Shae and I have kicked around the idea of buying investment real estate for several years. Today, we finally pulled the trigger. In all truthfulness, the moment came several months ago when we submitted a bid on an apartment building. It has just taken until today to finalize all of the legalese. Buying real estate isn’t for the faint of heart!
So what is so special about real estate as an investment tool. In one simple word, ‘leverage’. Putting someone else’s money to work for yourself is relatively easy in the world of real estate. Mortgages are advertised by virtually every bank, credit union, and even insurance salesmen! Right now, we are living in an almost unprecedented environment of cheap borrowing. The prime mortgage rate for a 30 year fixed rate loan is hovering around 3.5%. In fact, that is the rate we secured. I remember when I was a kid and you could have a savings account earn more than that.
We have talked together for years about what type of property we would want, why that would best achieve our goals, and how we would want to operate it. For us, residential housing, aka apartments, with a buy and hold strategy was a natural fit. Earlier this year, we got serious again about getting out of the armchair and into the field. We ran numbers on dozens of different properties for sale. I adapted a simple back-of-the-napkin model from BiggerPockets.com and used that to get a better idea of how different properties sized up to one another. Eventually, we started to get a feel for our local market. There were some abysmal numbers out there, a lot of mediocre ones, and some that seemed too good to be true. We started calling realtors and visiting places in person. Sometimes the numbers lined up with what we saw in person. For example, one place had an amazing rate of return on paper, but in person it was obvious that it was a high turnover, hard to collect rent type of place. When the tenants have smashed holes in the drywall, you run the other way as fast as your legs can carry you!
Eventually, we spotted an attractive looking quadplex that ticked off all our checkboxes. It had a simple geometry, was purpose built for apartments, good neighborhood, and was taken care of by a respectable owner. The ask price was 170k. We offered 151k. Other buyers put in bids, counteroffers ensued, and we eventually won with an offer of 156k. Below you can see our napkin investment math.
Monthly Rent through Total Expenses are on a monthly basis. The CAP RATE, or capitalization rate, would be the investments rate of return. Leverage is what makes the work worth it though. CASH-on-CASH is the rate of return that we are forecasting for the profit, cashflow/year divided by the cash to close. In essence, we made an investment of 45k dollars and expect to make 6k a year in profit. Of course, only time will tell how well it actually performs, but at some point you just have to jump in and start swimming. The other huge benefit of real estate is depreciation, but I’ll get into that closer to tax season.
Shae, her sister (Auntie), Frugal Boy, and myself just returned from an 8 day trip to Costa Rica. We went horse back riding in the mountains, zip lined at 50 mph past a volcano, and forded a river in our 4×4. The frosting on the cake, we did it all for just $100! * Find out how at the end of this series.
* Auntie paid some of her share of the trip and that isn’t included in our Out of Pocket total.
A Primer of Costa Rica
Costa Rica is located in Central America, just north of Panama and south of Nicaragua. The capitol is San José and there is a second international airport located just west of the city of Liberia in the northwestern province of Guanacaste. An established republic, like the United States, Costa Rica is sparsely inhabited and has no standing army. Ticos, a colloquial term used to describe the citizens, have their own currency called colones. The USD -> CRC exchange rate was about 1:530. So one US dollar would get you about 530 Costa Rican colones. The official language is Spanish, although many Ticos have at least a transactional level of English proficiency. The country has a thriving ecotourism industry, exports about 1% of the total coffee production in the world market, and is an attractive place for international companies to set up shop.
Now that you have a working knowledge of Costa Rica, let’s go! Or as the Ticos would say, ¡Vamos!
Day 1 – Getting There
We chose to fly into Liberia airport, not the capitol, because it was closer to the activities that we wanted to do and it was slightly cheaper. Even so, flying from Chicago required about 7 hours of sitting on a plane. We had a layover in Houston that added some more time to our travel day. All-in-all, you can count on sacrificing an entire day just to getting there. Expense wise, tickets were about $500 per person round trip. Frugal Boy is over the cut off for ‘lap child’ so we had to pay for his very own seat.
He enjoyed watching Finding Nemo on the first flight, even without any sound.
Other large expenses that we budgeted for included a meal at the airport, approximately $45, parking for a week ($82), and checking one piece of luggage roundtrip ($50). We saved money by bringing our own snacks from home, packing as lightly as possible to avoid more baggage fees, and booking our airfare well in advance.
An unexpected expense on day 1 was a $10 taxi fare from the airport to our hotel upon arrival. We were expecting a complimentary shuttle to be available, but couldn’t find it and I was feeling extremely unwell at the time and didn’t want to deal with one more thing.
Day 2 – Hitting the Road of Adventure
The first goal of the day was to use the ATM in the lobby to get native colones. Our primary bank refunds ATM fees, and you usually get the best exchange rate by using an ATM instead of a money exchange. Shae withdrew 250,000 colones ($470.06). The second goal of the day was to pickup our rental car. I chose Dollar Rentals because they had some of the best pricing, were off airport (not subject to extra taxes), and had the most transparency about insurance and coverage on their website. The morning’s challenge however was in getting over to their rental office which was about 2 miles away. Both Auntie and I needed to go because we were both going to be drivers. I asked for a ride from the hotel shuttle, and they said they only went to the airport. I tried calling the rental office and no one picked up. Thankfully, I saw a Hertz representative and he agreed to drop us off because their offices were right next door to one another. Yay Hertz!
Once we got there, it was a very easy checkout process. I don’t think I’ve had a checkout be so easy before. I did have a moment of weakness and switched from bare insurance coverage to full coverage. It was $90 more for the week, but after spending a night curled up to the porcelain throne, I wasn’t ready to take any more risks on this trip. For $414.15 we had a 4 wheel drive SUV that comfortably seated all of us and our stuff.
Back at the hotel, we loaded up all of said stuff and remaining passengers and hit the road for the city of Liberia to the East. We made a quick stop to load up on groceries before traveling south on the Pan American highway #1.
I had read about a local swimming hole that was just off the highway called Catarata Llanos de Cortes.
It proved to be a wonderful stop and Frugal Boy was very excited to play in the water.
It was 2000 CRC to park, and we made a donation of another 1000 CRC to two nice abuelas at the entrance who were collecting money for something or another. Finding the local spots is a great way to see the country and save money. We visited several other waterfalls during this trip and they were aimed more at the tourists and our wallets felt that in a big way.
After we had our fill of swimming, we decided to try and find a place to eat lunch in the nearby town of Bagaces. Bagaces was not a tourist town, but I was on the hunt for a local eatery. As Auntie drove farther into town and clutched the steering wheel harder, I spotted the Bar Renur Restaurant with several people inside (always a good sign).
The three women behind the bar greeted us with typical Tico hospitality. They especially loved Frugal Boy and even turned on some cartoons for him to watch while we ate. They didn’t speak any English, but our Spanish has improved a bit from our January Mexico trip, so we were able to interact just fine. Auntie and Shae both ordered lunch, I was still feeling a bit nauseous from the previous day so I just snacked on a banana. The lunch bill was a very affordable 5800 CRC (about $5.50 a person). One thing that surprised Shae and myself were the Costa Rican prices. We had heard beforehand that Costa Rica was an expensive country to travel, but as we later learned first hand it really is on par with USA prices. Really getting off the tourist path and eating like a local was still a pricey meal in comparison to our Mexico trip. Costa Rica would not have much of a geographic arbitrage advantage for retirement purposes.
From lunch, we continued down highway 1 until our turnoff at Las Juntas so we could get to Monteverde in the mountains.
On the drive up into the mountains there was a pull off that had a great view of where we had come from. You can easily see the Nicoya gulf that connects up to the Pacific ocean.
Finally, the winding, bumpy mountain roads delivered us to Monteverde, our first destination of our week long trip.
Monteverde is world famous for being a cloud forest. The elevation was around 5200 ft, making it pleasantly cool, and true to its name, enveloped in clouds more often than not. The last bit of driving was up a very steep and rocky road.
And then we were at our first Airbnb rental house!
For $246 we had a two bedroom house all to ourselves for two nights just minutes away from some of the best attractions in the area. I have yet to have a bad experience with Airbnb. The hosts lived in a house on the same land and they had two energetic little boys that made Frugal Boy light up.
I knew beforehand that the woman host was an ex-pat from the Boston area, so we brought a jar of pure maple syrup as a gift. Of course we bought it at Aldi for $6.50. She was ecstatic to get it and told us that pure maple syrup cost around $40 locally for a similar sized container. We also found out that peanut butter was around $6.60 a pound in Costa Rica.
If you were planning on eating peanut butter in Costa Rica, you might want to bring it from home!
Here is one more photo of our rental house in Monteverde.
After settling in, our host helped us make a reservation for a guided night walk to try and see some of the wildlife. The major tourist draw of this area is the biodiversity.
Standing in the parking lot of the Curi Cancha biological reserve, Shae told Frugal Boy to take a picture. He happily obliged, camera need not apply.
I don’t have any good photos from our night walk. It was about 2 hours long and our guide Adrian tried to spot critters for us. We heard plenty of birds, frogs, and bugs. Highlights included seeing a giant tarantula, nectar drinking bats, a phosphorescent scorpion that shone under a black light, and a Keel-billed Toucan. The latter of which, I learned is an omnivore instead of a herbivore and is not very popular with other animals because it will eat their young.
It’s worth noting that because Costa Rica is so close to the equator, they have 12 hour days year around. That means that it is dark by 6pm. This combined with the switch to mountain time, really screwed up our internal clocks. Shae and I both learned that living near the equator, probably wasn’t for either of us. We like having sunlight in the evening (at least until 8).
With the tour concluded, we were hungry (even me!) and decided to follow the recommendation of our host for an Italian place (Tramonti’s) just down the driveway. We ordered a pizza (5000 CRC) para llevar and enjoyed it back at the house.
My employer announced changes to the paid time off (PTO) policy today. Though it’s being touted as “better” and “more in line with industry standard,” like most benefits changes it’s meant to help the employer not the employee.
The current system is set up such that for XX number of years of service you get XX days of personal vacation (renewed in June), XX days of personal sick leave (renewed on your anniversary), and 3 days of personal time (renewed every January). The rules for how you can use each vary. The new system will do away with that and combine everything into one bucket with some special rules for long term federally protected leaves and one-off events like jury duty and funerals. Instead of once a year allotments, employees will get a fraction of their PTO days every pay period. Less tenured employees who don’t use a lot of sick time, like myself, will see an bump up in usable PTO days. Pretty nice huh?
The extra days up front will be a boost in the short term but after you do the math anyone staying long term will lose out compared to today’s plan especially with the new accrual caps and timings.
It is always good to have a back up plan as employee benefits packages can change suddenly and without warning. Just a few years ago there was a radical change to the post-retirement healthcare subsidies that left many retirees and soon-to-be retirees confused as to what exactly was going to happen to their healthcare and how they could afford it. In the past you could put in 35+ years of service and retire with a guaranteed pension. That doesn’t happen much anymore. Employers have to change to stay solvent. I wouldn’t be surprised if our own pension and 401k plans were to change over the next decade given the aging workforce.
By taking responsibility for your own finances and not relying on anyone else to provide for you (whether that be your employer or the government’s Social Security) you cushion yourself from the sudden benefits changes that may devastate someone else. Our goal to be financially independent by 40 makes the new PTO policies an non-issue for us. We’ll happily take the extra days off that we would have had to wait years for. By the time that the new policy would become a negative we’ll hopefully be in a spot where we are a) completely retired b) cut back to part-time or c) selfishly employed somewhere else (in no particular order of preference).
You have probably heard the saying “Pay Yourself First”. A few years ago, I saw a graphical representation of that saying that used water and buckets to represent the flow of money. In that analogy, income/money comes pouring down from the top and fills or leaks out of various buckets as it cascades down to the bottom. It is up to you to decide what buckets get filled up first and how much water is wasted (frivolous spending). Below is a rough representation of how money flows through our personal finances. You can see how we have put “paying ourselves first” as a top priority as those are the first buckets to be filled up.
If any water makes it to the bottom of the pipeline it can be used for FUN!!
Are you making the gold star buckets as big as possible? Have you reduced your red leaky buckets to the smallest they can be? Is your FUN!! at the end of the line, beginning, or somewhere in-between? Have you set up any reservoirs (emergency funds) for future droughts?
In honor of my brother buying his first house, I thought a cost of home ownership post was appropriate. Maybe this will be a spooky Halloween post for him and other new homeowners around the world or it will be a shot of encouragement.
For the past five months I have been rebuilding our front porch. The old porch had a failing foundation and was looking like it could fall down at any moment. When we bought the house we knew we would have to do something about it, and two years later we finally did. So before we get into the numbers a bit, let’s take a look at a before and after picture.
Everything from the roof down was demolished and rebuilt. While I did most of the work by myself, I did have quite a bit of guidance from our next door neighbor who is a professional carpenter. Shae helped with painting and decision making. Additionally, we hired a mason to lay new brick piers and a flooring contractor to sand the new/reused porch flooring.
With November only a week away and winter not far behind that this project is likely being shelved until next spring. There are still handrails to finish up, skirting, and a lot of touch up painting needed to officially mark the job as complete.
So you ask, what did it cost to get this far. $4235.03. Of that, raw materials was 79%, hired help was 20%, and bureaucratic fees made up the final 1%.
Our material cost was driven up by our choice to reuse the existing ipe flooring. Ipe is an extremely dense and rot resistance Brazilian hardwood. We were able to salvage about 70% of the existing flooring and reuse it, but the other 30% plus new stair treads in matching ipe accounted for 43% of our material cost at a total of $1438.66.
Another area we splurged on was the foundation work. We could have stuck a treated 6×6 into the ground and poured concrete around it and called it a day. Instead we dug huge holes to make large concrete pads to support brick piers (that were themselves filled with concrete) to support the framing.
The extra strong foundation was $1274.95 (793.95 in materials + 485 in mason labor). Our justification for spending so much on that was two fold. Firstly, if the foundation had been done properly the first time around, we wouldn’t have had to do this project. Secondly, a wood post in the ground would not match the historic nature of our house and neighborhood. It would also eventually rot out and that brings us back to our first reason.
Once you take out those two big ticket items we are left with $1521.42. That covers all of the framing lumber, painting, tools, a professional sander, permits, and misc. nickels and dimes.
Okay, I know I know. I left out the biggest cost of all in the numbers above. My time. I have been working on this on and off for the past five months and that has value. I do not know how many hours I put in, but I do know what local costs are for hiring out a job like this to a contractor. Let me just say, my time investment has been worth it. We have easily saved five figures by doing the work ourselves. All you have to do is take a look at the Labor portion of our costs and see that just two guys ate up 20% of the project cost. Imagine what a full team working for a couple of weeks would do!
Good luck with your new house bro. They are expensive and time consuming but for us, that beats the alternative of sharing a wall and roof with someone else. So roll up your sleeves and start building some sweat, blood, and tears equity!