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Plan critique? No stocks, bonds, or pension...
Old 10-11-2015, 02:57 PM   #1
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Plan critique? No stocks, bonds, or pension...

Greetings from Montana A little background about myself: 47 years old and single, currently doing database management for a CA company while working from home in MT. I've been reading ER for a few years but just joined today.

During the last real estate crash I started looking in detail into becoming a landlord. By the time that I'd committed to pursuing this back in 2011 the best deals had been taken. But costs to build new homes hadn't yet gotten out-of-hand.

So I started making plans to move from my home in silicon valley to MT. I'd get about $200k net from the sale of my home and cashed out all of my 401k to have some cash to put towards rental properties and my own home in MT. Now of course it was a questionable decision to cash out the 401k with all of the taxes/penalties due, but I wasn't going to be able to get the mortgages necessary for the purchases without having that cash up front.

So now I've got two duplexes. One that I built 2 years ago and another that was built about 15 years ago and is in good shape. I'm just finishing my third which should be done in the next 3 - 4 weeks. Each of these places carries a large mortgage, 75% LTV. I plan on this same level of mortgage for the new place as well. Once the new place is done and rented I'll have 6 rentals that will bring in about $3,350/mo net (rent minus mortgages, taxes, insurance, and utilities). Note that this number reflects no costs of repairs/maintenance.

Being a landlord is one side of the retirement plan. The other side is what is best described as fixed income. I've got $600k invested in the U-haul Investor Club with a variety of their offerings that range from 9 to 30 years. For the next 9 years that will bring in $5,346/mo. That number factors in my expected federal taxes on these earnings as well.

I took out a mortgage on my own house as well so I've got $2,545/mo in housing expenses (mortgage, taxes, utilities) and I estimate my other monthly expenses at $1,302/mo (health insurance, vehicle expenses, food, etc.).

I have no 401k, pension, or any other savings or source of income other than my job.

So once I retire I've got $8,696 coming in and certain expenses of $3,847. The $4,849 that remains seems like plenty to cover intermittent rental vacancies, repairs, unforeseen expenses, and income taxes on the rentals. Those taxes will be very low with all of the deductions that can be used against the income. That money also needs to pay for fun stuff, i.e. travel, eating out, etc. I also need to save about $1000/mo of that for the next 9 years as one of my U-Haul investments will conclude 9 years from now and that $1k/mo will be used for the time period of 9-15 years from now. 15 years from now I'll start collecting SS and refinance all of the rental properties just to get cash out which should result in over $900k in cash and thus security from when I'm 62 to at least 92.

The risks to this plan seem to be:
1: U-Haul investments don't pay. For this to happen as I understand it, they would essentially need to go bankrupt. So it's possible, but seems unlikely.
2: The rental market collapses AND home values collapses. Forecasts in my area call for continued growth 5, 10, and 15 years from now. If only values fall, then I'll just continue being a landlord. If rent goes down a little, I'll drop my prices a little and carry on. If rents collapse, I'll just sell to get my equity out then look for a way to invest that money.

Right now my plan is to work just a bit longer to trade in my two vehicles for two new ones and not have any loans on either. I'll have a bunch of mortgages on the rentals and the one on my own home, but no other debts. I plan to only have enough cash (20-30k) to cover major repairs. If I had to get immediate emergency access to more cash, I'd just take money out of a credit card which I could do for $50k or more. I think that's highly unlikely as I've never done such a thing before and plan to have a silver or gold level ACA health plan and thus shouldn't see medical bills of over $10-20k in any given year.

Looking forward, I expect rents to track roughly with inflation. Of course that may not happen but more people believe they'll rise faster than inflation here, so I think a safe guess is that they'll cancel each other out.

Do you see any other risks with the plan? Anything that jumps out as a big concern?

Once I quit, getting another job in my line of work would in all likelihood mean relocating to a major metro area. And once I'm out of work for 6+ months I may not be able to get back into my line of work, just like most folks in any tech business. So if my plan doesn't seem "safe" enough, how much more money do I need to save to make it "safe"? My own answer to this question is that I'll be at that point when I have new vehicles that have no loans on them.
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Old 10-11-2015, 04:57 PM   #2
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Welcome 18_apex!

Your plan looks very different from what most of us would consider, and I have no background in either rental property or UHaul (didn't even know that the UHaul Investors Club existed until today!). Have you looked through these two posts for things to think about before you ER:

Some Important Questions to Answer Before Asking - Can I Retire?

and

Early Retirement FAQs - Early Retirement & Financial Independence Community ?

I do agree that getting another job similar to what you are doing now would be very tough if you were out of it for any length of time, so that definitely needs to be a consideration.

Good luck with your planning!
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Old 10-11-2015, 11:19 PM   #3
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Lack of diversification would be a major concern for me... high risk.
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Old 10-12-2015, 12:18 AM   #4
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So as a landlord you will be depreciating the properties (tax deduction), but have to recapture the depreciation at 25% (which will be higher than your tax rate when you are old).
You are glossing over the numbers by not including repairs/maintenance as you state, but why exclude them since its easy to figure a ball park number (I use 2K per house per yr). So using that as example it drops your monthly net to $2,350/mo net.

Also most landlord planning books recommend not counting 1/12 of the rent as an amortized way of accounting for tenant changes and empty units.
Doing so will further drop your long term realistic net rent per month by quite a bit as it comes off the gross rent and not the net (only you have those numbers).

Besides those factors, I see the lack of diversification and wonder about such a heavy investment in the U-haul thing as possibly dangerous risk.
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Old 10-12-2015, 06:23 AM   #5
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https://www.uhaulinvestorsclub.com/HowItWorks

Hmm - this makes me nervous. If it were me and I was intrigued by this investment, I might put a few percent of my portfolio in it. Rest in a diversified portfolio of index funds.
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Old 10-12-2015, 06:46 AM   #6
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Too too much concentration risk! Let me put it another way ... You've got $600k to invest would you invest it all in one stock? Would that be prudent?

Don't know if you can get out but if you can...Low cost diversified mutual funds(Vanguard)!
Good luck...


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Old 10-12-2015, 09:08 AM   #7
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Rentals are a nice addition to a retirement portfolio, but expenses are key.....I just got a $3k bill to replace a tenant's furnace. I can't comment on the U-Haul business, but I do worry about lack of diversity and liquidity.
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Old 10-12-2015, 09:26 AM   #8
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What will you do if the housing market takes a tumble and you need to sell some properties for cash.


Maintenance costs can be minimize by doing some of the work.


Tooo many eggs in one basket, just like putting all your saving in the market.


How is the cattle market in Montana, I recently started to buy some animals back home. You pay cash and when you sell is cash
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Old 10-12-2015, 10:37 AM   #9
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Folks,

Thanks for the advice, I appreciate it. Diversification is certainly a concern of mine and I'll have to come up with a plan to fix that. My track record with the stock market has been poor and so I've stayed out of it for the last few years. That would seem to be the most obvious solution however to diversifying.

Sunset - Regarding the rental costs - I would agree that 1/12 months a unit won't collect rent seems about right, as well as perhaps $2k/yr in maintenance. Rather than try to factor those numbers in to my personal spreadsheet, I've just been trying to make sure that I've got plenty of excess money each month to cover these situations. My repairs the last 2 years haven't been that large as I've done all but one repair myself. As time goes on obviously those repair costs will increase. Regarding depreciation recapture - I'm not planning to sell the rentals so as far as I know I won't have to address this. When I get too old to maintain them, I figured I'd hire a property management company. I'll also refinance them along the way just to get some cash out, thus I'll never own them free and clear but I don't see that as a problem.

For better or worse the UHaul investment is now fixed, they don't have a mechanism to back-out of the investment. I can live with that.

HF63 - If the housing market collapses but rental rates stay acceptable, I'll keep the properties. Rental rates would really have to drop a lot for me to come to the conclusion that I should get rid of the properties. If in addition U-Haul were to also go bankrupt, then I'd be going back to work. Regarding the cattle market, I don't know the first thing about it but once I've got some spare time I'll look into it.
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Old 10-12-2015, 01:54 PM   #10
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I agree that many people go into retirement with too many eggs in the "market basket". I have $1.1M in equities and bonds and my rental apartment is probably worth $250k. So it's locking up around 18% of my capital. I'm happy with that.
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Old 10-12-2015, 03:10 PM   #11
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I'm pretty skeptical of your budget. You have $1300 month to pay for groceries, gas, health insurance, homeowners insurance, car insurance for 2 cars, phone, internet, etc.

And I agree with the others about the lack of diversification. I'm not anti rental - I have a rental... but I also have index funds, etc.
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Old 10-12-2015, 03:33 PM   #12
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Quote:
Originally Posted by l8_apex View Post
....For better or worse the UHaul investment is now fixed, they don't have a mechanism to back-out of the investment. I can live with that. ...
ok, add another risk then.... liquidity risk.
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Old 10-12-2015, 03:38 PM   #13
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Rodi, perhaps I haven't broken down my expenses the same way as other folks have. The "$1300" I'd mentioned is my "Daily Living" items below. I've slightly overestimated monthly costs for gas (it's been less than $200 for me for the last couple of years), health insurance (an ACA Gold plan would be $341 right now for me), and my actual food costs don't usually hit $500. All of the house costs are accurate and the other Daily Living costs are quite close. My house was built 6 months ago so I don't have a line item for repair costs.

House Costs
PITI (1852,230,59) $2,141
HOA $50
Gas/Electric $120
Water/Sewer $80
Trash/Recycling $32
Cable/Internet $122

Daily Living Costs
Auto Insurance $42
Gas/Diesel $250
Car Registration $30
Health Insurance $400
Meds $50
Cell Phone $30
Food $500

pb4uski - How much liquidity do you think that a single person should have? $50k? $100k? More? And by liquidity do you mean money available in a week or so, or are you thinking of some kind of longer time frame?
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Old 10-12-2015, 04:54 PM   #14
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The uhaul investment is interesting. Thanks for mentioning it.

If you would like to add some stocks, I think the oil sector is still a bargain in many sectors (I like the MLP etf AMLP). If you want to add fixed income I like the etf PCEF.
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Old 10-12-2015, 05:27 PM   #15
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Frankly for more diversification via stocks I think you should got really wide, ie VTI
Which is Vanguard's Total Stock Market ETF. has low cost of 0.05 % per year.

Advantages of a stock etf are it pays dividends, which are taxed at much lower rate than your interest bearing U-haul earnings. In fact dividends can be tax free if you are in the 15% or lower tax bracket.
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