34 with too much real estate, how am I doing?

[FiredUp321]

First of all, i’d like to mention that I come from a poor family and have had to pay for things that better off people usually don’t have to, like get people out of jail and pay for parents funerals since they had no money saved and nothing of value to sell.

I just turned 34 and I’m feeling a bit behind on investing. I have three properties, one is my residence the other two are rentals, one of those being multi-family. The value of all three combined is around $760,000 and I owe $264,000 on the loans for them (all under 3%) I have no other debt besides the houses, but cars are all 10 years or older so might need one soon.

I only have 20k invested in roth ira and another 20k in a hysa and 8k in checking account. I net around 100k annually after all expenses and live in a lcol city in Texas. I feel house rich and cash poor sometimes, but my plan is from now forward to max out my wife and I roth ira every year and put some money in taxable account. The rental properties net me about 40% of my annual income and the rest comes from military retirement which is adjusted for inflation every year and is expected to continue indefinitely. It also covers our health insurance for the family and pays for everyone’s college as long as it’s in-state. 

Our expenses are pretty low, about 60k

So how am I doing? Any tips or advice?

[uniwelder]

If I'm understanding correctly, the rentals bring in 40k profit (assuming you're already putting away for roof, appliances, etc) and military pension is 60k.  Total family expenses are 60k, so you can save probably 40k per year. 

I think you're doing really well.  I imagine with rental depreciation, you don't pay any income tax, so Roth IRA sounds like a great place to put extra money.  Keep at it.  In a few years, you'll have more cash invested and won't be so lopsided with the rental equity.

I'm taking a guess you might have 400k equity in the rental houses?  40k profit means a 10% cash return, plus they're building equity, and appreciating in value.  Sounds reasonable to me.  We have a few rental properties and they make up half of our retirement.  I think that's good diversification.

[FiredUp321]

Yes 40k profit and yes about 400k equity. Base expenses are 60k but that’s without another 20k in fun money which includes gifts, vacation, eating out, and entertainment and another 20k or so that i’m investing per year so I’m pretty much using up all 100k. If i no longer invested then I would have an extra 20k/yr and not feel this way, but I don’t really want to raise my lifestyle and not continue to invest.

[waltworks]

You're great, but in a risky position, especially if the RE is all in one town/city. Much like having a bunch of money in a single stock, S can hit TF and you can be in bad shape fast.

As long as you're not putting more money into RE, I'd say keep going and cross your fingers, though. Sounds like you could live off your retirement money (what did you do to end up with military retirement money at 34, btw?) even if the properties cratered or something, so yeah, keep it rolling.

-W

[ChpBstrd]

Seems like you're doing well, and have half your expenses generated from the R.E. mortgaged at extremely attractive rates. Rent increases will over time have a disproportionate impact on cash flows due to your relatively low-rate fixed payment. In particular, you are loaded for bear with regard to the risk of inflation/stagflation, as almost 100% of your income derives from inflation-adjusted or inflation-adjustable sources.

As others noted, it makes sense to max out the Roths and you'll have some left over for traditional IRAs. Expect the cash flows from your properties to increase over time, generating a snowball effect that will eventually max out both your traditional and roths.

Key Risks to Manage:

1) One of your rentals burns down, and you go months/years without rent while waiting for insurance checks and contractors: Study your insurance, consider banning smoking/candles, etc.

2) Lawsuit from tenant: Manage with umbrella policy, LLC, and maybe an existing lawyer relationship.

3) Failure to raise rents to market rates: Conduct a market survey and secret shopper competitors' properties every few months.

4) Failure to maintain/remod properties, leading to falling rental demand and loss of portfolio value: Establish a maintenance plan/budget. Inspect properties on a regular basis to prevent problems from snowballing, and write this inspection obligation into your leases.

5) You're not really at economies-of-scale levels, and today's high RE prices and mortgage rates may have essentially blocked you from expanding your business. Maybe that's fine because you only intend your RE business to be part-time, and have a durable separate source of income. But it is a limitation, and highly-positive cash-flowing property opportunities may not be available again for many years. Similarly, we have to wonder if a good refinancing opportunity will ever appear again, or if in the long run you are heading toward a 100% equity position on these properties.
 
6) You don't mention your age, but eventually you'll get too old to manage these properties. Think about your exit plan. Do not execute your exit plan after you are already behind on a bunch of things - execute it before things ever get that bad. This is a common landlord pitfall.

7) You could face rising delinquencies or vacancies during a severe recession. Set aside plenty of cash outside the LLC so that you can use paid-in-capital to keep up on maintenance and stay liquid during such times.