All Forum Posts by: Paul Novak

 This was a really interesting take on this and is a really cool perspective.  Thanks for sharing.

 To add more context I don't plan on retiring anytime soon.  The earliest I would probably retire is 10 years from now.  I think 50 is a pretty reasonable goal.  Currently we have a little over $500K in our retirement accounts so it's not a huge amount but not little either which will continue to grow.  The only thing I don't like about most of this money is that it's locked up until I hit 59.5 years old but I will be happy it's there to help supplement our rental income.  Again thanks for all the perspective.

 What your saying makes a whole lot of sense.  Thank you for taking your time to respond.  I truly appreciate people sharing their perspective that have more experience then I do.

First off Jason, thanks for replying to my post. To add some additional context I am currently 38 and I have not accounted for inflation in getting to my $11K number and I will explain why. There are two main reason. As we get to retirement I expect our expenses to reduce for example today we have a home mortgage in retirement I would expect to pay that off. Second my wife and I both have 6 figure jobs where we have been contributing to our 401Ks since we have been in our 20's. I also max out my HSA every year and have that money invested. Lastly we have money in Roth IRA's that will also grow. I say this because while I plan to live on our rental income in retirement I am hoping that our other investments can cover the cost of inflation. We also live in Wisconsin where cost of living is relatively low.

I am debating my next move with my rental business.  I am not that big.  I have 3 total properties and 5 doors, 2 multifamily properties and a single family.  My goal is to retire off of my monthly rental profits and my target number is $11K per month.  To hit that $11K per month I plan on having all my properties paid off.  I would rather have 10 paid off properties that make $11K per month then 30 properties with debt on them.  My current portfolio generates $2,790 per month with debt and would generate $4,900 per month if paid off in full.  This leaves me with needing to pay my current properties off but also needing to purchase more properties to achieve my goal.  Now for my decision:

I won't purchase a rental unless I can cashflow at least $500 per month.  With interest rates, home prices, and rent prices in my market to hit that goal of $500 per month I am looking at purchasing a house around $200K, putting down $100K, and renting it out for around $1,500 per month.  My wife and both make a high income for our area and I feel we could save about $100K per year to keep buying.  If we did a deal using the numbers provided above we could cashflow around that $500 per month.  My other option is to pay off the balance on one of our mortgages and cashflow more.  For example the last rental property we purchased we owe on it about $86K and if paid off would cashflow an additional $600 per month.

Because of our household income I am worried that paying off properties would bring us into tax brackets.  Trying to keep the logic simple if every house you own you can deduct 3 main categories on your taxes (property taxes, depreciation, mortgage interest) if I paid off a house I would make more with only two primary deductions.  If I purchased another house I would have 6 main deductions because each of the three would double up with two houses.  Honestly I don't see the market lowering home prices anytime soon or rates dropping any time soon.  I also am not a fan of timing markets.  I am a fan of saving up and investing when you have the capital to do so, sometimes your timing is good, sometimes it's not, but over the long term you will win.  Does anyone have any advice on how they would proceed?

I am looking for some advice.  Before I ask my question I wanted to provide background to help with any feedback you could provide.  My wife and I currently have 5 doors, 3 properties so we aren't looking to finance our first rental.  We live in Wisconsin so cost of living is relatively low and the average price of homes we are looking to purchase are between $150K and $225K.  From the properties listed above we cash flow $2750 per month which we are happy with.  Our combined income from our W2 jobs is around $215K per year.  We maintain zero debt other than our mortgages on our house and the mortgages on our rental properties and our overall expenses are relatively low.

With us being in prime income earning years where I believe our income will still make steady increases over the next few years I put more money down on our last property taking a short term hit for long term gains.  To do this I had the money for the down payment on our last property and I put an additional $50K down on the property by taking a loan out against my 401K.  My thought was it increased our monthly cash flow by about $400 per month for the next 30 years, I am paying the interest back to myself vs. the bank, and I am able to pay the 5 year loan back in about 8 months.  

My ultimate goal is to grow our rental business to the point that we are generating $11K per month with fully paid off properties.  Today I track our monthly cash flow along with our maximum monthly cash flow if the properties were paid off in full.  In my mind when our maximum monthly cash flow hits $11K I switch from growth mode to pay off mode.  Hopefully over this time I can recast some of my mortgages to increase cash flow before I get the mortgages fully paid off.

Now for my question. I want to purchase another rental property this coming year. I owe about $20K left on my 401k loan but will have that paid back no later than March. I am wondering what this groups recommendations are for financing. I want to keep my monthly cash flow on the property at $500 per month or more. Even if that means I have to put extra down I am fine with that. I have a HELOC I haven't touched with $90K available to me. I have about $55K availably with my Roth IRA contributions and taxable brokerage. Once I pay my 401K loan back I have $100K available to me in 401K loans we could borrow from my wife and my 401K's or we could just save. With interest rates as high as they are to have cash flow of $500 per month I am estimating I would need to put down about $100K on a nicer property. Am I wrong in thinking that I would rather pay interest back to me using my 401K for financing then borrowing from the bank? The loans take about $500 per paycheck off our pay but to be honest we make enough that we can easily afford that hit and if we didn't have the 401K loans out we would simply be depositing that much into our business every week anyways. If we worked to save the cash it would just delay our investing by maybe a year. I also understand that we could put less down on a property and buy more properties which would increase appreciation, increase debt paydown, and increase tax breaks. With my wife and I having two small children and demanding jobs I am okay with less properties and more cash flow from those properties for our current situation.

Anyone with experience with this that is willing to provide feedback would be much appreciated.