Case Study - fastest path to fat fire? HCOL family of 4.

[Sonos]

Note: I posted a similar question about selling our duplex a while back in the Real Estate section. I wanted to do a case study about our situation from a more holistic view.

Life Situation: married, filing jointly. Family of four ages 40, 39, 2.5, and 8 months. We might have one more kid in the next year or two. HCOL area in Seattle (our property taxes are almost $12k a year), but we have easy bus commutes, can walk everywhere, and have family in walking distance which is great with little kids. We house hack—our house is a legal duplex, we live in the main part of the house and rent out the 2 bedroom basement apartment. We could even add a third unit someday (maybe convert the garage) to make it a triplex.

We bought our duplex about 5 years ago and in that time frame the value of the property has increased from our purchase price of $907,000 to it’s estimated value of almost $1,800,000 today. Our lot is zoned multifamily and is in a very in-demand neighborhood, which all adds up to our property being very attractive to developers who would probably put townhomes in what is now our backyard

Gross Salary/Wages: $212k (product manager at high-stress tech company) + $140k (software engineer, probably severely underpaid due to staying at the same job for too long but WLB is amazing...would probably jump to $200+ if he gets a new job) = $352k

Individual amounts of each Pre-tax deductions
401k $19,000 x 2= $38,000 (we each max out to the federal limit every year)
HSA $0 I don’t think we have an HSA option
FSA $0 I don’t think we have an FSA option
IRA $0
insurance

Other Ordinary Income:
None

Qualified Dividends & Long Term Capital Gains:
None

Rental Income, Actual Expenses, and Depreciation:
Rental income: $2200/ month which includes utilities and pitching in for yard care and maintenance
Rental expenses: $300/month which includes the utilities and maintenance expenses mentioned above. The duplex doesn’t have split out utilities, so this number is just a very rough estimation.
Depreciation: no idea

Current monthly expenses:
Mortgage payment - $2700
Property tax - $1000
Homeowner's insurance - $400
Car insurance - $77

Nanny - $4,316 (she takes care of both kids full time while we are at work)

Cell - $100 for 2 cell phones
Internet - $66.95

Groceries - $1500 (includes eating out--mainly breakfast and lunch at work--we are working on lowering this)
Gas - $40
Pet food - $40
Gifts - $200

Loan payoff - $95,000 HELOC (home renovations + flooded basement repair)

I didn’t put in all of our expenses because my question revolves more around if we should sell our house or not and I think my question can be answered without our detailed expenses list. If it turns out that people need that info, I’ll add it in. This last year, we had a lot of change in terms of income and expenses: we spent a lot on house repairs (due to a flooded basement and deferred house maintenance) and I went from no income to a high income when I went back to work. At the same time, we hired a nanny that costs almost $50k a year. In looking at our expenses, if I had to estimate our spending going forward (including our continued improvements on reducing our spending in all areas besides house and childcare), I would say we’ll spend roughly $50k on house, $50k on nanny, and $60k on other expenses. That puts us at about $160k a year in spend. Our earned income is roughly $352k a year gross, plus another $22,800 in rent ($1900 x 12 months) for a total of $374,800 gross.

Expected ER expenses: Childcare expenses will drop to zero. Healthcare would probably increase, but I’m very open to some sort of part-time or low-stress barista fire for benefits while one of us is 100% stay at home parent.

Specific Question(s):
We’d like to be able to fire and be stay at home parents ASAP. If we got super frugal and lived in a lower cost of living area, we could probably do it now. But, we want to stay in Seattle to stay close to family who are very involved with our kids.

I’m thinking we could sell our duplex to unlock the equity of almost $900k and use $200k as a down payment for a new house and put the remaining $700k into our retirement accounts, which would bring us to about $1.15M in retirement and brokerage accounts (I realize these numbers are not accounting for sale/moving costs. Then we could keep working at our high-paying jobs for a few more years until we reach about $3M in assets for a 4% withdrawal of $120,000 a year (which would cover house at $50k a year and $60k a year in spend plus a little extra for padding).

Am I missing some other avenue for accelerating fire? We used to AirBnB our apartment which earned more, but we just don’t have the time to manage that now. One of us could quit now and we could just save for fire more slowly while the other is a stay at home parent, but part of me just wants to get us both to FIRE ASAP. Or, we could both go part-time and do a slower path to fire, but more free time now with the kids? Side hustles instead of W-2s (that feels risky to me)? Ideally, we want a slower pace of life with more time with the kids, but we want to stay in our HCOL area because of family. Maybe move to a less expensive part of the city and since we are fire we can just drive more to the see the family? Hive mind, what permutations of accelerating FIRE am I missing?

Thanks!

[robartsd]

Do you really want to FIRE ASAP or do you want to FIRE FAT? I know Seattle is HCOL and that you want to stay for family. Your tenant's housing expenses are less than half of yours and they live in Seattle too.

$60k ($5k/month) after housing and childcare is a ton of money - you don't come close to detailing how that is spent. While this is only about 1/3 of your current budget, it is more than 1/2 of your FIRE budget, so cutting this significantly could really lower your target number without changing your housing budget.

[Cassie]

Can you save that much by moving since you are staying in Seattle? Will it make your commute longer?

[Villanelle]

Your proposal is to sell the house but then stay in the same area, and have a mortgage.  That would free up equity, but increase your budget because you'd have to pay that mortgage.  And you'd lose the rental income.

So I think you need to carefully run the numbers to make sure that would actually save you money and move FIRE closer, especially after moving costs and realtor fees.  I couldn't quite tell from your post whether you've done that and what those numbers look like. 

[freya]

I found the numbers a bit confusing...are you counting that $95K HELOC against the equity you have in your home?

Selling in order to reap the benefits of the equity might make sense, but only if your housing costs don't end up higher than they are now, minus the rental income.  I did this (in NYC), moved from a fashionable neighborhood to a less fancy one that I actually enjoy living in more, and came out WAY ahead between the equity from the sale and the lower cost of the new place.  Absolutely worth it!!  But you definitely should run your numbers.  Include HELOC payoff, closing costs for both homes, as well as costs to fix up your house to sell, and moving/storage.  But - you think housing should cost you $50K/year??  I pay something like half that, and NYC is not exactly known for cheap housing (and my place is rather nice).

It sounds like you've got very high expenses apart from housing, which is probably going to result in several years (10 at least) for you to get to FIRE, even with the stash boost you propose.   If a lot of those expenses are attributed to the fact that both of you are working and barely have time to breathe if you can't even enjoy breakfast at home, then it might be worth considering whether that $140K income is actually triggering expenses that make it only a break-even, or even a money-losing proposition.  In other words, definitely consider having one parent quit now - for sanity's sake!  Feel free to post expenses if you think it would help to get feedback.

[GoCubsGo]

The thing that stood out to me was the zoning of your property.  If developers really want it and the area doesn't show signs of slowing down, staying in your house may be the best bet.  You may be able to continue to up rents yearly and save the hassle and expense of moving while still growing equity in your home.  I'd stay in the house and work on the other expenses.   

[seattlecyclone]

How do you feel about being a landlord? Would developing your backyard yourself have any appeal to you? Hire an architect and some contractors to put a few studio apartments back there and you can probably make some good money off the deal. I think holding on to such a valuable piece of land that's underdeveloped relative to its neighbors will prove to be a pricey decision, as the assessed tax value certainly takes development potential into account.

[waltworks]

You could ditch Seattle and move to a lot of nice places and be FIRE/stay at home parents right now. So there's that.

Otherwise, your fastest path, as always, is to rein in your expenses. Childcare is the low hanging fruit, but then there's another $60k/year to account for (which is considerably more than our family of 4 spends on everything, also living in a VHCOL area).

You have sufficient money to be FIRE now, but not in Seattle, probably. So step 1 is to think about what your actual goals are, because your very low savings (am I correct that you have only $400k in investments?) and high expenses mean that you are basically house poor. You can sell the house and move and have one of you get a part-time job and be set for life. Or you can stay where you are and keep your noses to the grindstone to live in Seattle.

Don't get me wrong - I live somewhere that is stupidly too expensive and could be set for life by selling my house too, and I'm not about to, because I like to be able to ski/mountain bike from my doorstep. But I also have plenty of time to spend with my kids and total flexibility in my schedule. If you're stressed out and miserable, and you don't get to see your kids, I'd think long and hard about how you'll feel about living where you do 20 years down the road. There are lots of nice places in the world to raise a family where a house doesn't cost $2 million.

-W

[Tuskalusa]

I really think it would be helpful to carefully track your expenses for a few months before making a decision. I think there might be some missing expenses that will come to light through your tracking (vacations, memberships, gifts, etc.). Perhaps some opportunities too.

I think selling your house just to take on another mortgage may be risky. If you like where you live, maybe there are other options for reigning your expenses and perhaps going to one income. For example, how necessary are the renovations?  Cutting the renovations and nanny frees up over $100k. Are there other things you could cut or are there other jobs that are lower stress for the higher earner?  You have a lot of options. I think getting something like YNAB could help you further analyze your budget and your options.

[nippycrisp]

No one mentioned capital gains. Maybe the law has changed, but you're well above the $500K tax-free limit for couples, and the gains rate creeps up to 20% right around your current income. With the numbers you've given, this could be a six-figure hit, which could be (possibly much) worse if you've taken any depreciation on your taxes. Also, 5% transaction costs on a $1.8M property is $90K, which is a non-trivial amount. I'd factor these costs into your calculations.

I can't offer advice on what to do. You have a fantastic amount of home equity, but you and others are correct that your savings lag pretty badly for someone with your earning potential. It's hard to imagine real estate keeping up with the market, given the high property values in Seattle.

[nippycrisp]

To address the future stability of real estate values:

In an inflationary environment, classic economics dictate that interest rates will increase, including mortgage rates. The average mortgage rate for the past 30 years is 6.4% (maybe more for nonconforming/jumbo loans?). We're at 3.7% now. A standard mortgage on a $2MM property is $7,436 today, but at those averages, it would be $10,008. Making no predictions about the future, but still recognizing that we're historically well below average, the increased financing costs of the property at average interest levels would likely be balanced by an according decrease in the sale price.

My father loves real estate because he bought a house in 1982 and sold it for double that in 1992. He doesn't like to be reminded that interest rates were 16% when he bought and 8% when he sold. This "success" was, in effect, a product of interest rates. While I'm not saying we're in the opposite situation now, I do believe that inflationary pressure, when it inevitably comes, will be the enemy of current home values.

[ysette9]

I don’t have the smart analysis like our friend nippycrisp, but even without you listing what your invested assets are I can say that you have a lot of eggs in one real estate basket. If that is your forever home and you are otherwise solid, then carry on. But since you are here asking about it I wonder if part of you wants to cash in your winning bet and diversify your net worth a bit. How much does home equity represent of your overall net worth? Which would you regret more: selling now and missing out on possible future real estate appreciation or not selling and seeing equity melt away in a correction?

[red_pill]

How much more did you earn doing the AirBnB thing with your apartment?  And what is the potential earnings of the third suite?

The reason I ask is have you done the math on your spouse staying home (losing the $140K gross, which is what net? like $105K?), but then you guys saving your nanny expenses ($50K), and the spouse could manage the AirBnB.  I would assume that there would also be reductions in the $60K annual "other" spend.  So, if your wife quit working now, what would the total impact be?  Maybe not as bad as you would think.

An alternative strategy would be to replace the nanny (I'm assuming is a live-out), with a live-in au pair.  Seattle is a very attractive city for these 18 to 22 year old foreign girls to come live in for a year, especially if you live in a convenient location like it sounds you do.  They cost between $150 to $250 a week, plus they live with you so it drives up your other costs a bit. Still, it won't be anywhere near what you're paying now.  There are some cons to it, but it is an interesting way to go. We have had 3 and two were absolutely awesome, the third was just too shy and quiet to mesh super well, but no big issues.  There are plenty of agencies that will set it all up for you.  I would highly recommend this if you have the space in your house.

The other major area of future savings I see is not having a 3rd child.  I'm of opinion that the world is over populated as it is, but I know thoughts on what is a socially responsible number of kids to have varies.  Regardless, kids are expensive.

Finally, I'm wondering if you would have spent $95,000 on your renos if you had been forced to save up for them beforehand. Sounds like the flood repair was an urgent situation (and at $400 / month for house insurance, did you put it through as a claim? Or just pay for it yourself).  But maybe you fell victim to a "let's just get it all done at once" thinking and financed it to make life easier, but ended up spending more because it wasn't cold, hard cash you had to hand over.   It's like cars - I know tons of people who will buy a $50,000 car with a car loan, but if they had to save that up there's no way they would spend the cash.  People just spend more when things are financed, and I'm wondering if you fell victim to that.

I guess ultimately I hear you say that "We’d like to be able to fire and be stay at home parents ASAP.", but that level of urgency doesn't seem to be demonstrated in your current spending habits....at least in comparison to some of the frugality I see people here discussing.  At least that's what it looks like from the brief details you gave.