how to retire in 6 years as a newlywed

Ok, here’s how:

But in reality, you can make a good deal more than that.  Here’s my “real” humble suggestion for investing for people that want a reasonably easy, high-paying investment.

Now your goal is really to do something that benefits God or your fellow man.  To do the things that really would be fulfilling to you.  If those thing that  you want don’t bring in much money, or require money, then you may want to consider investment real-estate as a way to supplement your income in the long term.  In that vein, I am going to suggest that you “get” a 4-plex as well as 3 small houses quickly during your first married years (rent out 2 of them, and live in 1–all owner occupied loans though).  This will allow you to leverage your money as small down payments, and eventually the growth in these properties will provide you with significant cash flow.  See the following.

For example if you were to get a 4-plex with $2400 a month rental income, and two houses each with $800/month rental income, that means that in 18 years (assuming 4% yearly growth of rent prices), you would be receiving $8000/month, with mortgage payments of (at most) $4000/month (which is a bit pessimistic).  So you’d have, at that point, $4000/month cash flow, or 50% going to you (so in today’s dollar terms, $2000/month net cash flow).  And that’s without spending a dime besides the down payments.  But it can get better than that, even, as we shall see.

So, the plan.  First, get a job (well, graduate college, then get a job, preferably–the world loves educated people).  Preferably get a job that you love (see Gunderson’s book “killing sacred cows” and also the book “The passionate programmer,” [if in the tech field] or related books).  Now save for awhile (rent, or see below…) and buy a 4-plex (FHA=3.5% down).  Preferably get parental loans for the down payment and make the seller pay closing costs so you don’t have to.  Live in it for a year, saving all the while for the next down payment–the down payment for a small house.  Then buy the next house (one that you can afford).  Save another year or so.  Buy another little house, and rent the first.  Live in it and save slightly longer, this time for a slightly larger house (for you to live in indefinitely).  At this point you’ll have maxed out the “single person mortgage” limit (which is 4).   When deciding which units to  buy, etc., you’ll want to buy whatever gives you the best “rent-to-mortgage” ratio (essentially what the term “cap rate” means).

The reason you want to get into debt like this is that 1) you only have to put down payments down, which for single family residences is only 5%, and which for the 4-plex is FHA (3.5% down).  Note well that you cannot buy multi-unit for less than 20% for less than FHA, so you really are lucky to have FHA available. 2) You are *leveraging* these properties because they increased based on their *initial value* exponentially.  Ideally all properties should be cash flow positive from the get-go, and then as rents go up exponentially based on initial cost, the extra either goes to your pocket or to invest in more properties.

Why is this possible?  Isn’t 4 houses not allowed?  Well, since you’re getting new properties about once a year, the rent from the other properties will show on your taxes as income, which decreases your “mortgage to income” ratio by 75% of the sum of the rent that came in.  Thus allowing you to qualify for more debt.  This assumes that your income will support buying the several, which it should, theoretically.  If not, see below “what if I don’t make enough.”

So the overall reason you would want to do this is to *leverage* your money into larger investments that will grow over time.  For instance if you pay 15K down for a $300K 4-plex, that 4-plex is going to increase in value at 4%, which is 12K year of appreciation.  So in reality you have gotten about a 100% return on your money.  In reality, the cash flow increases as well.  (Which is what you really care about).  Each year it also increases by 4%.  If you start with 0 cash flow (a bad property, and one to be avoided, but if you did), then in the next year you should have an increase of 4% to the rent sum ($2400) which equals $100/month, or $1200/year, so almost 10% from cash flow.  A reasonable investment.  But then the next year it increases by not $105/month (which is what a savings account, or stocks would do).  It raises by $120 dollars, and pays you $2600, which is a 20% return on your original investment (third year is $305/month, or 3660 yearly, 30% return on investment).  This because you have leveraged your money to “gain” the interest on the entire value of the place.  If you are able to purchase a 4-plex plus 2 houses to rent, you basically times the above numbers by 1.5 or so.  You can imagine that after 18 years or so, you will be net’ing $2400/month from the 4-plex (equals $1200 in today’s dollars).

TODO: business analogy (, plus graphs.

So you have quite a few investment options, each with trade-offs in return as well as timing.  For example, one trade-off is when you want to start receiving any money as “spendable” cash flow–earlier or later (if you’re a newlywed, then later is probably not a bad option–just make sure you get a job you like in the meantime!).

Your options are:

Option zero: by a tiny home, live in it, paying your income toward it, until it’s paid off.  Then move to another larger home, rinse and repeat (this has some serious issues, but is a valid option).

Option one: by “just” a 4-plex and then a home for yourself (2 properties total).  Try to and pay down the 4-plex, then eventually (if desired and interest rates are good) re-finance it and start to collect cash from from the rent  (this is the “retire in 6 years” option, but not recommended since it’s rather limited in scope (doesn’t grow much after that point)–but it is an easy option, with less work involved, and reasonably quick cash flow).    Option two:  buy 4 properties (a 4-plex, 2 houses, and 1 for yourself), then consume cash flow as it begins to come in over the subsequent years from increased rent.  This allows the properties to pay themselves off (since their mortgage payments include payment of principal over 30 years).  This option allows for almost “instant” cash flow, though it doesn’t grow as quickly as the others over time, and the cash flow doesn’t increase dramatically over time.  Option 2.5: buy 4 properties, then aggressively pay them off, one at a time (use increased rents to pay them each off).  Then consume the added cash flow.  Option three: buy 4 properties, then aggressively pay one off (use the increased rent from all properties to pay off one).  After it’s paid off, save up for a down payment, and buy a 5th property (probably non owner occupied mortgage).  Next pay off another property, then save, buy a 6th property, repeat.  Option four: buy 4 properties, try and pay off one quickly.  Sell it before it’s paid off completely.  Use the equity as the down payment for another “larger” property.  Then “pay down” another smaller property for awhile.  Then sell it “early” again and use its equity as down payment for another large property.  Repeat.  Eventually repeat with the larger properties.

The benefit of replacing a property with another (in options 3 and 4) is that you avoid paying capital gains tax on the one you sell because you are replacing it with another in the same year.

Note that debt actually decreases over time because while you are paying off maybe “one” unit aggressively, the others are also paying themselves off because each mortgage includes payment of a little bit of principal.  So in reality they’re all in some phase of paying themselves off, which is a good thing.

You can also move into one of your (smallish-er) units if the economy collapses.  At some point you should be able to live in a unit and “the other units will pay for your rent entirely” which could be important if push comes to shove.  Or in an emergency move in with parents and rent them all out, etc.  It’s seems like a stable bet for an economic emergency.

Note: you could make a goal of having “so much” income or “so many” total houses, also providing some “ending line”

A few more notes: you should probably dump your 401(k) since that is like investing in a slow moving company that you can’t control.  See the Gunderson book.  You can see from our above example that leveraging your money in real estate investments is a far better proposition.  Most landlords, after they’ve paid down their properties for several years, are of the opinion that land-lording is great and “why isn’t everybody doing this”?  And it’s a valid question.

Note that this is nice as a business vehicle because you don’t have to worry about tracking markets much (land-lording and maintenance are your only constant stresses), except when you actually finish paying something off, which is infrequent.  It’s low stress in that regard.  Eventually you can probably employ an agency to manage the apartments for you, though agencies are typically under-staffed, and charge 8% or 10.

Note: here’s how to get good tenants:  post at $5 below the going rate for your size unit.  Now in your application process, ask them if they are very clean, try and see their car, and also ask if you can visit their current residence to see how they treat the place.  Ask their neighbors about them.  Charge a late fee and actually charge it.  Check if their car looks clean and well-kept.  Check amount of debt, etc.  Get to know your tenants, invite them over, etc. Ask previous landlords about payment history.  Always on time?  Do they have a savings account?

Note: you could get a small house first (with conventional loan), then move into a 4-plex second.  Especially if it was going to take forever to get the down payment ready, which might be the case.  Why wait?

Note: you could get more than 4 if you “leverage” somebody else’s credit (a partner, really, is what you would want–or perhaps put it on your wife’s tab if she works).

Note also that this assumes “normal” house prices.  This is not taking advantage of anything but inflation and natural population growth, to bring you the end you want.  It’s quite shrewd.

Note: this system is good because it lets you live and get owner occupied mortgage rates for smaller places while your family is still small (newlywed).  So it tries to minimize that pain.  If you have a more advanced family, consider moving “out for a year” or having dad sleep in one one night, the other the next (so 4 nights/7 a week at the new place–and have all of his mail go to the new one).  Check your state regulations.

TODO: how fast would each one pay off? What would each style look like “in the end”?  401(k) style?

caveat: having these means you have to manage them, which means you probably have to stick in town.  If not, you could sell and “transfer” your units to a new place, though you’ll probably lose realtor fees (6% of the selling cost).

TODO: flashy statistics up front LOL

What about “get out of debt”?  Some thoughts.  Really what you accruing here is “business” debt.  If it is turning a cash flow, our hope is that it will continue to do so, and thus be “good” debt that actually increases our value.  You can mitigate risk by purchasing properties with a high rent-to-mortgage ratio.  You can also mitigate risk by “asking around” to see if rentals are doing well or not, buying in higher populated areas, and also by purchasing smaller units, since there is typically more demand (since they’re cheaper).  It also might catch you if you want to move and can’t sell a house–because you can only have 4 so you’d be stuck.  The reason I suggest getting into this much debt is that over time the pay off is greater if you can invest earlier (see exponential growth), and also your family is only little once, and probably won’t like moving around too often, so if you can “max out” ASAP then your wife will be happier for it.  It’s also fairly “normal” to have to sell your current house before moving, so in reality you’re not doing youself a big disservice. (could insert a graph with 3 versus 4 houses or what not–exponential really pays the earlier adopters).  Also note that by investing early, you’re getting into *less* overall debt than you would otherwise, because you’re buying properties when they’re at a cheaper price than they will be later.  Also it’s not a super dangerous investment because, if you cannot get tenants, you can always lower your rents and attract tenants that way.  Try to mitigate the risk of damage from tenants by trying to screen them well (see above), and offering competitive prices.  You can also move your family from a larger home to a smaller unit if you lose your job (and rent out the larger one, or let it be foreclosed on).  Also get a “semi-permanent” home for yourself.  You don’t need anything large at the beginning.  Live in a smaller house for a few years, then upgrade.  This keeps the sum of mortgage debt lower.  So, since this is “business” debt, it’s a question of how much business debt you want, after assessing the risks well (business debt is “meant” to go up in value, but can go down).  Mitigate risk through knowledge.  You might also mitigate risks by paying off a unit quickly, then from that point on, always having at least one unit free and clear, with no mortgage, so you can use it in a pinch.  You could also always have sufficient savings on hand to handle temporary loss of rent money, emergency repairs, etc.  Since it’s shared among buildings it might not be too terribly much.  You should probably never buy anything that is cash flow negative (referred to as a “crocodile” because it eats your money!).  The purpose is to save early and spend later, not the other way around.  The trick is…you must be frugal.  There is no “ok now spend spend spend” phase until you can.

TODO what would be making at each age? (compare to 401(k) too–option -1)

TODO online self-calculating version (oh boy!)

Note: also in a few years as more cash flow comes in, it will become harder to keep your hands off it and keep investing it, because it will be more tempting.  It also might bring you more satisfaction (see the Gunderson book–this is what you want, after all) to spend some of that money as it comes in, now, on doing the things you like.  Flexibility isn’t all bad here.  The real goal here is to get the “painful” part of it done, and early (as quickly as possible) so that later you can enjoy the fruits.  The painful part is having to owner occupy all these homes, and move frequently.  This is more painful as your family grows older, so recommended you do earlier rather than later.

Note: (related to 4) you could re-sell your single-family units (try to buy some that “are a bargain” then re-sell them, or sell them as “rent to own” (see REIC)).  This would increase the speed at which you’re able to build up your investments, because it would generate some extra equity with each sale.

note: at what age would you be making 70%?  at what age would it pay off your “larger” house? (allow them to enter “when they would like to start pulling from it” [?])

note: the folly of “spending down” your savings during retirement. Inflation eats away at your money! Yikes!

note: can mitigate work/collections by having a resident landlord

risk/downsides: this is a lot of “mortgage” debt…what do the prophets say about this?

What if you don’t have a high paying job to begin with?  Here are some thoughts:  try to get your first properties as one with *very* good mortgage-to-income ratios–report as much as you can as income from these properties–all of it counts as income–you could also try to buy down future mortgages, which helps with your personal “mortgage to income” sum ratio.  You could also try to buy each place as very cheap or very small units, which have decreased mortgages).

NB that it is folly to do this without some purpose for that money in mind.  Read the Gunderson book if you want to know more about this.

NB this is no get rich quick scheme.  In fact, it starts with you actually getting poorer, becuase you have to save for down payments, and move from house to house.  And it starts with little return, because typically cash flow is limited at the beginning, but grows over time.  I’m just suggesting it as a great vehicle to start a career, possible allowing for retirement in far fewer years.  Basically, you’re leveraging the renters to pay for your retirement for you.  Which makes it much easier to save.

NB the good news is you get the “hard part” (saving, moving) over with fairly quickly.  Then you can not worry about it as much after that.

Also the best part of this is that once you do have some cash flow, you can cut people some slack if they need it.  Got a poor tenant? Fit them a discount every so often.  Help them go back to school.  Somebody sick? Why not a month’s free rent?  And plus ideally you can use the money, in the end, to bless people’s lives.  That must be our end motive. “Seek ye first the kingdom of God, and his righteousness; and all these things shall be added unto you”

TODO how to get good deal in real estate (use MLS, be quick on the trigger finger)

Note: this is a much better vehicle than a 401(k) for retirement, because it pays you *along the way* as well as at the end, as well as it is leveraged, meaning you get bigger bang for your buck.

18 thoughts on “how to retire in 6 years as a newlywed”

  1. Investment debt should be fully secured so as not to encumber a family’s security. Don’t invest in speculative ventures. The spirit of speculation can become intoxicating. Many fortunes have been wiped out by the uncontrolled appetite to accumulate more and more. Let us learn from the sorrows of the past and avoid enslaving our time, energy, and general health to a gluttonous appetite to acquire increased material goods.

    President Kimball has given this thought-provoking counsel:

    “The Lord has blessed us as a people with a prosperity unequaled in times past. The resources that have been placed in our power are good, and necessary to our work here on the earth. But I am afraid that many of us have been surfeited with flocks and herds and acres and barns and wealth and have begun to worship them as false gods, and they have power over us. Do we have more of these good things than our faith can stand? Many people spend most of their time working in the service of a self-image that includes sufficient money, stocks, bonds, investment portfolios, property, credit cards, furnishings, automobiles, and the like to guarantee carnal security throughout, it is hoped, a long and happy life. Forgotten is the fact that our assignment is to use these many resources in our families and quorums to build up the kingdom of God” (Ensign, June 1976, p. 4).

    By way of testimony, may I add this to President Kimball’s statement. I know of no situation where happiness and peace of mind have increased with the amassing of property beyond the reasonable wants and needs of the family.

  2. This appears, superficially, to be something that doesn’t take much time away from family time (another benefit). In fact, you can fix up places with the help of children, which is like a family business.
    Probably key is to not over-extend. Plan carefully your purchases and rents.

  3. don’t over-extend (possibly purchase one house less–so make sure you get one that you could live in for quite awhile–good idea anyway).
    Also don’t over-extend it can strain relationships

  4. you can set a limit for yourself like “being able to handle 2 vacancies plus your current house” at all times (or have a large savings account to do the same, before buying a new property, etc.)

  5. with little family you don’t have as much stuff to move, and less kids friends relationships to worry about (your own you still have to worry about)

  6. you could also mitigate risk by lengthening out the time it takes you to buy (also giving you some more time to save up down payments). Just realize that the longer you wait, the harder it will be to move (more stuff accumulates over time, you’ll have more kids, more relationships, might be required to move into slightly larger houses–more hassle for the family).

  7. also financial peace U. about “interest” (after awhile your contribution doesn’t matter as much–perhaps this even means that after awhile you can start paying off anything out of pocket, really).

  8. smarter to by the 4-plex (lots of small units instead of say a larger duplex) because vacancies won’t kill you as much, and are spread out over time.

  9. One advantage to this is that you have a limit (4) of properties, so it gives you a goal, as well as an end, so you can stop worrying about as much.

  10. for a more detailed (if less newly-wed specific) treatment of these topics, see “investing in real estate” by Eldred. Unfortunately it’s a bit too nauseous for my taste (too many numbers) but it’s quite detailed, and on the same topics, basically.

  11. note that theoretically, you can buy more than 4 if you get “seller financed” loans, as well (they do exist). Basically you come up with 20%, the seller (who already owns the place), gets a mortgage on it, in his name, which you pay off.

  12. note: if you’re older than a newlywed then just save up 20% and buy the units non owner occupied. Also if you’re older then you probably have some cash saved into your home (in equity). You could theoretically pull out that equity and use it for various down payments (then pay it off again, of course…the end goal is to pay it off–it makes sense to pay it off later rather than sooner because, though paying off your own house is an asset, it is not a cash producing asset, though if your interest rate is high, might still be good idea to pay off).

  13. another stratagem in your favor might be that, once you have a house or two or three, to actually go and rent, while you rent out your normal house. This allows you to count all of the income as rental income, thus allowing you to get into more houses. Use this one with care, however. You love your family more than real estate 🙂

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