Author Topic: Should I turn some of my equity into cash flow again?  (Read 746 times)

Bengal

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Should I turn some of my equity into cash flow again?
« on: January 03, 2025, 04:39:06 PM »
Background: net-worth, currently 4 million, was 5 before housing downturn due to rising rates. Age: early 40's. Profession: tech management in HCOLA.

A few years ago I nearly tippled my real estate portfolio by taking equity out to buy more when rates were low. That came at the expense of reduced cash flow. The way you generally make money here in one of the most expensive markets in the world, is through appreciation, not cash flow.

I now only have 50K a year cash flow as a result of the cash out refi's, 68K a year principal pay down though since I have more units. Plus more houses growing equity. That cashflow (not principal paydown since I can't eat it yet) is just 10K a year short of enough to retire early now.

I could have retired with 70K in income if I just left it alone and didn't tap that equity. Here's the thing though. I have a bunch of cash I can deploy into say, JEPQ and get more cash flow and some growth. I could put 277K into JEPQ to make 24K a year off it and bring my income above what I need to retire right now if I wanted to. I could still put a huge chunk of cash into VGT as well and let it grow. BUT...if I put 277K into JEPQ, I will have less in VGT to grow. I'd only have 900K for VGT.

The rentals will keep rents growing, provide tax benefits, and be a hedge against inflation. VGT AND the rentals will provide long term growth. Rents and some JEPQ will provide me some cash flow to retire NOW.

Or I could keep working a bit longer, maybe two more years, but man I keep having OMYS....is 4 million not enough? It will keep growing...most of it is real estate.

Alternatively I could just pay off my super low rate primary residence and not need more cashflow to live, just less expenses which paying it off would eliminate. But with taxes and insurance being 50% of my mortgage, it just doesn't seem prudent to put 340K into paying it off. Though I do like the idea of less risk and lower expenses...


Current investments:
400K VGT and big tech stocks.
1.2 mil cash (350K of that is emergency fund for retirement, which needs to be larger than the fund you have when working).
Owe 340ish on my primary residence
No student loan debt (I paid mine back).

If I want 24K in income from JEPQ, I'd have to put roughly 277K into it. That leaves me with just about 900K to invest into VGT and tech stocks.

Think of it this way. I sacrificed some real estate cash flow by using equity in real estate to buy more properties, at the expense of some cash flow short term (will build back up over time as rents rise). That set me up even better for long term wealth and tax advantages, but at the expense of short term cash flow that keeps me from retiring early. BUT...I have a lot of cash at hand I could either use to pay off my house so I could retire on my existing rental cash flow, or I could use some of the cash to buy a dividend fund to supplement my rental income and retire now. Or I could just let it ride in VGT and tap some funds as needed to pay expenses that rents don't currently cover. I'm trying to optimize for risk, growth and some income NOW. While I am trying to coast 2 more years for more buffer, I would also like to retire now if I can.


« Last Edit: January 03, 2025, 04:45:03 PM by Bengal »

Loren Ver

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Re: Should I turn some of my equity into cash flow again?
« Reply #1 on: January 04, 2025, 08:04:55 PM »
This is a bit tangly, but I'll do my best.... I'm not really sure what any of your actual goals are, so giving advice is rough.

BUT...I have a lot of cash at hand I could either use to pay off my house so I could retire on my existing rental cash flow

I'm not sure what paying off your current house has to do with retiring?  Have your linked these two for a specific reason?  I happily retired with both a mortgage on my primary residence and student loans to my name - leverage is a wonderful thing.  Having capital to invest is also a wonderful thing.  Having large amounts of cash sitting, is generally not a wonderful thing unless you are scared of something or dislike your money growing. 

or I could use some of the cash to buy a dividend fund to supplement my rental income and retire now.

Some people like dividend funds- I am not one of them but I think there are some people that like them.  Actually, I've removed them from my portfolio as they force taxes on me that I dislike.  You might be building a dividend portfolio so your mileage may vary.  But consider tax strategy when you are talking about BIG MONEY. 

Or I could just let it ride in VGT and tap some funds as needed to pay expenses that rents don't currently cover. I'm trying to optimize for risk, growth and some income NOW. While I am trying to coast 2 more years for more buffer, I would also like to retire now if I can.

Risk, growth, income NOW, coasting 2 more years, and retiring now are not all obtainable at the same time.  You need to pick something and shoot for it.

If you want to retire NOW, then the goal is income.
If you want to coast 2 more years then you want growth.
If you are a fearful person, then risk and you go with timing overall and build a buffer. 
Unless you job doesn't actually pay for your costs and you are using your rent and/or portfolio for living expenses.  Then the advice changes.  But the details are limited, so this is what I have to offer.

Generally I'm a fan of stocks not real estate for retirement as it is little work for big rewards and it is easy to tap into the appreciation for money.  But there are some people here that really like houses as a way to make money. 

Loren

Laura33

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Re: Should I turn some of my equity into cash flow again?
« Reply #2 on: January 10, 2025, 01:44:43 PM »
My concern is about minimizing your downside risk.  You are very highly focused on the tech industry -- your job, your investments (other than the cash), and your real estate (both values and rental rates) are all reliant on the tech sector.  Which mean that a single economic shock to that sector fucks you over three different ways.  The dirty little secret no one really talks about is that the kinds of economic downturns that cause drops in the market also lead to major layoffs, which in turn seriously affect housing values, as people can't afford those home prices without those high-paying jobs.  AMHIK.

That kind of concentration may make sense when you're in the growth phase, because if you happen to pick the booming sector at the start, everywhere you put your money will ride the wave with you.  Even there, I wouldn't recommend having your investments so aligned with your job, though, because if your investments crash, you need your job to help you build them back up, and if you lose the job, you need your investments to carry you.  But if you want to be super-aggressive and put all your eggs into the tech basket, then that will definitely supercharge your returns as long as the tech sector stays hot.

The problem is that there is no sector out there that stays hot forever.  Over a 30-50-yr retirement, the tech sector will crash (it's a "when," not an "if").  You can handle that right now because you have a job.  But once you FIRE, you lose the safety net -- there's no steady paycheck to tide you over until your investments/rentals start to make money again.  If you don't have something else to fall back on, you end up selling those assets at fire-sale prices just to cover expenses, which is the quickest route to derailing all of your plans.  So when you don't have that safety net any more, you simply cannot afford to have all of those assets tied up in a single sector; you need things spread around, so that when one area is dropping, another is still providing you the cash flow you need. 

So, no, I wouldn't advise more RE -- particularly since that's a reasonable investment only if things go really really well (if your profit comes only from appreciation, then even a "meh" market isn't going to meet your needs, and you'll have massive $$ held up in illiquid assets not generating any kind of return at all).  The only way I would advise more RE is if that particular property pencils out immediately -- i.e., that the rental income itself is giving you a reasonable return from day 1.  There are a bunch of people who do very, very well with real estate investing as a path to FIRE -- but they're also very picky about making sure the properties they buy are profitable immediately, not just hoping that values will rise over time.  If you are in an area where that just isn't possible, then you should instead focus on putting your cash in some other investment that is not so closely tied to your industry/location.

What that other asset should be depends on your FIRE timeline and other income sources.  Given the aggressiveness of your stock portfolio, you may want to balance that out with a good chunk in CDs or individual bonds -- enough to cover your income needs for 2-3 years, say, to give you time to ride out any short-term market blips.  Or if you want to be a more active investor, you can research industry sectors that tend to be hot when yours is cold, and cold when yours is hot, to at least give you a chance that part of your portfolio will be in decent shape.  Of course, in a major downturn, everything tends to go down together, which is why I am a big believer in keeping a good-sized chunk in CDs in any event.