Guy on FIRE

Financial Independence; Retire Early

passive income

Update to My FIRE Journey

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Lately, I have been pondering a lot about what FIRE (financial independence; retire early) really means to me. Not just, “hey I do not need to work anymore.” – My views have changed a bit since I originally announced my journey.

I am not financially independent…. yet! However, the subject seems to cross my mind more and more as the days go by.

I feel like I am in a tunnel and way far off in the distance I finally see the fainted bit of light. Why? Well, my plan is solidifying and a more definitive timeline is starting to form.

Why do I want FIRE?

I notice that going to work every day is not exciting. In fact, its feels like a chore. Really, its the exact opposite from exiting. I hate working for the man and meaningless work. Anyone enjoy filling out expense reports? Mandatory quarterly compliance training? NO THANKS!

Oh, and I absolutely loath wearing a tie everyday. I now refer to my tie as my ‘corporate noose’  and it feels like I am suffocated a bit more each day. 

Sure, work pays my bills and allows me to save, and invest in real estate or dividend stocks. However, my work does not provide a source of fulfillment.

Now, I am not looking for work to provide satisfaction and meaning to my life, but its really draining when I do not give a damn about the work I am doing. Funny though, somehow I am on pace to be the top producer at my company this year.

Honestly, I am fed up with being forced to sit in pointless meetings where nothing is accomplished. Being confined to a cubical and having to sit all day is starting to take a toll on my body. Hell, I even read that sitting is the new (worse than) smoking… There is nothing worse than being forced to be somewhere from 9-5, especially when those are not even my best hours for productivity.

And don’t even get me started on some of my co-workers….

So not the 9-5, then what?

Spending 8+ hours a day on anything seems crazy. I rather divided those 8 hour days into 4 separate blocks of time.

I would love to spend 2 hours on my health and fitness (not just working out).

Another 2 hours would go towards volunteering and improving society or the local community.

I would also commit two hours to self-improvement (reading, learning, developing skills etc.).

Lastly, I would spend two hours devoted to developing and maintaining meaningful relationships with family and friends.

Early retirement does not mean sitting on the beach doing nothing all day. Though, there is nothing wrong with that. The beauty of FIRE? You can do what you want when you want.

Blinded by the Light?

As I mentioned earlier, I am started to see the light at the end of the tunnel. Cue Manfred Mann’s Earth Band’s – Blinded by the light. The light that is approaching quickly approaching has me distracted and dreaming about the other side.

A life with an abundance of free time comes to mind. Financial independence would provide such a thing. No need for an alarm clock if I retire early…unless I wanted to wake up early to go fishing or run before the heat. A life where I have time to regularly make it to the grocery store and cook (one of my favorite past times).

Plenty of time to travel and explore. I was tempted to turn in my two week notice earlier this month so that I could start hiking the Appalachian Trail. Unfortunately, this was not feasible. One day soon…

Less overall stress and better health sounds wonderful. No more worrying about deadlines or meeting performance goals. More time to workout and take care of myself.

This also means more free time to spend with friends and loved ones. Not just more time but better quality time. Sometimes, I feel that work bogs me down and I am not ‘fully there’ when I am with my family or friends – this is because work has me stressed or distracted.

How are you going to retire early?

Once my newest property leases up in the next month or two, it will increase my passive income to a level that is much closer to my FIRE number. However, this will not be enough to hit financial independence.

Ideally, I would like to buy one more rental property that provides strong monthly cash flow. After that, I would like to pay off my my first property (starter home).

This could be accomplished with three years (or less) of aggressively paying down my mortgage. I plan to use this property as my FIRE ‘home base’. I am fairly tired of house hacking and living with roommates.

No complaints though – house hacking has done wonders during my journey to financial independence and sped up my time to FIRE.

Not having a mortgage will help keep my cost of living down and at a level that I am use to spending.

Lastly, I would like to increase my cash reserves and non-retirement investment account income. This will provide a great buffer when I retire early. As such, I will not have to withdraw from my stock portfolio and can let the balance grow over time. Thanks compound interest!

the temptation

Well…. what is life without temptation? I am tempted to resign (retire early?) from my job next year after I collect my bonus check. Sure, this would be before paying off my home and I may or may not have achieved financial independence by then.

What I do know – the cash flow from my rental properties would (likely) be enough to support my life style and allow me to travel for 6-12 months without touching my savings/investments. Heck, my net worth might even go up during this hypothetical sabbatical depending on the stock market.

I also know that I would have adequate cash reserves during this FIRE test run to cover any potential major repairs. Absolute worst case, I could sell a few stocks in my taxable account if a doomsday scenario happened.

Would you be tempted to retire early or take a sabbatical at 27 (28 next year) knowing that you have a strong safety net to fall back on? Worst case, I can decompress for 6 months to a year. After all, I am truly burnt out after years of 80+ hour work weeks. After that, I could find another job and work for a few more years until I truly hit financial independence. Perhaps, I already acheived earned financial independence but need more of a buffer for peace of mind?

 

Announcing a New Guest Post Series

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I love real estate and guess what? I am very excited to announce our new guest series “Making it Happen: Jr. Real Estate Investors” that will start next month. The series will share the stories of junior real estate investors who own 1 to 5 properties and we have some great AMAZING guests lined up.

The Mission

Our goal is to show the benefits of being a landlord. We hope our guests’ stories will inspire you and that you will see how real estate can positively impact your life. Real estate provides great passive income and is one of the best vehicles to achieving financial independence.

You will learn how our guests got their start in real estate. These investors will share their story and how real estate is positively impacting their lives.

These are real people with real stories. We hope that you will be able to relate to someone who just bought their first property and hope that you see yourself doing something similar.

Also, our guest will share some of the headaches that they may have encountered as a landlord. As you know, we will always aim for transparency. Real estate is not all sunshine and rainbows…. BUT its pretty damn awesome most of the time.

We hope you will follow our series over the next few weeks. Lastly, please feel free to contact me if you are interested in participating. We have a spot or two still open.

The Fixer-Upper

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The tale of the rundown row home that turned into a gold mine.

Flash back to the spring of 2015. I was still working at MegaCorp and house hacking in my starter home. At this point in my life I was saving every penny I could find. This meant biking to work (which was awesome) and making all of my meals at home.

One afternoon, I was sitting on the couch updating my budget and net worth with Personal Capital, which is is something I always do at the end of the month. My net worth was nothing impressive at the time and definitely less than $100k.

Also see: 6 Steps to Saving a 6-figure Net Worth

Curiosity got the better of me and I was wondering what it would take to become a millionaire by age 30. Running some random scenarios, I realized that I would need a miracle to join the two comma club by thirty.

First, I ran a scenario of what if I saved and invested $20k/year? Not even close.

Ok… What about $40/k a year? Still short….

How about $50k/ a year? Nope.

$70k/ year? Fuck! Still short

This caused me to to jump into action. I wanted to find a way to increase the gap between my income and my expenses. My spending was minimal and could not go much lower since I was playing strong defense. So, I decided to focus on growing my income.

By increasing the gap, individuals are able to save/invest more. As such, this creates a snowball effect and the funds being saved/invested start to grow exponentially.

[Side note: Now, just to be clear, I currently do not believe I will need $1 million dollars to retire. Back then I was less educated about Financial Independence; Retire Early (FIRE). I also thought I wanted to live a ‘baller’ lifestyle.]

The Plan

Having tons of free time, limited cash and being comfortable with leverage (debt) led me down one path… You guessed it, MORE REAL ESTATE. Oh, and a side hustle as a property manager learning from someone with almost two decades of management and investing experience. But let’s focus on the real estate part today.

I wanted to find a multiunit (2-4 unit) or single family home that was worthy of its own HGTV show. This type of property would provide me:

  • Better value for my money
  • Increase my purchasing power
  • Allow me to build equity through my renovations (sweat equity)
  • House hack and have positive cash flow while living at the property.

Often, these properties allow for the owner to live in one unit for free while the rents from other units cover the mortgage. The owner can even make a profit while living in the building.  This is one of the best forms of house hacking.

This lead me to look at 2-4 unit apartment buildings which have many benefits. One of the biggest advantages is that you can buy a building with 4 units or less with a 30 year mortgage and only a 3.50% downpayment (FHA loan).

My first property taught me many lessons. These growing pains laid the foundation to make my future investments better. For example, renting to your friends and charging below market rents is a nice thing to do but its not a savvy business decision. I wanted my next property to provide STRONG cash flow regardless if I lived in the property or not.

The Search

Unfortunately, developers in Washington, D.C. also love 2-4 unit buildings. Why? Well, the condo market is hot and developers convert these apartment buildings into condos to make BIG BUCKS.

As you might expect, I lost out on a few multi unit buildings. I had a higher offer one property but lost to lower all cash offer. Many properties sold for  more than $50k above the list price.

My 3.50% down, FHA financing offer was not attractive to many sellers; especially when there were all cash offers with no contingencies.

As a result, this lead me to expand my search to single family homes. This type of property can also provide options for house hacking and great investment returns.

The Rundown Row Home

Throughout my search, I also kept an eye on single family homes. There was an old rundown row home (in DC we call a townhouse a ‘row home’) in an up and coming neighborhood that was way extremely overpriced.

The property had been listed for sale for several months. The seller also reduced the price three times and still could not sell the house.

Light bulbs and alarms were going off! I called my realtor to check out the house.

We went by the house the next day. And… well… the house did not show well. Four generations of a family were living in the house, there was junk EVERYWHERE and the property was not well maintained. Mold was clearly visible in the basement. There was no central air. The list goes on and on but I am not going to bore you with all the details… You get the idea…

Most people were scared away by such things.  Which was… AWESOME! At least, for me it was awesome. The house was down right disgusting and I understood why no one wanted to buy it.

This was my diamond in the rough. Where others saw disgust, I saw beauty and opportunity. Also, I saw a seller with limited options and decided to make a lowball offer. The offer was accepted.

The Rehab Loan

The house was barely ‘livable’ and I planned to completely gut the entire place. Remember, I did not have a lot of cash so I needed to get creative.

Thankfully, I had a good mortgage broker (very important member to have on your real estate team). We used an FHA 203K loan which allowed me to use loan dollars (debt) to buy AND fix up the house. The best part? I only had to put 3.50% down.

This type of loan required a licensed general contractor (GC) and a budget for the renovations. The approved loan budget was $66,615.00 and there was a $9,992.00 contingency reserve fund for cost overruns. In total, the loan would provide up to $76,607.00 towards renovating the property.

The actual project would cost north of $100,000.00 which means I had needed to get creative and find a way to fund the difference. As a result, I opened three credit cards that provided zero interest for the first 12-18 months.

The renovation would take 3-4 months and I knew the house would provide strong cash flow once my future roommates moved in. The balance of the three credit cards peaked at around $25,000 in total. This debt was daunting to look at every month but it served as an interest-free loan. I paid back the balance in 8 months without having to pay a single cent of interest.

Scope of Work

So… What kind of work did was needed? And you are probably wondering about the numbers (hang tight). Everything was from the 1970s (if not older). The house was originally 4 bedrooms and 1.5 bathrooms and I converted the place to 5 bedrooms and 2.5 bathrooms.

A few of the renovations include:

  • All new electric (wiring, switches, lighting, outlets etc.) and a heavy up
  • All new plumbing
  • Installing an HVAC system
  • Brand new kitchen, cabinets, countertops, and appliances
  • New floors for all three levels
  • 2.5 brand new bathrooms
  • Removing all interior walls on the main floor to create an open floor plan
  • All new windows
  • Treating the basement for mold
  • Creating an awesome fenced in back yard patio

The Hustle To Get It Done

I interviewed a half dozen general contractors. Most of the GCs gave me extremely highball offers and thought I was just ‘some dumb kid’ they could take advantage of.

Little did they know, I spent several years working/volunteering with Habitat for Humanity (amazing organization). I knew their pricing was unreasonable and at one point even told a guy to go fuck himself.

Some say, all is fair in love and war. I say, “all is fair in love and business is a war.”

Anyway, I about had it with GCs but my loan required that I have one. Thankfully, I found one guy who would GC the project, let me sub out the work to my guys, and do some of the work myself. The kicker was he got to collect a fee for doing almost nothing and had to sign off on the work.

Managing the rehab felt like bit of a full-time job in its self. Many mornings I was waking up at 5:00am, grabbing my cup of coffee and hitting the road so I could make it to Home Depot when they opened. I was constantly selecting or picking up materials for the house. Frequent phone calls and in-person meetings with contractors were necessary to manage the workflow.

The Numbers

So, the part y’all been waiting for.

Drum roll please…… Here are the numbers for Property #2.

My lowball offer of $400,000 was enough for me to get the property under contract. Additionally, this was almost $100,000 less than the list price at the time and about $200,000 less than the original price.

Purchase Price: $400,000.00

Total Loan: $469,500.00

Down payment: $17,028.49

Additional equity for rehab & carrying costs: ~$32,700.00

Total Equity Contributed: ~$49,750.00 (let’s call it $50,000.00 for analysis sake)

Monthly Rent: $4,000 (plus I live here for free. The place would easily rent for $4,500-$4,700 if I moved out).

My total investment costs of  $50,000.00. The house easily rents for $4,500/month and my carrying costs are $2,408.57/month (my mortgage payment after I refinanced the construction loan). This means I will have $2,091.43/month ($25,097.16 annually; $19,097.16 while I live in the house) in cash flow after paying for principal, interest, taxes and insurance (PITI).

A basic return on investment (ROI) calculation:

$25,097 / $50,000 = 50.19% Return on Investment

This means I will recoup my cash invested in 1.99 years ($50,000 / $25,097)

This analysis is a bit simplistic. I self manage and do not have to pay a property manager (maybe one day once I hit FIRE). There were will be minor repairs and expenses overtime. Over the next 30 years I will have larger expenses as well. All repairs and maintenance items will be supported by the property’s cash flow. Thankfully, everything in the house is BRAND NEW…. Literally.

Summary

Buying a fixer-upper can be a lot of work, but it can also be very rewarding. My second property provided much stronger cash flow than my first home. I also found a way to eliminate my housing costs while getting PAID to live here. The property appraised for significantly more than what it cost to buy and fix up. A few months of hard work for a life time of cash flow seems well worth it.

What is your experience with renovating properties?  Do you have a success story of your own? Or, perhaps you want to start rehabbing homes? Please comment.

Q1-2017 Dividends – The Dividend Report

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As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. I provide quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The Goal

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

Q1-2017 Dividends

My Q1-2017 dividend income was $334.60, which left me scratching my head. Last quarter (Q4-2016), my dividend income was $1507.92; I fully expected this quarter to be lower since many of my funds have larger distributions in December. I even anticipated this in Q4-2016 Dividends – The Dividend Report. BUT, this was just crazy.

My Q1-2016 Dividend income was $344.93 which means year over year my quarterly dividend income DROPED $10.33. This still made no sense as I had five figures more invested in the market compared to last year. So I had to do some digging to find the answer.

I switched jobs late last year. The funds in my new company’s 401k plan are a bit different when it comes to dividend distributions. I still receive 4 distributions a year. However, the distributions are in April, July, October and December.

Ahhhh! So there is the answer to my problem. My new 401k plan will not provide any dividend income in Q1, however, I will have two rounds of dividends in Q4. This is odd but explains a lot.

To summarize – my last year’s first quarter dividend income was $344.93. This equates to a $10.33 or 2.99% decrease from the same quarter last year.

I would have increased my dividend income over 50% year over year if my 401k funds paid a dividend this quarter. I fully expect Q2-2017 to bounce back and be well above the Q2-2016.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

dividend

The table below outlines my quarterly dividend income dating back to Q1-2013:

dividend

New Purchases

No individual stock purchases in Q1-2017.

Landlord Report – March 2017

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Hello there – welcome to the first Landlord Report. This monthly report will share my experiences as a landlord. The report will show EVERYTHING related to my rental properties….

I will discuss the rents that I collected, mortgage payments, and other ‘landlord items’. Other topics may include repairs, finding new tenants and any other items that might randomly pop up. The report will also share how much money I made and the amount of time (hours) it took. I want to show the world being a landlord is a wonderful thing.

I also manage ~50 properties for other people, but this report will not share information on my clients or their properties.

Throughout this process I aim to be as transparent as possible. Being a landlord is a wonderful way to earn (mostly) passive income. Please feel free to contact me with any questions – happy to provide insight.

Landlord Report – March 2017

landlord

This past month was much busier than a normal month. Never the less, the work load was very manageable. I closed on my new rental property and managed multiple contractors in preparation of renters (hint: this is the big reason why it was a busy month).

Let’s dive into this month on a property by property basis.

My property portfolio (2 now 3 – and not sure that counts as a portfolio… but hey! its growing) had a great month.

Rental Property #1

The Starter Home

The table below outlines all the revenues and expenses for property #1. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $2,275.00
Sublease fee $350.00
1st Mortgage $1,800.00*
2nd Mortgage $350.00*
Total: $2,625.00 $2,150.00
Profit $475.00

The tenants paid their rent of $2,275 (increasing $25/month next month) in full and on time. I stopped by on my way home from work to collect to the rent which took about 20 minutes of my time.

I typically collect the rent in person and will chit chat with the tenant(s) for a moment if they are home. This also provides a great time to see if there is anything wrong with the house or make minor repairs.

[pro tip: You will likely notice something is broken before a tenant will. Take a gutter for example. A tenant will likely only notify you once something is a problem for them. Being a present and proactive landlord can save time and money down the road]

Management Items

The young lady who lived in the basement room subleased her room for the next three months. She was required to pay a $350.00 sublease/assignment fee and this process took less than a half hour.

What was involved? The new tenant applied via my online application. I spent five minutes inputting his information into my vendor’s credit/background check website.

The guy had strong credit and a respectable rental history (verified by his previous landlord). I cannot stress this enough… Always ALWAYS require previous landlord references. Ask several questions and make sure its not their uncle or friend.

After that, I considered him ‘acceptable’ by my tenant rental standards (future blog post). Both of the other tenants also approved of their new roommate (requirement of the lease).

Next, I prepared a brief sublease agreement for electronic signature via Docusign. This process took about 10 minutes of my time. The new tenant sent me his first month’s rent and security deposit ($825 + $825 = $1,650) via paypal and moved in the next day. Moving forward, rent will be paid by check, cashiers check or money order.

Repair Items

One of the guys who lived at the house sent me a note about the front door on a Saturday night. The deadbolt had “become a pain in the ass. Like u gotta put your whole back into it to unlock”

Before you panic and think being a landlord is a nightmare (its not)… This is a VERY easy fix. I stopped by the house the next morning to look at the deadbolt. A little WD-40 and 5 minutes of my time, and the lock was working like brand new.

While I was at the house, I noticed the door knob/lock for the front door was sticking a bit as well. I figured I am already at the property and might as well save a future trip. Being proactive, I spent another 5 minutes taking the knob off, applying WD-40 and putting the knob back on the door.

This repair trip was the best possible outcome. All in all, the solution required 10 minutes of my time, a little WD-40 and no money (already had the can of WD-40. This is an essential for landlords/property managers).

The worst case doomsday scenario for this repair would have been a trip to Home Depot. And guess what? It would not be THAT bad. All I would need is a new lockset which costs less than $30.00

Rental Property #1 Summary

In summary,  property #1 – total income $475.00 and one hour of time. As a result, I earned $475.00/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

*My total monthly mortgage payment is ~$2,013.00 (dropping by $100/month in May now that my escrow account is properly funded… long story & will share more another time) and I am paying down additional principal every month. This is the only property I pay more than the minimum. Sometime over the next year or two, I will start aggressively paying this home off as I plan to live here when I start FIRE.

Rental Property #2

The Fixer-upper

The table below outlines all the revenues and expenses for rental property #2. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $4,000.00
Mortgage $2,408.57
Total: $4,000.00 $2,408.57
Profit $1,591.43**

The tenants/roommates paid their rent of $4,000 in full and on time. Since the tenants of rental property #2 live with me, collecting rent is easy. Everyone leaves their rent on one of the counters and I mobile deposit their checks. No trip to the bank required. The money literally comes to me…. Cannot beat that.

Management Items

One of my roommates’ leases expired at the end of February. As such, we were graced with a new roommate who moved in during the first week of March. This also means I did not have any vacancies at the property.

Finding a replacement was relatively easy. We put an ad up on Craigslist and circulated the information to our various social networks. We were fortunate to be ‘one and done’ since the first guy that showed up was awesome.

Like rental property #1, the new roommate/tenant had to go through my on-line application. He checked all the boxes as expected; most people with a government security clearance are pretty boring on paper.

Repair Items

Guess what? No, the answer is not chicken butt…. BUT! I had no repair items this month. This is ACTUALLY very common for a landlord. Real Estate is truly a great form of passive income and I will keep shouting this from the mountains.

Rental Property #2 Summary

In summary,  rental property #2 – total income $1,591.43** and one hour of time. As a result, I earned $1,591.43/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

**I also live in the house and get paid to live here. Pretty sweet right? House Hacking is awesome.

 

Rental Property #3

Rental property #3 is under construction. I will have an update later this week about the renovation process.

landlord

 

Portfolio Summary

To sum up this entire report, I spent about 2 hours of my time on existing rental properties. Property #3 is being renovated and that did eat up some of my free time (not included in calculations). However, I am comfortable with the upfront time and costs since the property will provide a nice passive income in the future.

This month I pocketed $2,066.43 or $1,033.21/hour. My renters also paid down $1,318.78 of my debt. That brings my monthly gain to $3,385.21 (or $1,692.60/hour). Not bad for a few hours of time? What is your excuse for not being a landlord?