Author Topic: At a Crossroads - I need mustachian input  (Read 1823 times)

livelifewithoutfear

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At a Crossroads - I need mustachian input
« on: October 20, 2014, 10:04:50 PM »
I feel i already know the answer depends on what I want now and later but here it goes.

Im 32 male in san jose ca, saved a ton and bought 3 properties in the down market in the bay area. 
Stats:

got a Wife who no longer works (we both wanted her to be home with the kids) , 2 year old, 1 year old and another on the way and I want to retire soon (35ish) as Im stressed, fat, bad anxious habits and totally alone in mustachianism in my group of friends family and coworkers.  I want to improve on my mustachian frugality and am struggling.  our house is 900 square feet 2br 1 bath so we will out grow it with the 3rd kiddo

earn 130k year as medical device sales rep. 6k annually contributions to 401k.  we spend 5k a month on needs but mostly dumb crap we don't need (wife disagrees)

35k in 401k
75k in personal portfolio
20k cash on hand

assets:

7 plex. debt 444k valued at 800k - cash flow 2200/month after expenses -- 25 year loan. bought oct 2012

duplex1 - debt 230 valued at 500k - cash flow 800/month 30 yr loan  bought july 2011

duplex2 - debt 345 valued at 925k - I live in it so the other unit rent is 1750 and my total expenses are $3400 so with the rent we pay about $1650 for PITI (principle, interest, taxes and insurance).  15 year mortgage with 12 years left bought 2009 then re fied

Here is the dilemma, I believe we are at the top of the market in the bay area as it has sky rocketed.  Since duplex 2 is our principle residence we can sell with out taxes and pocket 500K!!!!  crazy right?  with that cashola we can pay off the 7 plex and have the 2200 cash flow go up to 4700! leaving us with a grand total of 5500/month passive income from RE alone but no where to live in the most expensive place in the country.  (WE could move in with parents for 2 years and combine the 5500 a month with another 3000 a month from my check to savings.  2 years of badassisty and 8500 a month would kick ass and then I can go build my own house outright and be retired at 35.  I kinda love this….

OR

Keep it all as it will all pay itself off in time,( duplex 2 would cash flow about 800/month if we moved out) cut expenses, save 3k month total by moving in with parents and then what?  RE is way to pricey to buy and it would cost about 3k month to rent a 3br 2 bath house.


Wants:  1 year abroad in ecuator with family. should cost less than 3k/month.  Cant do this until the 3rd much kin is at least 2 so 3 years from now

Whadda ya think?

side note*  we don't like the city and want to move somewhere in norther cal less expensive but still able to visit friends and family if anyone knows of a wonderful mustachian friendly place to call home that is good to raise kids.  ants:  1 year abroad in ecuator with family. should cost less than 3k/month. 

Thanks,

LiveLife

Druid

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Re: At a Crossroads - I need mustachian input
« Reply #1 on: October 21, 2014, 12:42:53 AM »
@ livelifewithoutfear

I am not any kind of expert, but I also have the feeling that real estate prices are going to adjust downwards in the Bay Area in the short term. I also think that will bring rent prices down as well, so keep that in mind. However my guess is that prices are not going to go down to the 2010/2011 levels when properties were super undervalued. I also think properties will go back up again as population grows over the next decade.

However, I would probably sell the duplex#2 and try to look into whether you can apply the $500,000 tax break in two years if you move into Duplex 1. You could then sell another one in 2 years and not report a capital gain? You are to real estate heavy for my comfort level. I would try to get to a point where you only have the 7 plex. It looks like duplex 1 has 3.5% returns so I would move into that one next and sell it. Maybe raise someones rent and move into once it is vacant? Or they accept the higher rent and the return is more reasonable? Duplex 1's returns are barely over inflation. Duplex 1 may be worth selling despite tax consequences.

It looks like you have about $1,206,000 in equity and with $66000 passive income you end up with about 5.5% returns. I don't know if this is good or not, but if housing prices do drop then your loss of equity will bring your rate of return down. I am hoping you have adjusted for property taxes, maintenance costs, insurance, and if you want to get fancy possible vacancies? If you are one of those people who think the stock market will average 8 percent returns then your real estate holdings are not as profitable as holding your wealth in stocks. However it appears that the 7 plex has close to a 7.5% return which is great(assuming you accounted for all expenses)!

I know in my area, Marin, rent prices have been increasing due to the opportunity cost lost of not selling while prices are high. If rent prices decrease in your area you might start to get vacancies, resulting in lower rent prices, and this will bring your rate of return even lower.

On the other hand, this is the same thing as trying to predict the stock market. The economy "appears" to be getting stronger and this means the Silicon Valley and Bay Area might have more people locate hear for jobs and this may increase rents and increase the price of your properties. My recommendation as a layman is to sell at least one of your properties and diversify your portfolio a little more into stocks. I would probably put the $560,000(rough estimate after capital gain tax of amount over $500,000) from selling the duplex directly in index funds if you have low interest mortgages. I believe paying off low interest debt is not always the most financially savvy way to do things.

I haven't looked into real estate yet in to much detail, but it seems like you can potentially make even more money in areas where properties are cheap relative to their rents(the bay area has expensive properties and high rents). If I had the means to build a real estate empire I would diversify my property in multiple states. After all one major earthquake can take out your whole means of financial independence. I have heard of states where you can buy houses for $150,000 and collect $1,000 rents for example(someone on a MMM blog post mentioned it).

In summary, me a person with no real estate experience acting on pure intuition, would sell duplex 2 and invest the gain in index funds. I would then move into duplex 1 by somehow evicting one of my tenants(im evil!) and live there two years so I could sell it without having to report the gains(gain would again go to index funds). I would then have a 7 plex and hopefully at least $850,000 in the stock market(assuming I did not pay off 7 plex mortgage). You would have $575,000 less debt, $26,400 yearly income from the 7 plex, $34,000 yearly income from the stock market assuming complete withdrawal of returns of 4%, and a well diversified portfolio. I would then move to Colorado, Oregon, Washington, or some low cost living part of California and live the MMM lifestyle!

Note: If you have no other job right now. You may consider trying to list your job as a property manager. I only have basic tax knowledge but if you are an entrepreneur you might be able to start putting away 25% of your income away tax free:

http://www.forbes.com/sites/ashleaebeling/2013/02/13/how-entrepreneurs-can-get-big-tax-breaks-for-retirement-savings/
« Last Edit: October 21, 2014, 02:02:54 AM by Druid »

NP

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Re: At a Crossroads - I need mustachian input
« Reply #2 on: October 21, 2014, 12:01:20 PM »
we spend 5k a month on needs but mostly dumb crap we don't need (wife disagrees)
If those differences in attitude towards spending aren't very minor, I suggest you think it through and discuss with your wife how the two of you can reconcile your preferences. Otherwise it could seriously jeopardize your mustachian plan in the longer term.

dungoofed

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Re: At a Crossroads - I need mustachian input
« Reply #3 on: October 23, 2014, 08:42:33 AM »
This would have to be the only forum in the world where people take a "dilemma" like this seriously.

Firstly, congratulations on reaching this position.

If you were looking to divest from property you should be looking at selling the one property and buying at least in part some assets that are less or negatively correlated with it - bonds, maybe some PMs. If 500K in bonds scares you, maybe you could make up the balance with stocks and/or REITs.

Personally, I'd be focusing on making efforts to work on "stressed, fat and obnoxious" *before* you retire as it's possible retirement may not turn out to be the silver bullet you were hoping it to be. Have seen a friend go through similar ("if I had a year off I could learn x y and x" and then when he takes a year off from his career he fails to even *start* x y or z) - start down this path before you actually retire.