Diminishing returns

I’ve previously written about how I took the proceeds from the sale of our old home and used it to buy a big position in VNR, an MLP stock that is yielding almost 9% spread out in monthly payments. I am using the monthly distributions to payoff my interest-only 4% HELOC and pocketing the difference.

So what do you do when the stock goes on sale? I bought my position at a relatively cheap price of $27.85/share. It’s a good deal, considering the stock has fluctuated all the way up to $30 in the past year. But in the past month, due to an SEC investigation of one of their competitors (not VNR itself), the entire MLP sector has shed lots of investors. I have seen it hit bottom $24.23. Buy more? After all, buying companies with solid business but suffering from some emotional panic on Wall Street is a key strategy employed by Warren Buffet.

Well…that depends. While that’s a great price, I have to look at it through the lens of my entire wealth building plan. Let’s see what we can figure out.

Is this too much exposure?

My plan (not necessarily your plan) is to have rental property as my #1 investment with quality, cash flowing stocks as #2, and liquid capital as #3 to hedge my plays. I have already built up a very nice position in VNR, so if I had the cash to buy a similarly sized increase, I have to ask myself if that cash would be better spent knocking out a rental loan.

Knocking out a rental loan doesn’t have the same immediate cash yielding benefit as buying more stock. But the sooner you pay down a loan, the sooner you can sell and releverage that property into more real estate. Using prudent leverage, that same amount of cash can probably produce a higher yield over the years in real estate than buying more VNR. Hence, buying too much VNR could hamper my real estate growth.

What about the other parts of my wealth building plan?

Any good real estate portfolio needs cash to hedge things. At certain times, it’s best to put extra cash into your cash reserves. Instead of investing in other things, it’s best to stuff it in the proverbial mattress. That’s why when new money comes along, we need to see where it fits best.

From time to time, our cash reserves can get depleted and we need to shore things up before taking on new investments.

What will be my net yield?

If it’s not a big chunk of cash, but instead something smaller like $100, $1000, or even $5000, then it’s probably not worth it. The rule of thumb is that I get $7/month for every $1000 of VNR I buy. Even $5000 more of VNR would only yield $35/month more. That’s not even a 10% increase in my current monthly yield, so I doubt this is the right place.

Conclusion

Bottom line, I have a good position in VNR that should provide a nice monthly cash for many years to come. I don’t need anymore. Instead, I’m going to check the other parts of my wealth building plan and decide where to apply the next chunk of change.

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