Early Retirement Sounding Board

[Jeremy Bartlett]

All:

I am active duty military - been in for 6 years. My goal is to do a full 20, get out at 42 years old, and be done working with enough money to cover expenses + have ~$10K/month excess. I currently own a 4plex that will generate between $1200-$1500/mo after expenses, and a single family that gives me $325/mo after expenses. I am planning on buying a duplex in the spring as well (hoping to find one that nets $700-$800/mo. Every time I get reassigned somewhere, I try to buy a property or two that has a positive cash flow. By the end of this assignment (I move again June 2021), I will have 3 properties netting ~$1700/mo.

My question is, on my timeline I have another 14 years of active income to turn into passive income - should I start rolling my $1700/mo back into my mortgages to increase cash flow from rents, or should I focus all of my funds on acquiring new properties? I can have my single family paid off in 8 years if I start rolling that money back into it, and if I do the same to my 4plex I can have it completely paid in 8 years after that if I commit those funds I budget every month to live on my employment income - what I don't know is if I should allocate my passive income back into my existing investments to maximize long term cash flow, or focus on buying new properties. Any insight would be greatly appreciated!

[Dan H.]

Originally posted by @Jeremy Bartlett:

Chaz and Dan,

Thanks for the replies!

Dan you are correct in assuming they are both VA and conventional. My goal is to maximize cash flow for early retirement (I am shooting for $10-$15K above bills by age 42). Reducing expenses is one way to get a greater monthly return. What I don't know is if one is quicker than the other - acquiring properties or paying down debt. I have a credit score above 800 as well and my assets have proven to be good money makers, my next property in the spring will be my stopping ground for a while so I can build up a solid security fund (currently $8K - shooting for $30-$40K). ROI is great, but to me its just a stat or measure of that property, but has little to do with my end goal of early retirement. Do you know what I mean?

 >Do you know what I mean?

I guess I do not.  My goal is to make as much money with the money I have to invest as possible.  Everyone is constrained with what they have to invest even if the constraint is 10 digits.  I want the dollars I have invested to produce a high return within a risk scope.  In your case you have a situation where tenants are paying your mortgage and you are considering paying it for them.  The issue is the savings associating with paying down the mortgage is so low that almost any investment is likely to out perform it. 

To me I mostly look at 3 things to determine the quality of the investment 1) the return on investment 2) the amount of time the investment will require.  I would take a slightly lower return for a more passive investment.  3) the amount of risk

I could take the money you would use to pay down your mortgage and place it in something very passive and somewhat low risk such as the S&P 500 long term (14 years is long term) and achieve far greater return (historically probably double) than what you will save by paying down a conventional home loan.  I do realize using historical returns to predict future returns has some risk but you are not proposing placing a large amount into an investment all at once.  You are basically proposing a dollar cost average approach (starting with $1700/month).  I suspect in the history of the S&P 500 that it has not had a 14 year return (your timeline) that has not exceeded your conventional home interest rate.  Even if I am incorrect on that belief, it would be maybe once during the great depression and never in our life. 

I am not saying the S&P 500 is your best investment option.  I am using it to point out how easy and passive it could be to achieve a better return than you would save by paying down a conventional home loan early.

Maybe @Joe Villeneuve can explain it better.

Good luck