Author Topic: CASE STUDY: FrugalCoconut  (Read 1994 times)

frugalcoconut

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CASE STUDY: FrugalCoconut
« on: January 05, 2018, 09:26:46 PM »
I'm a 37yo SINK in South Florida.  I want to FIRE sometime in early-to-mid 2020 (before my 40th birthday).  The burning question on my mind is:  Can I do it (successfully) and what can I do better to prepare? This has been a longstanding goal of mine for as long as I can remember ... and finally I've reached the point where I only have between 2 and 2 1/2 years left but every passing year gets more tedious and makes me more impatient.  Additionally:  How should I structure my assets for withdrawals once I pull the plug?

Currently I have a combined balance of around $440K in my retirement accounts: 401K (mostly Roth), Roth IRA, and HSA -- and I max all three out every year (with some employer contribution toward 401K & HSA).  I qualify for Social Security benefits once I reach retirement age and I only have a small "pension" (currently at $14.5K with slow growth) that I will take as a single lump-sum payment at age 55.  I don't really keep cash liquid beyond what I need on a monthly basis to pay bills although any excess is basically counted as "reserves" for things like property taxes and home/auto insurance.

I own three properties -- I currently live in one and the other two are rented out (although I previously lived in those too).  Someday I might do a switcharoo by moving back into Rental # 1 and converting this Primary Residence into a rental instead.  I wonder if that might make more sense from a numbers perspective anyway since the Primary Residence has stronger potential for rental income?  Ideally I would like to pay off the mortgage on my current Primary Residence so I can own that free & clear as well.  I will be selling Rental # 2 to finally get that off the books.

I feel as though I am sacrificing/depriving myself in order to contribute so heavily toward retirement and that the only thing I spend on excessively is food -- but overall my expenses are still rather high.  I'm not one to buy "stuff" (more of a minimalist).  I haven't taken vacations except for rarely tagging along with someone else ... although some light travel would be welcome and I find the concept of geoarbitrage to be quite intriguing.

Here is the annual breakdown for 2017:

Net Income: $23.5K
* $60.7K gross income
* $10.0K taxes (federal+FICA)
* $18.0K Roth 401K
* $2.8K HSA (employee portion ... employer contributes the remainder)
* $0.7K Insurance (Medical+LTD)
* $0.2K FSA
* $5.5K Roth IRA

Personal Expenses: $13.8K (these are NOT specific to any particular property)
* $0.8K electric
* $1.1K cable/internet (only includes cable because the bundle was cheaper than standalone internet)
* $5.0K food/beverage (includes both groceries & dining out)
* $3.0K automotive (includes gas/fuel, tolls, car insurance, maintenance/repairs, registration, detailing)
* $2.2K healthcare/medical/dental/vision/prescriptions (does NOT include insurance premiums)
* $1.0K personal care (massages to alleviate some back/shoulder/neck issues as well as for general wellness)
* $0.5K entertainment (movies, online game subscription)
* $0.2K general merchandise / electronics / gifts
(my cell phone and its monthly bill are taken care of by someone other than me ... later I might take over ownership of that again)

PRIMARY RESIDENCE - $70K mortgage principal balance (3.625%, 15yr maturity in 2031) with value of around $120K

Potential Rental Income:  $15K+

Expenses: $12.7K
* $6.8K mortgage
* $3.6K condo fees (water included)
* $1.1K property taxes
* $0.6K homeowners insurance
* $0.6K home maintenance/repairs/improvement

RENTAL PROPERTY # 1 - owned free & clear (mortgage paid off a while back) with value of around $110K

Income: $12K

Expenses: $7.3K
* $2.7K HOA fees
* $2.7K property taxes
* $1.1K homeowners insurance (landlord-style)
* $0.2K city rental permit + online service for automatic debit of rent from tenant's bank account
* $0.6K maintenance/repairs + hurricane shutters on/off (x1)
(if I move back in, add $0.6K to cover the water bill)

RENTAL PROPERTY # 2 - $68K mortgage principal balance (4.25%, 15yr maturity in 2028) with value of around $90K

Income: $9.6K

Expenses: $15.7K
* $8.2K mortgage
* $3.6K condo fees (water included)
* $1.6K property taxes
* $0.9K homeowners insurance (landlord-style)
* $0.1K city rental permit + online service for automatic debit of rent from tenant's bank account
* $1.3K maintenance/repairs
« Last Edit: January 07, 2018, 01:08:36 PM by frugalcoconut »

Laura33

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Re: CASE STUDY: FrugalCoconut
« Reply #1 on: January 06, 2018, 08:13:00 AM »
Sorry, but it is hard to give specific advice with a partial picture.  For example, your ‘stache would throw off about $17k/yr, which leaves a big gap compared to your current expenses.  But you also have equity in several properties, and expenses associated with those properties — what are your plans there?  If you plan to keep the rentals, then it would be helpful to list all of the associated expenses and income as part of this analysis, so we can see the real picture.  OTOH, if you don’t plan to keep them, we need to know the plans for selling them and how much you think you can get from them so we can factor that in.  If you’re not sure, list all the info, because there are a ton of people here who can give you great feedback on whether the rentals are profitable enough to keep.

The other thing to consider is access to cash, since it seems like most of your money is tied up in retirement accounts.  I assume you are looking at a Roth ladder, but that still means you need your first 5 years’ expenses somewhere accessible.  What’s the plan for that?  Sell one or two rentals and live on those proceeds?

Also, you may want to move this to the Case Studies section.
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nessness

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Re: CASE STUDY: FrugalCoconut
« Reply #2 on: January 06, 2018, 07:33:11 PM »
Am I understanding correctly that you're generating negative cash flow from rental #2? If so, it probably makes sense to sell it right away.

TomTX

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Re: CASE STUDY: FrugalCoconut
« Reply #3 on: January 06, 2018, 07:38:52 PM »
If Rental #2 doesn't cash flow, you need to fix that. Unless the rent is way below market and you can raise it to get cash flow - sell it.

If that happens, what's your net income from Rental #1?
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frugalcoconut

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Re: CASE STUDY: FrugalCoconut
« Reply #4 on: January 07, 2018, 09:16:30 AM »
Not sure how to move the post to the case studies topic without deleting my content here and then re-posting a duplicate in the other folder.  I reported my own post to the moderators and asked them to move it so hopefully they can do that.

I updated my original post with annual income/expenses for both rental properties.

Rental # 2 was my very first home purchase which conveniently was at the height of the bubble, and although I definitely learned from it ... it was a huge financial blunder that's been dragging me down ever since.  I know there are some tax savings due to the loss and I'm not sure how to add that into the equation ... but overall it's a money pit.  I've wanted to avoid vacancy & turnover though because it takes a lot of time & effort on my part (since I handle it all solo) and therefore I've enjoyed the stability of having the same great tenant for 5+ years now.  Market rent ceiling is probably $12K if I sink more money into upgrades ... but overall I don't think it makes sense to pay off the mortgage just to end up with so-so cash flow later on.  It's just now getting to the point where the property is not underwater and I wouldn't have to bring money to the table at closing if I sell it.  I don't think the property is worth keeping.

I could gradually increase the rent on Rental # 1.  Rental restrictions in the community made it extremely difficult to get a tenant in there in the first place ... and now they have disallowed rentals entirely so if my tenant leaves then I would move back in there (which I'm okay with as stated above -- it's just costly to move yet again) and convert my primary residence into a rental (which should easily get over $15K annual gross rental income).

Beriberi

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Re: CASE STUDY: FrugalCoconut
« Reply #5 on: January 07, 2018, 11:32:08 AM »
It's time to read a wikipedia article on the Sunken Cost Fallacy.  The history of the home is pretty irrelevant.  The money is gone. 

Imagine I wrote a case study and said, "I also have a Purple Thingamabob."  When I get into the details, it turns out the Thingamabob generates $96 per year, but $154 in direct costs. I also have to do $13/year of repairs, but that varies.  And then I tell you that the Thingamabob causes me significant paperwork and logistical headaches.  It brings me no joy. 

Should I sell the Thingamabob?  I can get about $10-20 for it. It might cost me a lot to sell the Thingamabob, which means I get $0 for it.  Is that a good idea?

You are dumping $6100 into the rental every year - more than 20% of your gross income.  This is not a good idea.

SlowMustachian

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Re: CASE STUDY: FrugalCoconut
« Reply #6 on: January 07, 2018, 11:36:37 AM »
29k seems low for income. Can you check out the mmm posts for jobs that make over 50k without a degree or side hustle nation for ways to increase your income the next few years?

frugalcoconut

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Re: CASE STUDY: FrugalCoconut
« Reply #7 on: January 07, 2018, 12:08:12 PM »
I updated the original post to reflect the full set of numbers for job-related income ... the $29K was net from a gross of over $60K ... although I just changed it to $23.5K to factor in the Roth IRA contribution as well (since that wouldn't be relevant if I was no longer earning a W2 paycheck).
« Last Edit: January 07, 2018, 01:11:02 PM by frugalcoconut »

Laura33

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Re: CASE STUDY: FrugalCoconut
« Reply #8 on: January 07, 2018, 02:25:32 PM »
Thanks for the additional info, very helpful.  So really, you have $82k in income, and about $51k in expenses (some of which are deductible business expenses) - do you see how that is a completely different financial picture from $29k income and $28k expenses?

Immediate recommendation: switch that Roth to a traditional IRA.  The reason to do a Roth is when you think your future taxes will be higher than your current taxes.  You currently have @$60k income (not counting rentals) and will be living on less than half that when you FIRE, so a Roth makes no sense at all.  That and the HSA will knock your taxable income down to @$39k (again without considering rentals), which will knock that tax bill down significantly.

Second:  ITA, you should ditch the first house immediately.  Even if you walk away with nothing, you are still up $6k/yr.  Every year from here on out.  Or to look at it another way: that $6k you are covering every year is $150k more you need in your ‘stache before you can RE, just for the privilege of hanging onto an asset that is bringing you no joy or utility whatsoever.

Third:  I strongly recommend you hire a CPA this year to make sure you are managing the taxes appropriately for your rental properties, meaning taking all of the deductions that are available to you and helping to figure out how the new tax law will affect your situation.  You have a lot of balls in the air, and I am not remotely competent to run you through the financial implications of all of them.

More generally, ditching the bad rental is going to help quite a bit, because now you can use that $5k/yr profit from the good rental towards your post-FIRE income needs.  Assuming your RE budget is around $30k/yr (because you will need to pay health insurance premiums, which are not in your current $28k figure), that leaves you a delta of $25k/yr to cover.  Per the 4% rule, that suggests a ‘stache of about $625k.

The other option to consider is selling both the bad rental and your current home and moving back into the good rental.  Your housing costs for your current place are over half of your expenses ($15k between mortgage, condo fees, maintenance, insurance, taxes, and electric).  Looks like you can cut that by $8-9k by moving back into the old place, where you have no mortgage (and which I assume is smaller and so likely cheaper to insure/provide power to). 

Obviously, do the math yourself here on decreased expenses vs loss of rental income, and this is also something to talk over with your CPA — the best way to really feel like you know what you need to do is to run the math yourself with different scenarios and see which leaves you better-off in the end.  Also consider refinancing whatever property(ies) you decide to keep to a 30-year — your multiple 15-yr mortgages are causing a cash-flow squeeze and artificially inflating what you need to FIRE.  I could understand pushing the 15-yr if that’s going to allow you to pay off the mortgage by the time you FIRE (that’s what we did), but you are going to be carrying these for years post-FIRE.  And worse, it jacks up your budget in your early FIRE years, when you will be covering 100% of your needs from your ‘stache, and before you get any help from SS!  So you will have double-luxury in your 60s and on (no mortgage +SS), but will either be super-tight from 40-62, or will have to work extra years to meet that initial income need.  Plus rates are still near historic lows, so you can still get a very good 30-yr rate (and the interest is a total least deductible if you itemize).

Finally, you may benefit from the “bucket” approach that I picked up here: divide your post-RE years into different periods based on anticipated changes in your income/expenses.  So for ex from 40-52, your expenses would include your mortgage; from 52-62 (or 67, or 70, or whatever) it is your expenses without mortgage; then at whatever time you plan to claim SS, you would add that into your income stream (meaning that there is less your own ‘stache needs to cover); etc.  You start with the furthest-out period and multiply the annual amount you need to meet your income gap by the number of years in that period, then you present-value that back to total - that tells you how much of you’re current ‘stache you need to cover that last period of your life.  Then you do the same with the next period, and the next, present — that will then tell you how much of a gap you really need to fill.  FWIW, I found this approach gave me a pretty significantly lower figure than the 4% rule (which doesn’t really account well for things like “I will get SS, but not for another 25 years”).
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tralfamadorian

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Re: CASE STUDY: FrugalCoconut
« Reply #9 on: January 07, 2018, 03:47:35 PM »
Both the rentals are vampires due to the HOA fees and the property taxes on #1. Sell them both.

Finances_With_Purpose

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Re: CASE STUDY: FrugalCoconut
« Reply #10 on: January 09, 2018, 10:50:13 AM »
Agree with @Laura33 as usual. That's comprehensive.  Definitely agree re a CPA - they're more valuable than they cost if you find even a half decent one, especially with your situation.

Also agree re sunk cost fallacy comments - it's hard-wired into us humans, and it causes us to make poor financial decisions. That's why financial advice is invaluable, even if you manage things well.

On a positive note, you're doing well and have some clear routes forward.