How would you do it? Retire at 26 $4,000/mo cashflow?

Question

A couple of things to get out of the way before you read the rest of my layout.

Yes: I can save 70% of my gross income. I’m a minimalist and I require very very little to survive.

No: I’m not planning on having a family at the moment. If I change my mind, I’ll adjust accordingly, but the goal still stands.

Yes: I’m aware real estate isn’t completely passive. But I’ve found multiple deals in my neck of the woods (Michigan) that fit the required criteria of $300 cashflow per single family and $400 per duplex assuming a 7% vacancy, 5% repair l, 5% CAPEX, 10% PM.

My main question is this the best way to get this done? I’ve tried other formulas but this got me the closest. Am I underestimating the equity I can tap into? I only use 1 cash out refinance or HELOC in this plan. Any issues you see

Goal: $4000 cashflow by 26 years old:

Age 22:

Purchase a $150,000 duplex with a home possible (5% down loan). Investment requires $7500 (down payment), $4000 (closing costs), $3000 (repairs), $1000 (emergency fund), meaning a total investment of ~$15,500. You’ll live on one side of the duplex, rent the other, and have a roomate on your side in hopes of eliminating all housing expenses. Meaning you live for free. When you move out once you have 20% equity this should cashflow $400 ($200/unit).

Summary of Age 22:

Cashflow: $0/mo

Units: 2

Cash reserves: $~3000

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 23: Once we have roughly $26,000 saved, we purchase a single family home for $100,000. This will cost us $20,000 (down payment), $2000 (closing costs), $3000 (repairs), $1000 (emergency fund) meaning a total investment of ~$26,000. This house should cashflow $300/mo and we’re assuming (of gross rents) 7% vacancy, 5% CAPEx, 5% repairs, 10% property management.

Summary of Age 23:

Cashflow: $300/mo

Units: 3

Cash reserves: $~12,000 (35,000+3,000-26,000)

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 24:

Once we have roughly $26,000 saved, we purchase a single family home for $100,000. This will cost us $20,000 (down payment), $2000 (closing costs), $3000 (repairs), $1000 (emergency fund) meaning a total investment of ~$26,000. This house should cashflow $300/mo and we’re assuming (of gross rents) 7% vacancy, 5% CAPEx, 5% repairs, 10% property management. You’ll also use an FHA loan 3.5% down on a $180,000 duplex. This will cost $6,300 (down payment), $3000 (repairs), $5000 (closing costs), $1000 (emergency fund) for a total of $15,300. You should live on one size, rent the other, and have a roomate in your side as well. This should cashflow $400/mo when you leave. You’ll rent out the previous duplex you occupied and that will start cash flowing $400/mo.

Summary of Age 24:

Cashflow: $1000/mo

Units: 6

Cash reserves: $~5,700 (12,000+35,000-26,000-15,300)

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 25:

We purchase 2 single family homes for $100,000. In total both houses will cost $40,000 (down payment), $6000 (repairs), $4000 (closing costs), $2000 (emergency fund) in total this will cost $52,000. You should be able to afford it with your income roughly increasing with inflation and the cashflow from your other rentals. Each should cashflow $300/mo. You’ll also use either a HELOC or a cash out refinance in order to purchase another single family with the same parameters as ones before.

Summary of Age 25:

Cashflow: $1900/mo

Units: 9

Cash reserves: $~2000

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Age 26:

We purchase 2 single family homes for $100,000. In total both houses will cost $40,000 (down payment), $6000 (repairs), $4000 (closing costs), $2000 (emergency fund) in total this will cost $52,000. You should be able to afford it with your income roughly increasing with inflation and the cashflow from your other rentals. Each should cashflow $300/mo. We will also pay down our FHA loan and convert it to a conventional. Move out, rent both sides cashflow of $400/mo. You will purchase another duplex with another FHA or conventional loan.

Summary of Age 26:

Cashflow: $2900/mo

Units: 12

Cash reserves: $~0

Income: $50,000

Savings Rate: $35,000 (70%)

Credit score: 700+

Erik W. · Answer

@Nicholas Daniels. "corporate cog"? Interesting word choice....

Corporate cogs are the ones who make your smartphone/tablet/laptop and internet access possible. Those devices and services are not produced by some 20-somethings in a college room reading blogs and podcasts about retiring in their mid-20s. I would guess that corporations are at least partially responsible for 90+% of the goods and services you enjoy on a daily basis. Things like...soap (P&G), food (AWG), clean water, Monster energy drinks, toilets, medicine, coffee, beer, and everything tech related.

I say that because I am a "corporate cog." I work for a Fortune 500 automotive retailer. Next time you travel from A to B, sign onto a public forum, or take a shower...perhaps think for a moment about about us "cogs." We're out here helping make your life possible, richer, fuller. And we enjoy it quite a bit. We aren't slaves to a clock or some greedy task master. It is very fulfilling in many ways.

I've also been a part-time real estate investor since 2005. If all goes according to plan, I should be able to "retire" sometime around 50-52 after having pursued this goal for about 20-22 years. I say that with a caveat because when you were around age 10 we were reeling thru the biggest economic slow down since the Great Depression. People who had thought they were savvy real estate investors beyond needing a job were going bankrupt left and right. Rents were plummeting and interest rates were sky rocketing. I know...had 2 friends lose their entire portfolios, and they were smart guys. One was a 40-something with a Masters Degree in mechanical engineer who had a net worth over $1.5 million. The other was younger....though he was early 30s. His apartment complex hit a 10% vacancy rate: couldn't sustain it. Lost his building, his credit, and his family. All because he wasn't prepared to work for anyone other than himself. A little time "corporate cogging" could've saved him, I think. Never will know.

Okay, now that I'm done giving you the "crotchety old man" perspective, I'll say again...give me an AWESOME REASON WHY you want to do this. "I want options/freedom" isn't awesome enough. Corporate cogs have options too, like I do. I choose to work for Corp america. There is a lot of great work to do out here, and most of it isn't as horrible as the FIRE gurus/podcasters would have you think. Also, the pay and rate of success is a lot higher than most who try to retire in their 20s.

Let me share an example of a "Why" that provides motivation looks like....

I started real estate investing in my early 30s because I realized that most Baby Boomers are going to have problems living longer on lower incomes. My parents are boomers, and I love them very much. They are fairly well set financially, having multiple pensions + social security, but that may not be enough depending on what happens down the road. Part of my plan (my WHY) for early financial independence is so I can be personally, physically available to help them out when they get older without having to worry about only having X-days of vacation each year. If I need to take a months' unpaid leave to help them around the house, cleaning, cooking, caring for their daily needs, it won't be a big deal. To get to that point I realized early on that I needed to follow Dave Ramsey's plan to become debt free. Took my wife and I 10 years to get to that point. 10 years of frugal living, saving, investing, planning and working 50-60 hour weeks. My friend, that's a HUGE sacrifice! "I want options" wouldn't have been enough to carry me through those times when I wanted to quit.

I also have 3 children and a wife (first one)...who support me and give me a lot of joy. I want to be able to enjoy my family when I'm young and healthy, which has tempered my investing philosophy. I know you say right now you don't want a family, but 90% of people eventually get one. Might as well start planning for it, and if you don't need it, you'll be that much further ahead. It's a pretty big "why"...holding your own child and seeing your future and legacy in your arms. It's made me a stronger person, overall, knowing that there are people depending on me to make wise choices and do the right thing.

You're young. I was too once. Now I'm middle-aged. At your age, I thought achieving wealth early would be easy and I had no WHY beyond "I want options" either. So in a way, I see a lot of myself in you. But I hit a lot of bumps along the way, and happily they've given me some perspective on the chances of success, the requirements for success, and I can say confidently that anyone who strives for the level of success you want needs at least one very POWERFUL "Why" to get thru the tough times. "I want options/freedom/flexibility" is not enough. It is a vague notion you've pick up from reading/listening to FIRE blogs/podcasts. It takes more than that to succeed. You haven't told me yet what you want to do with your life and what meaning you want out of it.

Go back now and do better, dig deeper...think for at least 3 days then come back and try again. If it's good, we'll get into some strategy.

Jay Hinrichs · Answer

you don't need loans you just said you could pay cash.. do that.

you will need two full years of tax returns starting out great credit etc.

just talk to a good mortgage broker they will give you the skinny on what it takes to qualify.

you can get 4 mortgages pretty easy then it gets tougher as you move into commercial lending were experience and reserves are required.

Erik W. · Answer

@Nicholas Daniels, yeah, I want you to take 3 days (minimum). Your future is worth at least that much, isn't it?

Or is it? I guess we'll see.

@Jay Hinrichs has given you some things to think about, as have I. The "How" part is easy on paper. Here goes...do exactly what you put down on paper. If everything goes according to plan and there are no bumps, you'll get your $4000/income as planned.

But life rarely goes 100% according to plan.

If the economy slows down (and there are many signs it is slowing/will slow considerably), you could get laid off. You're young, and the old adage of corp America is "last hired = first fired." Then you won't have 70% of income to save; you may be taking a job as a barista to make your rent. You also won't be able to get or refinance any of your loans without W-2 income. Credit tightens in contracting economies.

Right now, you're plan works....assuming everything stays "as is" right now. Life has taught me that is not realistic.

A few other things:

1) You're a 20-year-old in college making $50K per year RIGHT NOW? I'd like to know how that's happening. Or is that the income you are projecting? What field will you be going into? Will you have time to work real estate on the side? Btw, is that $50K NET or GROSS? My guess is you'd have to make at least $63K gross to have a net income of around $50K. Most college grads don't make that fresh out of school, unless you're into engineering or other high-paid STEM type career track. There are a lot of 20-somethings with college degrees now making barely over $12/hour. You've heard of them, I'm sure...they all want Bernie Sanders as our next president. They will be your competitors.

2) Repair budget 5%. That is ludicrous. Try 15%. That's what professional property managers say. Going back 7 years I see between 12-17% in any given year, so it's accurate.

3) Health insurance for a self-employed person is going to cost you big $$$...much more if you have a family/kids. I recently priced my family of 5 on Healthcare.gov....$1700/month for a "Bronze" plan that hardly covers anything other than a major catastrophe. $3,000 per person deductible. $15,000 out of pocket yearly max. What's your plan for health care?

4) Emergency fund $1,000. An HVAC system that goes out will run you $5,000 minimum. Roof? Termites? Flood? Sewer backup? Wind knocks a tree on the roof (insurance deductible)? Don't think "it can't all happen at once." It sure can. Plan for $10,000 e-fund as a base and add about $2,000 per unit. A person with 5 units should have $20,000, minimum. If you don't believe me I'll tell you the story sometime about a pissed off tenant who flushed a bag of "Quickcrete" cement down the toilet and the $4,000 sewer line repair that caused... that wasn't even due to something wearing out normally. It was a malicious act of vandalism.

5) Life. You plan on inspecting your properties, I hope. Getting inside to see how the tenants treat them. Does your minimalist living budget account for realistic automotive ownership expenses? That $1500 rebuilt transmission or $3000 for a cracked engine block?

6) You said you thought about a family. Will your spouse be willing to participate in your ultra-frugal lifestyle? Any thoughts on how much it costs to have a baby? Last time we had one (in 2010) the labor and delivery was $7,000. That will be paid out of pocket unless you/your wife have very good medical insurance.

I'm here shooting holes in your vision of the future. Not to be cruel, but to help you see life all looks like a well-oiled machine when you're 20. I used to think the same. I had a ton of plans on paper, and according to those plans I'm supposed to be a multi-millionaire by now. Heh, I'm doing well, but not quite there yet. I laugh at my 20-something self that thought how "easy" it would all be. I needed 5 people like Jay and me shooting holes in my big plans back then...probably would've helped me avoid some major disappointments.

So yes, I hope to hear from you again in 3 days. I think you future is worth at least that much careful consideration.

Nicholas Daniels · Answer

@Jay Hinrichs

I was more saying I could buy a 100k property then knock out the mortgage quickly then repeat. I’m

Just not sure if I can get to 4K/mo doing that.

Nicholas Daniels · Answer

@Jay Hinrichs

What about acquiring the properties? Will a bank give me loans?

Jay Hinrichs · Answer

WEll your a smart kid just do the math.. simple as that don't need to ask the internet.. pay for them in cash and keep stacking them up over the years. you will never know your cash flow until U put the units in service.. some areas you may invest you will be lucky to collect rent 6 out of 12 months IE the hood.. other areas rents could be like clock work.. so its all just a WAG at this point.. but at least you have a good mind set.

Nicholas Daniels · Answer

@Jay Hinrichs

You’re not answering the question though. I can put down 20% for the properties, that’s not over leveraged. I could even pay off the entire properties if that’s a better option. All I want is to know how to get the $4k/mo. I CAN live off 4K/mo easily. I’m a minimalist, I live off LESS than 10k A YEAR.

Nicholas Daniels · Answer

@Erik Whiting

I watch Dave Ramsey a lot! My plan will be to pay off the properties once I get to 4,000/mo cashflow! I want limited risk, because as you’ve alluded, it’s when we’re most confident and things are going right that we get hit the hardest.

I know you said wait 3 days, and I’m fine doing that. But I guess if I’m getting more personal the reason I want to retire (or at least have the option) is because I’d like to be able to help my parents when they get older. I’d also like the option to be able to help my future wife’s (I do want marriage probably not before 26 though) family as well.

I’m an only child, there’s nobody who can help my parents with medical bills, housing, etc other than me. I think they’ve got enough saved, but I’m not sure. I’d like to have security for them as well as myself.

The corporate cog part, believe me I know. I’ve been working since 16 (Wendy’s , McDonald’s, Kroger, pool chemical company). I know what it takes to make a product a reality. But I also know there’s more to life than work. Working for someone else doesn’t give me purpose. I’d rather work for myself than other people. I like having control of my vision and destiny. I want to own my own time. Working for other people is ultimately making their dream become a reality, not yours. I want to make my dreams come true, not some company who would fire me the second my productivity drops off.

Jay Hinrichs · Answer

@Erik Whiting excellent posts and perspective's.

this person already made this post a few days ago and got a lot of the same feedback WHY and its not realistic to think you can live on 4k a month for the rest of your life.. etc.

Plus rent is not a guaranteed income stream as Erik pointed out people think so but during the GFC many folks with max leverage had vacancies and lost their portfolios I know people think rentals are immune but they are not.

true financial freedom Is ZERO debt rentals in the rental concepts.

Nicholas Daniels · Answer

@Erik Whiting I’m actually currently 20 years old and in college. It’s not necessarily that I want to retire, I just want the option.

It’s mainly just not having to be a corporate cog if I don’t want to. Having that flexibility is something I yearn for a lot.

My “why” would center around freedom and choice. I value my time. Maybe I’ll volunteer, travel, or maybe I’ll work and get an even greater cashflow.

I just want options!

How would you do it? Retire at 26 $4,000/mo cashflow?

How would you do it? Retire at 26 $4,000/mo cashflow?

Most Popular Reply

11 Replies