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Hello, Out from the shadows ... I am addicted to the forum
Old 02-01-2015, 09:53 PM   #1
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Hello, Out from the shadows ... I am addicted to the forum

I have been lurking for almost a year. I very much enjoy reading the advice and equally as much each other’s financial plans. It’s great to see a community of people that are realistic and want others to succeed. My only complaint is it has become additive reading the forum.

About my situation, I’m 39 and DW is 38. We have four children - all under the age of 7. I had been more concerned about having the ability to retire rather than going early until about a year ago – now my focus is going early. Thank you Early Retirement Forum for changing my mindset!

Cash - $100k
401ks and IRAs - $1.8M
529 - $300k
House - $700k
Vehicles/Equip - $100k
Commercial Property (apartment complex and development land) - $5M
Total Assets are $8M

House Mortgage is $400k and commercial debt is $2.6M, so $3M in total debt therefore making net worth $5M.

We purchased a couple of apartment complexes in the credit crisis, which are managed by mgmt company (we had no experience, but researched extensively). As you see, we have substantial debt (averages 4.7% rate), but have been and plan to continue prepaying. Our plan is to leverage them as our income bridge from 48 to 59. They consistently have been returning $350k / year before debt service. We are dual income and have maintained around $400k the past few years. No expensive hobbies, or hobbies for that matter, or expensive toys.

We married out of undergrad with some debt. We landed basic mega corp business jobs (we both work for same corps yet). Between a combination of hard work/investing in careers, living conservative (except our last house purchase), taking risks and not having substantial personal debt, we have been able to start to see the results. Equally, if not more important, is both of us have been likeminded in our approach in saving, and most recently wanting to “both” retire early. Our careers are now challenging to manage with the family, but because of our risk adverse nature and desire to retire, we both plan to stay working.

Thought I owed sharing my situation since I read all of yours. This coming year I am going to start to track our expenses (we did for several years after marriage, but that was in the day when it was all checks and manual input and we eventually concluded the “climb was not worth the view”) so we can build confidence when we arrive closer to the date. My entire life I have learned from others – whether directly or indirectly, so I welcome any advice in our situation. I will try and keep all of you updated at least annually (even though I will be reading yours nightly).
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Old 02-01-2015, 11:30 PM   #2
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I'm probably not telling you anything that you don't already know but while you have done very well the concentration of your assets in commercial real estate is risky as is being dependent on a single employer so keep the former in mind as you plot your future investments.

I have all my accounts defined in Quicken and they all update automatically via links to the vendors. This makes it easier to have the information that you need although there is a bit of work in setting things up. Also, I have found Quicken's Lifetime Planner tool useful in retirement planning.
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Old 02-02-2015, 07:47 AM   #3
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You're doing great. With 4 young kids you have a lot of living (and related expenses) ahead, but if early retirement is your goal, you're very well positioned.
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Old 02-02-2015, 07:57 AM   #4
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Welcome to the forum! I agree it is addictive. It appears you are well on your way to FIRE.
My motto is.... "a dollar saved is better than a dollar earned. I don't pay tax on the dollar I saved."
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Old 02-02-2015, 08:23 AM   #5
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Welcome to the posting side of the forum. I think a great many people lurk for a considerable period of time before posting.

You are very over leveraged in commercial property. You have a nice equity now but can be totally wiped out if there is enough of a drop in real estate value. That's the gloomy side of my comment.

If you could really sell your property for $5 MM, you would have a liquid net worth (sans house) of $4.3 MM. You didn't mention what your living expenses would be but that net worth would support an immediate retirement budget of between $120 K/yr and 160 K/yr. If downsizing is an option, you could have more.

You didn't mention whether the apartments are cash flow positive and by how much. Apartments are a depreciating asset that may go up or down in value. Eventually, they need significant renovation to avoid becoming a slum.

As a long term lurker, you've probably seen some of the threads where someone is asking if they can retire with "only" $3 MM. The comments are usually not pretty.

IMHO, you and your DW are working because you want to.
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Old 02-02-2015, 11:04 AM   #6
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I loved my job of 36 years until I decided to retire. Now that I have made the decision, I am not happy with the job. It's like a new car...I've always been happy with my car, bike, boat, whatever...until I test drove another, or in this case started retirement planning. so my point is, be careful as you make plans so as not to ruin for you what you have now. My advice to you is ENJOY YOUR CHILDREN and be part of their life, and treat your wife like a queen, and you will have a good life!
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Old 02-02-2015, 10:26 PM   #7
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Thanks for the feedback - I appreciate it. I will provide additional color and comments to your feedback. We treat the apartment complexes like a business as much as an investment, so we are keeping up maintenance and updates as we go (i.e. re-roofing, updating cabinets, appliances as to keep fresh look, etc.). We also rely heavily on a management company to keep units full, lawns mowed and professionally managed as we would quite frankly let things easily slip with our day jobs. Leverage is approximately 50% now, which is down quite a bit from where we started (note: industry convention is to advance 70%-75% on multi-family apartments...our size lands in this type of financing). The total of the properties kick-off $350k annually before debt service. The debt service is $240k annually, so we have additional funds for income tax and to prepay debt.

Not sure we want to work, rather more that we want to make sure we are well positioned before pulling out early. Lots of unknowns having kids to raise and get them started in their lives. Our personal expenses (based on year-end review of outflows) w/o childcare, mortgage, charity and savings is approximately $90k annually. If we FIRE’d we would need to add healthcare and we would also take a take tax hit on depreciation recapture and capital gains on any growth if sold assets.

Kitesurfer2, your post struck home. I found it easier before a year ago building wealth without looking at the end game. I always tracked and managed, but never knew when we could go early. Once I put a plan on paper (Excel) a year ago, it has made a series of emotions – relief retirement is possible, dissatisfaction in job, wanting to shorten timeline, go forward in time, etc. Time goes quickly enough and my kids are only young once, so I certainly do not want to lose sight of journey and what we have. Quite frankly, our number can be called anytime. I sometimes joke with my wife we are saving for her future husband. Thanks for this gentle reminder to keep in perspective.

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Old 02-02-2015, 11:45 PM   #8
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Welcome to the forum. As others said, it comes down to your expenses and what savings you have that are able to generate income money. Once you meet that point, you are working because you want to, and to some extent for peace of mind.

Although I am still working, I will admit that I think about retirement multiple times per day. I have a lot of hobbies and activities, work gets in the way of my life. I am fast approaching the decision that time is worth more than money and assurance i have enough with safety margin. The more I work the harder it is to get excited about it.

You have a lot of total net assets, only you can decide when it is enough. As 2B points out, with some conservative withdrawals you can make it.
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Old 02-03-2015, 05:27 AM   #9
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Originally Posted by FI_by_2023 View Post
The total of the properties kick-off $350k annually before debt service. The debt service is $240k annually, so we have additional funds for income tax and to prepay debt.
You did well on buying your property. I'm assuming your $350k is net after the management company and expenses. If right, you have a free cash flow of $110k/yr. With an equity of $2.4MM you have a return of 4.58%. Depreciation temporarily shelters a lot of income.

You probably have a significant amount of capital gains which would add to your tax joy if you sell.

Outside of real estate you have $1.9MM in investable assets. Almost all of that is trapped in the 401k/IRAs. That makes access a little less convenient and fully taxable.

I still think you have too much of your networth in your apartments but you have an income stream you could possibly live on. The $1.9MM would add about $60 - 70k/yr to your spendable income. You couldn't live on that based on your previous post so retiring would require you to either sell the real estate or stop the accelerated debt payments. I'll assume there isn't a balloon payment on the horizon.

You have a good problem. You can retire now either way. I tend to be risk averse in my retirement financials. You have to decide what you feel comfortable with.
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Old 02-03-2015, 06:56 AM   #10
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In my opinion 50% leverage on a multi-family property is not over leveraged. I agree with your assessment of the industry. If you are considering retiring I would not increase leverage. I am not retired and work in that field.

I am assuming that you have a personal guaranty with your existing financing. My only suggestion is that with that "relatively low leverage" the property should be financed with a non-recourse loan so that you are not personally liable unless a bad-boy carve-out is triggered (i.e. bankruptcy, fraud etc...). Interest rates for such loans are now in the high 3s with a 25 or 30 year amortization schedule. Normally such loans have a term of 10 years. Many times they are structured as commercial mortgage backed securities ("CMBS") and are rigid in terms but personal liability is limited. Your loan is somewhat small for a CMBS deal but local/regional banks are now doing limited recourse loans in the amount of your loan. Just a thought.
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another opinion
Old 02-03-2015, 07:51 AM   #11
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another opinion

As someone who's accumulated wealth through business ownership stakes (majority of wealth produced as the result of cash thrown off of business, then saved) and real estate (personal and investment), I think you are doing very well.

You are 10 years "ahead" of where I was in relative terms, (my DW didn't work at your point in life) in terms of wealth building a notion of future financial freedom.

In my opinion, extremely well done. You have navigated that mix of assets and risks very well and I don't see any reason you will not continue to do so based on your observations.
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Old 02-03-2015, 06:14 PM   #12
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You have correctly interpreted the cash flows. You are also correct about all investments being tied up in the qualified savings plans. A few years back when we made the first purchase we debated whether to save less and pay down debt or to save in taxable accounts. Eventually we concluded that b/c of our personal guarantees, which was touched upon in a post, that we would maximize protected savings (out of reach of bankruptcy in the event we had disaster we did not foresee….we did not know anything about this type of investment other than research).

Some background on how I started and grew to overall concentration risk - I researched and walked through rental homes, duplexes, multiplexes, etc. as many colleagues had went this route. I then started reading about apartments and talking to commercial realtors and management companies and concluded the “right” larger purchase we could more easily manage…meaning find a management company to do this full-time and I would not get roughed up trying to collect rent or feeling sorry for others and not collecting. This strategy meant significant more borrowings, cash investment and concentration, but I actually became more comfortable with borrowings more than relying on my skill to manage. Also, as an additional side note, I looked at several more properties than we purchased (some I placed a bid on and walked away and others I did not put an offer…I focused on returns and what would work for us)… this has kept it less emotional and also provides me a good perspective of the market.

I had actually tried “assuming” a CMBS mortgage on a purchase and was burned in legal fees and then ultimately declined. In hindsight, it was a blessing in disguise. Although CMBS’s have attractive amorts, their terms are quite egregious, which I think I learned more in trying to assume than I would have in applying for a new loan (I would have likely learned after the fact). So we bank locally, has benefits of no reserves, no prepay or defeasement clauses, easy to borrow when needed, have a person on the other end, etc. Of course, it comes with shorter amorts (max 20 year), rate lock max of 10 yrs, slightly higher rates and personal guarantees. However, we are prepaying faster and were able to react quite fast on one purchase, so the local situation has worked better for us. Thanks for the reminder on the guarantees – I will bring that up this year now that our equity position has improved.

Some of the comments made me look at this differently as FIRE options – I back of the enveloped scenarios last night again. Although possible, my comfort for the time being is to accumulate more wealth to feel extremely secure (and also gain a better sense of my living expenses). Although the careers can have too many stresses, I always tell myself several billion of the world’s population likely have it worse and so we can tough it out a few more years.

Sorry for the long-winded response – I have certainly become caught up in sharing my story.
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Happy New Year -- 2015 Year End Update on my finances
Old 01-01-2016, 04:36 PM   #13
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Happy New Year -- 2015 Year End Update on my finances

Hello, wishing everyone a happy new year. Have enjoyed reading the posts the past year.

Closed the year with just over $5.4M in net worth -- split out as follows in round numbers:

Cash - $0.1M
401ks and IRAs - $2.0M
529 - $0.3M (actual balance at $325k...up about $30k)
House - $800k
Vehicles/Equip - $100k
Commercial Property (apartment complex and rec land) - $5.4M
Total Assets are $8.7M

Total Debt is $3.3M ($2.9M commercial and $0.4M house).

2015 progress or lack thereof:
1) Did not track expenses as planned.
2) Purchased a piece of recreation land for hunting & family recreation and borrowed for it....yes, more borrowings.
3) Finished bsmt in house (reason for increase in house value)
4) Debt - Did not prepay debt this year with bsmt and land. Hope to prepay more debt end of 2016 or beginning of 2017.

Number 3 - was a plan and decided to execute with liquidity and young kids (better organized). Sadly, project was more than I wanted but that is behind us. Number 2 - I always shop for land and never really planned to purchase rec land given the lack of return; however, given it had some cash flow, we decided to purchase it. Wish we did not have higher debt, but overall no regrets given cash flow has 4% cap rate is helping pay for it. Place creates a nice family campground to rough it from to time to time and place for family to hunt.

2016 goals are to focus on improving and maintaining health (have done a really job the past two months), spend time with family and continue on FI glide path.
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Old 01-01-2016, 08:46 PM   #14
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Thanks for the update, I always love seeing the progress people are making!
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Old 01-02-2016, 06:01 AM   #15
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In addition to echoing what many have said, I will throw in my relevant 2 cents. First, your doing great in building your wealth and it sounds like you are considering the risks/rewards properly. I am in the commercial RE business and my focus is selling income properties (primarily office/industrial) and I own RE as part of my investments both as a limited partner (commercial deals by design) and sole owner of 1 residential unit. I can tell you from doing this over 29 yrs there are risks in RE and I have seen guys get wiped out... just make sure you are underwriting the risks properly.

I am 51 and have 4 kids (3 girls... yes, they cost more) and stay at home wife so I can give you a look into the future. My NW is similar to yours, but I am pretty liquid. I am assuming you have a nice lifestyle and while LBYM, your (and your kids) standard of living is/will be affected by your surroundings. I have 2 out of college gainfully employed and 2 more in college. One difference by choice is my DW was a stay at home mom when my first kid was born almost 26 yrs ago so we have been a 1 income family for a long time. In a way, my plan to RE may be easier than yours since we are dealing with 1 job/career to shut down. My plan to RE is based more on my last kid graduating which will put me at 55 when almost all the heavy lifting is done (except for a few more weddings.)

Ok, now let me tell you about the costs to raise kids based on my personal experience and those of my peers (I will leave the mystery as too what I directly experienced with my kids vs. my peers... Oh, and you will say "I will never do that".... Sure, we will see)...

- Fancy toys/video games/big time birthday parties... all this stuff seemed to have gotten more expensive
- Braces x 4... sometimes twice!
- Private school... yes, you may have good public schools but sometimes a child needs a different school due to needs...$$!
- Kids sports/travel... It's gotten rediculous and effects the whole family. Sometimes these sports "require" you to travel to Disney World over Christmas for a tournament... looks like the whole family is coming... $$!
- Fancy clothes, especially for this girls
- Cell phones/computers/iPads... standard issue these days
- 6 cars in the driveway (I said it would never happen... guess what), auto insurance, car accidents, attorney fees for "special situations"!!
- College/sororities/fraternities
- Weddings... $$$$$!!!!

That's just a taste. None the less, I know there are exceptions, but frankly, I don't see how any one with small children (the more, the more challenging) can make an early retirement decision until they get further down the road.

If I was you, perhaps you consider phasing out one of your jobs. Maybe DW becomes a stay at home mom or you a dad? That will effect your income/standard of living, but there are some positive trade offs here I can say are well worth it. You have allot of unknown large costs ahead of you with 4 kids. The good news is you are way ahead of the game in terms of your NW so unless you just can't stand your jobs, I would phase 1 out and enjoy the benefits of having 1 of you at home. Food for thought... Good luck!
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Old 01-02-2016, 06:43 AM   #16
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FI_by_2023 - you're doing quite well. And you're on track for a great retirement. My advice is to take expenses more seriously. Track your personal and business expenses with more detail. Then you'll find ways to cut spending - and more importantly - shorten the number of work years until retirement. And also - come up with a plan of how to deal with the real estate and apartments in the future. You're young, but at some point it may make sense to transition out of these investments. Or maybe you wish to quit your job and pursue real estate as a transition into retirement. In any case, your real estate holdings are a great asset to propel you to FI and RE.
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Old 01-03-2016, 08:52 PM   #17
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Thanks for the encouragement and insightful comments.

Really appreciate the tone on future expenses for kids. We have a lot of kid raising to do, which you raise very well. We want to make sure we have plenty of cushion before pulling the plug. Given our debt and solid incomes & related retirement matches, we are going to keeping making hay while the sun is shining (both stay working unless conditions change). If it gets too much on family (kids or us), one of us will need to bail --- we would each fight to have that opportunity. Our cost reductions levers would be no longer have nanny, reduce vehicle and likely back off 529.

I am always in a debate whether to move commercial assets but the current average cap rate is 9 to 10 on them and hard to replace. The new construction of apartments makes me think there will be an event and we will end up all fighting for rents (cutting margins). We are keeping up units (rehab units as needed, new roofs, etc.) with cash flow as we don't want them to turn into slums and don't want to face up keep costs if we hit some tough years. I did refinance this last year to bring borrowing cost to 4% to improve margin.
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