Rental property requires patience…and cash

habit-saving-moneyIt looks like we finally have tenants for my unit that has been vacant since the end of January. We’re talking three months of lost rent. In that time frame, I have had to pay for utilities. I will also have to pay a finders fee to my agent that located these tenants.

Last year I instituted paying an extra chunk of change on the smallest mortgage. Basically I was pushing the bonus rent into that mortgage to pay off as fast as possible. Turning it off was too hard, and I assume it would get filled quickly, so I never turned that off. It has made me cash flow negative for this short time frame.

Perhaps I should have turned it off immediately. I need to think that through, make a plan, and go through with it the next time we have a vacancy.

Do NOT act desperately

Having one applicant fall through, another possible applicant pass on behest of finding a better deal has given me every reason to get desperate. What do I mean?

Just last week, I had an applicant shoot to get the unit. The trick was, they had been foreclosed on and actually had a huge outstanding judgment to pay. I wanted a tenant, but I knew I might be taking on someone that would cost a lot more money to get out of. So I passed. And then in the middle of this week, I got a couple college kids who have their parents ready to co-sign.

Things looked much more solid, so I jumped at it. They want to move in today. Not sure all the paperwork can get pushed through that quick. But it will be nice to get the rent flowing again.

Do what makes sense, NOT what feels better

Most of this time, I had a persistent feeling that having an empty unit was bad. It pushed on me, stressed me, and strained me. But I KNEW that I needed to pick up a solid tenant. The cost of not waiting for such would probably any carrying costs.

I also knew I had a LOT of cash in the bank and could ride this out. Too little cash, and desperation can easily become reality. I had the benefit, thanks to Jeff Brown’s insistence on cash reserves, to weather this storm until a good tenant could be found. Well things look solid, but only time will tell if I picked the right people to rent out my unit.

And I get to through this again next month as another one of my units becomes available at the end of this semester!

When dealing with banks, assume NOTHING

house_cashMy four rental property mortgages came up way short in escrows this year. It meant they were going to increase my monthly payments by a huge amount. I discussed it with my real estate broker and my mortgage broker. It was agreed that it would be better to plunk down the cash to pay off the shortages. But that isn’t the point of this article.

You see, a month ago I sent checks in to pay off the shortfall. This was needed before I could request they stop collecting escrows. As this month’s payments went through, I noticed a shortfall still being reported on the website. I called them up, and sure enough, they had NOT applied the checks towards the escrow shortfall. Despite the checks being labeled as explicitly to be paid towards the shortfall.

Instead, the bank put the money towards this month’s payments. The extra cash in a couple of the checks was applied towards principle. When discussing this over the phone, I asked if they could reapply the checks. “No.” Essentially, what was done, was done.

I had dropped a chunk of cash and my issue wasn’t resolved. I hammered things out to get the balances paid off. It was quite a bit of cash to straighten things out.

Not only does this reaffirm the need to carry big cash reserves, it also highlights that anytime you need do anything different than make a standard monthly payment, don’t assume the bank will do it right. Call them up and make sure they are doing what you want with your money.

Checking ALL the facts

rodin_thinkeSkimming some financial forums, I once again spot people making gross assumptions with inadequate facts.

One popular discussion is whether or not you should pull out your 401K money, pay all those taxes including the extra penalty, and buy rental property.

People LOVE to point out the superior option of rolling your 401K money into a self directed IRA and using that to buy property without any tax repercussions.

And once again, such advice is rarely challenged as not a good bet. People seem ignorant that no bank will write you a note for only 25-30% down if it’s from an IRA. For a non-recourse loan, they will probably want more like 40-50% down.

It kind of kills the whole effect. If they are cutting the number of rentals you can buy in half, what’s the point of dodging the taxes?

Factor this too. IRA funded rentals require all proceeds to go back to the account. You can’t “touch”‘any of the money. It’s not an option to write a check at Home Depot for things and fix it yourself. You have to hire a contractor.

With the net effect canceling out your tax savings, you might as well just pull out your money and leave all those pesky regulations in the rear view mirror. After a few years, the penalties will probably become a distant memory.

VNR increases monthly distribution by 1.2%

newlogo7.9.10VNR has announced April’s distribution will increase by 1.2% to 21¢/unit. That doesn’t sound like a lot but consider that the previous rate only ran for seven months. The previous rate went for only three months, and the one before for six months.

If you tabulate growing from 20¢ to 21¢ in 16 months annualizes to 3.7% growth of distribution. That’s not bad, but it’s not the best. According to the Rule of 72, it will take 19 years to double the distribution. But I’m willing to put up with this because the annual yield is around 8.5%, which is pretty good.

The only thing I need to fine tune is the timing of my payments on my HELOC. The due date is the 15th of the month, but I usually don’t get my distribution until the 15th or sometimes a few days later. Given the time it takes to cut a check and mail it to my bank, I am planning to pay the HELOC on time, and then transfer the distribution into my checkbook, backfilling the earlier payment.

Having the right team pays BIG!

DSCN0002Once again, having the right boots-on-the-ground team to manage my real estate has paid off. I mentioned before about a tenant that received military travel orders to report to another base at the end of January and had to break his lease.

Fast forward to March, and we still don’t have a new tenant. We had one lined up a month ago, but their ability to sell their previous house fell through.

I received an email that a couple that had sold their prior house and was building a new one. Until their new home is ready, they are asking for a special short term lease (eight months). To support such a special lease, a premium of $200-300 was suggested by the property manager.

I picked up the phone and called my real estate agent that finds tenants. She boiled it down real simple. My unit was the only one in the area ready to go RIGHT NOW. The wife is a realtor and the husband works for the police department. When I first read that, it sounded like two people that probably had solid character. My local agent was able to tell me that she actually knew them and gave me a good read on things.

Don’t get sucked into analysis paralysis

I had already punched in $300 x 8 months and saw that I could recover the lost rent from two months of vacancy. And if things drag out, they might have to stay longer. That combined with the solid reputation these potential tenants had, it was a no brainer. I told my agent to pull the trigger and start the application process.

It’s important when opportunities rise, to jump on them and not waste too much time calculating things. Having a local professional that understands the local market is invaluable. I can follow a lot of things, but being able to call my agent or Jeff Brown and have them boil away all the irrelevancies while focusing on key factors is important.

My agent explained that there were more units that would be coming on the market soon, but mine was the only single-floor home available RIGHT NOW. I told her to pull the trigger!

When this short lease runs out, I’ll call her again and we’ll see what rents rates are like at that time. But it will feel good to catch up cash flow wise and even pull ahead.

Financial math often isn’t straightforward

wealthWhen you decide to pick up the gauntlet of investing for retirement and step away from passively throwing money into your company’s 401K plan, you may enter a perplexing world. Don’t be afraid!

For starters, you might start visiting lots and LOTS of websites looking for opinions. Be aware: many people can and will state opinions wrapped in feel-good language like “think about…it makes sense”. It doesn’t make it right. That’s why you need to learn how to drive a spreadsheet and crunch numbers on a calculator.

The only way to really deduce if they are right is to do the math yourself. This might involve either using a calculator or a spreadsheet. Another tool to have at your beck and call is a mortgage calculator.

Let me pick one example. I have a primary residence, a vacation residence, and four rental properties. They all have mortgages. So what do you do if you stumble across a surplus of cash? Try googling “pay off mortgage early” and you’ll find loads of opinions. People often suggest paying off your primary residence first. Many will state it is way more important than paying off rental mortgages. They’ll probably mention a dozen different reasons.

But simply put, your permanent residence doesn’t yield cash. The only way to get that money back is to SELL your permanent residence. You ready for that? In my situation, no. I’m not moving anytime soon. Sinking any extra of today’s dollars would be flat out stupid.

The plan is to knock out the rental loans as fast as possible to make it an option to liquidate a unit when the time if right. That combined with the accelerated depreciation I’ve set up will generate the biggest bang for the buck.

A finer point in this example is exactly how various pay off scenarios impact the bottom line. Currently, I’m piping extra rent towards the smallest rental mortgage every month. I’m interested in throwing a one time payment against it next month. What impact would it have?

Learn how to drive a spreadsheet and a mortgage calculator

Like the title says, some things just aren’t intuitive. I found a mortgage calculator that includes the ability to add extra on a monthly, annual, and one time basis. The extra monthly amount I’ve been paying is bringing the pay off date from 2042 in to 2020. Nice! What does my tentative single payment next month do? It pulls the payoff date in six months. What?!?! I thought it would have a bigger impact. It doesn’t. The question arises: is this the best usage of such money?

This discovery also raises the question about what if I could make an annual contribution to the rental mortgage? I began to go down my laundry list of extra sources of cash. The two I can think of is using one of my 6-month bonus checks or one of my 6-month ESPP options. The bonus check is currently used to fund my vacation property. But what if I routed one of my two ESPP checks into that rental property? I hastily punched it into the mortgage calculator in lieu of the one time contribution. I see the payoff date move up to 2017, just three years away. That’s more like it!

I’m planning to have a review of everything with Jeff Brown. I’m going to tell him that I can pipe extra cash annually, or even twice a year courtesy of my ESPP. Who knows? Maybe I need one of them to pay for insurance and taxes. One question I have for him is whether or not it really makes sense to put that single lump sum payment on the loan, or perhaps use it to beef up my cash reserves.

To top things off, I used the same calculator to find out where my second smallest rental mortgage would be in 2017, and calculated when it would pay off assuming I apply all the rent from the first unit. Answer: 2020! So, with extra rent added on a monthly basis minus one mortgage payment and throwing in a chunk of ESPP once-a-year, I can pay off the first loan in five years, and the second one three years after that. Estimating the 3rd and 4th units is probably absurd at this point, because there is too much variance that can happen in the next eight years. But I can only imagine that pointing the rent from four units with only two mortgage payments will be grand.

Circling back to the original topic at hand: you need to understand some fundamental concepts and when to use the right calculators. Plug numbers into a spreadsheet on an annual basis, and see how the balance of your loan drops based on paying the minimum vs. an increased monthly/annual/one-time amount. Also consider how you would get your hands on that cash down the road, and think about what you would do with the money at that stage. Buy more rentals? Stocks? Fund another EIUL?

Kicking around some ideas? Send me a message and I’ll be happy to discuss things with you.

Know anyone that has actually done buy-term-invest-the-difference?

wealth“But term and invest the difference” is a catch phrase idea that has been bouncing around for 10-20 years.

To do this, you must get a quote for cash value life insurance, like whole life or universal life. Then you get one for term life for the same amount of coverage. Buy the term policy and then start stuffing the difference into some mutual fund.

I have yet to meet anyone that has done all this. Many glorify the concept and are quick to bad mouth cash value life insurance. But ask them to show you a real illustration for both, and it seems everyone is empty handed.

Some have mocked the concept by calling it “buy term and spend the rest”. Probably because most spare money that isn’t forced into savings ends up getting spent on “stuff”.

Frankly I think the fallacy of this idea is how people don’t realize how much money is being suggested to be set aside. I admit I haven’t done this exercise myself. But that’s partly because I don’t believe it’s the right approach. I have a term life policy AND and over funded EIUL. My EIUL’s face value is about 1/3 the face value of my term policy so I deduce if I triple my EIUL premium, that would be my target amount.

And it would equal about 30% of my take home pay. Who wouldn’t do well setting aside 30%? The truth is, I can’t afford that much! And I doubt many out there can. Or at least, I doubt most would be willing to live such a lifestyle.

You might criticize me about not committing myself to the cause at hand or being unwilling to eat rice-and-beans. But the truth is, I don’t know to set aside such a huge amount of money to build a tasty amount of retirement wealth.

My father always told me, “work smarter, not harder.” –Scrooge McDuck

My real estate investments are doing well and they are realized by my willingness to set aside 15-18% in my earlier years. Part of the credit for that goes to my brother, who told me over the phone the week before I started, to max out my 401K.

VNR and my other stocks are doing well and paying me cash dividends. They are made possible by my willingness to take advantage of a HELOC.

Combine that with me slowly paying off a vacation home and stocking cash in my EIUL and I have no need to save 30%. And I also have mitigated away the downside risk of mutual funds.

Filing taxes is now in progress

TaxesI’ve mentioned before how complicated taxes can become as your wealth building plan gets underway. When you enter the workforce and start punching the clock every day, you have what’s known as ordinary income. That’s IRS-speak for job income.

But if you start adopting some of the practices I’ve mentioned, your income begins to change. I still get a majority of my income from my daytime job, but now I also receive rent, tax deferred MLP distributions, and qualified stock dividends. I also get paid a quarterly check for a book I wrote three years ago. I also had some other awkward sources of money.

One thing I had to dig up was how to handle the fact that I didn’t receive a 1099 INT from any of my banks. I knew I had received interest. It turns out that banks will usually only send you such a document if you earned over $10 in a given account. I didn’t make it. Nonetheless, Uncle Sam still expects you to report every penny so I simply looked up each account’s December 2013 statement and wrote down the year-to-date interest.

As a rule of thumb, I thought about every way that money came into my hands last year. It helped me remember a couple things that don’t come in the mail. I gathered a pile of electronic documents and emailed them to my CPA.

Last year, I had a tremendous tax bill. That was because I had to deal with the aftermath of nuking my 401K. While it was a hefty bill, the results were fantastic. I found a giant source of capital to create my real estate portfolio. Last year, I grossed over 50% of my daytime job in rental income. That’s a hint that things will be GREAT down the road. And need I mention that with a purposeful plan set up by Jeff Brown, ALL of that rental income is tax sheltered?

I’m eager to hear the feedback from my CPA. It’s pure speculation, but I’m guessing I’ll still be short and have to write a check to pay the difference against withheld taxes. But who knows? Thankfully this time, we won’t have to file an extension.

Happy tax season!

Buying a car with cash

toyota_highlanderI just recently bought a new car with cash. The feeling was great!

Let me fill in some details. My wife and I have been looking into another car for at least a year. We had looked at many models and had a list of features we wanted. We were also open to buying used, perhaps up to 2-3 years old, if it was in good shape and didn’t have gobs of mileage. But the key part of it was: it would be a 100% cash purchase.

Unfortunately (or fortunately), we couldn’t find anything used that didn’t have high mileage. It only cost a few thousand more to buy a 2014 new car with less than 200 miles than a used car with 70,000+ miles. (Some of these used cars, in fact, cost more than what we got). To top it, the features they include with the baseline model were WAY more than we needed. Given we have smart phones and our own DVD player, the upgrades were frankly unnecessary.

Car payments can really drag you down

Top priority: I didn’t want to take on a car payment. I’ve heard statistics say most cars you see driving down the road are dragging along a $400+ monthly car payment. If you’re reading my blog site, then I can bet you have already heard the pitch to save up and buy a car with cash instead of financing it with debt. I heartily agree with this practice.

The other piece of advice I often read but doesn’t seem to get stressed as much, is to try and make your car last a long time. Don’t get caught up with “car fever” and think about new one three years from now. That’s already burned into me. My wife’s car is eleven years old, and our minivan is seven.

Here’s some good news from the industry according to Kelley Blue Book,

“Americans are now holding onto their new vehicles for a record 71.4 months. On the used vehicle side, that interval has risen to 49.9 months, a figure that also represents a new high mark. Collectively, the ownership period currently stands at 57 months, up from about 38 months back in 2002.” — Kelly Blue Book, 2012

57 months equates to about five years. That’s good to hear! But better yet, if you can keep your car for ten years, you will be way ahead of the curve. Cars require a significant outlay of capital. The last car I bought was seven years ago, and I’m still driving it.

What if you can’t buy a car with cash?

I can certainly empathize with those that want to pay cash but simply can’t. I don’t want to get preachy. There are radio shows and forums that talk about how you CAN in fact buy a car all cash. You just have to lower your expectations, save, etc. Everyone reading this has probably heard all about it. I’m not hear to sway you in that regards.

What I want to write about is how my ability to pay all cash represented a more deep seated realization. My net worth and money making efforts have grown to the point that I CAN pay all cash for a car.

Given the current performance of my rental properties, EIUL and dividend paying stocks, I feel like the next time we buy a car, we will be even BETTER off than now.

I don’t have the data on hand to back this up, but I’m speculating that those that don’t have a solid wealth building plan in action probably tends to wards buying cars more often and using financing. Cars are nice and shiny. We all like to have them. I’ve driven through neighborhoods where things don’t look very wealthy, but people still seem able to have a couple nice, new cars. It’s probably the biggest “toy” people can buy and get it financed through the bank.

As my father told me the last time I went car shopping, “your goal is to beat the average.” That applies to building wealth, buying cars, and anything else money related.


Ups and downs of trading stocks

graph_up2I recently finished up executing the last shares of my big stock option. It is nice to wrap it up and be done with it. It represents a very nice part of my compensation package, and yet the whole experience was somewhat distressing!

I want to chronicle what it has been like to give you a taste of the emotional roller coaster that comes with trading stocks and options.

In the beginning

I was hired in 2010. My stock option grant was designed to be paid out on the following four years, with the first 25% vesting on the first anniversary of my hire date. My grant had two parts. One part would pay out the rest in 25% chunks annually. The other half would start vesting the rest in monthly periods. February 2014 is when I receive my last full vesting.

My company’s market price was about $44/share when I was hired in 2010. I didn’t pay a whole lot of attention to the price until 2011 started to approach. On my first anniversary, the price had risen to $97/share. Essentially, my stock option had doubled in value and I was super excited.

I got a big chunk of money when I cashed out the bits that I could. At a similar time, my wife had overheard someone else mention about trying to sell their town home in Orlando. When I heard the price, we started shopping online. After several months, we had figured out that with the stock option money so far, we could easily put down enough to buy one. Mortgage rates were around 4.5%. I had also worked out that my bonus check could fund the monthly payments, mortgage, utilities, and all. We signed the papers in November of 2011.

The Wealth Building Society is born

booksIt was March of 2012 that I started writing this blog. I had learned something new in the world of building wealth a year earlier, and it took me almost a year to shake loose the old ways and embrace this new concept. I reached a point where I couldn’t keep it to myself. Thankfully, this happened before I got my first chunk of stock option money. I had originally intended to use it to nuke my home mortgage. That was off the table and other things were being considered. Rental property, dividend paying stocks, and an EIUL were in the pipeline.

In the middle of 2012, the stock price had risen to over $113/share. I figured things were just going up and up and up. The sad part was, I had already exercise 2012’s quarterly grant. It was really hard being forced to sit on my hands and wait for another vesting of stock options.

Some varying news shocks were felt and the price dipped briefly down to the mid-80s. That hurt. I was worried. But it quickly rose back to $100/share. Frankly, $100 feeling like a mystical edge that was hard to cross. It seemed that running up to $100 was a struggle, but once crossed, it felt magnificent. And I hoped it would stay there.

Danger Will Robinson! Danger!

panic_buttonIn the first quarter earnings report of 2013, my company missed their earnings estimate. It wasn’t a huge miss. But in less than a month, the price fell from $99 to $72.38. It recovered the following month into the mid-80s. And then dropped even further in July to $66.51. While a 33% drop is pretty bad, this stock option had a strike price of $44. The value is in the difference. It went from a delta of $60/share to $20/share. That is a 66% drop in exercisable value. I knew what those people felt that had scraped together 401K funds with mutual funds totaling $1 million and watching the market take away $300,000+. It would drive me to get out too to avoid a total collapse.

But I was in a different situation now. I had already acquired cash flowing rental properties in the fall of 2012. I had started funding my EIUL and had seen it grow steadily for over a year. And in March of 2013, I took the cash proceeds from the sale of my previous home and used it to buy a big position in VNR. Cash was flowing in on a monthly basis that was close to the amount of money I earned at my day time job.

This provided me quite a bit of emotional relief. It also helped me collect my thoughts. The stock option has an expiration date after which its worthless, but that wouldn’t happen for a few more years. I told my wife that we would have to wait on getting that new car, and she was okay with it.

The best things come to those who wait

rodin_thinkeFrom there on, I decided to bite the bullet and wait it out. In my mind, I had set the day of the last vesting of stock option as my target date to shoot for. Before then, I would simply ride things out (unless the stock did something like jump to $200/share). My company beat its earnings estimate in the last quarter of 2013 and began to steadily recover its price. It climbed into the $80s followed by a slight dip into the upper-70s. I was waiting for each earnings report with glistening eyes. I had already seen what it meant to miss one. Now I awaited them to beat their estimate. In mid-January 2014, I watched the price rise back to $98. The tension was unbearable. If they didn’t make it this time around and the price tumbled, I would have missed a keen opportunity due to the timing of my vestige. On the big day, my company beat the earnings estimate again.

I cheered. And then something awkward happened. In after-hours trading, I watch the price fall five points. Huh? I was chatting with a colleague over Skype and he asked me what that meant. I couldn’t answer. To tell you the truth, Warren Buffett couldn’t answer. He avoids this type of daily chatter and points out how important it is to invest in strong businesses with long time frames.

Someone posted a similar question on Seeking Alpha regarding the drop in price. For the next 2-3 days, the price wobbled around $90/share. Then I heard a news report indicating that the DOW had dropped 300 points. Professional analysts referred to this as “consolidation”. I think they were spinning the news to make it sound less harmful. Several of the stocks I monitor had all slumped 3-5% in price. This had something to do with emerging markets, a facet of investing I’m not really familiar with (yet). Dr. Dave posted an article a potential market correction coming in the next 1-2 years.

Let’s wrap this thing up and put a bow on it

habit-saving-moneyI was getting a first hand taste of how tough it can be to depend solely on appreciation of the stock price. My option didn’t have any dividends to hedge the risk of price fluctuations. But then after this correction passed, things began to inch back up. I noticed for three days in a row, the price climbed 1.3-1.6 points each day. I quickly calculated in the head that ten more days, and the price would hit a golden price to sell and which I would be quite happy: $110/share. I told myself that if I could sell what would effectively be half of my entire option a hair away from the peak price of the last four years, I would be quite happy with the outcome.

Then the growth rate began to slow. I watched one day where it went up 0.6, only to see it fall the same amount the next day. I pondered selling immediately. Or putting a limit order to sell if it hit $100. Or a limit order if it hit $110. Or. Or. Or. It drove me crazy!

Finally one night when the price had closed just below $97/share, I put in a 60-day limit order of $110. If it was going to jump to that price, why not line things up to make it happen automatically. I knew it would be good.

At the end of February, I watched it go up almost 2.5 points. The next day it fell 1.7 points. This is really tough to sit by. It always feels like the next day will mimic the current one but you just don’t know what will happen.

On the first Monday of March, I see it drop 1.4 points and then start to recover. By the end of the day, it has dropped around 0.4 points.

On Tuesday, the price jumps 3.5 points in first ten minutes of trading. I’m shocked. What is different between today and yesterday and last Friday? Throughout the day, stock keeps going up. Right now, it’s up 5.6 points around $101.30/share. This is friendly territory. It isn’t the golden price of $110, but a price I would be very comfortable selling.

While running an errand after lunch, I hear a news report that says Wall Street is rallying due to news of an eminent easing of tensions regarding Russia’s invasion of Ukraine. I immediately recognize that this type of news has almost nothing to do with the company and it’s stock.

Since this could crash the next day, I decide to move. One block executes at $101.13, the other at $101.03. Whew! I’m out. No more panic. I got a good deal. I see the price rise maybe 1 point over the next couple days, and then drop again. I made the right decision.

Lessons learned

talkingI was never, ever, EVER happy with the price when I exercised some shares. If I made a move and then saw it rise after that, I felt like I had missed an opportunity. Sometimes the price fell after a trade, but I would ponder what if I held it until later. I had to condition myself to accept the trade and instead focus on where to move my freshly acquired cash. I can replenish my rental property cash reserves. I also plan to open a custodial account for my 2-month-old son. And I can finally snatch up some new positions from my short list of stocks. Stay tuned for more on that.

It was often a joke reading the opinion pieces and the buy/sell/hold recommendations were frankly worthless. It almost feels like everyone is trying to coach everyone else.

Forming macro opinions or listening to the macro or market predictions of others is a waste of time and even dangerous, because it may blur your vision of the facts that are truly important. –Warren Buffett

I have been able to reflect on many aspects of my wealth building plan, and there is no denying that my stock option has empowered me in many ways. I also can’t wait until I get my next chunk of ESPP payoff in five months. I also have one last small stock option so I might yet be able to exercise some shares at $110 if not higher.

What’s fun about this? My division was spun out into a separate private company. We were issued another stock option grant several months ago. At some point in the future, I get to go through this entire “exercise” again. It’s VERY nice to get an equity position. But it isn’t stress free.