I enjoy exercises like this these days since I've gotten more interested in personal finance and wealth building. I'll try to do this with real figures and little speculation. We're going to create a real estate empire
.
I'll start off with an IT degree, more specifically Computer Science, mirroring where I am right now. Let's say I got in to a UC (I.E. Berkley, UCLA, etc.). Tuition is $13,900 per year, they estimate a further $1,200 for books and supplies, and $1,900 for personal expenses and transportation. That sums up to $ $17,500 per year or $70,000 for 4 years. It's kind of feasible to have covered $30,000 worth of expenses over the 4 years since that's $7,500 a year. Grants, parents, and part-time work can handle that.
The UCLA C.S. curriculum (
UCLA Engineering B.S. in Computer Science Curriculum) gets you a solid background in calculus, linear algebra, physics, and the like. You get the principles of operating systems, algorithms, programming langauges, system architecture. I couldn't seem to find the electives, but let's assume you get things like app development, web development, database design, more in depth operating systems topics, and maybe some more fun and advanced topics like A.I. So coming out of this you should be pretty well rounded with good name recognition from the UCLA name.
Checking out Payscale (
Bachelor of Science (BS / BSc), Computer Science (CS) Degree Salary, Average Salaries | PayScale) the average salary of a Software Engineer is $77,667 and a Software Developer is $64,889. I personally would go the Software Engineer route mainly because of the title, but also because I feel that just being a developer you write code and don't really make design decisions, but it always varies from position to position. I would actually inflate the SE salary a bit more; if I average the range [$54,000 - $117,000] we get $85,000. Now I realize that this is averaging 2 numbers versus a lot more with Payscale's average, but average their average with my average and you end up at $81,583 which I think is entirely possible to command on the west coast.
Thinking about cost of living and all of that fun stuff I figure that Seattle is the best of the west coast job centers because there's no state income tax in Washington. So with that we can really get started.
Putting our starting salary at $81,000 in Seattle and plugging it into an income tax calculator (
Free Income Tax Calculator - Estimate Your Taxes | SmartAsset) Annual income after taxes comes to $61,506 which is $5,125.50 per month. The typical rule of thumb is to not spend more than 33% of your take home on housing, so pre-tax thats $2,227.5 and post tax thats $1,691.41 which gives a fairly decent range to look for an apartment. A brief look on Apartments.com comes up with a 1BR 1BA for $1,770 (
Rivet Rentals - Seattle, WA | Apartments.com) adding $200 for unassigned garage parking
gives $1,970 per month in rent. Lets add 15% of that for various utilities and that comes to $2,265.50 for total living expenses. If you're keeping track then we have $5,125.50 - $2,265.50 = $2,860 left after paying everything EXCEPT for that loan. Using a loan repayment calculator (
Repayment Estimator) subtract another $424.26 from that amount leaving $2,435.75 you can save I'd probably put more than that to the loan in reality. Here's an amortization schedule:
Loan Repayment Calculator - Edfinancial Services. We can dip into our monthly left over a bit more though, so let's try to get this shyt paid off quick. If we do an extra $1,000 a month that comes to a loan payment of $1,424.26. Edfinancial (
Loan Repayment Calculator - Edfinancial Services) projects we can pay that shyt off in 2.5 years rather than 10, here's the table:
Loan Repayment Calculator - Edfinancial Services. So now we're left with $1,435.74 a month. Now remember that your family back home has $2,000 / 12 = $166.66 a month they can kick in to the wealth building plan, bringing the total to $1,602.41.
Things are off to a decent start and we haven't even left the gate
. But now is where we have to start putting plans together. Ideally you'd want to build 3-6 months worth of expenses just to CYA, so that's $6,796.50 - $13,593 you need to save which would take you about 4-8.5 months to do. Erring on the safe side let's do 6 months of expenses, so saving doesn't really begin until you're 21Y9M old. At this point we need to start doing research on prospective rental properties (condo, single/multi family homes, etc.), gauging the market in several areas that will be conducive to a steady stream of tenants. That'll give us an idea of what to target in terms of a down payment and the associated costs. Regardless of where we look, we're going to target at least 20% because the FHA loan might be a little restrictive even though you only need 3.5%.
A brief search in Austin gives you decent offerings for under $400K. I'm seeing homes starting at about $220K so our initial savings needs to be between $44,000 and $80,000. Saving up that much will take 27.5-50 months or 2-4 years, which isn't too bad. By 23Y you'll be touching down payment range. Running things through a savings calculator (
Savings Interest Calculator - CNNMoney), 2 years of saving at 0.5% interest with a monthly deposit (after an initial deposit) of $1,602.41 will have you sitting at $40,248.54. Recall that our school loan should be paid off in 2.5 years, so when that's said and done we'll be at $49,967.34. From then on our monthly savings will go back up to $2,860. So now let's say from this point on we're looking for houses and it takes 6 months to find a suitable property. At this point our almost $50K has gone up to $67,260.88 (if you're plugging into the calculator, inital deposit was the $49,965.34 with monthly deposits of $2,860 for 6 months). A home affordability calculator (
Home Affordability Calculator - CNNMoney) says we can afford a house at $350,682 withour post-tax income, full down payment of our savings. Click on the advanced options and make sure the loan term is 30 years at 4.5%, property tax at 1% and insurance at 0.4%. They show a payment of $1,845, but we want a lower monthly payment to improve cash flow. I'm seeing rent range from $900-$3,000 in Austin for houses, and some of those look like shyt at first glance. Now I don't know about which neighborhoods are good
in Austin, so I just clicked on a house that had decent curb appeal. This one (
www.zillow.com/homes/for_sale/Austin-TX/house,condo,townhouse_type/70345723_zpid/1,0000221_rid/0-350000_price/0-1283_mp/globalrelevanceex_sort/30.736524,-97.130814,29.846004,-98.442307_rect/9_zm/) costs $229,900 and Zillow estimates a mortage of $932 per month with a down payment of $45,980 on a 30 year loan at 4.5%. Add on their estimated taxes and insurance costs of $442 and we come out to $1,374 we're paying each month. Lets do it
.
Doing a real quick comparison of the Austin area, not the neighborhood, I see 3BR 3BA houses renting for about $1,700 and up. Let's assume we don't need to make any repairs and list it for rent at $1,800. That'll give us a positive cash flow of $426 a month or $5,112 a year. Refreshing all of our totals we're at $18,780.88 in savings (subtract the down payment of $45,980 and $2,500 in closing cost [I don't know shyt about that to be honest
]). Check the amortization table on the rental property (
Loan Repayment Calculator - Edfinancial Services). Rather than putting our cash flow into our savings, lets put all of it towards paying down the loan. Check it now (
Loan Repayment Calculator - Edfinancial Services). By 38 we'll have a property paid in full and that can bring in $1,800 a month before tax or $21,600 per year. Let's take a step back though. This plan assumes that each month you're knocking on that door for your check. I don't know about you, but I got shyt to do, so why not take a little bit of a hit on cash flow and put that in the hands of property management. This could cost 8-12% of rent (
Q: How much do property managers charge?) so instead of $426 we're bringing in $426 - $51.12 = $374.88; I went at %12 as a "worst case". Our table changes to (
Loan Repayment Calculator - Edfinancial Services). Close to 17 years, that ain't too bad.
I'm gonna cut it short right here because it's very easy to get caught up in minutia. I might revisit this to explain things 15-20 years down the line, but for all intents and purposes the formula stays the same. Put as much as you can to saving for down payment on a property. Do what you can to understand the real estate market in your target area, make sure it's in a place that you can keep tenants, do what you can to pay that loan off ahead of schedule. At a certain point the cash flow from your rental properties will eclipse your career cash flow, so you could technically quit your day job and focus 100% on the empire. I personally only want 1 kid, but in this scenario I'd go for 2-3 but not until the mid to early 30s. You'd have to factor in the costs of a kid at that point and getting ready to groom them to take over the empire in some capacity (to to college for business or accounting) and devoting resources in to forming a corporation, if you haven't done it sooner (what I would do when I'm in the process of getting the second or third property). Then it's rinse and repeat. If everyone keeps their nose to the grind stone you could feasibly get towards $1 billion in net worth in the 3rd generation, possibly sooner if you explore other investment avenues as well.
Play this from 2:50-2:56
