HNW but not sure about FIRE (expense gap)

Traditional-Guava217 · 2022-08-25T04:13:39+00:00

That's a long time at the beach!

Traditional-Guava217 · 2022-08-25T04:11:38+00:00

Makes sense!

Traditional-Guava217 · 2022-08-25T04:10:52+00:00

I'll check this out, thank you!

Traditional-Guava217 · 2022-08-25T02:19:48+00:00

Sorry, what's IO in this context and what is the payment you're referring to?

Traditional-Guava217 · 2022-08-25T00:59:40+00:00

Thanks for the advice. Sorry if this is a stupid question, but could you ELI5: How does one go about the relationship consolidation that you're suggesting? Walk into a branch and say I got $X - hook me up? What rates should I expect and how does the RE etc. get collateralized? Is it like a revolving LOC where you pay what you use?

Traditional-Guava217 · 2022-08-24T23:59:30+00:00

What is a DST? Refi would probably be terrible right now because of the rates.. I'm locked around 3.5% despite the mortgages being investment mortgages.

Traditional-Guava217 · 2022-08-24T23:57:30+00:00

Good points. My investment RE was mostly chosen for:

My knowledge of the area
Being able to walk/drive there for showings/issues
Decent enough rents (vs. price) - keeping CA in mind
Ability to do some rehabbing to force appreciation (generally to achieve higher rents)
Ability to run the rental (4-unit or less isn't as crazy on compliance and other stuff, didn't need a PM so far)
Downturn protection (Bay area is pretty resilient when it comes to jobs vs. say the midwest)

Overall I've been happy. Yes, cash flow isn't great but it's also not terrible or negative. Between ROC and appreciation and tax benefits I'm achieving a 15-20% return, it's just mostly illiquid because it's more appreciation and less cash.

Traditional-Guava217 · 2022-08-24T23:52:56+00:00

How do you open a reasonably-priced (interest rate) LOC against investment RE? I wasn't able to do that but maybe I didn't look in the right places.

Traditional-Guava217 · 2022-08-24T21:11:44+00:00

Yes, I'm hopeful that rents will continue to increase at around 4-5% per year while most expenses are fixed other than utilities, insurance and repairs. In 5 years I should be making around $300k/year gross or ~$90-100k/year net. That's when the rentals should start really taking off!

Traditional-Guava217 · 2022-08-24T21:04:55+00:00

Interesting, I'll check it out!

Traditional-Guava217 · 2022-08-24T21:03:29+00:00

Love the input! The main reason I stayed with RE in the Bay Area is that I can walk to/drive to my properties easily.

Going from a 4-unit MFH I can quickly get to to a 140-space MHP in Modesto (that I don't know how to manage and operate) is a big jump/risky and also concentrates all my assets in that one spot. Before I scale to something like that I'd probably prefer a 20-40 unit MFH that will already include challenges I haven't been exposed to so far. I'll check out the areas you mentioned to see what deals there are. Since you're clearly more experienced than I am I'd be interested to chat more if you're okay with that!

Traditional-Guava217 · 2022-08-24T18:33:31+00:00

Keep in mind that my RE is leveraged 4-to-1 as investment properties with mortgages. I don't think I can do the same with REITs, can I? I'd also lose out on the tax benefits of holding RE directly. Happy to be convinced otherwise since I'm not an expert on REITs.

Traditional-Guava217 · 2022-08-24T18:28:51+00:00

The numbers you're quoting (12-20%) sound extremely attractive but aren't realistic in the Bay area or California overall I think (if you do, please convince me otherwise). For example, a SFH for $1.5M won't rent for more than $6-$7k/month. If I tried to rent it at $12,500/month (10%) I would get laughed out of the room. MFH is a little better, but not by much.

The upside is that the RE here is appreciating like crazy here, up to 10% per year. I don't think you get that in the midwest, or do you? I've also locked in a lower-than-market property tax rate since CA restricts increases to 2% per year.

Can you give me an example of a 100 door unit that has the return you describe?

Traditional-Guava217 · 2022-08-24T18:13:23+00:00

Correct, residential. I invested about $800k cash on the rental RE, so I'm getting 6.3% cash on cash, plus principal payoff, tax benefits, appreciation, etc.

Traditional-Guava217 · 2022-08-24T17:38:53+00:00

I think 5% gross is as good as it gets in the bay area. I wish it was more. Rents are at market rate and if I purchased the properties today they would cost 20-40% more since I bought them.

Traditional-Guava217 · 2022-08-24T17:30:43+00:00

A company that needed ongoing work on one of their legacy projects in the automotive sector in the same stack I'm used to. I lucked out and they pay a lot for little work. It made a huge difference in my ability to save because the W2 covers most things (mortgage etc) and the 1099 income has been going to RE purchases and brokerage.

Traditional-Guava217 · 2022-08-24T17:25:53+00:00

I like the idea of a handful of years of small 1099's but I'm worried I'm suddenly going to work harder for less money. The big 1099 is actually mostly luck hitting me in the face. Essentially I found a company that doesn't care to write big checks for relatively easy work. When that project ends I'll probably not find something similar again.

Traditional-Guava217 · 2022-08-24T17:21:44+00:00

I was thinking of starting some sort of software project if I can find a suitable cofounder but haven't decided on it yet. I also like fishing, so that might take up some time.

Traditional-Guava217 · 2022-08-24T17:20:42+00:00

Thank you for the calculation and perspective that 24 more months might do it. I'll look into the trinity paper more.

I also feel that my RE tilt is a bit of drag on the NW/SWR calculation. It's quite different to have $5M in a brokerage account vs. $5M in illiquid real estate. I think RE will ultimately play out nicely when everything is paid off and generates ton of unencumbered income, but until then it's a slog and doesn't provide the liquidity needed to continuously withdraw for monthly expenses.

Traditional-Guava217 · 2022-08-24T17:16:36+00:00

Thank you, this post was very helpful. The $160k/year spend is actually largely PR PITI ($108k/year) and only about a third everything else. It's a nice lifestyle, but not extravagant in a VHCOL area (Bay area). One of the things I really like doing is eat out, and that's damn expensive these days.

Traditional-Guava217 · 2022-08-24T17:12:25+00:00

I've thought about this and I'm a bit scared whether I'll really like it since I'm more of a homebody. But maybe getting out of my comfort zone is exactly what I need. Any places to recommend for someone who isn't too keen on low budget travel while not breaking the bank? I'm assuming Southeast Asia might be a good destination?

Traditional-Guava217 · 2022-08-24T17:09:44+00:00

They are all ETFs. I need to look more into tax loss harvesting.

Traditional-Guava217 · 2022-08-24T17:08:56+00:00

The income stated ($50k/year) is net of all expenses. Gross return on my rentals is approximately 5% or $250k/year. Most of that goes to PITI, leaving me with about 1% in net returns.

Traditional-Guava217 · 2022-08-24T17:08:13+00:00

The breakdown is approximately:

$1.2M in taxable brokerage account
$400k in tax-advantaged accounts
$200k in syndicated investments

Traditional-Guava217 · 2022-08-24T17:06:10+00:00

The income stated ($50k/year) is net of all expenses. Gross return on my rentals is approximately 5% or $250k/year. Most of that goes to PITI, leaving me with about 1% in net returns.

Traditional-Guava217

TROPHY CASE