tl;dr - I'm looking for specific investment ideas on how to get the rest of the way to quitting my day job. NOT looking for advice like "spend less money" or "move to a cheaper town" or anything like that.
My goal is to turn $300k of equity in my current rental property and whatever I can tap into from my primary residence into $4500 net cash flow/month and $460k total cash out for debt paydown and other projects. Would like to do this in less than 5 years.
We live in Boston, willing to invest anywhere.
With minimal fluff, here's our situation:
- Wife has a day job she likes. It covers benefits, etc. and gives us a comfortable base income.
- I have a day job I don't like, I want to quit but don't want to take a lifestyle hit. I like money! I take home about $65k per year. This is the income I'm trying to replace. This can come from passive income boosts or by paying down debt, or some combination of both.
- I have about $210k in debt with about $1725 of monthly paments. I would like to pay it all off.
- Stretch goal: I would like another $250k in cash to improve my current residence (I bought a money pit, and Boston contractors are 5x what they cost in the midwest).
Assets and liabilities:
- We have 2 x 2-family houses. House 1 we lived in until 2 years ago.
- It nets us about $10k a year but has over $300k in equity tied up in it (value is about $650k, owe about $350k)
- We can sell it now and pull out about $160k from our equity without capital gains taxes, and use the remaining $140k in a 1031 exchange.
- I'm sentimentally attached to the house, it's walking distance for easy management, and we have great tenants. If I don't have to sell I would consider keeping it. But I'm resigned to selling.
- House 2 we live in one unit and rent the other.
- Tenants pay $3000 a month, which covers most of our PITI (about $4k).
- Value at last bank appraisal was $1.2M, mortgage is $630k, HELOC is $125k for a total of $755k (about 63% LTV).
- About $20k in available cash, but I try not to touch that (emergency funds, etc.)
- No credit card debt.
- We are credit card churners. I have about $200k of available credit if I want to get myself in trouble (aka "see a great opportunity")
- I pay $400 a month on about $36k of student loan debt.
- HELOC is for $125k
- Currently owe about $115k, about $10k available
- HELOC payment currently $300/month but will go up to about $600 a month (interest only) after promo period ends in a year.
- I pay $400 a month for my car payment. Don't judge me, it's a long story and I like my new sprinter van after decades of driving sh*&boxes. Owe about $19k to pay it off.
- I borrowed from my retirement account and pay $325 on that debt. I owe about $40k.
- I have a real estate license and occasionally make a commission, but it's not reliable. That money goes to the money pit or debt paydown.
I was probably 2 years away from being able to quit my day job after we bought property #2. But the rehab on our current residence went wildly over budget (1840s house coupled with insane Boston-specific issues getting contractors) and then we had a little accident (my beautiful 1-year-old son) and between the HELOC payment to cover the overage on the rehab and the extra $1500+ we're spending on the kid's childcare, college savings, and plastic kid crap I am now much farther away.
And no, we're not moving. I live in an amazing 1840s Greek Revival with a barn AND a carriage house and parking but I can still walk to the subway and I'm a $10 Uber from world class entertainment, and we're 1.5 miles from my wife's dream job.
So here we are:
I bring in ~$5400/month in wages + ~$800/month in rental income from the pure rental property. I send out ~$1725 in debt service payments (after the HELOC increase) on ~$210k of debt. I have ~$300k in equity I can access if I sell the rental (losing $800/mo in income), but I can only use about $160k on debt paydown. I want to pay off the whole $210k, get enough extra to pay for $250k in improvements to my residence/rental property, and still net about $4500 a month in income. And I want to do this in 5 years or less.
How would you manage to take my $300k nest egg and do what I want with it? I have some ideas, but I am looking for stuff I haven't thought of. Where in the country would you invest? Would you go with multis or SFHs, and why? Would you pay down debt first, or invest first and pay down debt later?
You've got a lot of detail here, and competing goals, so that makes it trickier to answer you.
Some general principles that might be handy: if the debt isn't getting in your way, consider whether you would make more with the investment than you lose with the liability. For example, if you can make 10% on something, and that is balanced against -6%, then broadly speaking, using the money on the investment is better. If it is the reverse, reverse it.
Then add a level of subtlety and consider the risk you are taking on for either decision. Debt completely paid off is gone, assets have risks of ownership.
With a young child, where do you want to put your attention? There are plenty of options, and generally the higher return ones have more risk and need more effort.
Notes aren't on your list, but those can be pretty darn passive if you can find or create performing ones. But as for SFH or multi- what would you enjoy enough to do the work of finding and owning?
@Amanda G. , thanks for the reply.
No matter what, I want to pay off the HELOC. It will free up $600/month of cash flow and then I'll have the $125k available to me any time I want to jump on an investment property.
I'd also like to pay off the loan from my retirement account, since that puts me one step closer to my goal of quitting eventually. If I quit without having paid it off, I either have to come up with the money or pay a huge tax penalty. And since it is my retirement account, I get that money back eventually with interest.
Eliminating those two payments will roughly offset the loss of income from the rental property, and I'll have a chunk to reinvest in a 1031 plus access to the HELOC as needed.
I am fine with putting in more effort for a few years if it gets me to my goals. I'm already working a ton (day job, realtor, landlord, commissioned artist), so I can just reallocate how much time I devote to each of my side hustles.
If Boston weren't such an insane market, I would try to find another undervalued SFH or small multi and either BRRRR or fix and flip. But it's impossible to do anything here. In a perfect world, I'd find some large commercial space and hack it by putting in art studios to rent to all my creative friends, but that kind of space is also unavailable at prices that make sense.
I want more equity gain and income than I'm likely to get from syndication deals or notes, so I think this likely puts me back into more active roles like BRRRR or fix and flip, but in faraway markets. Those make me nervous because finding and managing great people is hard enough when you're local, but it seems it can be done if I can figure out a better system and I pick the right metro. I'd also be open to storage units, boat or RV storage, etc., pretty much anywhere.
My wife is starting to get impatient about the condition of the exterior of our personal residence, so I may tend towards doing some quick flips and pulling some of the profits out for that (it's a 2-family, so I can at least write off part of the work).
I guess that leaves me narrowing down to BRRRR, flips, or storage units somewhere far enough away from Boston as to still be profitable. Which then means I need to figure out what metro to invest in and start building a team there so I can be ready to jump in a couple of months when the house is sold.
As to what I enjoy, I really like identifying properties and doing deal analysis and making creative offers to get deals done. I don't mind the rehab process although it can get a bit stressful. I don't love being a landlord, but I do like the cashflow. I don't really have a preference for SFH vs multis. I am intrigued by commercial/warehouse, storage, and similar deals but I am still very much on the learning curve about how to structure those deals to make a decent profit.
In my opinion, SFHs won't do it for you given your time goals and resources, unless you get creative. You need to do something where you can bring in OPM and amplify your return with that.
I would pay off the higher interest rate/unsecured debt as fast as you can. Your Freedom Number totally depends on your expenses, and some of those have to go away.
I interviewed Mark Podolsky from The Land Geek for a podcast I'm launching soon. They have a very interesting model for buying land from distressed owners. You might consider looking into land if you're interested in doing creative deals in an asset class that most people aren't doing.
@Taylor L. , I wasn't looking much at SFHs until I saw the post from Sam about his 7 SFH's in Texas that he did in 6-9 months. I'm still curious about that. He's clearly developed an amazing system, which I don't have.
Definitely want to bring in OPM, but it's easier now that I have a chunk of my own capital to start with. Just means I can do bigger deals.
I don't have any unsecured debt in the credit card sense. Everything is also pretty low interest. Depending on how much we get when we sell it and how much needs to go to the 1031 fund, I would like to pay off the van as well as the HELOC and loan from my retirement account. That would leave me with only the student loan.
Definitely interested to hear your podcast! Drop a link when it's ready. Buying land could be interesting, I'll check out Mark.
If you sell the property with 300k in equity you can either keep the gain tax free if you’ve lived there or 1031 it if you haven’t. Either way, you free up that cash to buy value-add MF or Commerical properties. You can buy them yourself or you can buy into syndications that generate a lot of cash flow. You need cash flow to quit and you also want equity. Seems like you can get both with value-add in a mid-west market. 300k is enough that your PP will be over 1M plus meaning you can get better loans.
@Lee Ripma the rules are different for owner-occupied mutli-families. I can pull out some of the money tax free, but not all of it. I expect I'll end up with about $125-$150k that needs to go into the 1031 fund and the rest I can pull out. With the HELOC paid off, that gives me another $125k to play with and the remainder I will use to pay down other debt and improve my cash flow.
Midwest is on the table. Looking for metros that have strong fundamentals but are still reasonably priced. Most of the Texas cities except Austin, Kansas City, Indianapolis, maybe Buffalo. I'm open to suggestions, bonus points if there is a non-stop flight from Boston.
@Jason Turgeon . You indicate you do not like the job you are currently in - could you / would you consider changing jobs to something else that pays similar amount or even slightly less?
Some lifestyle changes, ala Dave Ramsey "Snowball" on your debts is also a good avenue to pursue to pay down you personal debts.
@Jim Cummings easier said than done. I'm a highly specialized professional in a very niche field. I've been looking for work elsewhere for over 6 years and have found it is very hard to get out of what I'm in now. I actually have two different opportunities now, but one of them involves a massive pay cut and I would have to do fundraising (nonprofit sector job), and the other one is a 6 month rotation to another office where I get to try something new. The former is in my field and would be a lot of fun and have great flexibility. But I'm leaning towards the latter even though it means I end up back at my original desk job in 6 months, because the 6 month gig may allow me to learn more about commercial real estate and set me up for better long-term goals, and there's no pay cut.
As for lifestyle changes, the goal of real estate is to not have to go back to rice and beans. We could sell the rental, pay capital gains, and wipe out our entire debt load except for one mortgage. We'd still have a nice chunk left over. My wife's salary and the rental income from the other half of our personal residence could cover the basics, but we would have to cut way back. I could quit tomorrow. I just don't want to take the lifestyle hit. I LIKE making big stupid art, traveling, going on vacation, and still having enough left over to aggressively save for retirement and our son's college education. The income that funds those things is what I am trying to replace.
I also want to raise enough capital to finish the exterior of our money pit. Again, I don't have to do it - we could leave it as is, or sell and move somewhere cheaper. I WANT to do it. But no amount of lifestyle changes or pay cuts is going to produce the capital I need. That's what real estate is for.