My Vision of FI: Phase One

I've written previously about my plan for financial independence. Twice, actually. Once in My 10 Year Plan post and again in it's sequel, My 10 Year Plan: 2016 Update. I know, I'm real good at coming up with titles. Be jealous of my skillz.

For those of you that have just stumbled across this little slice of FI heaven, I've give you the TL;DR version:

Work and save lots of money
Retire when I hit $587,500 by 35
Live happily ever after

That was last year. This is now.

This year, I'll be changing the plan more times than a 17-year-old girl trying to get ready for a date with the football captain. (and no, not basing that off any personal experiences….. or am I?)

I'll be covering them in a series of posts, based roughly on how I expect/anticipate/hope things will go.

First up is this post, which will cover everything in the Accumulation phase.

The second post will cover everything the Financially Free phase (say that ten times fast).

The third and final post will cover everything after that.

Notice a distinct lack of numbers and dates. Things can change so rapidly one way or the other that I'm not sure it's worth trying to pin a date or dollar amount to anything. I mentioned 2019 a few posts ago and almost immediately regretted setting that date on it. I would certainly like it to happen, and I'm going to strive for that with everything I've got, but as with much of life, there are no guarantees.

Before I look into the future, I want to take a quick peek back at where I've come from.

Start: Age 23, Net worth $10,000

Year 1 (2014): Age 24
Net worth $45k
Partially maxed 401k
Maxed Roth IRA
rented
Comments: I made a mistake when calculating how much went into my 401k. I included the company match. So, while I ended up with almost $18k saved like I thought I would, I actually only saved $13k. I did max out my Roth IRA though, and also rented a house. Total income: $76,314 (pre-tax)
Year 2 (2015): Age 25
Net worth: $83k
Maxed 401k
Maxed Roth IRA
rented
Comments: As of December 2015, my net worth was $83,000 (ish). I maxed out my 401(k) for real and vested my employer contributions, in addition to maxing out my Roth IRA. I rented an apartment for the last 6 months of 2015. Total income: $80,526
Year 3 (2016): Age 26
Net worth $128k
Maxed 401k
Maxed Roth IRA
partially maxed HSA
rented
Comments: My last year in the development program. I tried to buy a rental property that didn't work out, so I continued to rent. I maxed out my 401(k), Roth IRA, and put some money into my HSA. I got a new job at the end of the year that came with a big fat raise! I moved from the apartment into a friend's basement while I waited to buy a multi-family rental property. Total income: $82,269

It's nice to see I beat my 2016 estimate for net worth by a few thousand dollars! 3 years with really close estimates gives me a lot of faith in my estimating skills.

Which is a good thing…… because it's about to get way more complicated with the rental property thrown in there. But it's a good complicated and I'm happy to add in the complexity!

Accumulation phase going forward

In the next two years I project I will have the following financials:

Total estimated W2 income: $150,000
Total estimated rental income: $62,000
Total estimated misc income: $25,000

Total estimated expenses: $60,000

Those numbers are before tax. However, I happen to know some pretty smart tax accountants, so I'm hoping my tax burden will be a great deal less than it was in years past. Between my rental property business and the blog, I'll have lots of opportunities to apply as many deductions as humanly possible. Which, if you've ever taken a gander through the US tax code, add up to a significant number of deductions.

W2 Career

I make just about $77k per year. Not too shabby for someone 3 years out of college and in the Midwest. I do not expect to get any major bonuses or raises before I stop working. I do expect, however, to continue to work hard and have fun while on the job. I love my new position and don't want to change jobs after the 18 month ‘freeze' is up.

It's so nice to come into a job I love with great coworkers. Having had several not as satisfactory jobs in the past taught me how valuable a good team and fun job is. I also like the fact I can make plans for projects in the future! My last jobs all had firm end dates, so I always felt like I was being left out when they discussed future projects.

The income from my W2 career will provide the capital I need to start and expand my rental property business.

Rentals

Speaking of rentals…. I am staring down the barrel of closing on my first property! Now that the time is here, I'm equally parts terrified and elated. This is incredibly important to me and the last thing I want to do is mess it up. So you can bet I'm doing tons of research and coming up with a bulletproof lease (that's being checked over by a real estate attorney just to really cover my bases).

This first property will produce just shy of $10,000 this year in income. Next year it will bring in approximately $17,000. If, you know, everything goes exactly to plan and I encounter no major issues. Knock on wood!

That will account for a good chunk of the rental income I'm projecting. So, you ask, where's the other $35k coming from?

Ah-hah! Another rental property! (or two, or three!)

My goal is to have at least 3, and hopefully 4 rental properties to my name by the end of 2018. I want to buy another one this fall. That will be straight income producing, without me living in it. Then in the spring of 2018 I want to buy another property, one I can live in through 2019. Then in the fall of 2018, buy the 4th one (hopefully)! What a fabulous birthday present to myself that would be.

I'm guesstimating low for the income the properties will produce, since I can't guarantee they'll all be triplexes bringing in $1,500/mo. Property number two I'm guessing will net me around $5k for the year, depending on when I close and take over the property. I've set that number at $15k for 2018. Property number three I'm guessing will bring in $10k if I buy it in the spring. Property number four, the fall purchase, is set at $5k.

Other Income

The “other” income category is exactly what it seems. Any money I make on things not my career or rental properties. That includes things like this blog, stained glass sales, and any other side hustles I come up with (anyone want to have me house sit while they travel the world!?). I'm working towards bringing in $10k this year, and $15k next year.

If any of this seems confusing to you, just know you're not alone. I had to create a handy dandy graphic just so I could keep it straight!

On the other side of the equation is expenses. I've guesstimated those to be $60k for 2017 and 2018 combined, but honestly I have no idea. Buying properties and sprucing them up for renters comes with a fair amount of one time expenses. I know for sure my expenses will be way lower than 2016 as I'm no longer having to cough up $1057 in rent every month.

Summary

That brings me to the close of my accumulation phase. I'm going to continue to work hard, save lots of money, buy properties, and just generally diversify my income streams while keeping my expenses as low as I can.

….I also said I wasn't going to focus so much on numbers, and then proceeded to create an entire post around the anticipated numbers. The irony.
What do you think of my plan so far? Any suggestions or words from the wise?

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38 thoughts on “My Vision of FI: Phase One

  1. Wow, it’s really hard to say Financially Free Phase really fast, 10 times.

    Congrats on the pending close of your first real estate investment!! Woot woot! Exciting plans ahead, and I’m looking forward to enjoying your journey with you via your words! Your plan seems solid, though I’d be careful about going too far, too fast with the home purchases until you’ve digested the first 1 or 2 and made sure there weren’t any “surprises” (Miss Mazuma’s disasterous real estate story comes to mind). There are many out there (Coach Carson) who have crushed it in real estate, so it’s a proven track. Learn from those that have gone ahead of you.

    Looking forward to this series, especially that Financially Free Phase. Financially Free Phase. Financially Free Phase. Financially Free Phase. Financially Free Phase. ….

    • I’m looking forward to sharing! I love Ms. Mazuma’s tale of real estate and woe. It’s a very real, very sobering example of everything that can go wrong :/ I hope to learn from her mistakes and not repeat them!

  2. Woo! I’d personally love more details on the other income if you’re comfortable sharing. That’s a sizeable chunk of change – way to go! 😀

    “….I also said I wasn’t going to focus so much on numbers, and then proceeded to create an entire post around the anticipated numbers. The irony.”

    -THE STRUGGLE IS REAL-

    Every time I think “I’ll just do a light post this time — a slice of life talk. No heavy research or anything super time consuming…”
    NOPE.

    • I’ll share when I figure it all out, but for now that’s the lofty goal! Shoot for the stars and all that jazz lol

  3. So exciting!! Takes me back to buying my first property…oh the joys of being excited and terrified all at once! No greater feeling in the world. And yes, I had some financial dramas related to said properties (thanks, Fritz, for pointing that out!), but I seriously wouldn’t change any of it for I would be in a different place today. You’re on your way to great things, girl! Looking forward to joining you on this journey…when are we fixing up the efficiency?? Have tools, will travel!
    Miss Mazuma recently posted…Shift Your Perspective & Create New HabitsMy Profile

    • Probably some time in May! I’ll be out of town almost every single weekend in April… unless you would like to come on over Good Friday. I have a 3 day weekend and no plans yet!

  4. This is great Gwen! Good break down of the plan and I love the ambition. To play devils advocate ( I don’t have any experience or deep understanding of the US property market )…but what is the strategy if there is another housing ‘crisis’ in the US like 2008? Have you done the numbers from a ‘worse-case-scenario’ perspective?
    Also I too love the numbers!! Its great to see the detail!!

    Keep it up!

    • The properties I’m buying are fairly low cost. I have no business buying properties I can’t afford on one salary. For instance, P&I on this first property is $350/mo. Even adding in 3 more properties comes up to $1400/mo which I can certainly swing. If the housing market, and broader market at large, go tumbling down, I’ll be there to buy as much as possible.

      • An overall housing market likely would not hurt your overall plan. It could soften rent, meaning you’d make less cash flow. But even in the depths of 2009-2010, rents rarely went down that much and often went up. So, as long as you have solid mortgages and good reserves, you can weather the storm.

        And I agree – BUY more if that happens!

        Awesome to see your overall progress year by year and what you have planned for the future!

  5. Share your tax deducation wisdom, oh wise one! We owed on taxes for the first time this year and it totally sucked. We’re looking to decrease our taxable income and find a few deductions. It sounds like you’re well on your way to FIRE. Congrats on that first property! That’ll be an adventure, but I’m hoping it’ll be a profitable one for ya. 🙂

  6. Where rental properties are concerned, plan for capital expenditures in your estimating. Each house will have some big-ticket work every few years. If you plan to replace the roof and paint, then these capital expenditures won’t be emergencies. You could even fit them into your tax planning. Go through the things like water heaters, furnaces, kitchens, baths, roofs, siding, etc. noting their age and their nominal lifetimes and create a tickler file for yourself in the out years. If the water heater doesn’t go out, thank Murphy for the pass.

    Just remember that if you keep all your capital reserves in VTSAX, he’ll wait until a bear market to break everything. With a big enough cash cushion, black swans are paper transients. If a bunch of stuff is scheduled to wear out, temporarily increase your cap ex reserve just to keep Murphy away.

    • Yeah capital expenditures are no fun. I have to replace the gutters, some rotten wood on the exterior and paint this first year. That doesn’t even include any improvements I make to the inside of the house!

  7. Hi Gwen!

    A grand plan.

    A couple of thoughts, for what they are worth. I’m (probably) not talking bollocks, as these have worked out pretty well for me.

    Many in the FI world will poo poo rental properties (or anything that isn’t VTSAX for that matter!), highlighting the hassle and maintenance and yada yada. It is good to see you’re not listening to them.

    You’re young and (largely) free of responsibilities. Take advantage of that, it won’t last forever! At the moment leverage is your friend, and interest rates are (for now) at historically low levels. Use that to your advantage, if you get it right it will supercharge your capital appreciation.

    When you’re evaluating your real estate options, run the numbers on each property, but also think of the portfolio as a whole. Buying someplace cheap that marginally cash flows in an also-ran location might contribute a couple of thousand dollars into your bank account each year, but you won’t see much capital growth… and it is the capital growth that really boosts your wealth from property.

    With that in mind, once you have positive cash flowing properties 1 and 2 under your belt, for 3 and maybe 4 look at areas with strong growth prospects or in markets that traditionally outperform. They’ll cost more, and the yield is unlikely to be as good, but in the medium to long term it will be these ones that make the biggest contribution towards your FI number. You will always want your portfolio to be cash flow positive in aggregate, but evaluate each individual property on its own strengths (being able to add value, great location, in an area set to experience rapid growth, etc) and weaknesses.

    If you can tolerate the arrangement, look for a multiple occupancy property (duplex, triplex, whatever) where you can live subsidised (or for free) while you rent out the other flats and use them to cover your bills. This will allow you to massively increase your savings rate.

    Paula Pant and Coach Carson have some good stuff worth reading. Some of my more popular posts are property focused too.

    Good luck executing your plan, the path you are following certainly paved the way to Financial Independence for me so I hope you experience the same.

    Cheers
    Slow Dad
    Slow Dad recently posted…Financial Independence is only the beginningMy Profile

    • Thanks! I’ll for sure check out your links. This first property I’m buying is a 1910 house that got converted into a triplex. I will be living in one unit (the studio) and renting out the other two!

    • I think Slow Dad is wise! The 1% rule is great, as leveraging a small down payment to buy cash-flowing properties in marginal/slow growth areas, but I agree that the headaches may not be worth it, and ultimately the assets are ones that you may not want to own, or unload if you get sick of landlording. The 1% rule does not account for differences in vacancy rates, repair costs, marketing costs, and eviction rates between high and low quality properties.

      The bear market of 2009 was a great opportunity to pick up undervalued properties in otherwise high-growth, high-quality areas that were poised to boon as part of the recovery. Now, however, it’s really hard to get a 1% cash-flowing property in a desirable, high growth area such as Denver, San Francisco, Portland, Seattle, Los Angeles, or DC. The areas that will cash flow at 1% now tend to be in more depressed/lower growth areas and may provide a few thousand a year over time, but my guess is they will come with more severe tenant headaches, little capital growth, higher repair and vacancy costs, and difficulty unloading the properties should one want to get out of the business.

      I was lucky to buy one property in 2012, right as the market was coming back. I only wish I had bought more! It’s Class A and we get tenants that can generally pay their bills and don’t trash the place (for the most part, anyway). There is a line around the block to rent it whenever it comes on the market, and tenants tend to stay. That having been said, it doesn’t cash flow 1%. But it more than pays for itself, has appreciated significantly, and our repair/vacancy/marketing costs are fairly low. Rents have skyrocketed- over a 20% increase in 4 years. It will hit the 1% rule in a few more.

      I think quality and future growth, as Slow Dad states, are really important factors in buying a property, perhaps just as important as the 1% rule, which I broke, flagrantly, but in doing so ended up with a more stable, faster-appreciating property in a “hot” area with healthy rent growth. Would I have loved a property that met the 1% rule? Yes. But I also want high-quality tenants in an area with great appreciation and increasing rents.

      Curious as to everyone else’s thoughts…

      • I agree Slow Dad’s comments were very wise about balancing cash flow and growth properties. The growth properties can really accelerate your net worth gains. And thanks for the mention!

        I’m sure 1% rule properties are tough to find (or impossible) in the big, hot markets right now. But that doesn’t mean the non-high-priced markets are not worth having. Go to the south, mid-west, and heartland of the US and you can still find 1% properties or better AND they’re not dumps in horrible areas. I think that’s a misconception a lot of people have.

        The investing rules of the game are to adjust your strategy. 2010-2012 was an anomaly. Easy pickings for those who jumped on deals. Now is more normal and competitive. You have to dig hard for deals, do marketing, negotiate, add value to properties, etc. Not impossible, just more of a challenge (which weeds out the competition for those who take it on!).
        Chad Carson recently posted…The 7 Habits of Highly Effective People, by Stephen R. CoveyMy Profile

  8. A very ambitious 2 year plan! Good luck with your rentals! Looking forward to seeing posts on how those turn out. Personally, I’m not interested in getting into real estate investment beyond the REITs in my portfolio (…because I’m lazy AF…), so I am interested to see if the additional risk and effort pays off for you.

    • Ain’t no shame in your game! I hope I’ll be able to share they’ve turned out great! Time will tell lol

  9. You’re going to have to hustle if you really want to get to 4 income properties by the end of 2018. We’ve had ours for a year and a half, and I’ve decided we’re not ready to add a second one yet! The first one hasn’t been performing as well as I had hoped. Making money, but not gangbusters, and definitely not enough for a down payment on another.
    Norm recently posted…How Much Did Our Trip to Thailand Cost?My Profile

    • Ideally I’d be able to save every penny that comes in, but more than likely I will need that money for updates on the house first. I’ve got an exciting plan cooked up for house #2 🙂

  10. I think this is amazing! How stable is the economy in your area? Any concerns that you may have less than desirable tenants? Or that the economy (often less than healthy in the great Midwest) may go belly-up?

    I have one rental, and it’s done very well (even if it doesn’t make the 1% rule, but since I have a deal for cheap repairs, and it’s a Class A that sells itself in the worst of times with thus far HIGHLY reliable tenants, I come out far ahead).

    I as not to challenge that you haven’t done your due diligence, but more to express my own fears of investing further in less-than-liquid assets that can come with a whole bunch of headaches as well as the possibility of having to pay a mortgage on a non-income producing, depreciated asset.

    • The economy here is about as bad as it will get. I anticipate things will pick up here in a year or two once the local industries pick up steam. It’s offset somewhat by the local colleges around here. I am happy to rent to the grad student population if need be! If the economy plummets, I’ll be doing my best to acquire more properties whilst they’re on sale!

      • Interesting! Great that you are in an area on the upswing. I’ve seen too many towns in upstate New York, rural New England, and the Midwest that started on a downward spiral from which they never recovered, with their once-vaunted industries easily relocating to the South or overseas. Property there is unrentable, and worth almost nothing, no matter when it was purchased, even at the nadir of the market.

        Sounds like your area has no such issues! Glad to know it’s robust, and that your are confident in its future!

        • If the major industry goes south (figuratively and literally), I’m screwed on a number of levels since they happen to be my employer as well! However they just emphasized their commitment to the area so I don’t think they’re going anywhere for a very long time.

  11. Other income is: “things like this blog, stained glass sales, and any other side hustles I come up with ”

    What about investment dividends? Are you just reinvesting those back in to the funds and not keeping track of the annual income they happen to produce?

    I feel like a lot of Keith’s tricks are really more for the self employed. it’s going to be tough to take a major loss against your big salary, especially since your rental has such good stats (having to pay taxes….sounds like a great problem to me)

    You’ve clearly positioned yourself into a great spot and if you get a few more rentals with the same statistics, you can probably adios your job sooner than you’ve been intending…

    Good luck!
    TJ recently posted…Slow Travel – Overrated or Worth it?My Profile

    • You know, I don’t really count those. I guess I could…. but it’s really not anything significant. I think last year it was about $150? whatever VTSAX threw off.

  12. Gwen, I am totally impressed with your plan and the fact that you are talking about not 1, not 2 and maybe not even only 3 rentals. Go big or go home, am I right? Owning rental property is not part of our plan (at least currently), but I can’t wait to hear about how it goes for you. So exciting!!
    Mrs.Wow recently posted…The iPhone and My IgnoranceMy Profile

    • Thanks Mrs. Wow! I can’t wait to tell you all the nitty gritty details over some coconut juice and Ecuadorian coffee in October!

  13. Every time I read your posts, I feel like I’m looking into the mirror. Our ages are similar, our net worths are similar, our goals are similar, and I’ve just started looking into accelerating my path to FI with rentals. And if that wasn’t enough, we both make stained glass!

    Wtf, are you me?
    The Money Wizard recently posted…How to Choose a Vanguard Index FundMy Profile

    • I can only handle having one internet twin at a time! Not sure how the world in general could handle having more than one of me!

  14. Hey Gwen. Very impressive plan. I wish you well. The only downside I see is real estate. Mrs Groovy and I had a great tenant who, aside from a three-month immigration crisis (long story), never missed a rent payment for 8 years. And, yet, despite practically no tenant issues, we disliked being landlords. But if you find you got landlording in your blood, your plan should be a smashing success.

    • Thanks Mr. Groovy. We’ll see how it goes. I’m very much a people pleaser, so I imagine it will be a bit of a transition for me at first.

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