Emily is apprehensive that purchasing their first home might hinder her family’s path to financial independence. What is the most strategic way to utilize their savings and maintain their trajectory?
According to cap rate evaluations, Paul’s real estate investments have appreciated beyond a reasonable holding point. Should he liquidate his assets or are there additional factors to contemplate?
Mike has recently retired, while his wife continues to work. With a fully paid-off home and healthcare already managed, what are the best strategies for withdrawing from his investment portfolio?
In today’s episode, former financial planner Joe Saul-Sehy and I address these three inquiries.
Enjoy!
P.S. Have a question? Feel free to leave it here.
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Emily inquires (at 1:14 minutes): As young parents, how can we strategize for a significant move and our first home purchase without jeopardizing our financial independence objectives?
I was thrilled to hear your support for renting in Episode 559. My wife and I have embraced that perspective as renters for the last 15 years. However, we are now prepared to buy a home.
We are in our early 40s, married, with two children—a 3-year-old and an almost-1-year-old. We are nearing Coast FI and aim to become work-optional in the next decade. We intend to return to the Midwest and settle in a great school district before our oldest starts kindergarten.
We have $1.2 million in investments, plus $120,000 in cash designated for a down payment. Additionally, we maintain an emergency fund of $85,000 in cash. Depending on the timing of our move, we might be able to save a bit more, and we are also considering renting in the Midwest before purchasing.
Currently, we spend $11,000 a month due to high rent and childcare costs. However, we anticipate that will decrease to $6,000 once both kids are in school and we move, depending on our mortgage.
We plan for a housing budget of $500,000, which we believe will be sufficient to secure a decent school district with access to robust job markets. This figure could go up or down based on what we find.
Considering our ages, net worth, and timeline for achieving work-optional status, how should we approach financing our home? Should we make a substantial down payment? Would it be wise to opt for a 15-year mortgage? Or is it acceptable to carry a mortgage into our seventies?
Paul asks (at 26:20 minutes): Is it wiser to retain a high-value rental that generates significant income but comes with landlord responsibilities, or should I sell, invest the proceeds, and adopt a more passive approach with a 4 percent withdrawal rate?
In 2011, I purchased a 3,300-square-foot primary residence as a short sale in a highly sought-after neighborhood for $645,000. After a year-long struggle to obtain permits, I built a smaller second home on the same one-third-acre lot: an 1,800-square-foot house that is ideal for me.
I moved into that smaller house in 2017 and have been renting out the larger one ever since. The lot cannot be subdivided, so if I decide to sell, I will need to sell both homes together as a single property.
Here are the details:
The original 3,300-square-foot house (now a rental) is valued at $2.3 million and generates $10,000 a month.
The house I reside in cost $450,000 to build and is now valued at $2 million.
Together, the two properties total $4.3 million in value.
I owe $350,000 on a 15-year loan with a 2.75 percent interest rate, with six years remaining.
While I appreciate my house and the neighborhood, I do not enjoy being a landlord. The time commitment is minimal, but being right next door complicates handing off responsibilities to a property manager.
With a monthly rent of $10,000, tenants often treat it like a short-term rental while they search for a home to buy. To date, I have experienced almost no vacancies, but I haven’t secured long-term tenants either.
The cap rate based on a $2.3 million appraisal isn’t impressive, but it does yield $120,000 in annual rental income. If I sold and invested the proceeds from that portion of the property into a total stock market index fund, a 4 percent withdrawal rate would provide $92,000 annually.
That amount is less than the rental income, but it would be entirely passive. However, I would need to take into account long-term capital gains taxes and real estate commissions — and I’d also have to find a new home, which would likely cost me around $1.75 million to remain in the same
Emily feels anxious that purchasing their first home might hinder her family’s path to financial independence. What is the wisest approach to utilize their savings and remain on course?