depth.

+1

[Cwadda]

Currently, your annual PMI ($237 * 12) equates to 4% additional interest on the $70,000 difference between your mortgage principal balance and the 78% loan-to-value point where PMI is automatically dropped. (You can often pay for an appraisal at 80% LTV to get it done earlier.) As your mortgage principal balance gets closer to 78%, that effective interest rate will grow. Maybe not worry about it right this second, but it is a bit of an anchor.

Not much in the way of low-hanging fruit. You're under 25, so maybe that's a good insurance rate. Do you pay for collision coverage or just liability? When was your last car insurance shopping trip?

Thank you for this calculation. The major blip is that the home was purchased with an FHA loan, so PMI remains forever. I'll be able to refinance into a separate loan once I get to 20% LTV. For now, the plan is to just pay the minimum mortgage amount and save cash towards another downpayment. PMI hurts badly, but it's built into the cashflow and fortunately still works.

For insurance I'm still on my parents'. It was $200 a month when I shopped on my own, which is crazy because I've never had an accident or ticket. I believe the insurance plan (just got the policy in May) covers just liability.

I'm generally in the "don't pay off the mortgage camp", but in this case you may really want to consider accelerating your payments to get to 20% faster so you can refi.  The two main considerations are 1) your PMI is high enough that you'll be getting a good return on the extra payments, and 2) you may want to 'hurry up' to lock in a new rate before rates go back up (if you think that might happen).  Between the two factors, extra mortgage payments may save you a lot of money in the long run.  It would be interesting to do the math more in depth.

I'm definitely going to consider paying off the mortgage early to get rid of PMI but I may wait another 6 months-1 year to make that decision. The reason being, once you "pay into" your mortgage you can't get that cash back. I'm weighing the pros and cons of saving the cash instead to buy another house.

[HPstache]

So did you buy the rentals outright, or are they all included in the Mortgage payment of $1,665?  Or is the $1,665 just your primary residence?  Or do you you own a 4-plex and live in one unit?

[thedayisbrave]

You're in great shape for your age. 

Is homeowner's insurance and taxes really that expensive where you live? Where do you live? Yikes.

I would say if anything, work on increasing your W2 income.  Work hard, get raises, chase the opportunities. 

[SwordGuy]

At current property values, you need about $64K to get rid of the PMI (includes some $ for an appraisal). 

That will take you about 26 months if you just kept it in a savings account until you had enough to get the loan value to 80%.
(And maybe a month or two less if you paid into the loan each month.)  You can figure it out exactly with a mortgage loan calculator like https://www.drcalculator.com/mortgage/.

That's not bad, especially since you're only 23!  In fact, it's awesome!

(By the way - congrats!!!!)

Of course, if you find a property that will make more than $237 a month in that time period then it would be wise to put it into that investment instead.  2 years in the stock market earning historical average returns with historical average inflation would put you at an investment value in today's dollars of about $54,600.   4% of that is $182.  Of course, it could be half that or twice that!

Here's a useful compound interest calculator:  https://investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator

[Cwadda]

Or do you you own a 4-plex and live in one unit?

Exactly. I should probably combine the 3 rents and lump it into one income. It's a bit misleading.

You're in great shape for your age. 

Is homeowner's insurance and taxes really that expensive where you live? Where do you live? Yikes.

I would say if anything, work on increasing your W2 income.  Work hard, get raises, chase the opportunities.

Unfortunately, yes. Homeowner's insurance is that high and that's after I got 4 difference quotes and had the deductible raised to $5,000. Though it's nearly a 4,000 sq. ft building. Taxes are also astronomical here (I'm in the state of CT).

At current property values, you need about $64K to get rid of the PMI (includes some $ for an appraisal). 

That will take you about 26 months if you just kept it in a savings account until you had enough to get the loan value to 80%.
(And maybe a month or two less if you paid into the loan each month.)  You can figure it out exactly with a mortgage loan calculator like https://www.drcalculator.com/mortgage/.

That's not bad, especially since you're only 23!  In fact, it's awesome!

(By the way - congrats!!!!)

Of course, if you find a property that will make more than $237 a month in that time period then it would be wise to put it into that investment instead.  2 years in the stock market earning historical average returns with historical average inflation would put you at an investment value in today's dollars of about $54,600.   4% of that is $182.  Of course, it could be half that or twice that!

Here's a useful compound interest calculator:  https://investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator

Hi Sword Guy, thanks for doing these calculations for me. These are very helpful for future considerations in getting rid of PMI. I will definitely be revisiting the idea in say 6 months. I will also be looking into a streamlined FHA refinance to get a lower interest rate if available. You can do this as soon as 6 months after purchase granted all mortgage payments are made on time.

[HPstache]

Or do you you own a 4-plex and live in one unit?

Exactly. I should probably combine the 3 rents and lump it into one income. It's a bit misleading.

That is cool.  I did the same thing at your age, except it was a Duplex.  Are you making sure to take advantage of all of the tax benefits of this living situation?  You should be able to write-off 75% of your electric & garbage bill if you are providing those utilities to your tennants. 

If I were you, I'd consider FIRE'ing with real estate rather than the 4% rule.  If you could pay off that 4-plex in 10-15 years rather than 30 that should provide sufficient income as long as you don't succumb to major lifestyle creep.  Have you considered that?

[Cwadda]

Or do you you own a 4-plex and live in one unit?

Exactly. I should probably combine the 3 rents and lump it into one income. It's a bit misleading.

That is cool.  I did the same thing at your age, except it was a Duplex.  Are you making sure to take advantage of all of the tax benefits of this living situation?  You should be able to write-off 75% of your electric & garbage bill if you are providing those utilities to your tennants. 

If I were you, I'd consider FIRE'ing with real estate rather than the 4% rule.  If you could pay off that 4-plex in 10-15 years rather than 30 that should provide sufficient income as long as you don't succumb to major lifestyle creep.  Have you considered that?

I've started bookkeeping in advance and am interviewing some tax advisors for the upcoming tax season (still a ways away). 3/4 of mortgage interest, utilities, etc. can be written off.

I have considered retiring with real estate, maybe not in the 10-15 year time frame but it's definitely achievable. My plan is to buy a duplex next. Live in one side, rent the other. The rental income from the 5 units will be enough to cover both mortgages, plus extra cashflow. Under the ideal circumstances, this process can be continued indefinitely.

[HPstache]

Or do you you own a 4-plex and live in one unit?

Exactly. I should probably combine the 3 rents and lump it into one income. It's a bit misleading.

That is cool.  I did the same thing at your age, except it was a Duplex.  Are you making sure to take advantage of all of the tax benefits of this living situation?  You should be able to write-off 75% of your electric & garbage bill if you are providing those utilities to your tennants. 

If I were you, I'd consider FIRE'ing with real estate rather than the 4% rule.  If you could pay off that 4-plex in 10-15 years rather than 30 that should provide sufficient income as long as you don't succumb to major lifestyle creep.  Have you considered that?

I've started bookkeeping in advance and am interviewing some tax advisors for the upcoming tax season (still a ways away). 3/4 of mortgage interest, utilities, etc. can be written off.

I have considered retiring with real estate, maybe not in the 10-15 year time frame but it's definitely achievable. My plan is to buy a duplex next. Live in one side, rent the other. The rental income from the 5 units will be enough to cover both mortgages, plus extra cashflow. Under the ideal circumstances, this process can be continued indefinitely.

$900 extra dollars a month on your mortgage will pay it off in 15 years instead of 30.  My biggest regret is not paying off my duplex on a 15 year schedule rather than the 30 year I chose... I'm now 10 years into owning it and I could be close paid off already instead of 20 years out!  If I were in your shoes, I would deflect $900/mo of your $2,200 excess toward the 4-plex mortgage.  You said you want to FIRE as soon as possible, and this could be your soonest opportunity to get there.

[Cwadda]

Or do you you own a 4-plex and live in one unit?

Exactly. I should probably combine the 3 rents and lump it into one income. It's a bit misleading.

That is cool.  I did the same thing at your age, except it was a Duplex.  Are you making sure to take advantage of all of the tax benefits of this living situation?  You should be able to write-off 75% of your electric & garbage bill if you are providing those utilities to your tennants. 

If I were you, I'd consider FIRE'ing with real estate rather than the 4% rule.  If you could pay off that 4-plex in 10-15 years rather than 30 that should provide sufficient income as long as you don't succumb to major lifestyle creep.  Have you considered that?

I've started bookkeeping in advance and am interviewing some tax advisors for the upcoming tax season (still a ways away). 3/4 of mortgage interest, utilities, etc. can be written off.

I have considered retiring with real estate, maybe not in the 10-15 year time frame but it's definitely achievable. My plan is to buy a duplex next. Live in one side, rent the other. The rental income from the 5 units will be enough to cover both mortgages, plus extra cashflow. Under the ideal circumstances, this process can be continued indefinitely.

$900 extra dollars a month on your mortgage will pay it off in 15 years instead of 30.  My biggest regret is not paying off my duplex on a 15 year schedule rather than the 30 year I chose... I'm now 10 years into owning it and I could be close paid off already instead of 20 years out!  If I were in your shoes, I would deflect $900/mo of your $2,200 excess toward the 4-plex mortgage.  You said you want to FIRE as soon as possible, and this could be your soonest opportunity to get there.

Ok, thank you for this. I will have $2200/month in extra income and only $450 is currently pre-allocated for retirement/Roth IRA.

Also I just discovered yesterday that the tenant moving out wants to rent a room for 3 nights a week and is willing to pay $325/month. Good deal!

[SwordGuy]

$900 extra dollars a month on your mortgage will pay it off in 15 years instead of 30. 
... 
If I were in your shoes, I would deflect $900/mo of your $2,200 excess toward the 4-plex mortgage.  You said you want to FIRE as soon as possible, and this could be your soonest opportunity to get there.

 

I would not follow that plan.  Paying into your mortgage will get you a 4.1% return on your investment of that $900.
Investing it in Vanguard's VTSAX, if it earns the historical average rate of return over the next 15 years, will get you a 7% return in today's dollars and a 10% return in future dollars.    Since your mortgage is a fixed rate mortgage (I sure as hell hope that is true!), the 10% rate for tomorrow's dollars is the appropriate value to use.  (That's because the mortgage P&I doesn't change as dollars inflate.)  That $900 a month would equal about 343,000 at that rate of return in 15 years.   Your mortgage balance would be about $223,000 in 15 years, so you would have money left over.  If you pay it down as you go, you won't.   Of course, the market might be way down in 15 years and you might want to wait a few years for it to recover before you cash that money out.

Or, you could just pay the remaining 15 years out of the earnings from this investment and still come out ahead, as you would be earning more than you're withdrawing at historical average rates of return.