Case Study: Young Expat Abroad - Update 1 Year Later

[Alex31]

Hi All,

Thought it would be good idea to update my case given it's been a full year.

Monthly savings: ~$7,000  --> ~$8,000 (Combination of increase salary and reduction in expenses, ~80% savings rate now)

Net Worth: $246,500  -->  $385,000 

I still haven't quite figured out the ideal balance between the RE portfolio and stocks. Right now, I am putting the majority of my savings every month into the SP 500. The RE portfolio continues to tick along with additional cashflow making extra principal payments.

Also, given the advice, I've adjusted my long term plan and now aim to work an additional 24 months abroad. At that point, I expect to have around $750,000+ net worth, with at least $300,000 in equities.

Thoughts on the updated plan? Should I look to pay down one of the properties for the CF?

Most of the other details are given in the earlier post. Thanks.

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Life Situation: I’m a 30-year-old American who has lived/worked abroad for the last five years. I mainly work in very low cost of living countries, which allows me to save a considerable amount of my income at this point in my life.

My current working contract expires at the end of 2018 and I’m wondering if I could potentially FIRE then (in 21 months)?

Taxes: For purposes of taxes, I am exempt on foreign earned income to a certain limit. Tax filing status: Single, no dependents.

Net Salary/Wages: $9,500 a month (note that I have no 401K, HAS, IRA, etc.)

Current monthly expenses:

Rent: $1,300 (this is my big weakness, I could easily get accommodation as low as $500, but the place I stay at provides many luxuries including; free cleaning, pool, gym, laundry, etc.)
Food/Drinks: $600
Travel $300
Electricity: $60
Insurance/Health Care: $50
Transport: $50
Misc: $50

Total: $2,410

Net Monthly Savings: $7,090 (~75% saving rate)


Assets:

Cash: $8,000

Individual Stock Brokerages: $96,000

Previously, I had been investing most of my money in the California property market. In my mind, I see it as a sort of hedge to my work, as all my income abroad is in emerging markets.

Also, I potentially would like to move back to California once my current contract ends.


Property 1: $110,000 Value / $70,000 debt - $40,000
Property 2: $145,000 Value / $80,000 debt - $65,000
Property 3: $310,000 Value / $260,000 debt - $50,000

Combined, all the properties operate at slightly above cash flow breakeven after taking into account PITI, maintenance, taxes, etc.  (Net CF about $5,000 a year).

I use all the extra Cash Flow to pay down the mortgages.

All of the mortgages are at around 4.5% and due in roughly 25 years.

Total Combined Property Assets: $155,000


Debt:

Student Loan: $2,500 (at 2.1% Per year). This is the only debt I have and I’m not any rush to pay it down, given the rate.


Total Net Worth: $246,500


Big Question:

Is it possible to reach FIRE in 21 months?

I know eventually I would like to have a family/kids later in life, which would of course complicate things a bit. 

Thanks.

[SwordGuy]

How much are you intending to spend once you retire?

(And unless it's "very, very little", then I don't see how you'll make it work.)

[Feivel2000]

Look at it from the other side: Let's assume you could manage saving 8000$/month.

This would give you
8000 * 21 = 168 000
+ Cash 8000
+ Stocks 96 000
= 272 000

With an 4% SWR and your cashflow from the properties you would have an annual "income" of 0,04*272000+5000=15 880$

My guess is that that's enough to retire comfortably.

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[Freedomin5]

I'm in a very similar situation (working abroad in developing country), earning around the same net pay, and have gone through a similar thought process. As a previous poster mentioned, it really depends on your projected spending. Once you have a projected budget, then figure out whether your property plus investments will generate enough annually for you to meet your expenses, using net income from your rental properties plus 4% withdrawal rate on your investments.

[Alex31]

Thanks for the comments,

I project to be spending somewhere around $24K a year for the next few years.

This number could go down to as low as as $15K a year, it all depends on if I decide to do a few of the low cost things I'm interested in doing (like backpacking South America, hiking the PCT, etc).

Assuming 24K a year, it looks like I'm coming up short on a mathematically FIRE situation at end of my contract.

Freedomin5 - I'm curious how you are handling your own situation. For me, I really don't think I want to commit to another two years abroad, especially when in my head I'd be so close to FIRE...  But at this same time, its tough to pass up a 75% savings rate situation.

*Note that like most people on the board, I don't except to earn ZERO income for the rest of my life, I just want the freedom the FIRE brings.  With my background, I think I can easily pick up consulting work anywhere in the world.

[potm]

I don't think you will have enough to not ever work again but definitely enough to go on a long break from working if that is your wish.

Would you mind sharing what industry you are in? I would love to have a high paying job in a cheap cost of living area.

[Freedomin5]

Yup, we keep extending our contracts every two years because the pay is so good and the cost of living is so low. It's really easy to get into a OMY mentality. We are in Year 5 living abroad with a savings rate between 75% and 85%. As you're experiencing right now, it's easy to save 75% without trying too hard on an expat salary, so we try to capitalize on that as much as possible.

We are likely in our last two year stretch. We project needing $24k per year. Since we have an almost-paid-off rental generating $1000 per month net income, we need another $1000 per month, which means we need an investment nest egg of $300k. Having this hard nest egg number gives us a target to shoot for. Basically, we know we need to put at least $75k per year over the next two years in our investment account in order to FIRE at the end of two years. In all likelihood, we will save a bit more than that so we have a bit of a cushion.

Currently, our rental income goes into paying off the rental unit, so that by the time we FIRE in two years, we can depend on the rental income to help cover living expenses.

Very likely, we will continue to pick up interesting contracts even after our "technical FIRE date". The goal of FIRE for us is not to completely quit working cold turkey,but to have the freedom to pick and choose what we want to do - to pick non-paying work if we believe in the cause without worrying about covering living expenses, but also to pick paying contracts if the work interests us. Or to simply not pick up any contracts if we don't want to. It sounds like you have something similar in mind.

[Laura33]

So I think the issue here is that you started down one path (real estate), then switched to another (investments).  So now you have equity locked up in three homes from pre-paying the mortgages, which gets you closer to owning those properties free and clear (= huge influx of cash), but which is not putting cash in your pocket now, or 21 months from now.

You have the numbers on how much you can put away between now and the end of your contract, on the monthly mortgage costs, and on how much you need in 21 mos.  What would happen if you paid off one or more of the mortgages -- what kind of cash flow would that generate?  OTOH, what would happen if you refinanced or sold one or more of the homes and invested the difference -- what would that do to your 4% calculation? (My quick math says selling is not enough -- @$400K x 4% is more like $16K/yr -- but do the math on all your options)

I will say that your current savings rate is awesome and will clearly get you where you want to be within just a few more years, so that's not too bad of a downside, right?  But do also consider:  if you are planning to return to CA, will that $24K be sufficient for a permanent lifestyle there?  Or are you ok with getting a job again or finding some other way to make money if you return?

[Simpli-Fi]

One Expat to another,

You have half a million in debt and less than 100k invested.

While RE might be what you want now, I don't think FI is within 2 years reach, just my opinion.  Others have already asked the right questions for you to think about.

[Alex31]

Thanks for the comments;

Potm - I work in finance, advising on transactions in emerging markets

Freedomin5 - Looks like we have near identical situations, I really like your idea of setting a hard number in the investment account. I think I am going to shoot for $300K as well. 

Laura33 -  To get more into the property details;

Property 1: $110,000 Value / $70,000 debt - $40,000

$725 a month in Rent and the PITI++ is $500 per month, lets say $225 a month Free CF
 
Property 2: $145,000 Value / $80,000 debt - $65,000

$750 a month in Rent and the PITI++, $650, lets say around $100 a month Free CF

Property 3: $310,000 Value / $260,000 debt - $50,000

$2,000 a month Rent and the PITI++ $1825, lets say $175 a month Free CF

*++ general estimation for repairs, vacancy, etc.

Property 2 is most likely to appreciate given its location.  I am thinking about selling it in 21 months at which at the time I should easily be able to pay off the debt in Property 1 as well as add $10-$20K to my investment account.

This would get my monthly Free CF to $900 a month from properties.

If I get the $900 a month FCF from property and get my investment account to $300K then I should be close to FIRE.

That would produce $12K ($300k @4% withdraw) from Investments and $10.8K ($900*12) from Property Rent giving me $22.8K a year. Which is right around my target goal.

Does that sound feasible?

Thanks. 

[Villanelle]

Where in CA are you going to retire on $24k?  I'm sure it's doable, especially in the lower cost areas (aka Bakersfield as opposed to OC or SF, and based on your investment property values, it does seem like it's a cheap area, assuming that's also where you will live). Just make sure that'a a realistic budget for your needs, especially since it sounds like you would still be paying rent or another mortgage.  So I think the first step would be to make sure your $24k budget is realistic.  Did you reach that number based on actual researched estimated living expenses for the area, or did you back in to it based on what you can afford, without knowing what it will really buy you?

I tend toward the cautious, but since your savings rate is so very high, it wouldn't take much longer to build that stache up a bit more.  Especially because you mention a possible spouse and kids in the future.  Part of many people's plans is to be able to cut back expenses during years the market is down, but it sounds like you'd already be living pretty bare bones, so you wouldn't have that safety net.  You'd already be at a slightly higher than 4% WR to make up that $1800 shortfall.  As much as OMY is treated like the devil, with such an astronomically high savings rate and an otherwise very aggressive plan, it seems like it would be worth it (to me).

However, if yours is an industry where side hustles, part time consulting, and/or eventual reentry in to the workforce after a sustained absence are all very feasible, maybe it's worth the risk to you. 

[AMandM]

That would produce $12K ($300k @4% withdraw) from Investments and $10.8K ($900*12) from Property Rent giving me $22.8K a year. Which is right around my target goal.

Does that sound feasible?

Thanks.

Don't forget that if you intend to spend $24k you need income of $(24k + taxes).

[Alex31]

See original post with updates one year later.

[SwordGuy]

If you have to pay off the mortgage to get the property to cash flow, it's not a good rental.

It may or may not be a good speculation on property value appreciation, but it's a lousy rental.

I would look for rentals that cash flow.  The USA is a big country and lots of places are good places to find a rental property.

[Freedomin5]

$750k+ net worth seems like a reasonable number for FIRE. As noted last year, our situations are practically identical, and it’s still practically identical. I think it makes sense to go for another 24 months.

As long as your rentals + taxable account are generating enough to cover monthly expenses + taxes, you should be fine. Make sure before you FIRE that you have two to three years of expenses (so around $75-80k for you) in cash or some other very safe and relatively liquid investment vehicle. The last thing you want is to have to withdraw 4% from your portfolio when it’s in free fall.

Actually, I recently read somewhere on the forums that if your “planned retirement” is longer than 30 years, then you should use a 3.5% SWR.

We plan to do 50/50 RE and index funds, but that’s just because traditionally they are uncorrelated, and we are somewhat risk averse, and I like RE/property investment. I think it’s fun.  We also have real estate in a HCOL city that doesn’t meet the 1% rule — wanted to sell but it’s complicated because we work and live abroad. So right now we are just holding for appreciation and will think about what to do with the RE once we return to our home country. If your rentals are currently covering costs and selling would create a complicated tax situation, you may want to consider just leaving them in a holding pattern until you return to CA and re-establish residency.