What is the best path to FI for this situation?

Question

I am a mature and motivated 19 year old student who is on a mission to help my father gain FI after he has worked hard for 42 years. He is currently 53 and unemployed. However, he is currently seeking a new small business, so some source of income should be available within a year. More importantly, he owns a triplex which is now valued upwards 650k, which I want to 1031 exchange for something bigger that produces more cash flow. It should be noted, the triplex has a 200k line of credit on it. The triplex is not our current residence; we currently reside in a 350k single family house that is no where close to be paid off as we have only stayed here for six years thus far.

I am wondering what a possible path to FI would be with all this mind. I am willing to work extremely hard to help my father have a steady steam of passive income by the age of 60 -- I believe he deserves that at the very least for all the years of hard work he has put in and the outstanding life he has provided me regardless of hardships he has had to face.

Fradel Schaechter · Answer

@Deep Patel I think looking out for your father and the gratitude you have for his hard work on your behalf is just proof of your maturity. I'm only 25 myself, and I speak as if I am 60, but seeing this perspective in someone your age is truly inspiring! Good luck in your endeavors! :)

Christopher Phillips · Answer

@Deep Patel

That makes sense.

You would sell this property with the 1031 exchange, then step into a property that cash flows. The tricky part is that the new property will still be contingent on the ability to pay. Yes, the equity from the Triplex will go towards the new property, and you just have to find a property that would work with the DTI between the new property and the primary residence...

Deep Patel · Answer

@Christopher Phillips

You're correct in that the building does not cash flow enough. It breaks even and provides minimal net income, which is not worth it in this town.

One of the main reasons for me to 1031 exchange to a bigger building is that it is almost impossible to take all the equity out when my father's income has not been good enough the last few years. The banks are unwilling, or that would have been my first point of thought. Thus, I figure that with a 1031 exchange banks may be more willing if we put more money down and then prove that the building cash flows. Credit score is top notch as well, so with a good building investment I think we may be able to secure financing and jump start this whole process, while still allowing my father to seek small businesses.

Christopher Phillips · Answer

@Deep Patel

Not wrong...

However, it cash flows or it doesn't. It's all about the numbers. Numbers work or they don't. But, it sounds like it doesn't cash flow if you can't afford property mgmt on the building.

Going somewhere "cheaper" doesn't mean the cash flow will be better. If you leave NY/NJ or go further away from major population areas, yes, you can find less taxes, but the rental income might also be less. So, it comes down to - does it cash flow or not... If it does, what's the ROI%. If you can get better ROI% somewhere else, that would be a better use of the investment money.

Otherwise, you leave it in place, use the equity to expand the portfolio and you can always 1031 exchange it down the road.

Deep Patel · Answer

@Christopher Phillips

Well it has been flowing cash positive, but the taxes in the town are insane. $18,000+ annually to be exact. Further, I am not fond of the town council nor the building department, so I just want to leave that building and town in terms of investments.

As far as the basics of financial freedom and getting to my magic monthly gross income, I am aware of the math you showed. I guess what I am more so seeking is advice on whether to 1031 exchange for multiple single family homes, a few duplex or triplexes, or just an apartment building with 10+ units. I am currently looking at properties in the Midwest if I choose the apartment building because from what I understand that is the best cash flowing region currently. Further, I figure that with a larger building I can afford to have property management and would not have to worry about being physical present at the building very often. Of course, I am a novice in this field and am still trying to fully understand RE, which I am sure will take a few years and a few deals, so much of what I am saying and understand so far can be wrong.

Christopher Phillips · Answer

@Deep Patel

Path to financial freedom is found in building a portfolio of cash generating properties. If the triplex has equity, tap that to purchase addition cash positive earning property.

If the Triplex isn't cash flow positive, then that would be the time to think about a 1031 exchange into something that is cash flow positive.

Everyone has to think about their personal goals when investing, short term and long term. If (as an example) you can find $100-$300 positive cash flow per door and you want to have $10,000 gross income per month before taxes and such, then you have to have $10,000 / $100 to $10,000 / $300  = between 100 doors to 33 doors.

Living in the tri-state area, $10,000 per month isn't much to live on. But, if that is supplementing regular income sources then that can be used to continue to expand the portfolio.

That would be the short term goal. Long term, you have to think about portfolio management given depreciation recapture, capital expenditure needs, tenant headaches and such...