It’s tax season and this is a good time to review how my retirement accounts performed last year. I have a 401k (traditional and Roth) plan through my current company, a rollover traditional IRA from my previous company and a Roth IRA that I opened over a decade ago on my own.
This year I am blessed with the best Valentine’s present of my life… the love of my life, my daughter, born a week ago. For the last half year I have been hinting about a life changing event, and I think today is the best time to share this special love. I have never been a very emotional person, but when I lay eyes on this tiny person for the very first time, tears just flowed uncontrollably. I finally know what unconditional love is.
Happy New Year!
I had four short term financial goals at the beginning of 2016. Lets go over each one of them and see how I did.
Goal 1: Increase total passive income to at least $450 average per month or $5,400 per year (Include dividends, interests, and rental property)
I gave myself a B on this goal. I increased my average passive monthly income from $300 to $385. If not counting my real estate rental losses, I averaged about $650+ per month.
Lets do a quick review of my 5-Yr Plan to FI/RE targeting April 15, 2020. It has only been a month and I am still working on the details of each step. I track my income, expenses and net worth on a regular basis so it’s easy for me to know how well I am progressing toward my goal in any given month. Continue reading
The third step of my five year plan to FI/RE is to become an accredited investor. Given that most of my assets are tied up in my primary home, and the primary home does not count as part of the assets required to be an accredited investor, I have some work to do. The requirements to become an accredited investor is to have an annual salary of at least $200K for singles and $300K for married couples, or have a net worth of at least one million, not counting your primary home. For me to achieve this, that means I need to invest, invest and invest in the stock market.
Some of my ex-coworkers lost big in the tech bubble in 2001 and that scared me from heavily investing in my early years. The worst part was a couple of them bought their options to hold, and then they got laid off. They ended up with a huge tax bill and no salaries to pay. Luckily, I just started working, so I didn’t have much to lose. I probably loss enough to buy a nice BMW, but not nearly as much as some of my older c0-workers.
I funded my 401k when I started my job, but I was not maxing it out. I was putting all my savings in a money market for a down payment. It was not until 2006 that I started to max out my 401k, and around the same time funding a Roth IRA. When the market crashed around 2008-9, that’s when I slowly got back into the market, and picked up a couple of index funds and value stocks. I bought my home in 2006-7 with a ~40% down payment, so that cleaned out my savings. And as some of you know 2006-7 was the peak of the real estate market in the SF Bay Area, before it crashed. Strike 2! So far I had the worst timing in the real estate market.
After refinancing my home four times, I am down to about a 15% loan-to-value, and a monthly payment that’s less than 1k. At the same time, I have also built a hefty 2 to 3 years emergency fund and invested about 1 year worth in I-Bonds. At this point, I don’t need more cash cushion, unless I want to invest in another rental. But with the Las Vegas rental situation, I am turned off by the idea of being a landlord again. Who knows? When my boyfriend and I do move in together, I do want to eventually buy a bigger place to live. If I do, then my current place will be my next rental.
My plan for the next five years with the extra cash I have each month is to invest, invest and invest in index funds, REITs, and dividend stocks. I am open to any kind of investment that gives me a high return in dividend or interest. I have not started the peer-to-peer lending, but I might consider doing it in the near future. I am also looking into investing in crowd funding in large scale real estate investments. This is after I pay off my monthly mortgage payment and after I invest in muni bonds in step 1. The stock market is almost back at it’s all time high again. I hope third time is the charm and leads me to FIRE. I am excited what the future holds.
The second step of my five year plan to FI/RE is to sell my Las Vegas Rental. When I know what I want and set a goal, I usually get what I want and achieve that goal. My problem is often not knowing what I want or being indecisive. This has been the story of my life. There were a couple of times that I knew exactly what I wanted and I went after it.
In my younger and more foolish days, I wanted to be a homeowner before I turn thirty. By my late twenties, I have worked a few years since graduation, and saved up a good chunk of down payment. During the week I would search for open houses on mlslistings and realtor.com, and then drag my mom to go see them on weekends. All I know is that I wanted to be a homeowner, but I have no idea what I wanted beyond that. Sometimes I would find something I like, but they were either out of my budget, or not in a location where I wanted to live. As my twenties were ticking away, I was becoming more and more desperate to become a homeowner.
During a trip to Las Vegas with my friends in 2005, we saw billboards after billboards selling brand new condos. We have heard of vacation rentals from friends, and have stayed in one of my friend’s family rental, and we loved it. My college friend and I decided we wanted a rental in Las Vegas, so we bought a condo. Neither of us knew anything about the real estate market in Las Vegas, nor has experienced a real estate bubble. Long story short, we bought the condo at the peak of the Las Vegas market, and it crashed as soon as we closed on the condo. But I was a proud first time homeowner.
We found ourselves a tenant and a property manager, and rented out the place for positive cash flow. Things were looking good, right? Wrong. Things went from good to bad to worse in a matter of a year, after our first tenant moved out. Our property manager was putting in bad tenants, and charging us an arm and a leg for every little service on top of the 8% he was getting. My friend couldn’t get along with the property manager, so we ended up firing him after a few years. We have been managing the property ourselves since then. I took on the responsibility of communicating with HOA and taking care of the finances. From then, it has been a headache, after headache, for me to deal with neighbors, HOA, maintenance and insurance every year.
The condo community has a bunch of old retirees, and they nitpick about every little single thing. Seriously, they have nothing better to do than to watch renters’ every move, and report them to HOA. We get so many violations and fines that I couldn’t even keep up with. In hoping to get fewer fines, we decided to rent only one room out to a single person. This decision significantly cut our rental income and resulted in a negative cash flow of about $250 a month. What’s worse? The violations and fines did not stop. Since we live out of state, we couldn’t make it to every single HOA hearings to fight the fines. We ended of paying for every fine. It is a total nightmare.
This property no longer aligns with my life, and serves no purpose to my goal of early retirement. I need to sell this property as soon as possible, even at a loss. I have discussed this with my friend, and he agrees this property is doing more harm to our welfare than good. We will sell this property as soon as the current tenant moves out. Unfortunately, we just put a new tenant in the property in February ,and he has signed a one year lease. The earliest I can get rid of this condo is spring of next year. I am looking forward to it.
The first step of my five year plan to FI/RE is to pay off my primary home mortgage or have the means to pay it off. What I mean is that I am planning a two part process. Part One is to continue to pay additional principal until I reach $40K of principal at the end of five years, or before that. Part two is to invest in a Muni-Bond every month until I reached $40K at the end of five years, or before that, to cover the rest of the principal.
The loan amount on my primary home after the last refinance is $120K with a 3% fixed interest rate and a 15-year loan term. I have already paid off more than a quarter in the last few years since the refinance, and the current loan amount is a little shy of $85K. Since my internal target is October 15, 2020, that leaves me about 53 months to pay off $45K. What that means is that I need to pay off $850 in principal each month. Currently the principal portion of my monthly payment is about $615, so I would have to pay additional $235 per month. Currently I am paying $300 additional principal per month so Part One of this step is covered. Ideally, I would like to complete this step by March 15 of 2019 ,so I will increase my monthly payment by about $675 instead.
Part Two is to invest in a Muni Bond until I reached $40K on October 15, 2020. The exact breakdown is $755 a month for the next 53 months. The reason I am doing this is that when my mortgage reaches $40K in principal, the interest portion will be less than one hundred dollars per month, and the interest on the Muni Bond will earn more than enough to cover the mortgage interest. At that time I will be free of my mortgage. I have the option to pay it off, or not, depending on the Muni Bond interest. When that happens I wouldn’t mind riding the rest of the loan to term, knowing that I have the money to pay it off, if necessary. It makes more financial sense if I keep the money in Muni Bonds to earn interest, and have an extra cushion of liquid asset in case of emergencies.