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Greetings from Texas! Your thoughts on our plan welcomed!
Old 03-05-2018, 12:08 PM   #1
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Greetings from Texas! Your thoughts on our plan welcomed!

Hi Folks,

Been an avid reader here and bogleheads for some time now. I am 44 and wife is 46 with 12 and 14 year old kids. I currently work for megacorp and wife is a SAHM. Desire to retire in 8.5 years once both children are through college.

His salary - 250K-350K depending on commissions
Side Hustle - $18,600 property management fees (see below)
House - 450K (68K @ 4.375 remaining - will be paid off in 3 years)
His 401K - 603K with 80/20 AA
His IRA - 148K with 80/20 AA
Her IRA - 120K with 80/20 AA
Taxable - 195K 100% large cap
Cash - 30K
529Bs - 109K
Misc Real Estate Partnerships - $75K

Currently saving around 30K/yr in 401K including match. Save an additional $6K/yr in taxable, $8200 to 529Bs annually and saving all property management fees ($18,600) in savings acct.

His 'tiny' pension - cash balance plan expect ~$300/mo at 59.5

3M Real Estate Portfolio (owned 50/50 with my brother)
21 rentals (~$1K/mo rent each)
Self-managed (me) - I draw $1,550/mo property management fee
3 loans for rental real estate:
408K @ 5.25 for 5 years (20 yr amor)
335K @ 5.25 for 5 years (20 yr amor)
112K @ 5.73 (3 year pay off)

I plan to pay off all real estate debt within 8.5 years using rental profits. The only profit taken is payment to me for property management.

Goal is to retire @ 53 with ~3M equities (atleast 500K taxable), a paid off rental portfolio which allows me (and my brother) to collect 5K/month and use taxable savings until able to tap 401K/SS.

Our expenses are difficult to gauge with children right now but I would guess around 150K/yr. My ideal target in retirement would be the same - 150K/yr inclusive of SS.

Feel free to shoot holes in my plan! I only get smarter reading your valuable comments!
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Old 03-05-2018, 12:36 PM   #2
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Originally Posted by texasguy View Post
10 and 12 year old kids.

Desire to retire in 8.5 years once both children are through college.
Your youngest will be through college at age 18? That's impressive.
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Old 03-05-2018, 12:38 PM   #3
Confused about dryer sheets
 
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thanks just realized I incorrectly stated children's ages!
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Old 03-05-2018, 12:51 PM   #4
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Originally Posted by texasguy View Post
... $1,550/mo property management fee ...
Are you paying self-employment tax on that? If so, you should probably talk to your CPA. I had a similar arrangement with a partner in some commercial property a number of years ago and our CPA figured out a way to take the money without it being it self-employment income for me. Sorry I don't remember details but it was a worthwhile saving.
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Old 03-05-2018, 12:53 PM   #5
Confused about dryer sheets
 
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thanks will check with my CPA on that.
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Old 03-05-2018, 01:04 PM   #6
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Looks like your rentals are worth approximately $143k each, but they only generate $1k a month in rent. With high property taxes in Texas, I wonder if you are generating much cash flow on these properties. With fairly low rents, my guess you would be in B or C neighborhoods. I'm curious what your anticipated income and expenses look like when these properties are paid off. Texas has a long history of wide swings in property values and rents tied to energy, so where these properties are makes a difference.

You have five years remaining on what appear to be two cross-collateralized notes at 5.25 percent. These loans are due three three and a half years before the planned payoff. What is your plan for the last 3.5 years? What if values drop and the lender chooses not to extend your financing?

Finally, how have you calculated getting from where you are today to $3M in equities in 8.5 years? How much in contributions to which accounts and what rate of return? Anemic returns could derail you if you count on recent performance.
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Old 03-05-2018, 01:39 PM   #7
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excellent observations - thank you! Almost all of my properties are class C properties purchased between 2-7 years ago. Most were purchased for between 30-40K with the highest @109K. The monthly rents are equal to close to 2% of purchase price. The location of most of my properties are in an area undergoing significant gentrification and rising property values.

I pay about 10K/per month on the loans today, with a majority going to pay off the 3 year note. The other two notes are about 2 years in each. I assume I will just refinance at the end of the term and convert one to a 3 year and the other a 5 year (20 yr amor) You are right that the lender is a risk but I believe the increasing property values substantiate the risk.

I assumed a 6% return and $67,800 annual savings to 401K and taxable accounts for next 8.5 years. Additional savings of $33,600/yr starting in 3 years once mortgage and final car paid off. Also assumed sales of 75K-100K in commercial properties and investments during that time.
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Old 03-05-2018, 02:11 PM   #8
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I do not cross-collateralize. The lender has every incentive not to refinance you and take your properties when you cross-collateralize and the loan ends before the debt is repaid. Values drop, rents drop, or maybe they just don't want to. You have to scramble quickly not to get foreclosed on. If liquidity is tight, you could lose the properties. Look very carefully at the note as well for conditions.

There is no "final car" until you die or lose your license. You will likely buy one or more replacements in the next 8.5 years. I would factor those purchases into my calculations.

You have made a good profit on your portfolio. In your shoes, I would focus on unwinding the cross-collateralized loans. The easy money times appear to be coming to an end. I would not want those loans called as I was entering the home stretch and heading for the finish line.
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Old 03-05-2018, 02:34 PM   #9
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Thank you for the sage advice! Much appreciated and duly noted!
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Old 03-06-2018, 05:50 AM   #10
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Looks overly conservative to me if your income estimates turn out to be right. Netting $5k/month on rentals would provide $60k, leaving only $90k/year needed from investments. With $3M projected, your investments would only be drawing down at a 3% withdrawal rate. Not "exceptionally" conservative, but we still haven't factored in your and your wife's social security or pension income or the property management income (assuming you keep doing that).

As such, you may want to consider accelerating your plans if you don't desire to leave a very large legacy.
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