In need of advice

[xmanz3]

Good morning!

I have been a member of this group for 14 years and it is great to be back.

Background: I'm currently 46, single father of 2 boys (10 and 7). I'm self employed and I have 100% ownership on both businesses going strong.

Ultimate goal: I would like to retire within the next 10-12 years when both of my sons are already in college (kids college education is already taking care of) and I will go far away, throw my cell phone out the window LOL!!!! in order to relax, travel, and become a remote consultant helping people starting their own businesses. I also want to pay off the investment properties within the next 12-15 years.

Current Income: $85,000/yr

Secondary Guarantee Income: $41,000/yr

Investment properties (4) rental Net Income: $ 20,400/yr

Current Assets:

ROTH IRA- $15,000
Rollover IRA- $77,000
(2) 529 accounts- $18,000
Money Market: $16,000
Savings: $23,000

No debt, no car payment, and FULL health insurance for life!

Emergency Fund: $45,000

Both companies conservative market value: $2M will be an easy sale. If I decide to keep them, I will become a passive advisor and I will require $2,500 per month on passive income.

Real Estate net worth: $800,000

Total Net worth not including businesses: $994,000, including businesses: $2.9M

Total monthly income: $12,200 not including SS

During retirement, I can collect an additional $12,000 per month if I focus on paying off the mortgages.

Grand Total income during retirement: $17,916 monthly from business passive income, guarantee income and investment properties income.

Will you sell the businesses and real estate or pay off the investment properties along the way and keep the companies passive income + real estate income?

What will you do different?


Thanks in advance!

 

[njhowie]

For me, I want things to be simple in retirement. I don't want to have loose ends out there in illiquid things. So, again, for me, sell the businesses, sell the investment properties, bank it all.

 

[MBAustin]

I'm a bit confused as you say you have no debt but clearly have mortgages.

I would focus first on building up your ROTH and/or other tax-advantaged retirement savings rather than paying off the investment property mortgages. Being self-employed, you have several options to do this.

Ten years is a long time - I don't think you need to decide now what you will do then.

Any chance that one of the children might be interested in taking over one of the businesses?

 

[ivinsfan]

You don't have clue what those 2 business will be worth in 10 years.

Is your secondary guaranteed income a military pension?

How do you get lifetime HC?

How is 18K going to get two kids thru college?

I'm sure somebody else will come along with more questions..

 

[xmanz3]

For me, I want things to be simple in retirement. I don't want to have loose ends out there in illiquid things. So, again, for me, sell the businesses, sell the investment properties, bank it all.

Thanks for your feedback!

 

[xmanz3]

I'm a bit confused as you say you have no debt but clearly have mortgages.

I would focus first on building up your ROTH and/or other tax-advantaged retirement savings rather than paying off the investment property mortgages. Being self-employed, you have several options to do this.

Ten years is a long time - I don't think you need to decide now what you will do then.

Any chance that one of the children might be interested in taking over one of the businesses?

I should have said that I DO NOT have any CC debt, HELOCs, personal loans, etc.

I'm planning to MAX OUT my ROTH IRA until retirement age. Thanks for the advice!

It is hard to tell if one of the kids want to take the business since they are so young, but I know people that have done that and their kids have taken their businesses to the ground. Not sure if that will be a great option, but will see!

 

[xmanz3]

You don't have clue what those 2 business will be worth in 10 years.

Is your secondary guaranteed income a military pension?

How do you get lifetime HC?

How is 18K going to get two kids thru college?

I'm sure somebody else will come along with more questions..

As far as the businesses, I was giving an example of today's market value if I choose to sell them.

The guaranteed income is coming from the VA.

I have VA medical care for life, I'm a Desert Storm veteran.

Those 529 accounts are in addition to their 4 year college scholarship that each one of them already have.

 

[skipro33]

Sell the real estate and businesses or you will be too busy in retirement working. This should really be a no brainer or you define retirement different than I do. I define it as a complete ability to manage 100% of my time.

 

[ILikeStarTrek]

What are your living expenses now and/or will they be in retirement?

You give your real estate net worth at $800k and mention you would like to pay off the rental house mortgages, but what are the mortgage balances and loan terms (interest rate, years left)? If you have low interest rates on those mortgages, you may want to invest more in mutual funds instead of paying off those mortgages early. Hopefully the tenant rents are helping to pay off those mortgages (presumably included in the $20k/yr net income from rentals) even if you don't go out of your way to pay off the mortgages early.

Your situation also depends on how the businesses do in the next 10 years. Most people who start a business don't think it will fail, but do you have a way of being objective about how they will likely do over the next few years? Right now your businesses are your biggest source of net worth, and if you sell them now, many people would be happy about having that $2M invested in index funds for their retirement. On the other hand, if you expect that the businesses will be worth $10M in 10 years, you probably don't want to sell now! So some of your answer comes down to the likelihood of how the businesses will do.

You also said, "If I decide to keep them, I will become a passive advisor." I'm a little confused about that statement - are you saying you will become a passive investor today or after the 10-12 years when you said you want to retire? Either way - once you become a passive investor, will you retain both enough ownership and enough knowledge about day-to-day operations to insure that whoever is the main person(s) running the businesses doesn't run them into the ground? I think that would be a risk of being a passive investor, and you may find it is better to make a clean break and sell the businesses once you are no longer actively running them.

So a lot of mostly questions so far - finally, this observation:

If you sell the businesses today for $2M, invest in index funds in the market, and retire today - assuming 3.5% withdrawal rate, that's $70k/yr just from the business sale money. With $41k/yr guarantee income and $20k/yr rental houses, plus withdrawing about another 5k/yr from your other assets, that's $136k/yr. Many people would easily be able to live on that, and that doesn't even include making additional income from the remote consulting you want to do. But other people have higher expenses and $136k/yr would not meet the kind of retirement they want (which comes back to the question about your expenses).

 

[ivinsfan]

As far as the businesses, I was giving an example of today's market value if I choose to sell them.

The guaranteed income is coming from the VA.

I have VA medical care for life, I'm a Desert Storm veteran.

Those 529 accounts are in addition to their 4 year college scholarship that each one of them already have.

Thank you for your service. And yes when you retire your business could be worth almost nothing or 10 million dollars. This makes long term planning a lot harder. You need to save and invest more money in case the value of your businesses begins to decline.

Second try working on a potential yearly budget you are in a good place with a government pension and health care, so work from that. IF it's a disability pension it would be tax free.

What would the net rental income be when your properties are paid off? Is that the extra 12K a month your mention, does that mean each rental has a 3K a month mortgage payment ? or that you pay 12K a month in interest only? IOW additional income would be the amount of interest payments.

 

[xmanz3]

What are your living expenses now and/or will they be in retirement?

You give your real estate net worth at $800k and mention you would like to pay off the rental house mortgages, but what are the mortgage balances and loan terms (interest rate, years left)? If you have low interest rates on those mortgages, you may want to invest more in mutual funds instead of paying off those mortgages early. Hopefully the tenant rents are helping to pay off those mortgages (presumably included in the $20k/yr net income from rentals) even if you don't go out of your way to pay off the mortgages early.

Your situation also depends on how the businesses do in the next 10 years. Most people who start a business don't think it will fail, but do you have a way of being objective about how they will likely do over the next few years? Right now your businesses are your biggest source of net worth, and if you sell them now, many people would be happy about having that $2M invested in index funds for their retirement. On the other hand, if you expect that the businesses will be worth $10M in 10 years, you probably don't want to sell now! So some of your answer comes down to the likelihood of how the businesses will do.

You also said, "If I decide to keep them, I will become a passive advisor." I'm a little confused about that statement - are you saying you will become a passive investor today or after the 10-12 years when you said you want to retire? Either way - once you become a passive investor, will you retain both enough ownership and enough knowledge about day-to-day operations to insure that whoever is the main person(s) running the businesses doesn't run them into the ground? I think that would be a risk of being a passive investor, and you may find it is better to make a clean break and sell the businesses once you are no longer actively running them.

So a lot of mostly questions so far - finally, this observation:

If you sell the businesses today for $2M, invest in index funds in the market, and retire today - assuming 3.5% withdrawal rate, that's $70k/yr just from the business sale money. With $41k/yr guarantee income and $20k/yr rental houses, plus withdrawing about another 5k/yr from your other assets, that's $136k/yr. Many people would easily be able to live on that, and that doesn't even include making additional income from the remote consulting you want to do. But other people have higher expenses and $136k/yr would not meet the kind of retirement they want (which comes back to the question about your expenses).

1. The interest rates on my mortgages are between 2.75-4.125% and the terms between 10-25 years. The key is that the properties are on prime locations and I'm putting some of the net income back into the principal.

2. I have been running these 2 businesses for the past 13 years and since I'm in the healthcare/insurance business, the likelihood of growth is definitely there as well as stability. The office personnel is extremely reliable and since COVID we have been able to reduce some of our expenses while people are working remotely. I definitely do want to sell now.

3. After the 12 years, I will become a consultant for the company if I do not sell and let one of my sons or someone else that I trust run the business. Since that person will not be buying the business from me, but will become the next CEO or General Manager, I will require that $2500 monthly income to provide advice, review operations and financial reports, any video conference meetings, etc. But if my businesses are worth $10M or more in 10 years, I will definitely consider selling and I will still be able to start my consulting services remotely from anywhere around the world.


4. My current expenses right now are about $1750 per month and that does not include the child support which will go away in 10 years. So based on your last scenario of $136k a year, that will be more than enough to have a very comfortable lifestyle during retirement.

I think I will focus on max out my ROTH IRA, invest more in mutual funds, and find me 2 more real estate deals with positive rental income.

Thanks a lot!

X

 

[EastWest Gal]

I'm confused about something. How do a 7 year old and 10 year old have four year college scholarships?

 

[xmanz3]

Sell the real estate and businesses or you will be too busy in retirement working. This should really be a no brainer or you define retirement different than I do. I define it as a complete ability to manage 100% of my time.

I think as long as I have good managers, it might be worth doing for a few years.

 

[xmanz3]

It is called the DEA program or Chapter 35. It is the survivors and dependents educational assistance.

 

[Nords]

Will you sell the businesses and real estate or pay off the investment properties along the way and keep the companies passive income + real estate income?

What will you do different?

Aloha xmanz3, I’ll respond to your PM here.

You list all of your assets and your expected net income. As Ilikestartrek points out, none of that information is relevant or useful until you offer an estimate of your expenses. Have you had a chance to run your numbers through FIRECalc or ********? Are you at the 4% Safe Withdrawal Rate? Your inflation-adjusted VA disability compensation (and later your Social Security) can insure against almost all of the failure scenarios of your 4% SWR.

Your businesses are worth what someone will pay for them, not multiples or comps or appraisals. You essentially have two ways to maximize your investment:
1. Hire a contract CEO to run each business for you. Offer performance bonuses and maybe vest them in equity shares, but also pay yourself a dividend from the business. I’ve heard this from startup founders through online entrepreneurs to hedge fund managers.

2. Cash out: hire a business broker to figure out your negotiation parameters, and sell them now. Focus on your offers, not the perceived value of the business.

In general, if I can mortgage an investment rental property at 4% fixed interest rate (or less) and maintain a cap rate of 6% or higher, I’m tempted to keep the mortgage. That's math & logic, but behavioral finance will derail that every time. If paying down the mortgage now for higher cash flow later helps you sleep better at night, then pay down the mortgage.

What’s your exit strategy for the real estate? Will you hire a property manager, or defer taxes for a 1031 into a TIC partnership, or simply sell and pay your taxes? For most landlords, the default exit strategy is “probate”, and the heirs only enjoy that if they’ve had a chance to become familiar with the properties.

 

[pb4uski]

.... Will you sell the businesses and real estate or pay off the investment properties along the way and keep the companies passive income + real estate income?

What will you do different?


Thanks in advance!

I would sell the businesses and real estate because of concentration risk. For either, if there is some localized natural or economic disaster (earthquake, hurricane, tornado, floods or whatever) then with all your eggs in one geographic basket you could be in a world of hurt. If your businesses or properties are unlucky and happen to be in the path of things like the flood in Houson, California wildfires, bad water like in Flint, Michigan or rioting and fires in Minneapolis then you could take a big hit. IMO it is very hard for the individual investor to adequately diversify in real estate.

During your working years if something disaterous happens then you have time to try to recover... less so in retirement... at best you get made whole by insurance coverage and then have to try to figure out what to do with the property.

If someone comes to this board and posts that they have more than 10% of their portfolio in a single individual stock the advice is consistent to sell and diversify.... I don't see why it would be any different for privately held businesses and real estate.

Also, if you sell you are free to roam the world without worry about replacing tenants, repairs, maintenance and the like.

 

[Sunset]

...
I think I will focus on max out my ROTH IRA,....

...

With 2 businesses, it seems to me you qualify to have a self-401K , which can be an IRA and a ROTH.

https://investor.vanguard.com/small-business-retirement-plans/open-sep-simple-individual-401k

The max contribution limit to the self-401K ROTH is currently about $55,000 per year. (You can put the limit into any combination of the IRA/ROTH up to the limit per yr.).

Is this the type of Roth you are talking about ? or just the regular one anybody can get which has a limit of about $6,000 (roughly) per year ?

 

[xmanz3]

Im currently investing on the regular ROTH, I will contact Vanguard tomorrow.

 

[ILikeStarTrek]

I would sell the businesses and real estate because of concentration risk. For either, if there is some localized natural or economic disaster (earthquake, hurricane, tornado, floods or whatever) then with all your eggs in one geographic basket you could be in a world of hurt. If your businesses or properties are unlucky and happen to be in the path of things like the flood in Houson, California wildfires, bad water like in Flint, Michigan or rioting and fires in Minneapolis then you could take a big hit. IMO it is very hard for the individual investor to adequately diversify in real estate.

During your working years if something disaterous happens then you have time to try to recover... less so in retirement... at best you get made whole by insurance coverage and then have to try to figure out what to do with the property.

If someone comes to this board and posts that they have more than 10% of their portfolio in a single individual stock the advice is consistent to sell and diversify.... I don't see why it would be any different for privately held businesses and real estate.

Also, if you sell you are free to roam the world without worry about replacing tenants, repairs, maintenance and the like.

I agree with you about the small business being fairly risky, but I disagree about (not) being able to diversify with rental houses. I wouldn't own a bunch of properties in the same city block, but as long as one is spread out over multiple neighborhoods in an urban area, that tends to de-risk things.

- Some of the things you mentioned are covered by house insurance, and even loss of rents for a year (or more in some cases) is usually part of the policy.

- One caveat is hurricanes & floods. In my experience, insurance covers damage from the hurricane itself (e.g. if winds blow the roof off), but standard insurance doesn't cover water damage from a flood. One can buy flood insurance but it is expensive. I would tend to steer clear of areas that would be known to have a significant risk of flooding, like south Florida, coastal Louisiana, or just about anywhere on a beach or in a known flood zone. I do own one rental house in a coastal city, but the house is 11 miles inland from the nearest beach and the house is not in a flood zone. I'm not particularly worried about this one house, but I wouldn't want to have 50% of my net worth from houses in a coastal city like this.

- Since you mentioned Flint, MI, I will note that inflation-adjusted rents in the Detroit area in general have increased by about 15% from 1960-2014 (not bad for an area that some would see as being terrible for housing, although most urban areas have done even better than this). The population of Flint itself is only 100k, and I would tend to be more concerned about having a high amount of net worth in such a small area; but if one had a rental house portfolio in a few suburbs of Detroit, one would probably still have done okay (although it certainly would not be the most desirable place!).

- In fact, nearly all urban areas in the US have had inflation-adjusted rents rise substantially hire to wages since 1960. By contrast with individual stocks, I have seen articles which suggest that about 30% of all public companies in the US stock market will fail over a 20-25 year period. So owning a few rental houses in an urban area tends to be much safer than owning a few individual stocks in the stock market.

- Personally I tend to be more concerned about landlord laws in various US states. There are some states where it can take many months to evict a tenant, and to me, having a bad tenant or two is much more likely than having some other disaster that destroys a house. I have had a few tenants who didn't take care of houses, but I've never had one who vandalized a house on purpose. So there is a little risk here but it is generally manageable - but it is less risky if the houses are in a state where a non-paying tenant (or other lease violation) can be evicted fairly quickly.

- I like rental houses as a way to de-risk my retirement portfolio in general. In some cases, the whole stock market can tank for a few years; 2008 not withstanding, often when the stock market tanks, the housing market is okay. (And even when the housing market tanked in 2008, houses became nearly unsellable but rental houses generally did fine. I bought some rental houses in 2008-9 and I'm glad I did!)

For the OP in this post, since he generally wants to work another 10-12 years I would recommend that he diversify by increasing his investments in mutual funds during that time, but not that he sell his current set of houses.