Hi, I am...looking for feedback on my FIRE strategy

[SeattleRain]

I just discovered this forum a few days ago and was amazed by the wealth of knowledge and the welcoming community. I hope that I can learn from the experts here and perhaps give back a little in time.

A little about me.

• 52yo, male, married, 2 kids
• Retirement target: 2021
• I am an entrepreneur, investor and Joint-CEO
• Co-founded two businesses; one a consultancy and the other a software company
• Net worth: $4.5M
• Investments: $1.57M (taxable, 401k)
• Primary residence: $1.38M
• Secondary residence (also vacation rental): $750k
• Rental Property (Sydney): $650k
• Cash: $120k
• Debt: $0

Our rental properties allow us to NET around $45k/year, and we use management companies for both properties. Expensive, yes, but we don't have to deal with all of the downsides of tenants. We use our lakefront weekender 1-2 times per month, and it is rented out every weekend we aren't there.

My primary business income fluctuates based on market climate and overall company performance. Right now I can expect to save around $250k/year at a minimum.

The bulk of my net worth is tied up in the two companies, and I plan to exit both in the next 3-5 years. If all goes well, I can expect significantly increase my net worth (perhaps 2x). However, I don't like to base my retirement strategy on future income events when there's a degree of uncertainty around potential buyers, market price etc. I'd rather not be counting chickens, and all that.

Even though I love what I do as a business owner I am looking ahead to the next chapter in my life and I would like to be FIREd in five years. I have run FIRE CALC and I still have a ways to go based on my expenses which are pretty high because of where I live and have property. I also use the forecasting tool in Personal Capital to model different scenarios.

Right now I have about 45% of my assets in real estate, NOT including my primary residence. While both properties do well in terms of rental income, I am concerned that they may not generate the returns I might get elsewhere. Mind you, we have also enjoyed high capital gains as we have bought in high demand areas.

I have always figured that we could liquidate the real estate down the line as needed. Over the next five years I plan to put the earnings into more liquid assets, primarily bonds.

I would love to get people's thoughts on our portfolio mix (equities & real estate). What adjustments would you make (if any) in the coming five years?

Love the forum, and I look forward to hearing your thoughts.

 

[gauss]

Welcome!

The bulk of my net worth is tied up in the two companies

Just to clarify - this statement doesn't seem consistent with the asset chart and Net Worth shown.

Are you suggesting that your net worth is much more than the 4.5M when you include the estimated value of the two businesses?

 

[SeattleRain]

Yes, that is correct - I am not including the value of the businesses in my net worth estimate because there is too much variance in the current valuations. My best guess is that today they would be worth between $2-5M after fees and taxes. Our plan is to grow both companies in the coming 3-5 years to increase their market price. But there's no guarantee that we will find a buyer for both, or either, business. Successfully exiting these businesses is a key aspect to my FIRE aspirations, but I'll save that for another thread.

 

[Ready]

Welcome to the forum.

I think we need a bit more information to give you any meaningful feedback. What is the $1.57M in investments invested in? Equities, bonds? Mutual funds, individual stocks?

You have a high exposure to real estate, but obviously you realize that. I would probably not want that much of my net worth tied up on individual properties, but if they are generating good rental income, and the tax consequences of selling are high, it may be fine to leave them as is.

You say your expenses are high, but without knowing how high we can't give you much feedback on your retirement readiness either. If you want to expand a bit more, you may get more relevant feedback.


Sent from my iPad using Early Retirement Forum

 

[Another Reader]

With no mortgage debt you net $45,000 on 1.4 MM in real estate That's about a 3 percent rate of return. I hope that you have some significant appreciation in the mix to make up for the anemic cash flow.

 

[growing_older]

So about $1.4 million in rental properties nets about $45k per year. These seem like seriously under-performing assets. If you had instead an additional $1.4 million in stock investments, you should earn significantly more per year.

 

[SeattleRain]

Welcome to the forum.

I think we need a bit more information to give you any meaningful feedback. What is the $1.57M in investments invested in? Equities, bonds? Mutual funds, individual stocks?

You have a high exposure to real estate, but obviously you realize that. I would probably not want that much of my net worth tied up on individual properties, but if they are generating good rental income, and the tax consequences of selling are high, it may be fine to leave them as is.

You say your expenses are high, but without knowing how high we can't give you much feedback on your retirement readiness either. If you want to expand a bit more, you may get more relevant feedback.


Sent from my iPad using Early Retirement Forum

I have three different types of investment accounts:

SEPP - $42k
401k - $355k
Taxable - $1,035k

The 401k is mostly mutual funds, and the taxable account is comprised entirely of low fee ETFs.

The overall mix is 65% stocks, 25% bonds, 10% alternatives.

Our overall expenses are around $120k. I am spending some more time to get a very clear picture of expenses using PersonalCapital.com, as I know how important this is for retirement readiness.

 

[SeattleRain]

With no mortgage debt you net $45,000 on 1.4 MM in real estate That's about a 3 percent rate of return. I hope that you have some significant appreciation in the mix to make up for the anemic cash flow.

Our Sydney property has seen an appreciation of just over 500% since we bought it 20 years ago, so I think that helps. But that appreciation is starting to taper off, so I am thinking it might be a good time to convert that into something more liquid.

 

[SeattleRain]

So about $1.4 million in rental properties nets about $45k per year. These seem like seriously under-performing assets. If you had instead an additional $1.4 million in stock investments, you should earn significantly more per year.

I should have been more clear in my original post about the purpose of the real estate.

Our first property (a flat) in Sydney we decided to hold onto and rent out when we relocated to Seattle. It is a five minute walk to one of the most popular beaches in the city. We held onto it as a way to keep our options open in case we wanted to return to Oz some day. In the meantime, it has appreciated greatly in value, and continues to rent out at a decent rate. But I am thinking it is time to sell this and get a better yield.

Our primary home in Seattle is in a nice neighborhood, but the high valuation also means high property taxes - almost $10k this year.

Regarding the third property...About two years ago we started exploring the idea of a weekend retreat in the mountains. Our original plan was to buy some land and build a house, but we came across an amazing cabin on a lake, 90 minutes from Seattle. We bought the house in January last year. Since it was already operating as a vacation rental, we decided to keep it on the market as a vacation rental as a way to defray the costs.

When viewed as an investment, the vacation real estate is a lousy choice obviously. However, the purchase of the lake house was a lifestyle decision - an opportunity to have a place to escape the city on weekends, to share with friends, and create family memories for the kids. We never bought the property with the primary goal of increasing our wealth. We look forward to going out there, and we love every minute we get to spend in the mountains.

I guess it all comes down to personal choices, and what we want out of life. Is it worth having low performing assets in exchange for an opportunity to spend more time out in the wilderness with my kids? Am I willing to delay retirement in order to fund those experiences? In my case, the answer is "yes".

Anyway, thanks for taking the time to respond. And yes, I totally agree with you that I can get better returns elsewhere.