Author Topic: Lost my job, but scraping FI (get it??) Time to pursue passion & purpose?  (Read 2797 times)

Jeo

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Hello Mustachians! I’ll dive right in...

Life situation
41M, living with my fiancée (36) in the Chicagoland area, no kids yet. Last month my job was eliminated. I wasn’t very happy there towards the end, so despite the not-so-great timing (global pandemic / economic dumpster fire), it feels more like a creative challenge than a terrifying setback so far.

I’m using this surreal, job-free, socially-distant time to recenter and consider possible futures. Even if new job miraculously fell into my lap, the idea of jumping right back into another 9-5 isn’t very appealing to me right now. I’ve been feeling burned out and would like to pursue a passion project I’ve been nudging along for awhile.

Thanks to some real estate investments I’ve made over the last several years, I think I'm in a decent position to take a break from the 9-5 world. I own and manage three multiunit buildings with nine total apartments. I live in one with my fiancée, and the other eight have been 99% occupied since the renovation of the third property in March 2018. I keep diligent records in Mint and just compared all of my life expenses from then until today to my total rental + passive income from interest and cash back from credit cards:

Rental & passive income = $318,260
All expenses = $319,625

Freakishly close! Had I been unemployed these last couple years, I would have essentially broken even in terms of available cash. And since this doesn't include property value appreciation, dividends/earnings in retirement accounts, or a $35k+ gain in equity through mortgage principal reduction, my net worth would have actually gone up a decent amount. This has allowed me to plow nearly all of my job income into retirement, cash savings and paying off 100% of a $95k HELOC balance I used for renovations.

And now, the numbers. My fiancée and I keep our finances separate, so the all the figures below are just for me. (As far it's relevant to evaluate my situation, her net worth is about equal to mine or slightly higher, and her income is well into six figures.)

Assets
  • Real estate: Approximately $1.5m total value for all three buildings. I don’t have current appraisals but consider these to be fairly conservative estimates:
    • Property 1: $550k
    • Property 2: $400k
    • Property 3: $550k
  • Retirement accounts: $256k as of today. Most of it is in ETFs split approximately 90% equities / 10% bonds. $15k is in a 403b from a former employer that earns a lame but guaranteed 3% (dropped from 5% after the Fed rate cuts).
  • $135k in cash. Between tax refunds and severance from my ex-job, this should be $155k-$160k by July. I keep $10k in checking and the rest in a Marcus savings account earning 1.7% interest.
  • TOTAL = approx. $1.9m
Liabilities
30 year mortgages on each property:
  • Property 1: $270k balance on $320k mortgage from 2012 (3.75%)
  • Property 2: $223.6k balance on $240k mortgage from 2016 (4.125%)
  • Property 3: $271.7k balance on $295k mortgage from 2017 (4.625%)
  • TOTAL = $765.3k
Rental Income, Actual Expenses, and Depreciation
All properties are performing similarly, so for the sake of simplicity I’m lumping them together here. All expenses are averages from the last couple years, except for PITI which is the current monthly total. These expenses also cover the apartment we're living in.

Monthly rental income: $12,675
Monthly property expenses:
  • PITI: $6720
  • Repairs and maintenance: $1018
  • CapEx: $1148 (from two major projects—roof replacement for property #3 and basement waterproofing system installation for property #2)
  • Landscaping & snow removal: $159
  • Utilities: $860
  • Vacancy: $90
  • TOTAL: $9,995
Depreciation for 2019 totaled over $56k. This included $15k of unallowed losses from prior years, so it won’t be that high moving forward.

All other income and expenses
Monthly income from interest + average cash back from credit cards: $240
Monthly expense averages from the last couple years:
  • Travel: $512
  • Restaurants: $469 (ouch)
  • Groceries: $154
  • Transportation: $181 (Uber, Lyft, etc…we don’t own a car)
  • Alcohol & bars: $219 (includes going out + making cocktails for friends, which I love and do semi-regularly)
  • Charity & gifts: $206
  • Entertainment: $106
  • Phone service: $97
  • Internet: $65
  • Clothing & shopping: $106
  • Membership to climbing gym: $79
  • Other health & wellness: $60
  • Subscriptions: $51 (Spotify, Netflix, Amazon Prime, etc)
  • Cash spending and misc: $164
  • TOTAL: $2470
Anticipated changes to monthly income & expenses
With no changes to the income and expenses above, I’d get by with $450 left over per month. But there’s obviously a lot of fat for the trimming, particularly in food & booze department, so I plan to do better than that. Not going to work and the accompanying lunches, dinners and happy hours will help quite a bit. Health insurance will be a new expense after my employee coverage ends in June. Seems like the cost will be around $400/mo through healthcare.gov, at least until I can get a better deal through my fiancée’s insurance after we get married (in October, if the COVID situation allows).

One risk to my income is my tenants' employment and ability to pay rent. None of them work in an industry immediately affected by COVID, and nearly all can work from home. So far, no issues…but this could change. If it does, I’m hoping I can work out a deferred payment arrangement with them and get some form of mortgage relief from my lenders.

As for additional income, my fiancée recently purchased a 4-unit building, which we plan to move to a month or two (also COVID-dependent). Once we’re out of our current apartment, I'll get some renovation work done and rent it out. This should bring in an additional $1000 per month, although a portion of this will go towards expenses in the new apartment.

Anticipated one-time expenses in the next year
  • Basement waterproofing system for property #1: $15k
  • Renovation to current apartment after we move out: $15k-20k
  • Garage maintenance for property #2: $5k
  • Wedding: $15-20k
  • Honeymoon: $5k
  • TOTAL: $55-65k
This would still leave me with roughly $100k in checking + savings, even if I added nothing after my last severance check.

All of this leads me to believe I’m in a reasonably safe space to explore and dream a little. For awhile I’ve been tinkering with a business concept at the intersection of my career (design and strategy), my experience in real estate, and my passion for social impact—specifically targeting wealth inequality in my native Chicago. This post is already long enough, so I won’t go into the details, but it’s an idea that inspires me and hasn’t let go of me for the last few years. I want to take a real swing at it and, at the very least, prove that it won’t work so I know to move on. If I feel the need to make some extra money while I’m pursuing this, it should be possible to pick up freelance and teaching gigs through my connections. And if all else fails, I can always go back to full time work.

Specific Question(s)
  • What might I be missing? Do you see any potential blind spots in my thinking or calculations?
  • For those of you who have done something similar (using FI to pursue a project that's meaningful to you), what advice would you offer? What were the biggest surprises and lessons learned along your path, either positive or negative?
Thank you in advance for any insights you have! I already feel deep gratitude for the mindset and approaches to life I’ve learned from this blog and forum.
« Last Edit: April 13, 2020, 03:15:59 PM by Jeo »

GoCubsGo

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Sounds like a pretty great situation especially with you basically doubling your stache once you get married (that's a pretty major piece of the puzzle).  Your monthly spend is pretty admirable (to me) so I wouldn't make huge changes to it if you don't want to.  Minor items:

-I'd use a higher vacancy rate (especially since the economy might look pretty scary the rest of the year)
-Kid's should probably be discussed ASAP based on age.  Kids will add a whole different set of ongoing costs and a big change in lifestyle (cars, potential single family home, school system choices, college, etc)
- Your fiancee's future goals/plans for retirement should be hammered out as well.  If she's willing to work while you flesh out the new business concept it sounds like you'd be fine to go ahead and try it. 

It sounds like once your married you should be shoveling money into investments.  Make a plan for how and when you both want to FIRE and execute it.  You are starting from a great position based on both of your hard work and investing.

Jeo

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-I'd use a higher vacancy rate (especially since the economy might look pretty scary the rest of the year)
-Kid's should probably be discussed ASAP based on age.  Kids will add a whole different set of ongoing costs and a big change in lifestyle (cars, potential single family home, school system choices, college, etc)
- Your fiancee's future goals/plans for retirement should be hammered out as well.  If she's willing to work while you flesh out the new business concept it sounds like you'd be fine to go ahead and try it. 

It sounds like once your married you should be shoveling money into investments.  Make a plan for how and when you both want to FIRE and execute it.  You are starting from a great position based on both of your hard work and investing.

Thanks! Agree that I shouldn't count on my low vacancy rate holding steady through the year. I have enough of a cash cushion to weather that storm if it comes, so I'm not terribly worried at this point.

We would like to have a kid or two, and that would obviously change the math dramatically. We'll probably start trying within several months after getting married, so that would mean kid #1 in late 2021 at the earliest. By that point I plan to either have turned my concept into a real business or have moved on to find another income source.

My fiancée enjoys her job for the most part and plans to continue working for the foreseeable future. We do plan to continue investing our surplus cash and have started discussing our options for doing so. Her building was the big investment this year.

FatFI2025

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Your financials look pretty good, especially your low spending. I'm wondering about business startup costs for your passion project. Wouldn't it be wise to set aside a good chunk and say "once I burn through this it's over?" What type of expenses are you anticipating? How long until you realize revenue? I just started a one person professional services company and burned through $15K before getting the first check from a client and I'd consider that an ideal scenario.

Jeo

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@FatFI2025 - great questions. The business I have in mind will require the acquisition of a "pilot property" to test the concept, so some of the cash I have will go towards that. If the concept doesn't work, I'd still end up owning a cash flowing rental property, unless something goes horribly wrong and I have to sell it. I don't have all the answers yet, but I'm developing a plan that includes expected costs, go/no-go points and exit strategies.

FatFI2025

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@FatFI2025 - great questions. The business I have in mind will require the acquisition of a "pilot property" to test the concept, so some of the cash I have will go towards that. If the concept doesn't work, I'd still end up owning a cash flowing rental property, unless something goes horribly wrong and I have to sell it. I don't have all the answers yet, but I'm developing a plan that includes expected costs, go/no-go points and exit strategies.

I think if you develop this plan in such a way that limits your downside risk -- including protection from tenant lawsuits -- then you should be fine.

It actually seems unreasonable unwise for you to go back to a 9-5 if you're willing to take care of the home and kid(s) while your wife continues to work. Primarily, it will allow you to qualify as a real estate professional for tax purposes, deducting paper losses against your wife's income. It's probably worth doing cost segregation studies if you haven't already, although I'm not sure if/how that works for properties where you've previously taken depreciation. Second, I think maintaining a home with a child is a full time job and having someone partially in-source that is a huge financial benefit. Lastly, you could very well end up making more money. You're not talking about retiring -- you're talking about becoming a full-time entrepreneur and entrepreneurs often out-earn salaried workers.
« Last Edit: April 19, 2020, 09:22:38 AM by FatFI2025 »

Jeo

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@FatFI2025 good points. I hadn't thought about qualifying as a real estate professional — I don't spend nearly enough hours to qualify currently but would once I got the new business off the ground. I'll ask my accountant about cost segregation studies for my current properties as well. Thanks!

BabyShark

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Have you thought about getting legally married earlier to take advantage of your fiancee's health insurance?  You could still have your celebration in October as planned.

Lady Stash

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I'm pretty risk adverse and we may be moving into a recession so I'd run some scenarios assuming rents drop 20% and you have a higher vacancy rate.  If your rents drop and couple tenants move or can't pay, how long does your cash cushion last (after you use some of it for new business and have a few unexpected repairs)?

I would be tempted to sell one of your 3 properties now to give you more of a cash cushion or pay down the other mortgages and hedge against a risk that property prices will drop and take several years to recover. 

My personal preference is to be less leveraged but that's a personal preference because I sleep better at night that way. 

As you say, you can always cut back on lifestyle or look for a job if things get dicey.
 

 

Jeo

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Have you thought about getting legally married earlier to take advantage of your fiancee's health insurance?  You could still have your celebration in October as planned.
Since our marriage plans are very much up in the air at the moment, having the legal ceremony earlier is definitely something we've been discussing.

I'm pretty risk adverse and we may be moving into a recession so I'd run some scenarios assuming rents drop 20% and you have a higher vacancy rate.  If your rents drop and couple tenants move or can't pay, how long does your cash cushion last (after you use some of it for new business and have a few unexpected repairs)?

I would be tempted to sell one of your 3 properties now to give you more of a cash cushion or pay down the other mortgages and hedge against a risk that property prices will drop and take several years to recover. 

My personal preference is to be less leveraged but that's a personal preference because I sleep better at night that way. 

As you say, you can always cut back on lifestyle or look for a job if things get dicey.

Yes — if I had to weather a period of lower rents and higher vacancies, I'd cut back on travel/dining/entertainment/etc and then find at least part time work to prevent savings erosion. If that Plan B doesn't work and I end up in a situation that starts to eat into my savings, I'd have many months of runway to figure out a Plan C, D or E.

Since I don't plan on selling any properties in the next 10+ years, I'm not worried about near-term fluctuations in their value. For me to sell, things would have to get pretty apocalyptic and/or I'd have to find another investment option I'd be confident would deliver better returns with equal or less effort.

I'm very comfortable with how leveraged I am at the moment. As you mentioned, it's definitely a matter of personal preference. I used to be totally allergic to any form of debt, but that changed as I baby-stepped my way into real estate. I've built significantly more wealth using that leverage than it has cost me, and things would have to go pretty far south for that to flip.