Three houses, less than zero clues :)

[beachbumwithyarn]

Life Situation: Married, 33 y/o, 2 children, ages 5 and 2.  Background: We never planned on having kids, and we owned a modest townhouse with great salaries.  Being the beach bum that I am, we bought a beach condo at the bottom of the market in 2011.  It was gross so we spent a year fixing it up with sweat equity and it became my dream property.  I’m extremely attached to it but I’m starting to wonder if the responsible thing would be to let it go.  We could still go to the beach, we’d just go like everyone else does- rent a place for a week or two.   We bought it in Aug 2011, then found out I was pregnant in December 2011.  We still planned to stay in our townhouse but a combination of factors led us to buy a single family home (I can go into those factors if it’s important to anyone).  So we are in a wildly different life situation than we were when we purchased the vacation home.  We did not sell our townhouse, and are instead renting it out. 

While I’ve never been irresonsible with money, I also have never really gotten into the weeds before.  Also we haven’t started college funds yet which is actually pretty irresponsible I will admit.  Currently sending my oldest child to kindergarten in a private school- he was born 11 days after the public school cut off but is extremely bright so we are starting him early in the private school and next year he will go public and that will free up ~600 per month.

Gross Salary/Wages: 190K, plus ~20K bonus. (Me- 70K, husband the rest), 21,000 rental income

Individual amounts of each Pre-tax deductions

• 401k-9% husband's income w/ 3% company match-total retirement 265K
• HSA- 2,000/yr
• health insurnace
• Traditional IRA- 2,700 a year through profit sharing.

Other Ordinary Income: None significant

Qualified Dividends & Long Term Capital Gains: I'm not really sure about this

Rental Income, Actual Expenses, and Depreciation:
Rental income: 1750/month
Rental Expeses: Mortgage + HOA + Maintenance: $1360
Income - Expenses= Approx $400/month
Property is worth ~275K, have ~200K left on mortgage

Adjusted Gross Income: I'm not totally sure how to calculate this

Taxes: Yes, I pay them.  Not sure what else to say about this.

Current expenses:

House: Trash   $27.00
House: BGE   $240.00
House: Water   $100.00
House: Internet   $29.99
House: Groceries   $550.00
House: Church   $200.00
House: Home Maintenance   $100.00
House: Homeowner's Insurance   $96.50
House: Cell Phones   $100.00
House: Mortgage   $2,118.42
P&I- 1588
T&I-528

House Total $3561 :

Car: EZPass   $55.00
Car: Car Insurance   $159.66
Car: Auto Maintenance   $30.00
Car: Gas   $200.00

Car Total: $445

Kids: Child 2 College   $300.00
Kids: Child 1 College   $450.00
Kids: Breakfast with Child 1   $25.00
Kids: After Care   $175.00
Kids: Clothes/Medicine/Misc Expenses   $50.00
Kids: Daycare   $715.00
Kids: School   $457.58

Kids Total: $2,172

Shopping: Saving for Xmas   $30.00
Shopping: Software Subscriptions   $5.00
Shopping: Gifts   $20.00
Shopping: Shopping Catch-All (not kids)   $300.00

Shopping Total: $355 (This is extremely variable, I hardly ever buy extra things. Not the typical female.)
 
Just for Fun: Dining Out   $50.00
Just for Fun: Netflix   $10.00
Just for Fun: DirectTV   $88.08

Fun Total: $148

Rental: Maintenance   $40.00
Rental: HOA Fees   $14.16
Rental: Mortgage   $1,308.43
P&I- 1,031
T&I- 257

Rental Total: $1362.59

Vacation Home: Comcast   $70.00
Vacation Home: Electricity   $40.00
Vacation Home: Water   $102.45
Vacation Home: Entertainment (golf, etc)   $7.00
Vacation Home: Restaurants/Desserts   $30.00
Vacation Home: Gas   $8.00
Vacation Home: Maintenance   $50.00
Vacation Home: Condo Fees   $75.00
Vacation Home: Mortgage   $1,444.26
P&I-1,155
T&I- 289

Vacation Home Total: $1826

Misc: Next Home Project   $30.00
Misc: Computer Replacement   $15.00
Misc: Stuff I Forgot to Budget For   $25.00

Misc Total: $70


Expected ER expenses: Not sure what ER expenses means.  Coming up we are traveling for a wedding, going on a cruise for our 10 year anniversary, doing some work on the backyard which could cost $10k.  We don’t have to do the backyard work, still just thinking about it. Want to put a large chunk of money in 529s.

Assets:
3 properties above
3 cars-
one 2006, worth 3-4K (Acura)
One 2012-worth?? Worth 10K?
One 20?? Bought used. Worth ~6K

Retirement
Roth IRAs- total 47K
Traditional IRA- 40K
401k-185K
Pension plan

Investments
Index Funds- 18K

Cash
Savings- 31K ($1,300 of husband’s paycheck goes directly into savings)
Checking- 2K
Rental account-6K (first year collecting rent)
Savings accounts for the kids with a few hundred each.

No college funds yet!!! Want to start 529s with ~8,000 to start between the two


Liabilities:

Mortgage 1 (Residence) Maturity date Oct 2046
Balance 361,646, 3.25%
Payment   $2,118.42
P&I- 1588
T&I-528

Mortgage 2 (Rental) Maturity date?? Couldn’t find this, estimate 25 years left. We refi’d.
Balance 203,407, 4%
Payment   $1,308
P&I- 1,031
T&I- 257

Mortgage 3 (Beach condo) Maturity Sept 2026
Balance- 110,022, 3.875%
Payment   $1,444.26
P&I-1,155
T&I- 289

Specific Question(s):

My goal: Put more money into retirement and 529 plans, then index funds with any leftover.  While FIRE sounds great, I'm afraid I started too late and have too much money strapped up in properties now to recover. I haven't been putting my money in the right places.

Problem: Our monthly expenses, as laid out in the budget, total 9,941.  At this rate, we cannot save fast enough.  We put 1300 a month directly into savings but sometimes we need to eat into that to pay our monthly expenses.  As you can see, nothing is terribly crazy in our budget.  We could shave some off of groceries, TV, and save an extra few hundred a month I guess, but I think we need more than that.

Question: What would you do? Sell your beach place even though you’re really attached to it?  Would you sell your rental property instead? Would you sell BOTH??  We spend 3K a month between the two of them.   Would you keep yoru rental property and then sell it before capital gains kicks in? I think I have another 2 years before that happens.  (We have only been renting it for a year, and it’s 2 out of the last 5 years).

Thank you in advance.  Please be gentle, I am a beginner, but I do want any and all constructive criticism.  

[jgoody]

Have you considered renting your beach place?  It seems like you have a lot of expenses tied up there, and yet you seem to really love it.  I wonder if there is a way to make it pay for itself when you aren't using it.  AirBNB, VRBO, etc.  That way, it may generate some income for you and preserve the option of current use. 

Probably the best purely financial decision is to just sell it and like you said, "go like everyone else - rent a place for a week or two".  On the other hand, if you are really attached to it and you enjoy seeing the fruits of your labor when you vacation there, that is an intangible that may be hard to recreate by renting someone else's spot for a week or two.  Whereas if you VRBO it a lot, you get to keep your dream spot, but dramatically decrease the drain on your income - ideally it could even generate profits.

The current rental property seems to be generating a profit (if I'm reading things correctly and you are fully accounting for all expenses).  Now it is perhaps not as great a return as an index fund might yield, but it is still a profit.  So while selling it would immediately produce some cash, it would also be a net decrease in your monthly cash flow.

How do you feel about being a landlord/renter/VRBO owner?  If you like it, that seems to be a viable path with your current situation.

[Laura33]

Well, you feel tight on savings because you have locked yourself in to large fixed expenses -- 3 homes, 3 cars, daycare/private school -- which doesn't leave you with a lot of flexibity for everything else.  You are paying @$7K/mo. for just those things -- that's twice what many MMMers pay every month to live on!

It also appears that you have omitted some categories.  E.g., you say you have some vacations/travel planned, but I don't see a budget for that; the rental figures don't seem to account for any longer-term repairs or improvements, nor does the beach condo expenses; what about life insurance or your own co-pays/medicines; etc.

If you want to reach any other financial goals, you need to do something with the beach condo.  Right now, you are paying $22K/yr for the privilege of having it available if you ever decide you want to go visit it.  You can sell it, you can rent it out (short/long-term), whatever; but that $22K/yr bleed rate will cover several beach rentals with thousands to spare for savings. 

The other property, eh, I think you are undercounting the real costs for things like long-term replacement, but it is at least bringing in income, so while it may not be the best use of your @$1400/mo, at least it isn't costing you out of pocket.  The bigger question may be whether that is the best investment for whatever equity you have in that unit (I didn't see that figure there).  If you can sell it within the 5-year period to avoid taxes on your profits, and then divert the profits toward savings/investments, that may be a better path in the long-term.

And why in the world do you have three cars??  The cars themselves aren't outrageous, but if you sell one you'd free up more cash for investing plus reduce your monthly carrying costs.

FYI, the expected ER expenses is what you think your budget will need to be in early retirement, so you can compare whether your current savings is on track to get you there in time.  So for ex the kid expenses would drop off, but you'd keep the house expenses unless you plan to move.  And the tax information is to provide a clear accounting of where your money is going -- if you just give the gross income and your monthly expenses, we can't tell whether the expenses are accurate (and the delta is the taxes you pay) or whether you are failing to account for a significant amount of cash in your expenses. 

I think the bigger-picture issue is to change your thinking about things.  I get the impression you've sort of been throwing money at things that seem like good ideas, and then whatever is left over gets saved/invested.  And that probably worked fine when you were DINKs.  Now that your life has changed from what you expected and you have more expenses + two more little critters depending on you, you need to start from what you need to save to reach your goals, and then arrange your lifestyle around what is left over.  And that also means doing things in order -- e.g., don't worry about college savings before you know you are on track to be able to retire yourselves, because your kids will have other options to pay for college, but you won't have other options to pay for retirement.

[beachbumwithyarn]

Have you considered renting your beach place?  It seems like you have a lot of expenses tied up there, and yet you seem to really love it. 

Thank you so much for your reply. I meant to address this in my original post.  Currently we rent to very close friends on weekends for a half discount and it only makes us 1-2K a year.  I so far have refused to rent to strangers because I have seen my fair share of rental units and have seen how they get destroyed.  I cannot mentally come back to my vacation home and see what a bunch of strangers have done to my countertops, and they've stolen my TV. :)

But this is definitely the avenue I want to go down.  Just 10 minutes ago, in the shower, I had an epiphany (shower is where most epiphanies happen).  My parents, who are retired, have been casually shopping for beach condos just like mine (because they love mine so much). I think it's the price tag that keeps them from buying.  Why don't I convert my condo in a 50/50 timeshare with them?? We've already paid $115K of it, they can pay the other $100k, we can split up the year.  I trust them to take good care of it (and they stay there now a lot).  I haven't actually asked her this yet, but this just might free up a lot of our debt.

[beachbumwithyarn]

It also appears that you have omitted some categories.  E.g., you say you have some vacations/travel planned, but I don't see a budget for that; the rental figures don't seem to account for any longer-term repairs or improvements, nor does the beach condo expenses; what about life insurance or your own co-pays/medicines; etc.

Thanks Laura.  We don't do yearly vacations since we have the condo. This year is an exception because its our 10 year anny.  The cruise is $1500 and it's paid for.  The wedding is 3 hours away and we've decided not to stay overnight so no hotel bill, just the train ticket, food, etc.  I guess I should add a line item for our own co-pays but we hardly ever go to the dr.  Still, we should be putting money aside for it. 

Also the cars are all paid for, just FYI, no car payments there.

I do have money budgeted for rental mainenance and condo maintenance.  We actually covered all of our condo maintenance this year from the income we got by renting our beach condo to friends.

And why in the world do you have three cars??  The cars themselves aren't outrageous, but if you sell one you'd free up more cash for investing plus reduce your monthly carrying costs.

We definitely don't.  The oldest car is one our kids can't even ride in.  I wanted to sell it last year when we bought the house, for 5K and save $50 a month insurance.  But my husband didn't want to. So I kind of dropped it.



 

I think the bigger-picture issue is to change your thinking about things.  I get the impression you've sort of been throwing money at things that seem like good ideas, and then whatever is left over gets saved/invested.  And that probably worked fine when you were DINKs.  Now that your life has changed from what you expected and you have more expenses + two more little critters depending on you, you need to start from what you need to save to reach your goals, and then arrange your lifestyle around what is left over.  And that also means doing things in order -- e.g., don't worry about college savings before you know you are on track to be able to retire yourselves, because your kids will have other options to pay for college, but you won't have other options to pay for retirement.

THIS IS EXACTLY IT.  You've nailed it.  Now that we are getting older and real life is setting in, we need to re-prioritize.  Thanks for the perspective.

[thedayisbrave]

I think the main question here is: do you want to be a landlord?

You ended up becoming an accidental landlord as many people do.  It at least pays for itself (many accidental landlords end up being negative in cash flow after expenses) so at least it has that going for it.  You mention not wanting to rent out your beach house to strangers due to potential damage, etc so it sounds like you might be a little more risk averse than you think. 

How much did you buy the rental townhome for and how much can you sell it for if you listed it today? Make sure to subtract realtor commission etc.  If you don't know the value ask a local realtor to pull comps for you.  They can do this in 2 minutes. 

Based on your response I think moving forward with 2 things would significantly increase your monthly cash flow and reduce your stress: 1) sell 50% of the beach condo to your parents... it sounds like an absolute win-win unless you foresee issues owning property with your parents and 2) sell the townhome, take the proceeds and beef up your accounts (depending on your profits from the sale).

[SwordGuy]

I have a facepunch for you.  It's tradition on this website, to tell the truth bluntly.   Dollars don't have feelings, they just get spent or invested.   If they're spent wastefully then financial options that would otherwise open up simply don't. 

"As you can see, nothing is terribly crazy in our budget."

You must have a different set of glasses than I do. :)

I see 2 adults with 3 cars and 2 houses, one of which they only visit occasionally.

I'm thinking your definition of "not terribly crazy in our budget" may be in need of some serious calibration.

I would go back over your budget and seriously ask yourself if what you spend your money on is really necessary.  REALLY necessary.  Not customary for your family or those you hang out with.  REALLY necessary. 

Now, about your rental property.   Do I understand that you're only budgeting $40 per month for maintenance?   If I understand that correctly, all I can say is "NO!!!!!!"   That roof is wearing out.  The HVAC is wearing out.  The plumbing is wearing out.  The floors are wearing out.   Every single item in that rental property is wearing out.   You have to set aside money to replace it and you have to start now or be hit with a huge bill when each item finally gets critical.  $40 a month won't cut that.

Now, about the beach house.   MMM did an article on Tiny Details Exaggeration Syndrome.   It's just a building.   It's made out of stuff and it costs money.  It's just stuff.  Stuff wears out.  Rented stuff wears out faster than stuff you take care of.   So what?!!   Just charge rent accordingly and pay to fix it.  It's financially foolish to do otherwise. 

Or, if owning a beach house you barely use is more important than financial independence, that's ok, too.   

[beachbumwithyarn]

I have a facepunch for you.  It's tradition on this website, to tell the truth bluntly.   Dollars don't have feelings, they just get spent or invested.   If they're spent wastefully then financial options that would otherwise open up simply don't. 

Facepunches welcomed, that's why I came here. To be fair though, I already know my mortgages are a problem.  What I meant by "not crazy" is we don't fly to vegas every month and gamble, we don't spend hundreds on tobacco, or $100 a month on haircuts.  I don't spend my money on crazy things except for this beach place :)

We are setting aside more money than $40 a month, I don't know why I put that in there.  We have over 6K in a fund just for rental expenses.  Once it gets to 10k we are going to start investing it, unless you have other suggestions.  This year (first year of renting), we spent around $900 on maintenance, including a new washing machine, toilet fixes, a dryer fix, and furnace filters.  The house is 10 years old and we maintained it very well so it should hold up well, but I know things will always happen.

I also see where you're coming from that my beach condo is just 4 walls and stuff, but I respectfully disagree.  It doesn't feel that way to me.  It's a place where my family goes to enjoy time together, make memories, have our vacation.  Your goal is financial independence but part of my goal is to enjoy my life in what we like to do as a family in the now.  Would I buy it in my current life situation? Hell no.  Do I want to sell it? Hell no.

[beachbumwithyarn]

I pitched the idea to my parents of buying the rest of the condo out and becoming 50% owner.  They are seriously considering it and checking their finances. That would reduce our condo expenses from $1705 a month to $260 a month.

Still lots to figure out about that process.

[Laura33]

We are setting aside more money than $40 a month, I don't know why I put that in there.  We have over 6K in a fund just for rental expenses.  Once it gets to 10k we are going to start investing it, unless you have other suggestions.  This year (first year of renting), we spent around $900 on maintenance, including a new washing machine, toilet fixes, a dryer fix, and furnace filters. 

Be careful you don't end up double-counting your income here -- you did list the $6K rental fund as an asset, but what we are talking about is the monthly $40 maintenance line.  If in fact you are putting aside the whole @$1750 rent check into a maintenance fund, then that's great -- but then the "rental maintenance" line needs to say $1750 instead of $40, and the monthly budget still needs to balance at the end.  If you are balancing the budget based on $40/mo. maintenance, then you are really spending $1700+ of the rental income on other things and not setting it aside for maintenance (even if you are physically putting the checks in a "rental" account).

[beachbumwithyarn]

Yes, I get what you're saying.  The rental checks go into a rental account, the rental expenses are paid from that account.  It's kept separate from our regular finances (at least this first year) but I tried to combine them for the sake of an overall budget, it's not going to add up. 

Anyways, I think I know what direction I need to go in now.  Thanks to you all.