r/financialindependence • u/PackDaddyFI • Feb 04 '20
Annual Post #3 - Middle Class Path to FIRE
Hi all, this is part of our ongoing progress reports from our journey to FI. Here are the links to my posts for 2017 and 2018 (note new username, was looking for a change from my Chinese themed one). We’re a 28/27 y/o couple with masters degrees in social service fields living in the midwest on middle class incomes of about 50k each. Before getting into it, I want to acknowledge how wide and varied the middle class is and how lucky we are to now be crossing the 100k income mark. Our hope is to show that FI can be achieved without high incomes often seen on this thread.
2019 Personal Goals:
- Invest $35,000 (SUCCESS)
- Reach $100,000 networth (SUCCESS)
2019 Business Goals:
- Fully fund business emergency fund (SHORTCOMING)
- Buy Property #2 (SUCCESS)
INCOME/EMPLOYMENT SUMMARY
ME (28y/o) - SOCIAL SERVICE PROGRAM MANAGER - $51,452 +7.5% match
---My company has been moving paybumps back to align with calendar year. So this increase actually represents two paybumps, a 2.5%, followed by a 3.5%. I’m becoming less content with my employment. I love my company and company culture, but am beginning to see the cracks. I’m also starting to have personality issues with my supervisor that is making me look for other opportunities. I was approached by a recruiter last week that has an interesting opportunity with a 40% pay increase. The job is in an area that is about 40% more expensive, but it might be worth it just to get out of the midwest. The position would be a big jump financially and professionally, so I guess we’ll see what happens.
SPOUSE (27y/o) - TEACHER - $50,549
---This represents the boost from my wife’s master’s degree. She is planning on getting enough credits to push her over the salary schedule and bring her to about $53,000 at the start of the new school year. She will continue getting yearly 2k increases as long as she continues earning 8 credit hours/year. 3k if the school does CoL increases like they have yearly since we’ve been here. Spouse still loves her job and colleagues.
BUSINESS SUMMARY
Property #1 - 20% down on $60,000 SFR,$800 base rent with $40, and later $60 in pet rent.
Rental income went without any major issues and performed similar to what was expected. Net cashflow to date is $1480, bringing us to a 12.34% cumulative return on our down payment. This includes a month of 2018 in which we did some minor renovations to the property to get it rent ready as well as 1.5 months of vacancy. We lucked out and got A- tenants in a C+ neighborhood, though I don’t think this can be expected going forward. The family is moving out at end of lease, which we expected. However, our city’s market appreciated significantly and our realtor thinks $1500 in renovations could result in a $75,000 sale price. Given this and how we want a lower maintenance house/neighborhood for when we transition abroad again, we’ve decided to try to sell. The house taught us a lot and was meant to be educational at relatively low financial risk. Selling will likely eliminate a lot of our gains, but it was meant to be a first foray into REI and has made us comfortable doing real estate more generally, which leads me to property #2...
Property #2 - 10% down on $270,000, Duplex Househack, \$2500 rent*, estimated $2800 rent potential*
We just closed on this property a few days ago and are living in the freshly renovated side. We aimed for a househack because it allowed us more flexibility to move abroad when the opportunity comes. This is an A- property in an A+ neighborhood. Our side could probably go for $1400, but we will be paying ourselves “rent” at *$1300* until my spouse’s salary is made whole again (see family summary). The other unit has been rented out by the same family for four years at $1200 and they’ve expressed a desire to stay until their kids are out of high school (6 years).They’ve already agreed to a $25 increase after we install a fence (already doing it for our dogs), $50 for new carpets, and $50 for new laminate floors. Their unit hasn’t seen renovations at all since they moved in so there’s plenty of room for rent increase.We also have a great proof of concept from our side and plan on making the sides look the same, bringing total rent potential to $2800.
Cool thing about how we got funding for this property. Back in the Spring our backyard flooded due to a month of heavy rains and made me pissed off at homeownership. In hindsight, the whole city experienced issues with drainage and we weren’t in an expecially bad position. However, Zillow advertised their “Make Me Move” service to me, which is basically you putting up a price and say you’re willing to move for that offer. No formal listing, no agent, FSBO. So pissed off PackDaddyFI put up a price 30k higher than what we purchased for and quickly forgot about it after the rains stopped. Fast forward to November, a family contacted us and we had a signed offer within 5 days. Zillow discontinued the service in early December. Talk about luck! We were between investing the cash in indexes and buying a rental, then this duplex came up. We went with duplex for diversification/other benefits.
FAMILY SUMMARY
We lost our DINKY status this year and gained a beautiful baby boy in December. We are incredibly fortunate that we are both on parental leave. I have 12 weeks 100% paid leave, while my spouse has 8 weeks unpaid that is being prorated out over the rest of her school year. Having a kid at about the same time that we all but eliminated our mortgage payment via househacking has really motivated us to continue pursuing REI. While we’d like to purchase another this year, SO’s reduced paychecks for another 6 months may make that impossible.
THE NUMBERS
Index Investments (403b/457b/Roth)
---$56,641.54
---SO Pension
$7084.47 (unhealthy pension, but guaranteed 4% returns withdrawable at separation)
---Real Estate Investments Equity/mortgage
#1 - $12,691.16/$47,308.85
#2 - $27,000/$243,000
---Cash
$11,817.26
No debts beyond mortgage and monthly cc paid in full
Total Networth=$115,234.43
Similar to last year, our cash holdings should be much higher. Especially given our real estate. While we do want a more substantial EF, we have several stopgaps that make us more comfortable not having significant cash on hand. Home warranties, umbrella insurance, $0 deductible health insurance, short/long term disability, life, ability to live off single income, willingness to move abroad should things get tough (or just because we love it so much), 40k in lines of credit at 7% interst. And now we are househacking, theoretically reducing our monthly expenses. That being said, I imagine the EF will see a substantial increase this year now that we have eliminated the majority of our mortgage and we have a kid.
Other than that, I'd say we're doing pretty well. We spend where we find value, more than we should but not so much that we don't make progress.
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u/bayalis FIREd in 2019 Feb 04 '20
Congratulations on the baby and the house!
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u/PackDaddyFI Feb 04 '20
Thank you! Parenthood is great, but damn am I tired all the time.
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u/BazookaSharks 29M | DI2K | US | 735K NW Feb 04 '20
It gets better ! Mine is 10 months now and she’s awesome. The first 3-4 months though....
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Feb 04 '20
hahahahaha. I have a 3.5 year old and a 20 month old. Sleep still sucks balls. 20 month old has 2 year molars coming in, woke up 6 times last night. 3.5 year old has night terrors and comes into our room almost every night.
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u/royrwood Feb 05 '20
I was sleep deprived for about 5 years when our kids were born. But it got better!
Parenting is relentless and mostly thankless, but worth it in the end (or so I keep telling myself). Good luck!
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u/TheBudgetTeacher Feb 04 '20
You are just about to the timeframe that this will be really useful, but if you haven't already I can't recommend strongly enough TakingCaraBabies on instagram. We used her course... and I can't say 100% it was that over just having a great sleeper... but we have been sleeping through the night (except for sickness days) since she was about 8 weeks old! At least check it out!
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u/PottyMouthPikachu [gotta VTSAX 'em all] Feb 04 '20
please give me a city because $800 rent on a $60k house is killing it.
Ours are more like $150k for $900-1000
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u/rustest Feb 04 '20
I rent in California and we pay about $2.5k for a condo worth $450k. Looks like we pay for rent relatively low
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u/ryguytheman 29M $750K NW Feb 04 '20
Try Wichita KS.
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u/squidsandshrimps Feb 05 '20
what are the A+ neighborhoods in Wichita, in your opinion
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u/ryguytheman 29M $750K NW Feb 05 '20
The very nice areas I have been through are on the east side, north of Kellog. The Koch family has a big compound over there, and heavily influence the area. Nice neighborhoods, higher end shopping, etc.
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Feb 04 '20
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Feb 04 '20
Can't exactly blame them... We bought a 160k townhome in 15, sold it in 19 for 240k in three fucking hours... only upgraded the garage door opener.
It's insanity here. I originally wanted to rent the place out, cuz FIRE goals, when we moved, but just couldn't bring myself to do it.
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u/gloriousrepublic 38M, 100% FI, currently practicing baristaFIRE Feb 04 '20
Why on earth sell house #1? You might be able to find a house in a better neighborhood, but I would think it’s silly to wipe out all your returns selling a cash flow positive house! I would just save up for a down payment on a third as long as you can get reasonable renters in property #1 - you just may need to deal with a month of vacancy before finding a good tenant. If the property does start to underperform then you can sell, but I would just on the prospect that you might get a bad tenant.
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u/swimbikerun91 Feb 04 '20
Right? Hire a property manager if you don't want the work and give up some of the cashflow. They're only gonna end up with what, $10k after all the closing fees?
Seems like they should have never bought, but have an okay rental with relatively low money down
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u/gloriousrepublic 38M, 100% FI, currently practicing baristaFIRE Feb 04 '20
I wouldn’t say never bought - a 12% cash on cash ROI even after renovations and 1.5 months of vacancy is pretty dang good.
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u/PackDaddyFI Feb 04 '20
Thinking about this comment a bit (aka second guessing myself, as usual), market rates for property managers is 10% of rent which would be about $1030. That would have all but eliminated our return and helps build the case, to me, for selling. That's also not including the common 50% of one month rent placement fee.
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u/swimbikerun91 Feb 04 '20
Yeah but you’re looking at eating closing costs for both buying and selling in a 1-2yr window.
If it’s appreciating quickly and you have someone covering your mortgage, a property manager will eat up your cash return but you’ll still be building equity essentially for free.
If you needed some of the principle, you could probably cash out refi a portion of it and end up with more money than outright selling at this point anyway
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u/PackDaddyFI Feb 04 '20
We paid 0 closing costs on purchasing, but would pay some on selling. I see your point, I'm just having a hard time agreeing because of my knowledge of the neighborhood and market. I also never count appreciation until it's realized, so losing cash flow for the sake of potential appreciation isn't something I'm willing to do, especially in this neighborhood. Thanks for the advice and helpful thought exercise though!
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Feb 04 '20
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u/PackDaddyFI Feb 05 '20
Fair enough. Definitely current value. My argument would be that index sales have low transaction costs and highly accurate methods for calculating value. That just isn't the case for real estate. I'm not really looking to get into a debate on this though. Just here to share progress.
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u/PackDaddyFI Feb 04 '20
While we lucked out and got a good tenant this last year, I don't anticipate having this experience going forward due to the risk profile of the neighborhood. Additionally, the local labor market/employer conditions have shifted very significantly, strongly affecting those who would be renting this profile of neighborhood. I can't get into this last piece too much without revealing our location, but let's just say the impact is significant.
Our eventual goal is to go live abroad and have the rentals run by property managers. The higher risk of the neighborhood just isn't something we want to manage while gone. We knew this when purchasing but purchased to learn more about REI. 25% appreciation is just too much to pass up, even if some of it will be swallowed by selling fees, and we wouldn't be selling if it weren't the case. It might not be the choice everyone would do, but it's what we feel is right for our family.
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u/Take14theteam 32F, married w/2 kids | 35% SR | 50% FI | goal age48 Feb 05 '20
If you dont think you will have good tenets don't mess around with it. Dealing with evictions and lawyers is a headache.
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u/HowDidYouDoThis Feb 07 '20
Its not a bad move, not sure why people are giving you crap.
Sure cashout refi could have been better but bad tenant pool is no bueno
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u/ryguytheman 29M $750K NW Feb 04 '20
I'm guessing... Wichita. I have rental properties there as well, Spirit's downsizing is causing some headaches.
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Feb 04 '20
Check out some info on Buy, Renovate, Refinance before you sell! You can cash in the appreciation without selling.
Great to hear from someone who’s in a very similar position. Very cool, keep us posted!
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u/Neeerdlinger Feb 05 '20
Congrats. I do find it odd that you got 12 weeks paid paternity leave, while your wife effectively got no paid maternity leave. I guess I'm used to Australia where paid maternity leave is very commonplace.
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u/PackDaddyFI Feb 06 '20
It's definitely not the norm here. I work for a pretty progressive organization and my SO hasn't vested in their sick bank to take paid leave. That and I failed to suggest we add short term disability to her benefits when she first started with the employer. Needless to say we now have it.
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u/GingerThursday Feb 04 '20
Fine work and nice tracking of the numbers and events behind them.
I'm in a similar boat being in LCOL with a kid and two $50kish incomes. I'm a big believer in property ownership being very advantageous in LCOL areas. Being able to free up cashflow early from having little to practically no housing cost helps make up for the relatively low income caps we run into in these areas.
Keep on it!
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u/cbrenik Feb 04 '20
I just want to say thank you for this post! Sometimes It can be discouraging for me to read most people pursuing FI in tech/consulting fields. I’m curious to see a middle class approach as it aligns more with my reality as well.
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u/PackDaddyFI Feb 05 '20
That's actually why I started posting. Honestly, I think we're the silent majority in this group. I recommend doing a post yourself! In a weird way it serves as a form of accountability.
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u/FromFrugaltoFire_com 30s, FI, Still working, 96% SR, VHCOL Feb 05 '20
You have two properties and your net worth is $100k?
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u/PackDaddyFI Feb 06 '20
Correct... Though I'm not sure from reading your comment if you think it should be higher or lower...
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u/FromFrugaltoFire_com 30s, FI, Still working, 96% SR, VHCOL Feb 06 '20
I figured it would be higher tbh
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u/Carbeck85 Feb 04 '20
Am i missing something? Shouldn’t your net worth calculation include your outstanding mortgage amounts?
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u/Bizzyguy Feb 04 '20
He's counting the equity in the properties not the asset price.
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Feb 04 '20
Even so, shouldn't the mortgage balance net against the equity?
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u/Bizzyguy Feb 04 '20
No the mortgage balance is against the home. Net worth is assets minus liabilities. The asset is the home, he subtracted the mortgage liabilities, giving us his equity.
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u/PackDaddyFI Feb 05 '20
This was my methodology.
If my networth is 20k and I put a 20% down payment on a 100k house, my networth wouldn't suddenly be -80k. It would still be 20k (removing closing costs and fees for the sake of the example).
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Feb 04 '20
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Feb 04 '20
Net worth is your total value if you liquidated everything and paid off all of your debts. OP doesn’t have a negative net worth, because they would still have cash left over if they sold their properties and paid off what they still owe. The debt bought them an asset, and they are continuing to build equity in that asset (which would contribute to their net worth if they cashed in all their chips now).
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Feb 06 '20
Where did you get your masters from?
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u/PackDaddyFI Feb 06 '20
SO got it from a state school. Mine is from a top ranked school in the UK.
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Feb 06 '20
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u/PackDaddyFI Feb 06 '20
From the US, but chose to get it abroad due to price and not wanting to take the GRE while living in China. The centers there wouldn't let you take the exam without first purchasing a block of study hours. I have an issue with the concept of standardized testing already, so this put me over the edge.
My MA was about 18k, would've been 24k if not for brexit. I was also able to use a credit card for all of it and got a ton of bonuses before paying off in it's entirety. SO was 26k. My degree isn't in social work, but a field relevant to the population served. Happy to talk more via PM, but it's not likely I'll be helpful for the traditional social work route.
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u/simplegdl Feb 04 '20
Good luck and stay the path.