Diversification – Buying an Apartment Building

October 20, 2016 by Andrew 2 Comments

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.

With money so cheap to borrow and smart people expecting stock market returns going forward to range from 6-8%, it makes sense to seek diversification away from equities and bonds. One extremely popular and well established method of doing just that is owning investment properties.

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.

It’s Official – Free and Clear Deed!

December 10, 2015 by Andrew Leave a Comment

I wrote exactly one month ago about how we had paid off our mortgage (see here). Simply sending in the last payment to a mortgage is not enough however. To truly be finished with a loan, whether that be a student loan or a mortgage, you need the paperwork to back it up. For mortgages, that comes in the flavor of a Release from Mortgage. Basically the lender says, “Yup, they done paid in full” except in writing and usually in a more educated manner.

That piece of paper does more than just give you a warm fuzzy feely. When it comes time to sell your house, the buyer is going to want proof that no one else has a legitimate claim to the property. A mortgage after all is just a secured loan, with the security being the property. So I took that nicely worded piece of notarized legalese and went down to our county clerk/recorder’s office to have it filed for $33. The clerk/recorder’s office keeps a record of all property deeds, mortgages, liens, and foreclosures. These public records are commonly available online for easy searching. It makes it very easy to research properties and also to be very nosy. 😉

Anyway, we now officially own the deed to our house free and clear. No other parties have any legitimate claim on it and the process of selling will be slightly simpler.

screenshot from county recorder’s website

Shae’s name is on the deed. I don’t know why it isn’t listed on the Grantees list, but it is where it counts.

929 days

November 10, 2015 by Andrew 1 Comment

929 days, or 2 years 6 months and 16 days, or simplified even further 2½ years from the day that we took on a mortgage to the day that we killed it.

2½ years ago we bought our house with a 15 year mortgage. By living a frugal lifestyle we were able to make quadruple payments on our mortgage and be debt free in only 2½ years!

Mortgage Balance

Being debt free is a huge step towards financial independence, the ability to dictate where, when, what, and with whom you work. For many people, financial independence is commonly realized as retirement. A time when you can pursue your own interests and not have to depend on a paycheck.

For us, our monthly mortgage payment was the single largest monthly budget item. Now it is a thing of the past and let me tell you, it feels liberating!

I often think of mortgages in two ways. The first way is that a mortgage, just like any other type of debt is a pay cut that you negotiate for your future self. If you make $50,000/year and you take on a $500/mo payment, you have effectively given yourself a pay cut of $6,000. Earning less is no fun, but that is essentially what debt does.

The other way that I think of mortgages is to visualize the rooms of your house. We have about 12 distinct areas of our house (foyer, living room, dining room, kitchen, basement 1, basement 2, bedroom 1,2,&3, master bath, attic). Our mortgage was 33% of the value of the house, so the bank ‘owned’ four of the twelve rooms of our house. For people that only put down 1-2% on a house and take a loan for the other 98-99% they only have a few square feet to ‘live’ in because the rest belongs to the bank!

Of course, any discussion about paying off a mortgage has to include the age old argument, “is mortgage debt good debt?” This is an argument that is entirely personal in nature. Camp good debt argues that with the historically low interest rates that homeowners can secure 3-4% it makes more financial sense to make minimum payments on mortgages and invest the rest into the stock market in the hope of earning 7-10% there. The 3-6% profit makes mortgages an easy source of leverage. The other camp argues that paying off a mortgage is a guaranteed 3-4% and it is too risky to leverage your home for stock purchases.

I would argue that any debt over inflation (about 2%) is bad debt and any debt below inflation (less than 2%) would be good debt. I say that with the major caveat of this being personal debt. Businesses is a whole different ballgame.

So what was our grand super duper secret for paying off our mortgage so quickly? In three words,

below our means

The house that we bought was a foreclosure put up on auction. We could have bought a house twice as expensive with the mortgages offered by big banks. Instead we bought a fixer upper.

The Day We Moved In

This house had sat empty for three years. While that made the price drop down into bargain territory, it also made for some hefty elbow grease.

New Water Heater Required on Day 1

toilet didn’t even have a seat

leaky plumbing everywhere!

pony up more cash for missing appliances

Sweat equity moving and installing ourselves

Thankfully, we had family that pitched in to help us move and install a number of appliances.

moving new refrigerator

installing a new dishwasher

sliding a dryer down the stairs

Sister-In-Law cleaning up the bushes

Planting flowers

Thank you!

It has been quite the journey. Being frugal and saving money is a means to an end. For us that includes being debt free!

Now What?

Now we will redirect that mortgage payment money so we can max out our tax protected retirement accounts. Once those are maxed out, any surplus money will be spent on whimsical fun things! Hurray delayed gratification. ?????

Planning for (Early) Retirement

April 30, 2015 by Andrew Leave a Comment

You may have noticed an addition to the sidebar. It is this little chart graphic that I try to update once a month.

May 2015

It is our yard stick for two major financial goals in life. The first is to pay off our mortgage and be completely debt free. The second is to have enough interest earning assets socked away to be able to live indefinitely without having to work (aka retirement).

We currently have 62% of our mortgage paid off. Our extra payments help to chip away about 3% every month.

The retirement bar rises more slowly and could even decrease if the stock market goes down. We are currently at 12.3% of our retirement goal, but what is the goal number? More importantly, how do you find out your own goal number?

Planning for Retirement

There are only a couple of numbers that you need to know in order to plan for retirement. The most important number is your annual expenses. Ya, ya, I know what you are thinking. All of those retirement calculators and financial gurus on the internet talk about retirement in terms of income. “You need to be able to replace 80% of your working income in order to retire.” Let me tell you, that’s a load of crap.

What you really need, is to be able to cover 100% of your expenses. You track those, right? If not, now’s a great time to get started with Mint.

The great thing about basing your retirement goal off your expenses is that if you want to retire sooner, you just have to lower your expenses! Man, I knew this frugal thing was going to pay off. 🙂

Before you rush off to figure out your annual expenses keep in mind that they should be adjusted for retirement. If you are going to be mortgage free before you retire, you can drop those mortgage payments from your total. The same goes for items such as daycare, estimated income tax (you’ll be retired), and any debts that you have paid off (student loans, credit card, car, etc…).

Okay, so do you have your annual expenses number? Let’s use $30,000 as an example.

4% Rule

Here comes the second number. If you guessed 4 you’re wrong. The second number is 25. Multiple your annual expenses by 25.

$30,000 x 25 = $750,000

There you go, that is how much money you need to save in interest earning assets (like stocks and bonds) in order to retire. Do you see what I did there. I said “retire”, I didn’t say “retire at 67”. That’s right, once you have your nest egg you should be able to retire at any age and live indefinitely off your nest egg.

Suuuurre… say the skeptics.

Don’t believe me? Let’s start with exhibit A, the Trinity Study. The study, done by a group of professors in the 90s, and later updated with recent historical data, looked at rolling 30 year periods to see how stock portfolios (50/50 stocks to bonds) would have fared since as early as 1926. The authors concluded that given a withdrawal rate of 4% per year, the likelihood of a portfolio surviving for 30 years was 96%.

It’s at this point that you look over to your SO, if you’re single you can skip this step, and you find out who among you is the more cautious. The cautious partner will probably say that number is too small, and want to use a 3% withdrawal rate just to be safe. So we really have two retirement numbers, the 4% and the ‘rock solid’.

If you’d like to read more about the Trinity Study and the 4% rule, Go Curry Cracker has a great write up on the topic.

Going back to our example, 4% of $750,000 is $30,000. Yay, the math works!

But $750,000 is SOO much money. Who could ever save up that amount of dough.

If you are close to the ‘normal’ retirement age, you may not have to. Social Security and any pensions may be able to subsidize your annual expenses. Instead of needing 30,000 from your portfolio a year, you may only need $10,000. That shaves off a cool half million right there. If you are still young and want to pursue early retirement then Social Security and pensions are too far away to be much of a serious help. Instead you’ll have to focus on two things, cutting expenses and raising income.

Early Retirement

Mr Money Moustache (MMM), an avid early retirement blogger, has put together a simple table to correlate savings rate to years till retirement.

Saving 10-15% of your income for retirement will put you on track for retiring in your 60s or 70s, assuming you start in your early 20s. We are currently putting aside 25% of our income, and even that amount of savings only puts us on track for late 50s. Our goal is to increase our savings percent to 40 or 50 so we can retire early. Preferably before we turn 40. That may be possible if we are disciplined enough to pay off our mortgage early and save that freed up cash flow instead of spending it on lifestyle creep.

Some Final Thoughts

I use the word retirement, but what we are actually pursuing is early partial retirement. The flexibility of working when, where, and on what we want is incredibly appealing. It may not be necessary to reach 100% of our retirement number if we offset our annual expenses with partial working income.

The second thought, is that no where in here have I mentioned financial windfalls. That could include winning a lottery, or receiving an inheritance. The reason for their omission is simple, you shouldn’t count on them or rely on them.

Finally, the 4% rule has been getting a lot of flak in the past few years saying it is obsolete and no longer valid. The arguments generally go that bond rates have plummeted in recent history and yield close to zero. The 2008 crash and subsequent depression hit close to home and rattled a lot of 401k holders. The 4% rule works if you remain flexible. Should you buy a new car the year that the stock market drops 50%? Probably not, maybe you can make do with what you have until your portfolio recovers in a year or two. Is the market up 15% this year? Maybe you should withdraw more than 4% to build up cash reserves for down years.

Last Minute Christmas Shopping

December 20, 2014 by Andrew 1 Comment

This is the last weekend before Christmas and because it was a bit chilly to walk outside with Frugal Boy I braved the mall. No, I’m not a masochist, I just know that Frugal Boy loves people watching and what better place is there to people watch than the mall before Christmas.

As I was unloading the stroller back at home, one of our neighbors came by and asked if I had finished my Christmas shopping. I told him no, I had never even started. He offered me luck on a seemingly impossible task, to save Christmas in less than a week. What I didn’t tell him, was that while I hadn’t done any traditional shopping, I was in fact done with gift giving.

The Frugal Gift For Your Spouse

Shae and I have always had an aversion to trying to find the ‘perfect’ gift for one another. The hassle of it all, shopping, buying, wrapping, keeping the secret, and hoping for a genuine positive reaction during the unveiling is all a bit more work than either of us would like to do. In something of a growing tradition, the goto token gift has become new pairs of socks, simple, practical, and fairly cheap.

Our unconventional gifts to one another are both easy to give and a joy to receive. This year we both paid off a chunk of our mortgage for a combined extra prepayment of 10%. All told, in 2014 by living frugally, we have been able to shave off 40% of our mortgage this year alone.

10% Christmas Gift to Ourselves

The quadruple mortgage payments that we started making in April have set us on track to be mortgage free in about 12 months (assuming we give ourselves the same present next year)! Yippee!

The Frugal Gift For Your Child(ren)

Frugal Boy isn’t old enough to really appreciate presents, so this year we just made a contribution to his 529, college savings, plan.

Merry Christmas Son

You can see two jumps in the chart. The first in May when we put inheritance money towards future education and another in December when we gave him his present early.

While a 100% monetary gift works well for babies, because they don’t understand the concept of a gift, it probably won’t be a smash hit with older children. In the future we will continue to spend a substantial amount of Frugal Boy’s gift budget on 529/savings contributions while spending a bit of money on a token toy. After all, as parents, it is our job to take care of the needs and necessities first. We can let his relatives spoil him with the ‘fun’ stuff. If our Christmas tree is any indication, that is exactly what is happening (100% of the presents are to Frugal Boy).

The Frugal Gift For Your Nieces and Nephews

We basically followed our standard method of operation for our own children. Babies received all cash gifts and should their parents choose to invest that money in an account that compounds that niece or nephew will receive the advantage of time. Older nieces and nephews received trinkets and a supplement of cash to round out their presents. As an uncle and an aunt, we tend to be more prone to spoiling than with our own child. Plus, what kid doesn’t want 1,000 stickers for Christmas? 😀

Wrapping Up

While we haven’t done the traditional gift giving this year, we have done a frugal edition of it. A grand total of zero items were purchased at the mall, and most gifts came from our checkbook. Sure it isn’t the picturesque Christmas that you see in the films, but then again is that even the meaning of Christmas in the first place? With that said, are you done with your Christmas shopping?

Frugal Living

Indulging in life, financially responsible

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