OurNextLife.com // Choosing People Over Money, the Story of Our Rental Property / Real Estate Investing, Rental Property Investing, Financial Independence through Real Estate, People First Then Money Then Things

Choosing People Over Money // The Story of Our Rental Property

Something we’ve been wanting to write about for a while now, but have struggled with, is the story of our rental property. Lots of you have asked us questions about it, and we’ve wanted to answer honestly — but the truth is that we wouldn’t recommend that others follow our lead on this one. Because virtually every decision that went into choosing our rental went counter to what the real estate experts will tell you to do. But at the same time, we’re completely happy with our choices, and wouldn’t dream of taking them back.

First, Let’s Rewind

Back in the early 2000s, did anybody else watch Suze Orman, or just me? Anyone? Bueller?

I love Suze’s unapologetic wackiness, and her willingness to dish out tough love while still being empathetic. Over the course of a few shows, she transformed my views on spending, and what it means to “afford” something, and helped me look to the future more than I ever had before. (Mr. ONL was already a saving pro by this time, so he didn’t need this basic level coaching like I did. Plus I think Suze drove him a little nuts.)

But something I will never forget, that Suze said at the end of each show was,

People first, then money, then things.

— Suze Orman

This mantra was so well-timed for me. I was just starting to earn enough that I was no longer living paycheck-to-paycheck. I had nearly paid off my student, car and credit card debt. And I was starting to define how I saw myself in relation to money, or in other words, what I wanted my money to do out in the world — whether it be to buy me lots of things, show off my status, fund my adventures or support people and causes I care about.

Mr. ONL had had his adulting hat on longer than I had (he is three years older), and so he had already been giving to charity and doing things like sending wedding presents when friends got married (so grown up!). But other than being willing to throw down on some baller travel, he hadn’t really defined himself in relation to money either.

Related post: What’s Our Money Really For? // There’s More to Life Than Future Goals

Fast Forward to 2013

A few years ago, when we decided to pursue early retirement in earnest, we had to make a choice: Do we want to get to early retirement as fast as we possibly can, or do we want to take a little longer to get there, but allow for some fun in the meantime, as well as the ability to keep giving to charitable causes we care about and maybe help out some family along the way?

As powerful as that siren song of freedom from work is, we made the choice that we’d try to get to FIRE as fast as we could without squeezing those two categories too much. And that’s why we’ve continued to travel a bit, go to music festivals and take on a few other splurges along the way (we can’t sacrifice now for the future, after all). It’s also why we’ve made the deliberate choice to follow Suze’s advice and put people ahead of money.

OurNextLife.com // Choosing People Over Money, the Story of Our Rental Property / Real Estate Investing, Rental Property Investing, Financial Independence through Real Estate, People First Then Money Then Things

Choosing People Over Money and the Definition of Financial Independence

There are as many definitions of financial independence as there are people pursuing it. But I’d be willing to wager that most people would include the concepts of freedom and happiness in their definition. For us, we might articulate it differently on different days, but it’s fundamentally something like:

Financial independence is the freedom to follow what makes us happy, and to live our best lives.

And what a beautiful thought that is! What we came to realize, though, is that our happiness would be shallow if it didn’t include taking care of those we care about. Not that we have to provide for everyone, of course, but if we saw someone struggling, especially financially, we wouldn’t be able to stick our heads in our Scrooge McDuck-style pool of gold and just pretend there wasn’t something we could do. Just as we wouldn’t be happy if we couldn’t support important causes close to our hearts. That realization led us to our modified definition:

Financial independence is the freedom to follow what makes us happy, and the privilege to be able to help out those in need.

This definition feels closer to what our hearts want, but we only got there after lots of self-reflection. But here’s a bonus: when has helping out another person not ended up making the helper happier? Um, never, that’s when. Helping feels amazing, and it’s good to remember that when we feel too stretched or busy to lend a hand.

Related post: Why We Ignored The Experts and Loaned Money to Family

So what’s all this got to do with our rental property? Let’s talk about that.

The Story of Our Rental

Around the time when we were formulating our FIRE plan, we started talking to a relative about downsizing their home and moving closer to us so that we could spend more time together and help out with some things. The problem: because of the housing crash, this relative had very little home equity, and wouldn’t be able to buy a home closer to us. Renting was an option, of course, but it would be incredibly difficult to find a rental that would provide for this person’s special needs, and the possibility of rent going up each year was a scary thought given the fixed income this person lives on.

I can’t remember when we had the idea, but at some point we realized that we could buy a home specifically to rent to our relative, and we could do all the things a traditional rental wouldn’t offer: ensure a good location with access to public transit and walkable services like groceries, provide assurances that rent would go up only when necessary to cover expenses and not just to make more money, and, of course, ensure that our relative would never get evicted or foreclosed on for financial challenges.

We started exploring the idea.

Real Estate Investment Math

As with all things financial, there are differing opinions about what constitutes a good real estate investment, and we won’t try to capture all of that here. (Go check out Bigger Pockets if you want a more in-depth education on the topic.)

But most people will tell you to at least follow the one percent rule to ensure that you will be able to generate positive cashflow on your rental, above and beyond your mortgage, repair expenses and income tax on the rent. The one percent rule says, generally:

The rent you will be able to charge should be at least 1% of the mortgage you have to take out to buy the property. (Or, alternately, 1% of the purchase price.) If you plan to buy a place for $125,000 with 20% down ($25K, leaving a $100K mortgage), make sure you can charge at least $1000 per month in rent, or $1250 if you’re following the purchase price version of the 1% rule.

Professional landlords us the one percent rule as a general guide to determine if a property is a good investment or not. If you know that rents in your area average $1000 a month for one-bedroom apartments, and there’s a four-plex of one-bedrooms for sale for $375,000, then the one percent rule tells you that’s a great deal. If it was priced at $500,000, it wouldn’t be such a great deal.

As you can probably guess, we did not follow the rule. We cared far more about finding the right property in the right neighborhood, and we knew that would mean having to stretch our number up a little higher than the amount of rent we’d be charging would justify alone. In the end, instead of meeting or exceeding the one percent rule, we ended up with:

  • .86% of the mortgage amount in monthly rent
  • .69% of the purchase price in monthly rent

If we were professional landlords, we’d be getting a failing grade so far.

The Added Fun of Income Tax

Not hitting the one percent threshold for our rental economics means that we generate essentially no cashflow each month while we’re paying off the rental mortgage, something we plan to do right on time for the full 15-year term instead of paying it off early (unlike with our primary residence). We could squeeze out a little cashflow by refinancing into a 30-year mortgage, which would lower our monthly payment, but as anti-debt as we are, that idea holds just about zero appeal.

But aside from the mortgage, insurance and property tax, the real killer right now is income tax. We’re in a pretty high bracket while we’re still working, and every penny of our rental income goes straight into that highest marginal bracket. Ouch. Of course we deduct everything we can on the rental income tax schedule — depreciation, maintenance expenses, insurance, mortgage interest, etc. — but the IRS still sees it as a profit despite the fact that we’re making no money on the rental just yet. The flipside is that we’ll pay close to no tax on the rental income after we retire because it will all fall below the taxable threshold.

Playing the Long Game

So on the one percent rule we’re failing, and on the positive cashflow front we’re failing even worse. (It’s costing us a few hundred dollars a month in income tax right now.) This is the very definition of a bad investment.

Except.

We’re playing the long game all the way here. We bought a home in an area where property prices rise faster than the rest of the region, and the house has already gone up in value 20+ percent in the two years since we bought it. So at some point when we sell, we expect to see a sizeable payoff. We also know that it will flip from cashflow negative to cashflow positive after we quit our jobs and drop down several tax brackets, and once the mortgage is paid off. Then it will net us enough to cover a sizeable portion of our expenses each month. Finally, the house provides several of our contingency plans in case our own early retirement plans don’t deliver as expected. We could move into the rental with our tenant if we really had to, and it’s a comfort knowing that’s an option, albeit one we hope never to need!

No Price Tag on Peace of Mind

On some level, it’s weird to even break down the numbers on our rental property, because it was never about making us rich, or even really about making us financially independent. It was more a matter of, “We can help, so we will.” And that’s not just good for our relative who rents from us, but for us as well. We sleep better at night knowing that person is safe and sound nearby, in a home that can never be taken away. And that’s worth more than whatever money we’re spending to make it possible.

Shifting Our Timelines

Buying the rental was the first big decision we made to help out a loved one, and making a personal loan was another. While we’re not clamoring to get into any more financial arrangements with family (we don’t recommend anyone make a habit of this!), we’d make both of the same decisions again in a heartbeat.

That said, the decisions have had a real-world impact on our early retirement timeline, though that impact has possibly been offset by recent saving progress. While our net worth has remained the same, just shifting some of our taxable savings into rental property equity for the rental, and some of it to loan principle that we own, we did see our taxable savings drop in both instances. When we bought the rental, we knew that doing so would add at least six months, possibly more, to our saving timeline. But it would also add a passive income stream to our later years of early retirement and beyond, hedging us against market fluctuations and better diversifying our portfolio. It felt like a good trade.

All in all, we’d say the choices we’ve made are worth it. We’ll be arriving at early retirement maybe a tiny smidge later than we otherwise would have, but we’ll have a more solid plan when we get there with more income streams in place, all of which feels like a win-win to us. Plus knowing that people we love are safe and secure — we can’t put a price tag on that.

Chime in!

So many questions for you guys! Do you own a rental property (or multiple), and do you always stick to the 1% rule? Has anyone else bought a property and ignored the 1% rule for good reason? Anyone else wrestling with how best to support those you love without spending down your nest egg or jeopardizing your own security? We’d love to know about all of this. Share, share away in the comments!

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70 thoughts on “Choosing People Over Money // The Story of Our Rental Property

  1. It’s great you’re helping family like that. I’m sure they really appreciate the sacrifice you’ve made and understand not everyone has the resources to do it! I like that you’re taking the long-term approach with the property. I’m thinking similarly about my primary residence. It sits on .75 acre in a super popular neighborhood in Nashville. In the future, I want to further develop the property and add at least one more house.

    1. Hi Kate! I know our relatives we’re helping DO appreciate it and know that not everyone could do it. :-) And wow, what you’re considering is not something that’s ever crossed our minds, but how interesting to explore adding another house on your lot! Regardless of what you decide (and contrary to what shows about house flipping suggest), I agree completely that real estate is best played as a long game. :-)

  2. I think your plan is perfect, because it is YOUR plan. You put people first and there are no losers in that deal. Your values won over greed. We own rentals and when I bought the first one 23 years ago I had no idea what the 1% rule was. It was a foreclosure that cost $44K with an unobstructed lake view (due to a small county park across the street). We’ve had the same tenant for 21 years and although she is not family, she might as well be. I will write about this soon – as I need to have the time and courage to document the story, but she still pays the same rent as she did 21 years ago. Her husband died of cancer in that house 15 years ago and she is on a fixed income too. She never calls us for anything unless it is a major maintenance issue. We’ve taken care of her financially (by not raising the rent) and she has protected our asset. We are seriously considering a move to that house next fall – and it will be a sad phone call to make to her. We could get a lot more for each rental unit we own, but we keep the rents low to keep good people. Not the best business model, but it reduces turnover and it has worked for us.

    1. Thanks, Vicki! And wow, your story of having the same tenant for 21 years is pretty incredible. I love so much that you’re more focused on the people than on the profit, and you aren’t looking to squeeze every penny out of your investments. Please do write that story and let me know when it’s posted so I can link over!

  3. Thanks for putting this story together, peace of mind for your family member and a long run financial game is a win win in my book.

    We are hoping to get into the rental world over the next 5 years, I haven’t researched it to much but the 1% rule is a good starting point

    1. Glad you enjoyed! And knowing that you want to get into the rental game, definitely do your homework beforehand. We wish we had known how much income tax would eat up of our rent (and make it a net loser while we’re still working), as well as all the rules around depreciation and write-offs. Not to say it’s bad, but just make sure you know all the pros and cons of what you’re getting yourself into. :-)

  4. My dad is retiring (very, very soon, I hope!), and he’s selling his rental property with his business. The biggest hold up beside the usual red tape? He’s negotiating a price freeze on rent of his current tenents because they’re so wonderful. He’s seen it all (from football teams to fortune tellers, literally), and we’ve had to do a lot of repairs. These people are a lovely family with a kiddo who will be in school for two more years. So my dad is really insistent that the family be able to stay put if they so choose. I know it’s counter to what many people would do, but it really makes me even more proud of him.

    Personally, renting scares me. Probably because I’ve always been part of the clean-up crew when renting hasn’t gone well for my dad. But I think he’s generally happy with it. It sounds like you have the right approach for helping others and for the long haul.

    1. Aww, I love what your dad is trying to negotiate. I really do think that lots of landlords are happy to give breaks to good tenants who are good people too. But your dad sounds awesome. :-) And yeah, I’m actually completely with you on renting generally. I have basically zero interest in dealing with any of that other stuff, and the idea of renting to a random stranger is not my idea of fun.

  5. Most of my rentals have exceeded the 1% rule. Now that rents have increased, they are way exceeded it. Of course if I look at the value they have now, maybe not…

    You need to have a positive cash flow. What will you do when you need a new roof? of a new HVAC system? Or a renter causes $10K worth of damage? You can count the mortgage pay-down, the principle part, as cash flow to make your numbers work just a bit better.

    I never count appreciation, or depreciation. A 20% bump in value is great, but much of that will be lost when you sell. Commissions and selling costs will eat up ~10%. Properties can only go up if wages go up.

    Renting to family is OK, as long as they would pass the credit and income checks. It’s when you help out someone, and you see them buying cigarettes, drugs, alcohol, gambling, nice vacations, new hair, multiple pets, big TVs, etc. and not have enough for the rent. All stuff that you may avoid as you want to live below your means and get ahead.

    You already have the rental, so you are OK. It’s too late to go back.

    1. I think these are all good and important cautions (and you would know!), but there are a few circumstances unique to our situation that alleviate these concerns. First, our family member tenant is a trustworthy person with solid financial habits and excellent credit, as well as a guaranteed income stream. So getting the rent payment each month is not an issue, nor is any concern about the property getting trashed. Second, we have lots of cashflow, just not from the property yet (we call them “jobs”). ;-) But we have savings set aside for this purpose and right now have no trouble cashflowing expenses. But still, good considerations for folks considering getting a rental. If that’s you and you’re reading this, do yourself a favor and go read the No Nonsense Landlord’s blog! :-)

  6. “People first, then money, then things.” Love this!

    I’m glad that you are actually putting the quote into practice. Family over profits. What good is reaching financial independence if you don’t maintain your relationships and have people to spend your newly free time with?

  7. We had a rental property, but that’s the unit we sold in July – and we were glad to get rid of it. We definitely aren’t landlords. We don’t want to deal with finding good tenants, renovating between them and just doing what landlords need to do to ensure their home is treated with at least *some* respect.

    I recently helped a friend ready his home for sale after renting it to tenants for a couple years. That experience taught me how bad things can get…if you find the wrong tenant.

    That’s definitely not the case for you guys, and that’s awesome. We happened to have good tenants as well, but that was pure luck. I wasn’t even aware of that 1% rule / suggestion…but even if I was, it wouldn’t have changed things much. I didn’t buy the house with the intent to rent it, so the circumstances were different in my case.

    In the end, we don’t see ourselves owning another stationary property for a long, long while.

    1. I feel a little ill hearing about your friend’s tenants. :-S We used to have our old city condo after we’d moved to the mountains, and every fiber of my being resisted renting it out, for all the reasons you stated. In the end, we sold it rather than rent it, and I’m so much happier with that decision. I don’t think we’d look to be landlords if it hadn’t been for this very specific situation and a tenant we trust not to trash our investment. And I don’t blame you guys for running far, far away from anything with a mortgage on it!

  8. Haha, here I am – Mr. Rental Property fan! :-)

    First off let’s start with Suze Orman – loved watching her show because she always just says what’s on her mind and she’s usually right about what she says.

    That’s a tough spot on the rental property, but wonderful what you guys are doing. I know that my first rental property didn’t go as well as I thought it would… live and learn!

    But like you, we’re looking at the long term. We’re in a little better position than you are on our first one since the tenants are covering the mortgage and just slightly more. But in the meantime, we’re gaining quite a bit of equity in the house.

    No Nonsense Landlord brought up a good point about the capital expenses that could come up like a new roof, etc. That’s one of the reasons we bought another one (and plan to buy a couple more) – to help spread our risk.

    I got back on the horse though with everything I learned on that first one and the duplex that we bought earlier this year is cash flowing nicely (well over the 1% rule).

    — Jim

    1. I totally miss Suze. She cracked me up, but like you said, she was almost always right!

      Our tenant is definitely covering the mortgage plus a little. The cashflow would be positive *except* for income tax on the rent. So it’s not as bad as I might have made it sound in the post. And we could get more cashflow if we refinanced into a 30-year mortgage instead of our 15, but no thanks. You know we have zero comfort with debt. (And we also understand that other smart, rational people can be comfortable with it!) ;-) In terms of capital expenses, we have savings specifically to cover that, as well as plenty of *other* cashflow. As for your note about spreading the risk by owning several rentals, my first thought was, “That just sounds like multiplying the risk!” Haha. I guess I do not have the right temperament for landlording! ;-)

      1. The risk multiplying made me laugh just because of how different we all are with levels of comfort with debt and risk. :-)

        I’m with you on the keeping the 30 year though – you never know what might happen and that lower payment is some security. You can always pay extra if you want right now, but on the flip-side, the bank’s don’t seem to like it if you don’t pay the whole amount of the payment for some reason. :-)

        — Jim

        1. Yep, totally different comfort levels! :-) And haha — we’re definitely all about the 15-year mortgages! 30-year mortgages are just interest pits as far as we’re concerned… but I completely love that we can have these different views and still be blog friends! ;-)

  9. Before I say anything about our personal situation, I just wanted to say thank you for such an uplifting post today. We are dealing with the sudden death of a cherished pet, and your words brought the first smile to my face in over a week. Thank you.

    We don’t own a rental property, but would purchase one in a heartbeat if our relatives needed a place to live (that’s why I keep our credit scores up instead of just blowing them off). It hasn’t happened yet, but it certainly could. We also recently forgave loans made to two relatives, one for a vehicle purchase and one for assistance with a home purchase and subsequent refinance. We don’t “need” the money and we finally decided we didn’t want debt owed to us to be an issue in the relationships. We may not loan again, most likely we’ll just gift and keep it simple. Our net worth took a hit, but our attitudes didn’t! Everyone has to make their own decisions regarding these issues, but having the capacity to help family members is truly a blessing, and we feel so grateful for the opportunity.

    1. Oh, you’re so welcome! I’m so sorry to hear about your pet. We’re total animal lovers, and every time we’ve lost one, we’ve been destroyed by it. Sending some love your way…

      I love your attitude about money and family, and would LOVE to be in a position to gift money one day. We’re not quite there yet, but it’s certainly on our radar. And I love how you put it: Having the capacity to help family members IS a blessing!

  10. I first bought a condo when I was 24 years old at the recommendation of my parents with when considering the tax deductions. I lived in it for 3 years, and I actually refinanced (at no cost) it to a 15 year loan about a year and a half in.. For two out o those three years, I rented a spare bedroom to a craigslist random at a price that was probably below market rate. I just thought it was too much space for just me and I felt good about myself for doing a nice thing for somebody who was struggling, plus it was enough to essentially fund an IRA for the year. That is, I took less $$ to ensure I had a compatible-enough roommate. It’s not all about maximizing the money at all cost. I like that quote. People then money then things.

    Eventually, I moved out and it became a full rental property for a couple years. It probably did hit the 1% rule at the beginning, but by the time I sold it, it was closer to 0.7% when considering the then current value rather than the purchase price. (The current value I’d say is more important because that’s the value of your asset now and your comparing the income you can receive from that asset vs just pulling out all the equity after selling costs.) In your case, there is probably less analysis needed because blood should always run thicker than green paper. :)

    If I had stayed in that condo, I might be able to retire a lot earlier because I would not have had a mortgage or rent at a slightly earlier age in life, but that would have meant that I had to stay in that location, which after a few years, I already knew was something I didn’t want to do.

    Plus, I feel more comfortable having zero debt and the equity in more productive assets (mutual funds).

    Plus, I just checked Zillow and the Zestimate is only $3k higher than what i sold for and around these parts, Zestimate is always on the high side.

    1. I hope you’re not second-guessing the choice to sell your condo. It’s crazy to think about choosing the place you’re going to live forever when you’re still a young cub, and as you said, you knew you didn’t want to spend your life in that area. And sounds like you got lucky with timing on the sale, too, which is always nice. :-) I love that you charged lower rent than you could have to get a good roommate match, and maybe help a few folks out.

  11. I’d love to get into the rental market. I attempted to buy a Multi-family property, but I got derailed by zoning issues. So, I shelved the idea until I move and settle into my next position. It’d be wonderful to have some extra income coming in!

    1. What’s funny is, having been a landlord for a few years now, I’m not especially interested in having more properties. ;-) But if you’re into being a landlord and dealing with all the management and extra tax documentation, it certainly can be a good way to earn semi-passive income!

  12. What you’ve chosen is wonderful. Being landlords, especially to family, is not for us, but we have converted a downstairs room to a bedroom and installed a downstairs bathroom with grab bars for elderly relatives who visit. We fully expect our parents to live with us one day too. Hopefully they’ll be healthy and self-sufficient for a long time, but when they need us, you can bet we’ll be there for them.
    You’re so right: people first.

    1. I love that you’re planning ahead to make room for your parents in your home! How wonderful of you guys. :-) And I don’t blame you for not wanting to be landlords to family — it’s not without its landmines. But there are lots of ways to help out, and it seems like you’re planning for one of the biggest ones!

  13. Interesting post. I bought a rental property 4 years ago when times were good and thought this would be better than an RRSP. It was great for some time and then the economy tanked and vacancies skyrocketed where it is located. So to remain competitive and secure a tenant I dropped my rent and I am actually loosing money each month. I have to keep looking long term as the mortgage keeps getting paid and the market will rebound. The thing is I am not sure I will keep it, most likely selling it to dump the cash into savings. Dividends are easier than people :)

    1. That’s a tough call! I don’t know what we would do in your situation — I suppose it depends on how soon you need that money. If you’re willing to ride it out and can cover the mortgage, then it might be worth sticking it out, but everything with real estate is such a guess! Who knows what the markets will do next month, next year, next decade… ?

  14. Peace of mind is better than any money you can receive. So I totally agree with you. Sometimes money isn’t the answer to everything. Finding the right tenants so they don’t bother you or creating headache in the future is way better than getting a few more dollars.

    1. Well said, my friend: peace of mind, especially when it comes to loved ones, is worth more than anything. And family member tenants can still create headaches, but I’d imagine it’s many fewer than random strangers could cause! ;-)

  15. I have an elderly friend who owns a house well his tenants lost their job. Instead of kicking them out he has let them stay till they find a job. When the guy started renting jobs were good but since then have dried up. Mining town. The guy does odd jobs around town to pay the bills and maintain the house but nothing steady.

  16. I have several people in my life who are on fixed incomes, and the lack of affordable housing in this country is just heartbreaking; it’s something I see reflected in their ongoing struggles to live stable, less stressful, adequately housed lives. I really think the only way right now for people to have decent housing if they are disabled or elderly or just working in low-pay jobs is to tap into their personal social support networks.

    Many moons ago I used to work as a caseworker providing emergency, temporary financial assistance for rent and mortgage payments, and one of the things we had to document in order to provide that one-time assistance was that person’s future ability to pay their housing costs on their own. And aside from their actual income, be that fixed or from wages, we could also count family financial assistance toward that calculation. Working that job impressed on me the ways in which families really do step up to help each other — it was sometimes the only way a person could survive month to month. I think it’s a reality I don’t often see discussed; or maybe it’s a reality that’s easy to not see if luck or circumstance places you far outside of it.

    In my own family, I’m currently providing monthly financial support to someone, and it’s an ongoing conversation among other relatives who are also chipping in if we are fostering co-dependency by doing so. I really struggle with that question, and even sometimes feel angered by it, because it’s an impossible mathematical calculation to earn less than $700/month in benefits (in this case, for an adult and child) and still be expected to get ahead in any meaningful, material way. Yet, there is still a moral judgement that can creep into my thinking, where I conflate being able to financially care for oneself with being somehow a better person, and not being able to do so with being a less worthwhile one. When are you helping and when are you enabling? When are you throwing your own money away and when are you providing the only bulwark against disaster?

    Earlier this year I read the book “Evicted,” by Matthew Desmond, which is a beautifully written exploration by an ethnographer about the housing landscape for poor families in Milwaukee. In that book, he talks a lot about the network of relationships that are required to keep a poor family afloat in a housing system that works against them at so many turns. I think it’s important to acknowledge that sometimes — many times — people do absolutely trump profit, because if we don’t all make those sorts of choices, we and the people around us, will fall. In an interview, Desmond talked about the “rise of the unaffordable world,” and how that will be a challenge for us all, no matter our incomes.

    Thanks for writing this post. It’s too easy sometimes to think that we live in silos, protected by our own good financial planning and decisions; but we don’t — we live in a world with other people, and I do believe managing our money responsibly includes considerations beyond profit.

    1. Wow, Megan, you’ve seen so much of this first-hand, both through your work and in your personal life. I will have to check out that book — that’s totally up my alley. I couldn’t agree more with you, and in this case we’re glad we’re able to be part of someone’s social support system. The judgment stuff is really tough, and part of our calculation going into this was that we didn’t want to be in a position to be questioning our relative’s basic financial decisions. As long as they could pay rent, then great, no need to pry. And that has worked well for us so far. Same deal with the different relative who’s paying us back for a loan. As long as they make the payments, then we don’t think about what they’re spending their money on. (Sorry for all the plurals — trying to protect their privacy!) Because it *would* be easy to start judging whether what they were spending money on was the “right” thing or not, and that’s not healthy ever, but certainly not for a family relationship! But, all the same, neither of our relatives are dealing with extreme poverty in that way, and I think that’s a very different ballgame — I’m sorry you’re having to ask those tough questions, but I sure am glad that people like you are willing to take a hard look at the problem and step in to help where you can, as murky as it all is.

  17. If the relative is indeed reliable in paying the rent and takes care of the place, then it’s probably a good idea to forego a few 0.1% on the rental yield and have the peace of mind.
    A caveat: Not talking from personal experience here, but the personal finance world is filled with examples of money issues between relatives going wrong. In fact, sometimes 50% of Suze Orman’s show is about that. So, knock on wood that this worked out well so far!
    Personally, we in real estate through private equity funds and we are happy with the results so far. These are big multi family housing investments (we are just mom and pop investors, among larger mostly institutional investors) and everything is professionally managed. No phone calls on Christmas Eve about the toilet not flushing for us.

    1. I think it’s completely smart to pay heed to those cautions that are out there about mixing family and money, or friends and money. It was not lightly that we made this decision, nor our decision to make a personal loan to a different family member. In our case, both arrangements are working beautifully, but we knew going in that we had to be willing to lose the money we were putting in. And while that wouldn’t be ideal (it would for sure slow down our path to FIRE!), we’d be fine if those things didn’t work out. That was definitely our bottom line consideration.

      As for your investments, your approach makes sense! And I love JL Collins’ point that we’re ALL invested in real estate because it’s such a big part of the share prices in the markets. :-)

  18. I am glad you are you. I am glad that you are doing this.

    Once I am far more financially secure, I intend to do something similar for someone who I consider family. He’ll likely never maintain a job, but a safe steady place to live would keep him in a much better position and keep me happier. He’s a good guy who is not fit for work due to disability. He helps me with whatever I need (he loves driving and I HATE it) and wouldn’t hurt a fly. Ensuring his safety helps to ensure my lack of worry. It won’t be a sound financial choice, but it will be a sound human choice.

    1. Thanks, ZJ. :-D It’s awesome you’re thinking of doing something similar down the road, and I love how you put it — maybe not a sound financial choice, but a sound *human* choice. Can I steal that? ;-)

  19. I love that you are able to help this relative in this way…providing a service they need with short term costs but long term prospects. It sounds like it also gives your relative both support and independence. Pretty awesome.

    One of our rentals is barely at 1%, one is well over. Both do okay with taxes, particularly since we do our own maintenance and can write off the mileage.

    1. Thanks, Emily! The fact of what it means for our relative makes it worth it, even if the math isn’t great from a pure investment perspective. But I’m glad that your rentals do well for you! Maybe we’ll actually get a proper rental one day. ;-)

  20. We have one rental property and are failing on that 1% rule as well. However, we lived in the property first, for about 10 years. Also, the place needs quite a bit of work, so our friend is living there for the timebeing. He is cool with us coming in to do some remodeling here and there, in exchange for a pretty decent rate on rent. We’re looking at the long game too – as the rental property being a source of income when we semi-retire.

    1. It seems like you have a totally great rental situation, despite the 1% rule. You got lots of value out of the property as your own home! And yeah, the long game is a totally different thing! It may not give a lot of cash flow in the near term, but I understand looking at it as a source of long-term income. :-)

  21. Love this story so much! Thanks for sharing it. We are open to owning a rental property in the future, but not there yet. We’d follow the conventional wisdom as long as it made sense, but I love that you’d helped a family member and, even if delays your plans a bit, it sounds financially sound for the long haul. We think being helpful & generous along the way to FI is the best way to make sure you’ll be that way when you do retire. Kudos for doing that!

    1. Thanks, Kalie! I’ve been really thinking a lot about saving and generosity lately, and how to balance the two, as you said, while you’re saving and once you reach financial independence. I’m sort of thinking about overarching master theory of balancing the two. You guys have any interest in collaborating on a post like that? Seems like it’s right up your alley. :-)

  22. I don’t have an investment property but you know where I stand when it comes to helping others, especially family, so I’m dropping you a note to say thank you for writing this. You are kind people with big hearts. I wish someday I can do something like this for others too. :)

  23. We’ve done the same. When I moved in with my 2nd husband, I rented out my first house to a pair of 60 yr old ladies – one still working (a widow saddled with medical debt from her late husband’s cancer battle), and the other (divorced) on SS disability. They had just suffered an apartment fire. They could not quite afford the going rate of what I could have made on the property from other applicants, but I felt my property would be best maintained with them there rather than other applicants who had small children or large dogs. So I chose them. Not only did they care for the property, they even made some improvements! I paid materials cost, her son provided free labor.
    About 16 months in, the woman on disability had a massive stroke. I didn’t find out until a month later when the other tenant was struggling to make the rent payment on her own and asked to be released from the lease to move in with her son.
    I had offered for my son and his fiancée to move in at the conclusion of the 2nd year of lease to the ladies, nearly coinciding with when my son & fiancee’s apartment lease would expire. So I dropped the rent by $375 for the next 6 months to keep the remaining tenant in the house rather than vacant. She stayed 5 of those 6 months, so my house was only vacant 2 months before my son and his fiancée moved in – during which time they did some paint touch-up and we did a few minor fixes/upgrades.
    Now, my son and his fiancée have moved in at half-price rent. Of course this is causing tax issues for me (it’s treated as a 2nd home/vacation home rather than a rental) but I am helping them get on their feet as they are young in their non-degreed careers – my son is a rookie firefighter, thus not making a fortune. They are able to save for their wedding/honeymoon (which of course we are helping with that too) and then hopefully pay down debt – in preparation for giving me a grandbaby!!
    In the meantime the property continues to appreciate at a much higher than expected rate! Good for future renting or selling; not so desirable for Property Taxes. But the house is paid off, so their cheap rent is still covering costs of taxes, insurance, and HOA. (Just not really helping pay off the new A/C system I had to install 2 years ago, but the former tenants helped pay for some of that.)
    I just feel so blessed and fortunate (with my and my 2nd husband’s income) to be able to help both stranger or family at a young Empty Nester’s age. (We are 46 and 51). I’ve also forgiven some former-in-law relatives’ debt, and was able to loan money to a friend who thankfully was able to repay that loan.
    My husband has been able to pay off his daughter’s student loan, and purchase a slightly used car for her at BA graduation several years back. And now the same for his other daughter, who decided on entering the workforce rather than finishing a 4-yr degree. She was financially self-sufficient after choosing not to finish college, which was tough!! and now he is rewarding her tenacity and hard work, which led to her moving beyond a hourly job to a fulltime office job at a small architecture firm.
    One more to go! Our youngest: My daughter (now 23) graduated last year with a BS (and no student loan debt thanks to her dad’s TX vet benefit) – but now she is trying to figure out “Now what?” while working an hourly job. She doesn’t want to incur student loan debt to pursue an MS and also doesn’t want to “settle” by entering into a career that she dislikes just for the sake of the paycheck.
    Meanwhile, my husband and I are feeling severe “burnout” and are trying to figure out how to Retire Early — so I am glad I came across this blog today!! We are debt-free except our mortgage and maxed out on 401k and IRA. Trying to figure out the next investment vehicle that doesn’t cause more Income Tax! (Sorry for the long post! Oops!)

    1. I love this story — it’s so wonderful that you guys are so dedicated to helping others out, strangers and family alike. Our view is: What is all this money for if we can’t help others with it? And in terms of investment vehicles, most of the community seems to go with Vanguard index funds, specifically those that aren’t focused on dividends (which create more taxable income). Highly recommend Jim Collins’ Simple Path to Wealth if you haven’t already read it.

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