Anonymous
12/08/2012 15:29
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:If OP is still around...
DH age 36-earns 360k
DW age 34-SAHM
2 kids. (elementary age)
36,000 college debt- interest is at 2.5%
1,195,000 home with 1 mil. left on mortgage for the next 30 years (just bought)
500,000 in mutual funds and
350,000 in bank-- from an inheritance from the loss of both parents- (not sure what to do with it yet, the rest is in aforementioned mutual funds)
60,000 emergency fund
Nothing in 529 yet.
Would love to know your thoughts here. Thanks
Hi OP, just wanted to bump this up in case you have time to look at it. Would love to know your thoughts, especially about the allocation of the inheritance. Also, event though we just bought this house, we may possibly try to sell in a year. A job transfer may be on the horizon. We are worried about the loss we would entail. Our income has been at this rate for about 2 years, before it was about $38,000, so we're kinda just learning how to properly handle these finances.
Anonymous
12/08/2012 09:49
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
OP, thank you for doing this.
Age:
--30 and mid-30s. Would like no more than 2 kids, two probably ideal - recently started trying.
Current income:
--One spouse FT salaried employee, $100k.
--One spouse owns a business that has never been in the negative, but doesn't bring in much (we budget off the salaried income only), even though its been promising. Both spouses agree it is time to apply for salaried jobs. Spouse with business formerly made more than other spouse but in an industry hit hard by the recession.
Assets:
--Home worth about $500k, owe $253k. (recently refinanced to 15 year at 2.875%)
--Only other debt: $16k federal student loan (5.3%, interest tax deductible in current income range)
--Own two older cars, neither of us drive much however.
--$296k in 401(k), IRA, SEP-IRA
--$8k in ROTH IRA
--$2k in another investment account
--$16,500 in 529 college savings for future child(ren)
--$57k in cash
--Some other assets that could be sold if we had to
--Business and its assets including its cash
From sitting down and doing this rundown, I know I need to (and I WILL):
--Purchase index funds with some cash we have sitting in IRAs.
--Not have so much personal cash earning low, low interest.
--Contribute to ROTH IRA for 2012 (will be eligible), in addition to 529 contribution.
What would you recommend? We live frugally and are happy. Other factors include that salaried employer recently started offering ROTH 401(k) option. We know kids are expensive but thankfully family has offered childcare at no cost to us.
Age:
--30 and mid-30s. Would like no more than 2 kids, two probably ideal - recently started trying.
Current income:
--One spouse FT salaried employee, $100k.
--One spouse owns a business that has never been in the negative, but doesn't bring in much (we budget off the salaried income only), even though its been promising. Both spouses agree it is time to apply for salaried jobs. Spouse with business formerly made more than other spouse but in an industry hit hard by the recession.
Assets:
--Home worth about $500k, owe $253k. (recently refinanced to 15 year at 2.875%)
--Only other debt: $16k federal student loan (5.3%, interest tax deductible in current income range)
--Own two older cars, neither of us drive much however.
--$296k in 401(k), IRA, SEP-IRA
--$8k in ROTH IRA
--$2k in another investment account
--$16,500 in 529 college savings for future child(ren)
--$57k in cash
--Some other assets that could be sold if we had to
--Business and its assets including its cash
From sitting down and doing this rundown, I know I need to (and I WILL):
--Purchase index funds with some cash we have sitting in IRAs.
--Not have so much personal cash earning low, low interest.
--Contribute to ROTH IRA for 2012 (will be eligible), in addition to 529 contribution.
What would you recommend? We live frugally and are happy. Other factors include that salaried employer recently started offering ROTH 401(k) option. We know kids are expensive but thankfully family has offered childcare at no cost to us.
Anonymous
12/07/2012 22:05
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:Wow, this is great, OP! I am excited to see what you might recommend for me.
HHI is $170K. I make $75K and DH makes $95K. We are both 33.
Retirement: $500K
House: $550K (mortgage is $410K)
No other debts
Emergency fund: $40K
529 for our toddler: $8000
OP here. How much in savings and investments do you have? Your retirement accounts are very high for your age (DH and mine are slightly higher but we are slightly older; but I own a business and put in $40K several years- please elaborate on how yours got so high) . Are any of the retirement funds in a Roth? Where do you currently live?
Anonymous
12/07/2012 16:17
Subject: What a self made multiple millionaire would do in your shoes to increase your net worth.
Not OP, but $500K in retirement savings at age 33 is remarkable. One of you is a stock wizard, or something. Don't think you need any advice except keep up the good work.
Anonymous
12/07/2012 16:07
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
OP, are you still around? I posted this early on the 2nd page but afraid you may have missed mine, as it seems you've responded to some posted later. I realize we're probably a boring case: DH and I are careful savers and young, but neither of us have financial savvy (and our families are terrible at this -- so no advice from them). We also don't have a huge HHI and have no chance of family money, so we need to be smart.
I would truly be interested in what you recommend to me. Thank you again.
I would truly be interested in what you recommend to me. Thank you again.
Anonymous wrote:Wow, this is great, OP! I am excited to see what you might recommend for me.
HHI is $170K. I make $75K and DH makes $95K. We are both 33.
Retirement: $500K
House: $550K (mortgage is $410K)
No other debts
Emergency fund: $40K
529 for our toddler: $8000
Anonymous
12/07/2012 08:15
Subject: What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Sorry, I don't think I was clear - we are not paying anything toward that crazy policy. FIL set it up ages ago (before I even met DH) and pays everything. It's not like we are paying the monthly premiums or anything. I am sole beneficiary in event of his death.
That's good. If your FIL is at all amenable to a rational conversation, could you approach him to stop funding the policies and gift you the premiums instead? You could purchase term insurance and invest the remainder. If he won't, he wont - it's his money - but if his intention is to pass it along to his son and grandkids there are much, much better ways to go about it.
Anonymous
12/06/2012 20:48
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
OP,if you're still giving advice -
250K HHI
Mortgage is $2500k/mo @4.25%; currently owe $389k, value around $500k
Combined retirement accounts are just shy of $500k - we max out 401ks and trad. IRAs
College accts for 2 kids are $30k - we contribute about $800 month
Cash in savings acct $100k
Student loans of about $30K
We are trying to save up for potential addition to the house. Or I may take a lower paying job, which could be as much as a $70k decrease in salary. We will likely need a new car sometime in the next five years, but I figure we have that covered and will pay cash. I feel like we should have more in savings, or should be doing something else with some of the savings.
250K HHI
Mortgage is $2500k/mo @4.25%; currently owe $389k, value around $500k
Combined retirement accounts are just shy of $500k - we max out 401ks and trad. IRAs
College accts for 2 kids are $30k - we contribute about $800 month
Cash in savings acct $100k
Student loans of about $30K
We are trying to save up for potential addition to the house. Or I may take a lower paying job, which could be as much as a $70k decrease in salary. We will likely need a new car sometime in the next five years, but I figure we have that covered and will pay cash. I feel like we should have more in savings, or should be doing something else with some of the savings.
Anonymous
12/06/2012 14:51
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:New poster here. Thanks for offering to do this.
HHI fluctuates between 400k and over 500k depending on end of year bonus, split evenly between dual salaries (although mine might go down slightly as I transition to a new role). Own a home worth just over 725k but owe almost 650 on it (we bought with little down FHA but are about to refinance with a conventional loan at a lower rate to lower our payment substantially each month). Hoping to buy a slightly larger home in the 1M range to stay close-in with more room. 10k in college savings for one DC. Max out our retirement accounts and have about 275k in those. No other investments or income. Somehow between childcare, life insurance, car payment (honda civic) and life, we only save about 60k a year. Not sure where to go from here. We are blessed (until the last few years we made very little) but seems like we should be further ahead. We have also had to give money to family over the years (extreme circumstances with illness) so money went there too. Thanks in advance.
What ares do you want to move to? Describe your current property (location, type, bedrooms, etc). You save $60K per year, but have no money in investments or savings? ages?
23:48 Back. We are hoping to stay close in to the city or a close suburb. Current property is 1600 sq ft, 3 bdrm 2 bath about a mile from the center of the city in NW (row house). We have about 75k in short term savings, 10k in college savings, about 275k in retirement accounts. We just started making money in the last few years and every year have had a major expense (wedding, down payment on home, fertility treatments). We are 37 and 40. Thank you for doing this.
Anonymous
12/06/2012 14:23
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:I am having a hard time figuring out how to model the below in excel. Can you help me understand better by reviewing my calculation and tell me if I am expressing it correctly? The one issue with my calculation is I am not sure where I can purchase a home for this price that rents for $2750, but let's suspend that part of reality for a moment so I can get the spreadsheet set up!
You need to pick a rate of return that is acceptable for you in rental real estate. When I first started that figure for me was 8% cash on cash return, net of all expenses, preferably with a fixed mortgage. The following is the rough formula I use to assess a property. Take the gross monthly expected rent and multiply time 85%. This affords me 5% for repairs, 5% for management fee and 5% for vacancy factor. You have to make 8% cash on cash return on 85% of the gross income after PITI (principal, interest, taxes and insurance). When I first started I always did my own management (and did until I had about a dozen properties). As a result of managing them myself my true vacancy rate was less than 1%. But, still you shouldn't buy something unless it works at 85% (if you have a property manager that charges more than 5%, you need to lower the 85% number accordingly).
Property Purchase Price: $400,000
Downpayment Required by Lender: $100,000 (25% b/c Investment Property right?)
Gross Monthly Rent: $2750
Less PI: $1520.06 (300k at 4.5%, 30 year fixed)
Less Ins: $62.50 monthly
Less Taxes: $375 monthly
Remaining: $792.44 monthly, $9,509.33
85% of remaining: $8,082.93 annually, which is approximately 8% of downpayment amount ($100,000)
OP here. Almost $2750 times 85% equals $2337. Leaves profit of $379 per month. Times 12 months is $4548. Divided by $100K is 4.548% cash on cash ROR. Incidentally you can get investor loans at most banks at 20% down. And you can do much better than 4.5% today. To quickly ballpark properties any time you can get 1% of the purchase price in rent, you almost always have a winner. 1/2% is always a loser.
Most banks require 25% down on investment loans, and getting 1% on the purchase price in the DC area is a fantasy...unless you're talking about slum/ghetto areas..
Anonymous
12/06/2012 14:17
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:Anonymous wrote:Thanks OP-this is 21:38. You are correct-our rental is a former primary residence.
I appreciate your persepctive. I guess we thought that our rental property was building equity and even though we lost some money, the transaction costs didn't make it worth it to sell. I am doing a refi, and we will end up with a + cash flow, but only a few hundred/month. I get what you're saying.
We have about another 300K saved up and I am looking for properties, but am nervous with buying in DC b/c it is so tenant friendly. Do you have any words of advice of where you would buy now?
OP here. You are right that it was likely appreciating, but you could have used the same money to buy something else that was appreciating AND providing cashflow. You really should sell this property and buy something that will generate better cashflow.
As for renting in DC, I have scores of tenants. I rarely have a problem. Screen your tenants well and allocate for rental loss and you will be fine. That said, you should not buy another rental until you sell your old residence. You have to change your mentality first. Until your mentality is about cashflow, not appreciation; it is not a good investment for you.
As to your savings, you seem afraid to invest it (this is a common problem). $300K is way too much to have saved liquid with no plan. Your rate of return is so low that it is likely loosing money when inflation is factored in. I'm not a huge fan of the stock market as the returns are nominal. To be honest I use the stock market for retirement and to have a certain amount in what banks consider liquid fomr (it helps me get loans and leverage my other returns). Saving money like that will prevent you from getting wealthy. You have to get out of a saving mentality and into an investing mentality. Obviously you need a certain amount in savings. Figure out how much that is for you and then I want you to get the rest out.
I would prefer you to be more aggressive than this, but one good thing you can do with your money is convert retirement funds to a Roth. You can only do this is your retirement funds are not with your current employer, but you should begin converting. This makes sense for you because you income is very high and it is likely that it will remain high in retirement. Tax free income is a beautiful thing. You should seriously consider doing it in 2012, as tax rates are lower than they will be next year and I would bet in all future years for a long time to come. It also gives you some very good estate tax deferral strategies, which are probably going to be relevant based solely on your salary.
Incidentally I noticed that you complained about not being able to find an 8% cash on cash return. Please give me a neighborhood that you would like to invest in and explain why that neighborhood. I will show you a property with your desired return (or point out a better neighborhood and why)
I call BS - Troll. There is no place in DC (and this is DCUM) where there is 8%-plus net return on RE investments. Except, high risk (ghetto) neighborhoods where risk out weighs potential gain. What a bunch of crap. Silly advice on marginal investment improvement ( get 2.2% instead of 1.9% in my brother in laws company!) is total bull shit, not helpful except to feed the amateurs that look here for advice.
Show me a high risk, high return possibility and I'll listen. High risk low retrun nonsense is just that.
+1
8% return cash on cash is an impossibility in the DC & suburb areas. Our rentals are financed with 25% down and 15 yrs mortgages and pays about 2% cash on cash. This is not an area where you can buy a property for 60k and rent it out for 1600/month
Anonymous
12/06/2012 13:50
Subject: What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:Wow, OP this is cool of you. I am interested but wary of posting so much personal data. Maybe you can answer with some general comments based on the following. DH and I work in stable jobs making 225k combined. Have been contributing to 403b's and 529 for a few years, don't have enough cash for a 20% down payment where we would like to live, and would like to have a second child soon but feel like that will put us into the slog. No debt, but saving is slow. What should we do?
OP here. Buy with an FHA loan. Rates are so historically low that not taking a loan now is in and of itself a major mistake. i also believe that there will be very high inflation coming. You need a major hedge. If we get the type of inflation I expect and you have a fixed mortgage it will change your financial output for the rest of your life. I am mistaken it will make minimal difference to you if I push you into buying now. This is a good example of calculated risk. The risk of not taking a fixed real estate loan now is way higher than the likely upside of taking one.
As I have urged other posters, please consider a multi unit to live in (DC has great houses with basement rentals). Takoma Park, Hyattsville, and Arlington have some too.
NP. I am confused, sorry - if this poster doesn't have the DP, how are they buying? Asking bc I am in a similar situation where everything is okay except for not having the savings for a DP. Does a multi unit have different DP requiermetns or somethign? Sorry, I am clueless
Anonymous
12/06/2012 13:22
Subject: What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:Wow, OP this is cool of you. I am interested but wary of posting so much personal data. Maybe you can answer with some general comments based on the following. DH and I work in stable jobs making 225k combined. Have been contributing to 403b's and 529 for a few years, don't have enough cash for a 20% down payment where we would like to live, and would like to have a second child soon but feel like that will put us into the slog. No debt, but saving is slow. What should we do?
OP here. Buy with an FHA loan. Rates are so historically low that not taking a loan now is in and of itself a major mistake. i also believe that there will be very high inflation coming. You need a major hedge. If we get the type of inflation I expect and you have a fixed mortgage it will change your financial output for the rest of your life. I am mistaken it will make minimal difference to you if I push you into buying now. This is a good example of calculated risk. The risk of not taking a fixed real estate loan now is way higher than the likely upside of taking one.
As I have urged other posters, please consider a multi unit to live in (DC has great houses with basement rentals). Takoma Park, Hyattsville, and Arlington have some too.
Hi OP thanks. This is good advice, that I hope we will take (it is what we have been talking about but we are wusses!).
Anonymous
12/06/2012 13:21
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote:Anonymous wrote:I'll be following your responses with interest, as I am a self made millionaire (okay, with my husband) as well.
We are late 40s, make $400K to $450,000 a year, depending on bonuses. Both full time employees. Our kids are 10 and 12.
No debt of any kind.
Assets are retirement tax advantaged funds ($1.3 million); taxable accounts ($600,000); company stock ($120,000); kids' college funds ($140,000). Our house is worth about $750,000.
You do not have enough risk in your portfolio. You are majorly exposed to inflation, which I expect to be very high in the coming years. You need a major hedge. I would look into mortgaged real estate. You should do a Roth Rollover. The taxes suck, but you should begin rolling, especially with taxes where they are today.
The company stock worries me. It is too much tied up in one place, but not enough (presumably) to give you any real benefits. I've never done this before, but presuming it is publicly traded stock, I would put a margin account on it and buy other stock. Margin accounts are non recourse so if the value of the stock goes down they will force sell the stock for you, but never come after you. It is margined against just the company stock. By margining it you get to keep the stock, but buy something that is a hedge to it dropping in value. Margin interest is very low, so this strategy should increase your return by a few percent, while minimizing your exposure. Generally you can margin to 50% of the stocks value.
I am required to keep this much company stock - condition of employment. Why am I exposed to inflation if I have growth stocks? Only $70K of our tax advantaged investments is in a traditional IRA.
Anonymous
12/06/2012 13:20
Subject: What a self made multiple millionaire would do in your shoes to increase your net worth.
Sorry, I don't think I was clear - we are not paying anything toward that crazy policy. FIL set it up ages ago (before I even met DH) and pays everything. It's not like we are paying the monthly premiums or anything. I am sole beneficiary in event of his death.
Anonymous
12/06/2012 13:18
Subject: Re:What a self made multiple millionaire would do in your shoes to increase your net worth.
Anonymous wrote: Not OP, but first of all, you should make sure whoever decided that the right way for you to save for retirement is through an expensive permanent life insurance policy that is not intended as life insurance (your words) forfeits any further say in your finances. My god, woman - do you have any idea how much money you're wasting on insurance you don't need? And if you DO actually want insurance - he's young, get a term policy and surrender his current policy. (And definitely do this before cashign in an old 401k!) Invest the leftover premiums in something - whether it's a tax-advantaged vehicle orreal estate, as OP undoubtedly will suggest.
The policy was set up by FIL as a vehicle for transferring money to his kids, basically. The understanding is that we are free to use the money whenever and however we want - but as soon as we touch it, we own the premiums as well. FIL has similar insurance polices on all his kids and grandkids.