Hi! 38 yr old making first steps towards ER

[se012101]

Hi. This is my first post here, so I wanted to introduce myself. This seems like a great forum. Tons of interesting info and ideas. Hopefully I won't annoy people with my naivete about some of the terms and concepts of investing, because I have a LOT to learn.

I'm a 38 year old married father of two boys, who turn 6 and 2 this spring. I have a good job that I still find rewarding, and it pays well. The problem is that it eats all my time, and I have come to realize that this is the most precious commodity I have. I want to spend it with my family and pursuing my hobbies (music).

Next week, we complete our first baby step towards financial freedom. We are paying the final 5,000.00 or so on the mortgage of our primary residence. We knocked it out in 2.5 years, by putting an initial 20k chunk on it, then paying 3,000.00 extra every month. The mortgage was for 126,000 (houses in the suburbs of Dallas, where I live, are still cheap).

So, with that out of the way, here's our basic plan.
1) Take the 3k/month we were using to pay down our mortgage, and the 1200.00 monthly payment we no longer have to make and save like crazy.
2) When we have 20%, buy another single family home. In this area, 3 bed/2bath, 1500 sq feet can be had for about 130k. So, 26k down, 104 financed.
3) Rent it out. Rent more or less neutralizes mortgage, insurance, taxes.
4) Apply the 4200/mo we now have to the mortgage, and knock it out in a little under 2 years. The rent is now unlocked and becomes income.
5) Save like crazy, buy property #3, apply 4200+rent from property #2 to it, and go even faster. And so on, until we have enough income from the rents to no longer need the day job.

Obviously, we'll have to take about a month per year off from the extra payments to pay property taxes and insurance, but that's the basic plan.

At least initially, we will be using a property mgmt company to handle the renting mostly due to lack of time and knowledge.

It will take quite a bit of discipline to keep plowing all that money into our long term plans, but we've made it through the first 2.5 years, and I feel confident that we've developed the habit now. It seems like a good time to be getting into this, with house prices low, interest rates low, and a lot of people who have been foreclosed upon who would probably prefer renting a single family home to an apartment.

Any feedback on our plan from more knowledgable folks (that's probably 100% of people on this forum!) is MASSIVELY appreciated! Thanks in advance!

 

[WM]

Hi se012101! Welcome to the forum. And congrats on getting your mortgage paid off, that must feel great!

You'll find mixed opinions here about the feasibility of relying primarily on real estate to fund your retirement. You don't mention other investments - do you already have an emergency fund? IRAs? 401ks?

Have you actually done the calculations to see whether your rental plan will give you positive cash flow? Remember that you'll be paying a property manager, as well as routine and unexpected repairs, you'll probably have gaps in between tenants sometimes, etc. Rentals can really be a drain if you're not careful and/or lucky.

 

[fisherman]

We in some ways followed that plan. Payed house off at 34 and then bought two more very cheap rentals at well below market prices and paid cash for them. Renting has worked out well but it is a pain sometimes. The income in this market is nice however.

We assume two months vacancy per year after accounting for all expenses and a sinking fund for repairs so that the budget income amount is likely to be met. That formula has never let us down and we have luckily had a little better luck but it is still part of the plan.

Land lording can be hard if you do not have the personality to collect rent well. Some of the bonds you can buy today would be as good a deal with out head aches. IF you have the personality for it and some luck it can work out pretty good as part f your income stream but I would never use it for anywhere near even half.

 

[sailwc]

Reply

Your plan sounds pretty good and you realize it takes discipline to stick to it. When I was your age, I kept plowing money into 401K and benefited from stock market growth. In the span of 10 years tripled my money. We also paid everything off, that is until we built our dream home, but owed little on it. This put us in a very good situation, along with the fact we both earned a pension. You are on the right track, just don't sacrifice so much that you don't enjoy life while you are young and enjoy your boys.
Welcome to the forum. Oh and I am now 55 and retiring this month, I can't wait!

 

[se012101]

Thanks for all the responses! Being just about done with our mortgage does indeed feel great! Especially when we consider emergency scenarios (no job for prolonged period) and realize how much closer we are to being able to squeeze by now that we've got that big gorilla off our backs.

@VM - thanks for busting me about the cash flow calculations. "Rent neutralizes expenses" was a big vague, and it needs to not be.

So I've spent all afternoon researching, spreadsheeting, and basically giving myself a headache. But I've got the first 3 years mapped out now. It doesn't look too bad. I have us making a small loss in years 1 & 2, while the mortgage on the rental property is being paid off - no problem with the day job - and then in year 3, a nice profit - about 5400 on our 104000 investment, after expenses and taxes. And as soon as we're onto the 2nd rental property, things get better because having exceeded the standard deduction with the combo of property taxes from my primary residence and expenses from the 1st rental, we'll be able to truly deduct all the expenses we're allowed to on the 2nd. Things also get better when ER is realistic, because we'll drop out of the 28% tax bracket, which really dings up the numbers right now.

Question - does anyone have any experience buying a rental property out of state? I'd never try this on the first one because of lack of experience, but later on this seems like an idea. The downside to no state income tax in TX is high property taxes - 2.36% for city/school/county in the city I live in. Also, anyone with experience of the pros and cons of buying a small apartment building (maybe 4 units) vs a single family home?

Thanks again!

 

[militaryman]

sailwc said "You are on the right track, just don't sacrifice so much that you don't enjoy life while you are young and enjoy your boys."

I'll echo the "just don't sacrifice so much that you don't enjoy life while you are young and enjoy your boys."

As far as "the right track" I'm not so sure....

Your first post says that time is your most valuable commodity, and the desire to spend more with your children. Rentals are a very time consuming effort even if you have a management company (which I would be careful not to underestimate the cost of a good one in your equation)

If I were in your shoes and had the cash flow that you do I would be looking towards "throw away the key" investments. Meaning investments I could put the $$ into and forget about and not have to spend the self proclaimed most valuable commodity (time) to make work.

for instance it is already taking alot of your time ----

So I've spent all afternoon researching, spreadsheeting, and basically giving myself a headache.

This type of pursuit will continue to take ALOT of time to do properly, with or without a management company.

By the time your "plan" is really rolling I bet you have a teenager.

How long is your #5 (below) going to take? When do you anticipate really being able to quit the day job? ie.. How much will you need to have coming in to pay for all the medical and really feel secure to quit. This has to be nailed down to really determine whether you will be reaching ER in enough time to matter.

If it is not going to happen while the kids are young then your plan will not succeed if ultimately the plan is to allow you to have more time with the boys.


5) Save like crazy, buy property #3, apply 4200+rent from property #2 to it, and go even faster. And so on, until we have enough income from the rents to no longer need the day job.

So again I would look to more simplistic endeavors that take no more additional time and instead invest your most valuable commodity in the boys. You'll NEVER regret that.

My choice in your same situation was to take a different job that demanded FAR less of my time and effort, a much shorter commute at a 15% pay cut. I still have the day job but am home at 2:45 (before kids get off bus) and don't think about the job until the next day. I instantly (after 3 month job search) solved my problem of not enough time with the family and have never regretted it.

Additional things to flesh out before you go "all in" on the "rentals to ER" idea.

1. How much do you need from the rentals to live on (with medical, college tuition, etc) This needs to be a somewhat hard number with some padding and then you can find out based on your rental plan whether you will reach the goal before your young family is an "old family"

2. All your eggs will be in one basket. What happens if the rental market goes south and your properties are vacant or are unable to produce the $$ stream you need. Meanwhile you gave up a job that you may or may not be unable to replicate.

Ok, these are just counter points (i tend to play devils advocate ) that I thought you should consider, Good Luck!!

 

[Space Mountain]

Have you ever considered investing in REITS? (commercial property that pays monthly dividends)

No headache and can sell with a click of the mouse?

Oh, and no landlord issues, to boot.

Space Mountain

 

[Koolau]

2. All your eggs will be in one basket. What happens if the rental market goes south and your properties are vacant or are unable to produce the $$ stream you need. Meanwhile you gave up a job that you may or may not be unable to replicate.

Hi se012101 and welcome to the board.

I would echo militaryman's caution. Diversification is probably the most important thing you can do to insure your ultimate goal of ER. Without it, you may well reach your goal and reach it very quickly - if all goes as planned. However, if things go badly for a few years, you may find yourself frustrated and worried and your timeline delayed. There are plenty of books (and other threads) which discuss diversification so I won't go into detail - and I admit to not always following my own advice about diversification - but I got lucky.

Regarding a rental property in another state: I've done it and it worked out pretty well, but there were a couple of close calls and I can see where it all could have gone very badly. I don't REALLY believe in luck, but it doesn't hurt to have some of it (the good kind, that is). In our case, we bought and rented out the property to help pay for it and to "hold" it for our retirement home. It is important to find a good rental agent if you are thinking of a remote location. We got "lucky" and found that good agent. Otherwise... Who knows? And, in any case, YMMV

Good luck!!!

 

[freebird5825]

welcome to the board.
I'll bet ya I can ask more naive questions than you can.
I can't contribute too much for the proposed real estate plan, except...
I do have several friends who did the landlord thing, and after 10 years are completely fed up with the time penalty issue, i.e. the time loss due to handling rental property problems. Most of them have unloaded their properties and are now enjoying life. Some are still active landlords because they need the extra income. But I can tell you that none are thrilled with it.

 

[Salaryman]

Congrats on your achievements thus far.
Have you considered a self directed 529 for your kids' college tuition? We have 3 kids & have been funding it since they were born....as well as funding other investments pools.

Good luck.

Salaryman

 

[landonew]

A few points you may want to consider.

Leverage can be both your friend as well as your worst enemy. Leverage occurs when you use a small portion of your own investment to secure debt, and then use the aggregate to invest with the hopes of obtaining a higher rate of return.

However, the higher the degree of leverage the higher the degree of risk.

Suppose you get well into your plan and have 5 outstanding mortgages for each rental house w/ an aggregate gross income of $5,000/month and a an aggregate liability of $4,500/month (mortgage payments, repairs ext.)
Everything is going well, and you are well on your way to FIRE.


Then you hit a rough patch... Say rental rates plumit, and you have some unexpected vacancies.... Now you have a cash flow problem. Your investment is still a good one, but to keep it going you have to come up with $3000 each month to stay out of default.

Now the kicker... You lose your job and real estate market takes a dive.

Now you have a serious problem. Your investment is experiencing a stage of negative cash-flow (albeit temporarily) and your ability to supply the capital to keep it afloat has been extinguished.

You have hit foreclosure city. The banks foreclose on your property and sell it at below market value. You are left hoping that the notes are satisfied so you don't get hit with a difficiency judgment.

You may think the above scenario is very unlikely, but that exact scenario happened to our last landlord.

This situation is easily avoidable.

First and foremost, start yourself up an LLP. This will allow you to shelter yourself from any personal liability in the case of a disaster (i.e. foreclosure city). Additionally, it will allow you to remove profits from the venture and thus shield them as well.

Secondly, consider your current liability before buying additional properties. If you already have 3 mortgages ourstanding, consider using that $20K down-payment to pay down one of the other mortgages.

Third, don't skimp on the emergency fund. Your business (LLP) should have one as well. (mentioned above as a sinking/expense fund I believe)


Good luck.

 

[militaryman]

A few points you may want to consider.

Suppose you get well into your plan and have 5 outstanding mortgages for each rental house w/ an aggregate gross income of $5,000/month and a an aggregate liability of $4,500/month (mortgage payments, repairs ext.)
Everything is going well, and you are well on your way to FIRE.

Think he said in his plan that each Mortgage would be paid in full (apprx 2 yrs to do) before next was purchased.

Not sure if this enables him to reach his goal of ER while the family is still young though.

You are right about the fact that if he did ER and count on the rental $$ as the only source of income can only be seen as a weakness.

 

[landonew]

Think he said in his plan that each Mortgage would be paid in full (apprx 2 yrs to do) before next was purchased.

Not sure if this enables him to reach his goal of ER while the family is still young though.

You are right about the fact that if he did ER and count on the rental $$ as the only source of income can only be seen as a weakness.

If so, then that is even worse. The whole point of the real estate game is leverage (at least early on).... I was afraid he would stretch his capital too thin. It appears however, that he intends to apply it to thickly

I would suggest bonds, CDs, or some other cash equivalent. The way you are planning on doing it will produce a similar rate of return.

 

[Maurice]

Welcome to the board, its always nice to see more musicians show up. There are several here.

I would echo the concern of having all your eggs in one basket. 100% real estate just doesn't seem like a good idea to me. I will say that by having developed the mindset required for saving and investing you are more than halfway there, just spend some time investigating investment alternatives in addition to your real estate ventures.

 

[se012101]

Hey, been away on a trip for a few days and haven't had a chance to check in. Thanks so much for all the insightful thoughts. This really helps.

Timeline-wise, I wasn't aiming for ER significantly before the kids are in college - barring some extreme positive x-factors I'm not even factoring in (e.g. significant sustainable raises early in the timeline). I was thinking 15 yrs, 10 years if things go extremely well. Which puts me at 48-53...not too bad.

Time commitment wise - I'm certainly willing to work hard at this - any goal in life worth having, you've got to work hard at, in my opinion. When the big goal is achieved, I'm less worried about the time factor - honestly, right now anything less than 50 hrs/week of intense multi-tasking, and I'm ahead. Up until then, I agree it's a worry - taking that on in addition to the aforementioned. Counterbalancing that concern, my wife is a stay at home mom, and is as commited as I am to this goal, so once our youngest is in school, she has some time to give to our project.

More leverage - right now, the idea of very heavy debt doesn't sit well. My philosophy is that if the investment literally makes zero, and I can handle the mortgage payments out of my salary comfortably, then that is an ok amount of leverage. Buying the one rental property to get started fits that requirement. After that one is paid for, then we'll re-evaluate, and with a lot more experience of the business under our belts.

Diversification - yeah, that one is worrying me. Good points.

Switching to an "easy" job - not really a practical possibility. I'm in a pretty specialized job, and the pay is pretty good. I'd have to bust my butt for several years to even hit 50% of what I'm making now. 50% is fine after ER (in fact we've been living perfectly comfortably on just over 50%, excluding the mortgage and extra payments), but not while saving for it.

Thanks again for all the feedback and good wishes! You guys rock!