For many personal finance bloggers, financial independence means 25x our annual expenses.
At the start of our personal finance journey, we made this our initial goal: to invest 25x our expenses in our traditional retirement accounts. Thus, we downsized our home, cut our expenses, paid off our debt, which ultimately lowered the amount of money we need to have invested to achieve the 25x goal.
Later, we decided to focus on cashflow when we thought we’d pursue real estate. We didn’t.
Instead, we decided to go the lazy route to investing: dividends.
Depending on where you are in your journey and what you want to do, you might be comfortable investing in something different than us. That’s OK. We only share our journey and conclusions so you can see how we arrived at the decision we did.
NOTE: I am not an investing expert…far, far from it. Returns aren’t guaranteed…this is for entertainment only…get help from a qualified professional (not me)…yada, yada, yada.
Initial Idea: 25x in Our Traditional Retirement Accounts
Since we started late and with a lot of debt, we’d have to have 10 years or so in our jobs to achieve enough passive income to cover our expenses.
Next Idea: Real Estate Cashflow
In an effort to make this an apples-to-apples comparison, we focused on the potential ROI in terms of cash-on-cash returns. Consider this a high-level overview of the things we’ve considered investing in. Know that I’ve not considered ARV, creating upside, depreciation, etc.
$8,000 to Invest in Real Estate?
With an FHA loan and 5% down, one can easily buy a duplex for $160,000 in Pennsylvania. House hacking, for the win!
Based on the 1% rule, let’s assume the mortgage is $152,000 / 4% interest on the loan. The payment is $1,039 a month including principal, interest, and PMI. Let’s say you cash flow about $500 per month for the house, which isn’t unreasonable as we’ve met some REI in this area who see $300 cash flow per unit. Five duplexes and we’d be FI!
Now, we’d have to set aside money for repairs and whatnot, but $500 isn’t bad—that should cover electricity, water/sewer, and garbage. With $8,000, we might not have any living expenses, which frees up cash for investing in additional properties. GuyOnFIRE is a house hacking master, so check out his story.
$8,000 = about $6,000/year
Cash-on-cash return for 5% down = (6000/8000) * 100 = 75%
With 20% down instead of 5%, the cash-on-cash return is lower (obvi).
Cash-on-cash return for 20% down = (9000/32000) * 100 = 28.13%
or $80,000 to Invest in a Manufactured Home Park?
With $80,000 down and owner financing, we could do well with a manufactured home park.
Many Baby Boomers with MHPs might be in a sticky situation if their kiddos aren’t interested in becoming landlords, so there could be some deals here in PA.
Let’s say we find a park and we decide to take on debt (!!!). We put 20% down on a park valued at $400,000. Lot rent in some parts of Lancaster County is HIGH. We’ll go with something a little more reasonable to assess this deal. Let’s say it’s a park with 15 lots to rent with lot rent at $400. Expenses, we’ll say 40%, which leaves us with $2,600 before debt service.
A $320,000 commercial loan at 5% interest and 25 year amortization means we’ll have a P & I payment of about $1,870 or an interest-only payment of $1,333. That leaves us with a net profit of around $1,300 a month or $15,000 a year. Two MHPs and we’d be FI!
$80,000 = $15,000/year
Cash-on-cash return for 20% down = (15000/80000) * 100 = 18.75%
Current Strategy: Investing $800,000 in a Taxable Brokerage Account
Debt makes me cringe a little. Same with Garrett. We just eliminated all of our debt, so do we really, really, REALLY want real estate? No.
Since I’ve stumbled across dividend investing, we decided to go for it.
Let’s say we had $800,000 invested in VYM. At a yield of about 3%, we’d see about $24,000 each year of passive income, which is more than what we need to cover all of our expenses.
The tradeoff is that we have to accumulate this kind of wealth to see such dividends, which we don’t have today. Our real investment is trying to make this happen is time.
Dividends have lower returns, but there aren’t any septic systems to windows to replace, so maybe it’s worth it…? We’ll find out.
P.S. Close to paying off a mortgage? Wondering what to next after you paid off your mortgage?
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