Author Topic: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?  (Read 31080 times)

nippycrisp

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #100 on: October 22, 2022, 01:05:17 PM »
You asked about interest rates, so I'll address that. You could think of this decision in terms of best/average/worst-case scenarios.

Best: the current reversion towards historically average mortgage rates reverses. Rates plunge back to low single digits, while the economy remains strong. Home values reverse their current slide and you gain a bit of equity. No major problems with rental or job loss. In three years you are able to refinance and save maybe $1200-1500 a month.

Average: rates remain near their current historical average. Home prices go sideways. Economy is mixed. You remain house poor, and miss the opportunity to go in on a down market. on the other hand, you have a cash-flowing rental at a good interest rate, but are stuck with 7-8 years of PMI on your new purchase and have limited liquid assets to deploy. 

Worst: This is your nightmare scenario. Mortgage rates continue to climb, and/or the broader economy tanks. The good news is you have locked in a lot of debt at a "low" rate relative to the 9-18% mortgages we've seen in the past fifty years. The bad: home values have shrunk as borrowing costs increased, and nearly fifty percent of your net worth is tied up there. You will pay PMI forever, and will be blocked from refi-ing due to low LTV. Two other things are also likely to happen: inflation has continued (the likely reason the Fed has increased the rates that are fueling the high borrowing costs) and the rate hikes have pushed us into an unsurprising recession. Unemployment increases (this may not affect your job, but what about your tenants? CA isn't a landlord-friendly state), and your limited free dollars are eaten into. Instead of buying depressed equities, you may be selling them.

Obviously there's some more nuance than I've sketched out, but you get the idea. No one can say how likely each of these scenarios is but, if I can editorialize, I don't see much in the way of upside to offset the risks.

If you absolutely must upgrade, I'd suggest looking at the numbers if you sell property #1. Your loan looks late stage, so you're probably not saving too much on interest/tax deductions. You can carry the profits into the new sale (I think) without taxes, you lose PMI, the hassle of managing a rental, reduce your exposure to the mortgage industry, and have some extra to deploy into the current market. And you can still refi if that avenue becomes attractive.

You can't control the broader economy, but you can control your risk.

Dicey

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #101 on: October 22, 2022, 04:37:36 PM »
Being house poor made me rich. CA real estate is a whole different beast, one that even some very smart mustachians just can't grok. My advice would be to put 20% down, because you can and because PMI sucks. Also, you must know yourself well enough to be sure of how you will react if the market continues to soften and your down payment goes poof! It could happen, but if it's really your forever house, it won't matter in the long run.

I lived in SoCal, I get it. I still think it's extremely risky -- CA can't get a pass on math forever.
I do not disagree in theory, only degree. CA does not get a pass on the math. We bought our primary NorCal home on a short sale in 2012. We bought SoCal  rentals in 2015 and 2016 below market. Each had been on the market for 12+ months for reasons that didn't scare us.*

Real estate is a roller coaster. Those for no stomach for it should stay renters forever. Ditto for those who dislike home maintenance. Also, anyone ewho believes RE "must go up" should get an automatic DQ.

*Yeah, one of them smelled of sewage. We replaced the wax ring that had failed for $5.00. Problem solved.

terrifictim

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #102 on: November 10, 2023, 06:17:04 PM »
Hi @nippycrisp and others,

It's been a while so figured I would update. Basically just want to confirm that everyone goes "No-Brainer" before I do this.

We ended up buying a property in December 2022 for $800kish at 6.25%. Wife and daughter love it, so definitely a win on the family side. We're having a second daughter soon, so we would have been forced to buy at some point - which would have hurt even more now.

We've definitely had some lifestyle expenses + the increased mortgage - right now I make about $11k/mth and we're spending it all, 1/2 on the mortgage, 1/2 on everything else. Our cash on hand is about 2-3 months of expenses.

We decided to rent the existing property through a property manager for the past year and it's been wonderful - no issue, payment every month. Getting close to renewal of lease where we have to decide whether to renew lease or sell.

As of the last post the general consensus was to sell. I'm now much more inclined to do that, any thoughts about why I should not?

Key Stats:
Estimated Selling Price: $575k
Current Mortgage: $170k at 3%
Current Rental Income: $2650/mth
Net Rental Income (after Mortgage, HOA, Insurance, Prop Tax and Mgmt Fee): $700/mth
I have until Dec 2025 to sell before I get hit with capital gains tax.

EchoStache

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #103 on: November 11, 2023, 07:07:19 AM »
You are netting $700/month on the rental property, with the risk and headaches associated with land lording.

$400k from the sale of property in a MMF would pay you ~$1700/month.

Unless you can drastically increase net profit on the rental, it seems you would be much better off re-allocating your $400k equity even in the safest no risk investment that exists.

nippycrisp

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Re: Case Study: 29 and a recent MMM Enthusiast - Can I be FIRE by 40?
« Reply #104 on: November 11, 2023, 08:21:55 PM »
Agree w/Echostache. Hell, putting it in one of those 5.25% saving accounts would outperform the net rental income.

The only arguments I see for keeping the rental is the possibility of appreciation (in rent or property itself). Don't see that happening with rates where they are.

If you have some flex, might want to toy with trying FSBO, especially if the comps are easy. 5-6% realtor commissions are going to take a big chunk of your net.