Emily is nervous that buying their first home will derail her family’s journey to financial independence. What’s the smartest way to deploy their savings and stay on track?
Based on cap rate calculations, Paul’s real estate investments have appreciated beyond their sensible holding point. Should he sell his assets, or is there more to consider here?
Mike is recently retired while his wife still works. With a paid-off home and healthcare already taken care of, what are best practices for drawing down an investment portfolio?
Former financial planner Joe Saul-Sehy and I tackle these three questions in today’s episode.
Enjoy!
P.S. Got a question? Leave it here.
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Emily asks (at 1:14 minutes): As young parents, how do we plan for a major move and our first house purchase without throwing a wrench into our financial independence goals?
I was so happy to hear your defense of renting on Episode 559. My wife and I have taken that perspective to heart as renters for the past 15 years. But now, we’re ready to buy a home.
We’re in our early 40s, married, with two kids—a 3-year-old and an almost-1-year-old. We’re approaching Coast FI, and want to be work optional within the next 10 years. We plan to move home to the Midwest and settle into a great school district before our oldest starts kindergarten.
We have $1.2 million in investments, plus $120,000 cash earmarked for a down payment. We also have $85,000 in cash as our emergency fund. We may be able to save a bit more depending on when we move, and we’re also open to renting in the Midwest before we buy.
We currently spend $11,000 monthly due to high rent and childcare. But we expect that to drop to $6,000 once both kids are in school and once we move, depending on our mortgage.
We’re estimating a housing budget of $500,000, which should be enough to get us into a good school district with access to strong job markets. That number could be higher or lower depending on what we find.
Given our ages, net worth, and timeline for reaching work-optional status, how should we approach financing this home? Should we make a large down payment? Should we consider a 15-year mortgage? Or is it okay to carry a mortgage into our seventies?
Paul asks (at 26:20 minutes): Does it make more sense to keep a high-value rental that brings in solid income, but comes with landlord headaches, or to sell, invest the proceeds, and live more passively off a 4 percent withdrawal rate?
In 2011, I bought a 3,300-square-foot primary residence as a short sale in a highly desirable neighborhood for $645,000. After a year-long battle for permits, I built a second home on the same one-third-acre lot: A 1,800-square-foot house that’s perfect for me.
I moved into that smaller home in 2017 and have been leasing out the larger one ever since. The lot can’t be subdivided, so if I ever sell, I’d have to sell both homes together as a single property.
Here are the numbers:
- The original 3,300-square-foot house (now a rental) is worth $2.3 million and brings in $10,000 a month.
- The house I live in cost $450,000 to build and is now worth $2 million.
- Together, the two homes are worth $4.3 million.
- I owe $350,000 on a 15-year loan at 2.75 percent, with six years remaining.
I love my house and the neighborhood, but I don’t love being a landlord. The time commitment is minimal, but living right next door makes it hard to hand off responsibilities to a property manager.
And at $10,000 a month, tenants tend to treat it as a short-term rental while they shop for a home to buy. So far, I’ve had almost no vacancy, but I don’t get multi-year tenants either.
The cap rate on a $2.3 million valuation isn’t great, but the rental income is $120,000 annually. 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 give me $92,000 annually.
That’s less than the rent, but it would be completely passive. Of course, I’d have to factor in long-term capital gains taxes and real estate commissions — and I’d also need to buy a new home, which would likely cost me $1.75 million to stay in the same neighborhood.
For additional context, I have a well-diversified investment portfolio of $3.5 million that already generates more than enough to cover my lifestyle.
So my question is: is it smarter to hold onto the rental and keep the $120,000 in annual income, or sell and invest the proceeds for a more hands-off return, even if it’s a bit lower? And how should I think about taxes, commissions, and housing replacement costs in this decision?
Mike asks (at 47:53 minutes): I’m 61 and recently retired. My wife is 54 and earns $100,000 a year as a W-2 employee. Our home is fully paid off and is worth $1.5 million. My healthcare is covered by my former employer.
We have $5 million in investable assets held across a rollover IRA, a Roth IRA, and a taxable brokerage account:
- $500,000 in cash
- $1.5 million in a Schwab dividend ETF yielding around 4%
- $1.5 million in Schwab’s U.S. Large Cap Growth ETF (SCHG)
- $1.5 million in Schwab’s S&P 500 index fund
I plan to withdraw $100,000 per year. Which accounts and assets should I draw from first?
Resources Mentioned:
#609: Q&A: How Not To Screw Up Retirement Spending – Afford Anything | Podcast
#595: Q&A: The Scary Shift from Saving to — Gulp! — Actually Spending Your Money – Afford Anything | Podcast
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