I might be a madman. But, here are my 2013 retirement speedrun goals.

[Praxis]

So, I discovered MMM about a year ago and have significantly reshaped my life as a result.  However, I am not the passive sort, and have been since working to develop the absolute fastest method to speedrun the retirement process.

 ("Speedrun" is a term gamers use for recorded timed trials to beat classic video games in the shortest possible time, exploiting any known shortcuts or overlooked bugs in the process no matter how small.)

MMM's recent article about "constant optimization" make me chuckle, because I already do so- to an extreme.

I make about 50k annually at a salaried job.  I currently have a small pile of cash in my 401k due to having left it at employer match for the last few years, a couple rental properties that almost cover my cost of living (which is low- $1k - $1.5k monthly), and a nice pile of savings, as well as access to a lot of money via HELOC.

My goals for this year:



* Increase net worth by 100k.
* Have a taxable income of $0, excluding Roth contributions.
* Roll my 401k in to my (empty) Roth 401k at almost no cost due to the above
* Max out my Roth 401k contributions and open and max out a Roth IRA


So, as I said, I am a madman.  But, I am going to attempt this.  Here is how I intend to accomplish each point:

How will I increase my net worth by double my salary?

I only purchase distressed properties to use as rentals.  After repairs, I've yet to have a house add less than 30k to my net worth, including (based on my math) the one I am currently fixing up and have not yet rented out yet.

Purchasing and fixing up three properties plus saving 50% of my salary will accomplish this, even ignoring rental income.

How will I have a tax bill of zero?

Fixing up a rental property is tax-deductible.  I simply have to spend more money on home repairs in the year than I make via salary (thank you, savings).  I can reuse the same money via HELOC.  If I spend 60k on repairs to those three homes, I can deduct $60k from my taxes.  This gives me the opportunity to roll my 401k to a Roth with minimal (or no?) tax bill.


The last point is actually potentially the hardest.  I'd need to probably go the last five months of the year with no paycheck (funneling it all in to the Roth), relying on my rental income and savings, since I've only done employer match the first five months so far.   Depending on my situation I may not fully max out the Roth 401k, but I'm going to try my best.

Why do I care so much about maxing out the Roth?

While I typically just do buy and hold (leveraged real estate as discussed by MMM), I would love to have the ability to flip a property using a self-directed Roth IRA- tax-free.  I just need to get my Roth IRA big enough.  This is my long-term (i.e. in a year or two) plan.

If your rentals almost cover your cost of living now, aren't you almost retired?

Unfortunately not.  I can't safely retire off of having rental income that matches my cost of living for the following reasons:

* Rental income has risk associated with it; I need to have sufficient margin to cover inevitable repairs.
* My rentals are rent-to-own deals, which reduces risk (better tenants).  However, that means they'll all sell in five years, if all goes well.  Sufficient margin is needed to cover this loss of income.
* I need margin to grow the investment.  Inflation and all that.
* My cost of living will eventually go up; I will not always be a single man in a small apartment.  My girlfriend will be moving back in town later this year.



Thoughts?  Questions? Comments? Mockery?

[1tolivesimply]

Fixing up a rental property is tax-deductible.

You can write off maintenance, property management and other rental expenses and declare a "loss" on your tax return, however, if by "fixing up" property you're talking about remodels or big upgrades, they're not 100% tax deductible, in most cases, you can only deduct part of it (in several years) as depreciation.

In other words, yes, you can reduce your "taxable income" fixing up rental properties, but no, you cannot "simply spend more on repairs than you make" to pay $0 taxes.

[grantmeaname]

Why do I care so much about maxing out the Roth?

While I typically just do buy and hold (leveraged real estate as discussed by MMM), I would love to have the ability to flip a property using a self-directed Roth IRA- tax-free.  I just need to get my Roth IRA big enough.  This is my long-term (i.e. in a year or two) plan.

I am not yet an accountant, and I have never played one on TV, but I'm pretty sure that if you hold real estate in your self-directed IRA you can't do any work on it yourself.

[arebelspy]

Why do I care so much about maxing out the Roth?

While I typically just do buy and hold (leveraged real estate as discussed by MMM), I would love to have the ability to flip a property using a self-directed Roth IRA- tax-free.  I just need to get my Roth IRA big enough.  This is my long-term (i.e. in a year or two) plan.

I am not yet an accountant, and I have never played one on TV, but I'm pretty sure that if you hold real estate in your self-directed IRA you can't do any work on it yourself.

Correct.

So he could flip a property, but would have to hire out all the work (can't even pick up a paintbrush).

Would be very different than what OP is doing now.

[mpbaker22]

Why do I care so much about maxing out the Roth?

While I typically just do buy and hold (leveraged real estate as discussed by MMM), I would love to have the ability to flip a property using a self-directed Roth IRA- tax-free.  I just need to get my Roth IRA big enough.  This is my long-term (i.e. in a year or two) plan.

I am not yet an accountant, and I have never played one on TV, but I'm pretty sure that if you hold real estate in your self-directed IRA you can't do any work on it yourself.

Correct.

So he could flip a property, but would have to hire out all the work (can't even pick up a paintbrush).

Would be very different than what OP is doing now.

This seems silly and looks like government intrusion on the surface.  But I suppose it prevents someone from hiding taxable labor within a roth?  Creates a level playing field for businesses vs. individuals, I suppose.  Perhaps he could pay himself out of the roth at a low rate,  minimum wage?

[arebelspy]

This seems silly and looks like government intrusion on the surface.  But I suppose it prevents someone from hiding taxable labor within a roth?  Creates a level playing field for businesses vs. individuals, I suppose.  Perhaps he could pay himself out of the roth at a low rate,  minimum wage?

It makes sense.  Otherwise you could do tons of work, and have it all be gained tax free.  It prevents that loophole, it just makes RE investing within a Roth tougher (you need to use different methods, like notes, IMO).

[chiizu]

sorry, rental real estate is considered passive by definition.  you can only take passive losses against passive income, so the furthest you'd be able to reduce your taxable income is to the extent of your rental income (or other passive income sources.)  you cannot use your rental losses against your ordinary income (wages.)

[MustachianAccountant]

Rental real estate is indeed considered passive, but you *can* take rental RE losses against ordinary income up to a point. It's an exception in the tax code for "active" rental real estate owners - people "involved" in the day to day of the property (plus some other rules). IIRC, the loss limit is $25k, but I don't feel like looking it up right now.
Also agree with the other poster on what's deductible and what has to be depreciated. Lines are fuzzy, and you can try to be aggressive if you want, but beware the long arm of the IRS.

[MgoSam]

I highly encourage you to talk to a CPA before you file your claim for the rental properties. Would hate for you to get tripped up and get a huge tax bill.

[arebelspy]

Praxis, I'm curious how your plan is going, a month in.

Have you found your next flip? 

Would love to hear details!

[Praxis]

Praxis, I'm curious how your plan is going, a month in.

Have you found your next flip? 

Would love to hear details!

So, as mentioned in this thread, apparently my deductions have to be spread out.  That means the Roth-filling part of my plan doesn't work.  That's alright.  Just means I'm skipping maxing out the Roth for now, at least until I review with my CPA.

So! Update!

Yes, I am finishing up one house this week and just got the contractor in to get started on another!  I am currently also negotiating a short sale with a bank for what will hopefully be the next, too, but short sales can take a month or six months...never know.

The one I am working on right now is probably going to end being mine.  It is a house with an unfinished basement and I am converting it to a duplex.  I figure I'll rent one side out to cover my cost of living.

With the one I did I'm finishing this week plus the duplex (should be finished by August) I should have ~80k net worth gained.  I will get appraisals to verify.  I don't sell the houses (so I don't have to worry about taxes for now), but instead rent them out and refinance them (to get funding for my next 'flip').

I'm going to continue searching for my next deal in case the short sale falls through.

[arebelspy]

Awesome.  Sounds like you're making good progress.

Forced appreciation (sweat equity) is an amazing way to pop one's net worth quickly via not much more than some knowledge and a bit of work.

Thanks for the update.

[Praxis]

I'm actually not doing the work myself- my full time job keeps me too busy!  I was saving around 60% of my income before I started doing this.


I got some mentoring from a local flipper (who also wholesales deals to me occasionally when he finds more than he can work).  I track down and find houses that are way undervalue- people who are underwater and going in to foreclosure, or beat up houses that people got as an inheritance and want to get rid of quickly- and then get a contractor (who I have a working relationship with and works very cheaply because I'm giving him a lot of work) to hop in there and fix it up.  The contractor also is given a lot of leeway to source his materials as cheaply as possible.

These are often big jobs.  But the houses are undervalue and a ton of equity is added from the work.  Take a house with a rotting kitchen and broken cabinets and a creeking animal-urine-stained-floor, and stick a brand new granite countertop kitchen and tile floor in there, and the added value is enormous.  Stuff like that.  In one house I added a bathroom to the large oversize poorly-drywalled room upstairs after cleaning it up.

It's very doable to take a 50k house, do 25k work on it, and have a 100k house out of it deal.


I buy the house cash, pay for the work cash, and then I refinance the house for 75% LTV off of the new appraised value.  If I did my math well, I got all of my money back, and I go buy another house.

This is how I, with a 50k salary, can add 100k+ to my net worth in one year.