Archive for the 'Real Estate' Category
Monday, November 2nd, 2009
Credit Card Debt
In the past, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way.
However, given the current lack of great no fee 0% APR balance transfer offers, I am no longer playing this “game” and have just paid off my last 0% offer for now. This makes the net worth chart a bit funny, but it should clear up next month.
Retirement and Brokerage accounts
Our total investment portfolio increased by a few thousand dollars since last month. DW’s 401k was already maxed out at $16,500. I made another $1,000 contribution to my Solo 401k, for a total of $16,500 contributed in 2009 as well. (I forgot the limit was $16,500 and not $15,500 last month…) This makes us done with our goal of maxing out both our 401k salary contributions for 2009.
I am starting to build up too much cash, and have started investing for retirement in a taxable brokerage account as well. In the interest of tax efficiency, I’ll have to move around some investments in order to keep bonds in the tax-advantaged IRAs/401k and the “extra” stocks in taxable. I expect to finish investing $20,000 this week.
Taking that additional 20k into account, our total retirement portfolio is now $211,095, or on an estimated after-tax basis, $170,047. At a 4% withdrawal rate, this would provide $567 per month in tax-free retirement income, which brings me to 23% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
We keep a year’s worth of expenses in our emergency fund. Another $10,000 is earmarked for upcoming home improvement projects that I keep putting off (minor roof repair and solar water heating).
Home Value
I am no longer using any internet home valuation tools to track home value. Some people have suggested using my tax assessed value, but I also think that is too high. I simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. (Currently on month 2 out of 6.) For the most part I am concerned about mortgage payoff, which I still plan to accomplish in 20 years at most.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 15 Comments »
Tuesday, October 6th, 2009
Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end.
Retirement and Brokerage accounts
Wife’s 401k was already maxed out at $16,500 for 2009. I made another $5,500 contribution to my Solo 401k, for a total of $15,000 contributed in 2009. This makes us about 95% done with our goal of maxing out both our 401k salary contributions for 2009.
Our total retirement portfolio is now $190,085, or on an estimated after-tax basis, $152,349. At a 4% withdrawal rate, this would provide $508 per month in tax-free retirement income, which brings me to 20% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
We still have a little over a year’s worth of expenses in our emergency fund. Part of the cash is earmarked for some smaller home improvement projects.
The next step is to put future funds into buying ETFs in a taxable brokerage account since I no longer have room in tax-sheltered accounts. I’ll probably use TradeKing or Scottrade as my buy-and-hold ETF broker, and keep Zecco as my “play money” account.
Home Value
I am no longer using any internet home valuation tools to track home value. If I still did, it would have been $572,000. Some people have suggested using my tax assessed value, but I also think that is too high. I am simply picked what I felt is a conservative number based on recent comparables, $480,000, and keep it for at least 6 months if not a year. This way, I just focus on the mortgage payoff, which I still plan to accomplish in 20 years at most.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 23 Comments »
Monday, October 5th, 2009
If you like to keep up with my net worth updates, you’ll know that I’ve been trying to estimate my home’s value using four different internet valuation tools:
It’s finally been a year since I started using these tools, and I wanted to look back on how successful this experiment has been. Some give one numerical estimate and some give ranges. When I got a range of values, I simply used the midpoint. Here are the results over the past year:
Accuracy. We all know the real value of a house is what someone is willing to pay for it. (Actually, it’s what a bank is willing to lend that person…) But as a group, I would say these services can’t possibly be accurate because they all seem to disagree all the time. In nearly every month, estimates would differ by $50,000 or more. Half are up over the past year, and the other half are down.
Even though they all seem to use similar housing information databases, all of them must interpret the data differently. Some may take into account the change in value of all houses in zip code, or the city in general. Or they may differ in what properties they consider to be comparable sales (by zip code, by distance, size, or age). How do you weigh different physical factors (i.e. number of bedrooms, bathrooms, and square footage)?
Volatility. Bank of America appears to have had the least volatility over the last year, while Coldwell Banker has the wildest swings. I believe the recent upswings are due to some more houses being sold in my area at the higher range recently, while for a time very few houses were being sold and those were at the low end. If so, it would follow that Coldwell Banker weighs recent sales more heavily.
Should I Keep Using These Tools?
Even though the house you live in might not be considered an investment per se, I still think one should track it’s value. The fact is that $200,000 in home equity here could buy me an entire house elsewhere if I were to move. (And I know people who have done just that.) I have seen that home price trends can vary across different neighborhoods within the same area, so you can’t just go by city-wide data.
However, due to the lack of reliable estimates from these internet valuation tools, I’m going to stop using them in my net worth updates. I initially tried to deal with the variations by taking the average of all four and also subtracting 5% to be conservative and 6% for real estate agent commissions, but the swings still dwarfed all my other accounts. I’m still undecided about what alternative to use.
Posted in Real Estate | 34 Comments »
Wednesday, September 30th, 2009
I received an interesting reader question last week about a scenario where you are very sure that you’re going to sell your house in a few years. In that case, would paying down your mortgage principal create an opportunity for a relatively high return with minimal risk? The e-mail:
Your blog is very insightful. I had an idea that I wanted to run by you. I plan to list my condo for sale in about 14 months. Currently I have a 2nd mortgage with an 8.875% rate. I want to have the most net cash at the time of sale, so I’m thinking the safest investment I can make over the next 14 months is to pay down this mortgage. If my math is correct, I would get a 4.9% return on the avoided interest (less what I would have gotten back from deductions). Am I crazy, or does it seem like I’ve found a good place to put my cash until I leave?
I’m not a mortgage professional, but it would seem to me that in theory this should work. When you make the additional principal payments, every future mortgage payment will also include less interest and more towards paying the loan balance down even faster. When you sell the house, you’ll get your “return” from this lower loan balance.
The annul return from paying down your principal should be roughly equal to the annual interest rate of your loan. The reader had an 8.875% second mortgage, which would seem like a pretty great short-term return over 14 months. The exact return might be a little off to the amortization schedule, it should be close. The mortgage interest may be tax-deductible, but remember that interest from a bank CD outside an IRA is also fully taxable. Check out these related posts:
Within the posts above, based on the amortization schedule of a 30-year fixed mortgage at a 5% interest rate, I plotted both the effective interest rate paid and the annual investment return from prepaying below:
I suppose that one big risk in doing this is that you don’t end up selling the house, so your cash is now stuck in the home’s equity and will be more difficult to access. So you’ll have to be fairly confident that you will be selling the house, or at least be okay with the possibility of just having a smaller mortgage balance.
Posted in Real Estate | 15 Comments »
Tuesday, September 22nd, 2009
I hope that all of you in the Atlanta metro area are safe and dry right now. I’d also like to take this chance to correct a common misconception, which is often promoted by the media every time a flood occurs. As just one example, take this CNN article:
He hustled out of bed and rushed to the door. There were his neighbors, surrounded by floodwaters the neighborhood is supposed to experience only once every 100 years.
The highlighted sentence is not accurate, and gets people thinking strange thoughts like “Oh the last flood was in 1969, I should be good until 2069 or so”. The fact is there is a reason we hear about such floods all the time. Let’s look at what FEMA has to say:
The term “100-year flood” is misleading. It is not the flood that will occur once every 100 years. Rather, it is the flood elevation that has a 1-percent chance of being equaled or exceeded each year. Thus, the 100-year flood could occur more than once in a relatively short period of time.
Again, if you live in a 100-year floodplain, you have 1 percent chance of being flooded every year. Think of how concerned you’d be if you were told there was a 1-in-100 chance of your house burning down every year. The way the math works out, this means that over a 30-year mortgage, there is a 26% chance you’ll have a 100-year flood during that time period (1 - (0.99)30). This is also why most people with home loans in such areas are required to buy flood insurance.
Many people are in 500-year flood plains, which gets people even less worried. “The last flood was in 1909, we’re good for another 400 years!” Actually, having a 0.2% chance of a flood each and every year works out to a 6% chance of occurring at least once over a span of 30 years, or 1-in-17.
If you haven’t already, take some time and check if you are in a flood plain here. Some may consider buying flood insurance even if you are not required to by your mortgage lender. We ended up buying a modest amount of building coverage from the NFIP.
Posted in Real Estate | 26 Comments »
Thursday, September 10th, 2009
Recently, I’ve been taking another look at investing in California municipal bonds. Even if you don’t live in California, the yields can be quite attractive. But is it a good idea?
Tax-Equivalent Yields
Right now, the Vanguard California Intermediate-Term Tax-Exempt Fund (VCAIX) has a yield of 3.49% with an average maturity of 7 years. In addition, since the interest from this fund is exempt from both federal and California state income taxes, the equivalent taxable yield is actually much higher. You can use a tax-equivalent yield calculator to find out how it works out for your tax brackets.
If you are in the 33% federal tax bracket and 9.3% CA bracket, that 3.49% would be the same as a taxable bond yielding 5.74%. Even for an out-of-state investor, the federal tax exemption alone gets you to 5.21%, which is higher than many mortgage interest rates.
If you are in the 25% federal tax bracket and 9.3% CA bracket, that 3.49% would be the same as a taxable bond yielding 5.13%. For an out-of-state investor, the equivalent yield is 4.65%. As you can see, these yields are definitely more attractive for those in higher tax brackets.
Safety Concerns
Is this reckless rate chasing? Let’s look at a few articles on California munis by Vanguard, Schwab, and Fidelity. Here are some highlights:
- You’re nearly first in line. California’s constitution requires that state general-obligation bond payments take priority over other payments except for those that fund education. This means as a bondholder you’re ahead of other government employees, firefighters, and basically everyone else.
- Diversify. If you do invest, don’t make it all of your portfolio. There is still some risk. You can still hold other national muni funds, US. Treasury bonds, and investment-grade corporate bonds.
- Buy a bond fund. I would invest in a managed municipal fund and not in individual securities unless I was very experienced. You don’t want to have to navigate a minefield of call risk, GO bonds, bonds based on sales tax revenue vs. utility fees, and other tricky details.
Holding Period Concerns
It’s important to note the maturity and duration of the bonds you’re buying, because if you have to sell sooner than the average maturity, you’ll be greatly exposed to price volatility. For example, if California’s credit rating drops further, then the current market value of the bonds you buy will also drop. If you sell early, you’ll have to take a loss. However, if you are able to hold a bond until maturity, you’ll still get the fixed yield and the principal back, so it won’t affect you.
Also, if you sell early and the bond value has increased, you may be subject to capital gains taxes from which you are not exempt.
My Personal Opinions
I’ve been keeping track of all the ways the state of California has been trying to manage this budget shortfall, and it is clear they are ready to take some very drastic steps to cut expenses. In any event, I fail to see how the U.S. government would not bail out California if things got really bad. If private corporations can get bailed out, why not a state full of voters? I’m not alone, however, as these bonds have been rallying as of late.
I am thinking of investing in California municipal bonds for a very specific scenario: I would buy them instead of paying down my mortgage further, as the tax-equivalent interest rate from the bonds is actually higher than my (tax-deductible) mortgage interest rate. This way, I both come out ahead in terms of interest and I have good liquidity if I wish to access the money for some reason. I also don’t see myself as taking too much extra risk, as I would with a stock fund for example.
Posted in Investing, Real Estate | 31 Comments »
Tuesday, September 8th, 2009
Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end.
Retirement and Brokerage accounts
Not much stock market movement this past month. Wife’s 401k was already maxed out at $16,500 for 2009. I made another $5,000 contribution to my Solo 401k, for a total of $10,000 contributed in 2009. This makes us about 80% done with our goal of maxing out both our 401k salary contributions for 2009.
Our total retirement portfolio is now $181,673, or on an estimated after-tax basis, $145,887. At a 4% withdrawal rate, this would provide $486 per month in tax-free retirement income, which brings me to 22% of my long-term goal of $2,500 per month.
Cash Savings and Emergency Funds
I did pay an additional $6,000 towards my mortgage this month, which ate up a lot of cash. This is roughly two extra mortgage payments, which if I do this every year will put me on track to shorten my 30 year mortgage to 20 years. Depending on interest rates, future contributions may be invested into municipal or government bonds.
We still have a little over a year’s worth of expenses in our emergency fund.
Home Value
Using four different internet valuation tools - Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version) - I again took the average and took off 5% to be conservative and 6% for real estate agent commissions. This ended up giving me a 6% value increase this month, which again makes my home value movements dwarf all other activity for this net worth measurement.
I’ve been using these internet tools for 10 months now, and while I like being able to track the overall trend in home values, the wide swings in estimates make me very skeptical of their accuracy. I expect to do this for another 2 months so that I have an entire year of data, but after that I will switch to another less volatile method.
You can view previous net worth updates here.
Posted in Goals, Investing, Real Estate, Retirement | 30 Comments »
Monday, August 31st, 2009
I just got a rather difficult question in my inbox, and thought that it would be a good idea to get some perspective and advice from my thoughtful readers to help another reader. Be gentle! I think this could happen to many of us.
Jonathan - what would you do in my shoes:
Parents are in their late 50’s, bought a house they can’t really afford (@7% interest rate) and are going to be foreclosed on within the year.
If I co-sign/add my income to theirs, together we make enough for them to qualify for a refinance @4.5% 5/1 ARM. Possibly long enough for them to sell the house in the next 5 years and recover some of their lost equity (80% of their savings were tied up in the downpayment that has almost all evaporated).
However, I obviously take a credit hit and a significant risk if one of them can no longer make even the reduced payment. I am single, without kids, and in my late 20’s, working an average job (moderate job security).
Thanks for any suggestions - your blog has spared me the same fate as my parents.. so far.
First, I’m glad to hear that you are trying to help your parents, even though they made a significant financial mistake.
Do you live in a non-recourse state, where they can’t go after other assets if you default on a mortgage loan? Have you confirmed that you can get the new loan with the current loan-to-value ratio? Your income might be enough, but they still might reject or require another downpayment. If so, how much does lowering the interest from 7% to 4.5% lower the monthly payment? Would your parents be able to afford the new payment without assistance? How stable is their income?
In the end, I would say that if this requires large cash injections from you and not just your credit score and income verification, it is risky to bet that your home value will rebound in 5 years. It might, or it might not in such a short timeframe. If they live in a non-recourse state, I would at least explore the possibility of having your parents let the house go and get by with bad credit and the rest of their savings. Can they rent a place for a lot cheaper?
However, if they can swing the new payment with your co-signature only, perhaps it is worth a try. The hardest part is probably convincing your parents to downgrade their lifestyle and housing preference to something more realistic. It’s a tough situation. What would you do, readers?
Posted in Family, Real Estate | 67 Comments »
Wednesday, August 5th, 2009
Credit Card Debt
For newer readers, I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end. I just paid off a large-ish balance this month.
Retirement and Brokerage accounts
Besides watching another market rally, we made a bunch of retirement contributions this month. Wife’s 401k is now maxed out at $16,500 for 2009. I made a $5,000 contribution to my Solo 401k. This makes us about 65% done with our goal of maxing out both our 401ks for 2009.
Early in the month, I also decided to go ahead and make our IRA contributions for 2009 (non-deductible due to income limits). So that’s another $10,000.
Cash Savings and Emergency Funds
We still have a little over a year’s worth of expenses in our emergency fund. I was supposed to use up some of the cash to make a principal prepayment this month, but didn’t do it due to a variety of reasons. Mainly, I wanted to do things in order and do the retirement contributions above first. We also found that we have a roof leak that may require some cash.
In addition, we have gotten some quotes on a solar hot-water system for the house, which seems like it would have a fast payback period of 2-3 years. A photovoltaic system would cost significantly more and have a payback period of around 8-9 years depending on size. Still researching this.
Home Equity
Using four different internet valuation tools - Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version) - I again took the average and took off 5% to be conservative and 6% for real estate agent commissions. The bloodshed slowed a bit this month. 
All in all, more steady progress. I feel like I’m not learning a lot from these updates, but it seems to be a good habit to keep an eye on things.
Posted in Goals, Investing, Real Estate, Retirement | 31 Comments »
Tuesday, July 28th, 2009
Many people see owning a rental property as a ticket to prosperity. But wouldn’t it be nice if you could simply own an interest in a rental property, but not have any of the accompanying hassles? I’m far from an expert in this field, but let’s take a look at an REIT that invest in residential real estate.
What is an REIT?
REIT stands for Real Estate Investment Trust. From the National Association of REITs website:
A REIT is a company that owns, and in most cases, operates income-producing real estate such as apartments, shopping centers, offices, hotels and warehouses. Some REITs also engage in financing real estate. The shares of many REITs are freely traded, usually on a major stock exchange.
To qualify as a REIT, a company must distribute at least 90 percent of its taxable income to its shareholders annually. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax.
Since all the REIT income usually “passes through” straight to the shareholders, you are getting relatively direct exposure to real estate. You’re not investing in raw materials, a homebuilder, or some other derivative.
REZ Residential ETF
The iShares FTSE NAREIT Residential Plus Capped Index Fund (ticker REZ) is an ETF that tracks the FTSE NAREIT All Residential Capped Index. Here is the breakdown by industry breakdown and also the top 10 holdings.
As you can see, this is not the same as owning a single-family house, or even a bunch of single family houses. The fund holds interests in apartment complexes, healthcare facilities such as seniors housing communities and skilled nursing facilities, and also self-storage companies. For example, you can search online through the apartment complexes owned by Equity Apartments.
The annual expense ratio for REZ is 0.48%, which is on top of the built-in costs spent by each individual REIT. iShares also has ETFs focused on the different sectors such as Retail (retail stores, shopping malls) and Office/Industrial (office and industrial buildings).
ETF Advantages
One obvious advantage of owning an ETF instead of a single rental property is simplicity. You don’t have to spend time and effort dealing with finding tenants, maintenance issues, or problems with local government. You don’t have to search for properties to buy, negotiate prices, or obtain financing. You also don’t have to ever worry about keeping up cashflow, as there are no mortgage payment due each month.
Then there’s liquidity. If you need to sell, REZ has decent share volume so you can just type in a sell order and you’re done. You pretty much know the market price at all times.
Which One Is Better?
Here’s the tough question. Which will have the better return? With a single property, you are looking at monthly cashflow and property appreciation (plus possible tax benefits). With the ETF, you have your quarterly dividends and share price appreciation.
REZ currently has a current distribution rate of 5.11% based on its last quarterly dividend of 0.3003 cents per share, while the dividend yield listed on Yahoo! is 8.84% based on TTM (sum of all dividends paid out in the trailing twelve month period). According to the iShares page the Price/Earning ratio was 33 and the Price/Book ratio was 1.73 as 6/30/09.
The trailing 1-year total return of REZ is -39.64% according to Morningstar. (Too new for older numbers.) However, depending on how much your rental house was leveraged, many private investors could have done much worse. If you put $10,000 down on a $100,000 house and the house dropped just 5% in value, you would have essentially lost 50% of your $10,000 as well. I’m not sure what the total leverage of the REITs in this ETF are.
Also, we have to go back to the fact that this REIT doesn’t hold a bunch of detached single-family houses. Healthcare facilities seem like they would be a good source of income in a growing field. However, they could also be susceptible to political changes in Medicare rules.
I think its safe to say that any individual property could do worse or better than REZ. Perhaps a better question is how much you value diversification. Instead of putting your money into one property in one area, with an ETF you are instead owning a slice of thousands of different properties across the country. If you have high confidence in your abilities to select and manage a single property, that might be the better way to go.
Posted in Real Estate | 15 Comments »
Wednesday, July 22nd, 2009
When people talk about asset allocation, they usually refer to the relative amount of stocks or bonds in their portfolio (like the model portfolios shown here). But I am occasionally asked whether to include personal home equity in asset allocation. If you have a significant amount of home equity, does this mean you are overexposed to the Real Estate sector? Should you change your other investments to compensate?
Conspiracy Theory Argument
Professional portfolio managers are usually paid based on a percentage of assets under management, or when you make trades. Since they don’t usually control your home equity, they can’t charge you for it, which is why some say the industry secretly decided it shouldn’t be included in asset allocations.
I’m not so sure about this one. Most people don’t have professional money managers. And if they do, for example I’m betting that most advisors would include a huge 401(k) in their planning even they didn’t control it.
Pricing and Liquidity Argument
It is very hard to determine the true market value of an individual house. You can’t sell only a portion of it, which means you can’t rebalance relative to other asset classes. Because of these issues, some people say personal home equity shouldn’t be included.
Still, this is also true of investment/rental properties, which I think should be included in asset allocations just as much as owning any company with physical assets.
My Answer: It Depends?
I plan on staying in the same geographical area indefinitely. Once I’ve committed to buying a place, I’m mainly trying to pay off all “future rent” at once. If I never move, then obviously it won’t much to me what happens to housing prices. If housing prices in my area go up, then my house value will go up, and an alternative house I want to buy will go up. The opposite will be true if housing prices go down. Over the long term, prices should pretty much match inflation. So I don’t consider my house as part of my portfolio.
However, if I planned to sell my house upon retirement, and then use the money to move to a significantly cheaper home and use the difference to cover other expenses, then I would care about my house value because I would have to “cash out” at some point. Some people end up relying on a reverse mortgage to pay for things, which would be a similar scenario.
Posted in Real Estate | 16 Comments »
Monday, July 20th, 2009
While going through some old boxes, I found an old CD case containing some audiobook recordings from a real estate program by Robert Kiyosaki and Dolf De Roos. I’m pretty sure they are from this set called Rich Dad’s Roads To Riches - 6 Steps To Becoming A Successful Real Estate Investor.
Kiyosaki is best known for his book Rich Dad, Poor Dad (my 2005 review). People tend to either hate him or love him, but to me he’s just a guy who has wrapped up a legitimate way to make money - investing in real estate - and tried to simplify and market it to the general public in a palatable way. You can read about most of the criticisms at this link, although it is a bit long (Reed really hates this guy.). I see his books as having the occasional nugget of wisdom buried in a pile of shiny happy fluff.
Luckily, I took notes when I listened to it the first time, so I didn’t have to go through it all over again. Here’s the stuff I decided was worth remembering.
- Avoiding Alligators. A general rule is that you should never invest in a home that does not immediately produce positive cashflow. In other words, the rent covers your mortgage plus other expenses, and you don’t have to keep making monthly payments out of your savings or income. A property that requires more money every month is called an “alligator”. Why? Because you have to constantly feed it and feed it. If you ever stop, it eats you.
- When To Expand. Along the same lines, if you keep buying alligators, you can only buy a finite number before all your money is tied up feeding them. If you buy cashflow-positive properties, it is much easier to keep buying them. Once your property value increases, you can extract the equity by refinancing and use to invest in another cashflow positive house. This way, you’re never in a bind with regards to cashflow.
- Tenant Screening Tip. When looking for tenants, always ask for the contact information of the current landlord and the landlord before that. This is because the current landlord might lie to you in order for you to accept their nightmare tenant, and have them move out peacefully. The previous landlord will be willing to tell you the truth.
- Treat It Like A Business. Don’t put up with tenants that chronically pay rent late. Maintain concrete rules for due dates, charge late fees when applicable, and if necessary, initiate the eviction process promptly. If you show them that you won’t tolerate late payments, this will either whip the wishy-washy ones into shape, or get rid of the bad ones as soon as possible.
The rest:
- The 100:10:3:1 Rule. This rule basically states that to find an appropriate real estate investment, you’ll need to look a 100 properties, makes offers on 10 of them, attempt to finance 3, and you may finally buy one of them. Basically: look hard and be picky.
- On Leverage. $10,000 can control $10,000 worth of stocks. If it goes up 10%, then you are up $1,000. Alternatively, $10,000 can control $100,000 worth of real estate through borrowing money (leverage). If your real estate goes up 10%, then you’re up $10,000. Of course, they don’t focus on the fact that if your home’s value drops by just 10%, you’re completely wiped out. The ability to leverage cuts both ways, but can help with cashflow.
- Property Manager. Hate the idea of fixing toilets at 3am in the morning? Hire a “good” property manager. Unfortunately, no tips were included on how to find such a mythical creature. (Similar to unicorns and the “cheap and prompt handyman”) Also, property managers usually charge about 10% of your gross rent.
Posted in Real Estate | 11 Comments »
Friday, July 17th, 2009
I’m getting ready to pay some extra money towards my mortgage loan, and remembered that I have an option to re-amortize my mortgage loan if I make a substantial principal prepayment. This is also known as “recasting” a mortgage. Basically, my monthly payments are lowered slightly over the same remaining term instead of simply accelerating my loan payoff schedule. My interest rate and escrow payments stay the same, and I don’t have to pay any fees or closing costs.
Most loans that are sold off to investors do not allow recasting, as I imagine they don’t want the added complexity. However, some allow either a one-time recast, and other allow repeated recasting if the extra payment is large enough. Ask your lender about this feature beforehand if you’re interested in it. In my case, I get to re-amortize whenever I pay a lump-sum of at least $10,000.
My tentative plan, discussed briefly in my Quick & Dirty Plan To Reach Financial Freedom, is to make two extra mortgage payments a year. (If interest rates rise enough, the money will simply be placed into a long-term bond.) This will shorten my 30-year mortgage by an entire decade, so I’m mortgage-free in 20 years at age 50. The commonly discussed biweekly payment plan is the same as making one extra mortgage payment each year, and knocking off about 5-6 years.
For my mortgage, if I pay exactly $10,000, it would only lower my normal mortgage payment about $50 a month. Theoretically, if I keep my payments the same as if I didn’t re-amortize, my total interest paid would be the same, and my loan would still be paid off 10 years early. The lower required mortgage payment would simply provide an added bit of flexibility in case I run into financial trouble.
However, for my situation the $10,000 requirement would mean I’d have to wait and lump my payments every other year instead of making the payments whenever I like. I don’t think $50 a month is worth the added hassle, as I really do want to have this thing paid off in 20 years.
(As a reminder, I think paying extra towards your mortgage should only be done after you have maxed out your tax-deferred accounts like IRAs/401ks, as well maintaining an emergency fund or other liquid assets.)
Posted in Real Estate | 26 Comments »
Tuesday, July 7th, 2009
Credit Card Debt
I have taken money from credit cards at 0% APR and placed it into online savings accounts, bank CDs, or savings bonds that earn 4-5% interest (much less recently), and keeping the difference as profit. I even put together a series of step-by-step posts on how to make money off of credit cards in this way. However, given the current lack of great no fee 0% APR balance transfer offers, I am mostly waiting on existing offers to end. My credit score remains high enough that I haven’t seen any negative actions.
Retirement and Brokerage accounts
Markets most went sideways this past month. 401k contributions are still going regularly, and I want to make my 2009 non-deductible IRA contributions soon. I still think the best thing to do is to keep investing regularly, although it is quite boring to watch.
Cash Savings and Emergency Funds
We still have a year’s worth of expenses in our emergency fund, and it is still growing. Possible uses for extra cash might include capital improvements to the house, including a solar hot-water system to reduce electricity bills, or a photovoltaic system to possibly eliminate them! I love the idea of selling electricity back to the city.
Home Equity
Using four different internet valuation tools - Zillow, Cyberhomes, Coldwell Banker, and Bank of America (old version) - I took the average and took off 5% to be conservative and 6% for real estate agent commissions.
We remain “underwater”, with our outstanding mortgage balance greater than what we probably would net after selling our home. Home equity variations continue to dwarf all other activity, which is somewhat annoying since it’s not that important. Just gotta shrink that mortgage!
Posted in Goals, Investing, Real Estate, Retirement | 27 Comments »
Thursday, July 2nd, 2009
You may have heard the term “three-legged stool”, taken from the idea that a stool needs three legs to maintain balance. (Photographers use tripods, no duopods or quadrapods. Even a four-legged chair will likely wobble.)
Old Three-Legged Stool of Retirement
Traditionally, the components of the three-legged stool of retirement have been presented as Social Security benefits, Pensions, and Personal Savings (401k, IRA, and other assets).
This is partially supported by data from the Social Security Administration:
The Qualified Retirement Plans slice combines pensions, 401ks, and IRAs together, making it hard to see the breakdown. The Other Assets include income from other investments like capital gains or dividends from taxable accounts and real estate. We observe that a quarter of all income in retirement is still from working for a paycheck.
Shaping Your Own Retirement Legs
These are just averages, and each of us will have their own path to retirement. If you’re planning on retiring early, you won’t have Social Security yet. For people born after 1960, the full retirement age for benefits is already 67, and expect it to rise even further the younger you are. I think some form of SS will still be around when I’m 70, but who knows.
1. Flexible, reliable, part-time income
We already saw that lots of people over 65 still work. Even though I want financial independence early, I’ve also come to realize that I’ll never stop working. Ask yourself what are you really going to do in retirement? In addition, I think it would be stressful to stare at a big pile of cash and think to myself - “Crap, I hope this lasts for 30+ years!” Maintaining a part-time job and the related skills would help my cashflow, and also ensure that I could return to the workforce if disaster strikes.
I would want a part-time job that could provide some socialization and a sense of improving your community or helping others. Most of my imagined jobs involve teaching, coaching, sporadic technical consulting, or something tourism-related. It can’t be 9-5, and I’d want to be able to take months off at a time. This won’t be easy to find, so I need to start developing more “fun” skills as well as personal relationships now.
2. Personal Savings: Accumulate 30 times annual (non-housing) expenses
Without a pension or Social Security, you’ll need to live off your own savings. If you invest in a balanced portfolio of 60% stocks and 40% bonds, studies have estimated that you can have a “safe withdrawal rates” of about 4% per year. By being a bit more conservative than that, this means accumulating 30 times your annual expenses.
For example, if your annual expenses are $30,000, then you need to save $900,000. This is a very general rule of thumb. Taxes are tricky, but if your income is only $30,000 per year, you won’t be paying very much income tax. Check out the historical effective tax rate over a past 25 year timespan:
For reference in 1995, to be in the bottom 50% (safely in Q1/Q2) your adjusted gross income had to be under $31,000. And this even includes payroll taxes of about 9%, which you won’t have to pay on investment income. The result: very low taxes (possibly under 5%) if you keep your expenses down! Which brings me to…
3. A Paid Off House
I don’t think everyone needs to own a home. However, I happen to enjoy many of the intangibles of owning a home, I love my house and neighborhood, and plan on staying here a while. The cost of this leg can vary widely, from a $1,900 house in Detroit to… where I live, so choose where you want to live carefully. 
Financially, owning a home protects you from future inflation and rising rents. You are still subject to property taxes and maintenance costs.
In addition, not having to pay rent means you need less income from savings, reducing your needed nest egg in #2 above. You also pay less taxes. Withdrawing additional money from an IRA, for example, will mean subjecting them to your marginal tax rate, which could be 25% or higher. So to pay $750 in rent, you’d have to withdraw $1,000. Not very efficient.
So there, you have it, my three-legged stool. Yours may be very different - you may like renting, have a pension, own investment property, or have some other sources of income. I still worry about health insurance, but I’m still hopeful that some positive health care reform will occur that will create affordable health insurance for individuals under 65 not covered by an employer group plan.
* You can read more about the last two legs in my related post A Quick & Dirty Plan To Reach Financial Freedom.
Posted in Frugal Living, Real Estate, Retirement, Taxes | 10 Comments »
