Keep tracking your net worth with a spreadsheet

I’ve written in the past about the virtues of tracking your net worth with a spreadsheet. If you take one thing away from reading this blog, it’s that you need to track your net worth with some frequency.

And to this ode, I have fallen short. I got off my routine back in May. In the past hour, I got back on the horse and caught up. Big four month gap there.

It came with a surprising revelation: my real estate cash account has gone low. There’s still quite a bit, but it is TOO low for my purposes. What happened? I have put out a bit of money to support my wife’s launching career as an author amidst other things.

What to do?!?! With every account in front of me, I reviewed all the monthly cash flows coming in and out and applied a handful of adjustments.

  • Dialed back the bonus principal payments on the smallest investment mortgage.
  • Slightly lowered the monthly payments on the HELOC.
  • Pulled back the monthly amount being routed into  prime checking.
  • A recent stock option exercise recently settled, so I scheduled it to move to this account.

With all these adjustments, the cash balance on my real estate checking account should start to climb. And this is why its important to take a pulse once a month by writing down every asset and every liability.

I also reviewed the state of things now compared to two years ago. My total in liabilities has shrunk by over $60,000 while assets have increased by over $100,000. Net worth has grown by 29% total over that time frame.

Cash, cash, and more CASH

Trying to save money for retirement? Got a plan in place? Does it include slips, bumps, and unplanned things popping up? Well, as my father has often said, “expect the unexpected.”

To do that, you need to have piles of cash lying around. Stacks of cash, ready to handle situations, is a must. Here’s one way to think about it.

Scrape together $1000 for an immediate emergency fund

This may hard. Tough. Seemingly impossible. Look at your paycheck. How much do you bring home each week? $500? $750? More? Try to set aside $50 or $100 each week, each paycheck. (Adjust based on your payout if you must). But get in the habit of setting aside money. Able to set aside $50/week? In 20 weeks (less than six months), you’ll have scraped together $1000. This is handy when your car’s radiators springs a leak and sets you back $500.

Now shoot for $10,000

Got an IRS refund coming next year? This is the perfect time to make plans to use it as seed money for a bigger savings account. Not invested. Not put in the stock market. Not stuffed into a mutual fund or real estate. Pure cash in a handy savings account you can reach should the need arise. Did you automated $50/week going into that first account? See if you can cut another $50 of spending out of your budget and pipe that into this account. Get a chunk of cash from the IRS, from a recently deceased loved one? Or perhaps you have stock options and ESPP plans? Those are all good opportunities to stock it up. Say no to that new furniture set, or a new TV. Put it off for a year. Start this first.

Automate all the things!

That was the title from a fellow software dev. I once had to wait on a colleague for a meeting. He happened to have “The Automatic Millionaire” sitting on his desk. I glimpsed at about four pages before he arrived. The message was to put as much of your wealth building plan on automatic as possible. Slow and steady is the ticket to success.

If you can get comfortable missing those deductions from your paycheck that are routed into savings, it becomes easier next year, to increase from $50 -> $60. Or from $100 -> $125. Get a raise next year? Increase your savings amount at the same time. Sometimes this is called “paying yourself first.”

Got direct deposit for your paychecks? Maybe it will cost you 1-2 hours to contact payroll, sit on the phone, configure a password, or lookup bank routing numbers. But learn how to automatically have your paycheck split up between your checkbook and your cash savings accounts. It will be worth it. Never put the onus on your to remember to set aside savings. Automate, automate, automate. Then, once a year, spend that hour of effort to get back into payroll and bump things up. Up, up, up. Get a 10% raise? Cut something out? Pay yourself by increasing your savings rate.

Don’t have direct deposit? It may be harder, but make it a habit to stop by the bank of payday. Make it a ritual. Glory in socking away that money. Not everything is going out the window. It can also help you focus on what’s REALLY important. Did you need to buy that DVD? That was $15 you could have saved. What about that dinner out? Another opportunity. I’m not suggested you turn into Scrooge, but cutting back a little here and there makes it possible to sock away bits of cash. And if you start small, you can grow tall in your savings rates.

Cash is what makes the rich

When you have piles of cash sitting around, opportunities become available. Options are on the menu. You car breaks down, and now you can fix it without digging the hole of debt. Your mortgage payment doesn’t line up with a paycheck snafu, but you’re covered.

It doesn’t stop there. An opportunity to buy a discounted note for $20,000 pops up. Now it’s in reach because you have the cash on hand. That’s why if you can reach $1000 and $25,000, you can then think about pushing that pile up higher and higher.

The rich keenly have plenty of cash on hand to plug into opportunities. We can too. (I have!)

Happy wealth building.

What is happening to the stock market?

graph_up2The stock market lately has gone CRAZY! So what’s happening? Well, I don’t have all the answers, but let’s look at some of what’s going on, and see what we can figure out.

At the beginning of this latest market crash, news reports came out about the price of oil dropping drastically. In case you didn’t know, oil is a key piece of the economy. Whose economy? Well, I know the most about the US economy, but oil is an international commodity, so it affects everybody. In essence, we all use oil to drive cars, fuel shipping trucks/planes/trains, and deliver most other goods of the economy. When oil prices fall, other parts of the economy rally. And when oil prices shoot up, other parts of the economy suffer.

So why is the whole market sliding down? One word: panic. Back in the 1970s, OPEC tried to control the oil market at an extreme level, and they actually contributed to a worldwide recession by pushing the oil market too hard. I’m not saying that is what’s happening, but when the price of oil moves a LOT, MANY investors panic.

All the oil stocks dropped off quite a bit. Strangely enough, stocks like VNR, which is 85% natural gas and has little to do with oil, has dropped 50% in the past 2-3 weeks. That is probably because many of the people that bought VNR are panicking that for some reason, VNR is next. In general ALL energy stocks will typically suffer a hit or a rally when stuff like this happens. A nice side effect for people like me that have a more long term aim at things is that I just reinvested a monthly dividend and picked up twice the usual shares.

But what about other things? VMW is a stock I pay attention to, because I still have a sliver of stock option. It has dropped to $77/share. It has nothing to do with the oil market. But many investors freak out and simply want to get their money out of the market when “shaky” situations like this occur.

This is known as systemic risk. Financial planners push mutual funds hard by selling the story of risk avoidance. They make it sound like during rough patches, mutual funds help you avoid such situations by spreading your risk across the whole market. The trick is, in these types of situations, emotions run high and people will pull their money out of everything. Hence, mutual funds will suffer losses just like other things. The trick is, when people cash out, they want their money. Mutual fund managers are forced to actually sell to dispense cash, and thus lock in losses. The time to get back to where you were takes too long and hence we all suffer.

The thing is, I have little money now invested in mutual funds. Instead, I have real estate, an EIUL, and other vehicles (one which I’ll post about soon!) My net worth has hardly dropped at all. And the yield on my investments is just as strong, meaning I’m not waiting for the market to recover nor am I waiting to “get back to where I started”. This saves me from having the proverbial “201K”.

I don’t have all the answers. I can’t tell you what the market is going to do next. But I can point out the risks that exist, and how mutual funds don’t provide the answers their salespeople claim. Everything comes with risk, and I have that nicely managed by having a super sized bank account filled with cash.

Happy investing!

habit-saving-money

It’s the yield, stupid!

habit-saving-moneyWhen it comes to building retirement wealth, you must keep your eye on the ball. What does that mean? Simply put, your goal is having the biggest after-tax cash flow when you reach retirement. Cash flow now, 25 years before potential retirement, is foolish. If you take a step that results in MORE cash flow today but produces LESS cash flow in retirement, then it was the wrong step.

Something to look at is the yield you currently receive. In essence, at any given time, you have a pile of cash. Your pile of cash should be earning some degree of cash. The rate it earns is the YIELD. If you have $100,000 and it nets you $5000 a year, you have a yield of 5%. We can discuss lots of different assets and their various yields. Real estate, CDs, mutual funds, bonds, stocks, whatever. Bottom line: your cash needs to be put to work. And the higher yield the better.

Duh! That part is obvious. What is more subtle is that you need to always look at all money coming in as cash flows. You may have a daytime job, which is one cash flow. But you may also have real estate properties generating cash. Your stocks may generate dividends and distributions. But at the end of the day, you need to know what your total yield. And then you need to be willing to investigate options that can increase your yield.

At that point, it becomes easy to evaluate whether or not debt will help or hinder your growth of wealth. When real estate can generate 5% growth and you leverage it 4-to-1, you dial things up to 25%. Borrowing money at 4.5% becomes a no brainer. The remaining hurdle is hedging the inherent risk that higher yields produce. One of the biggest ways to immunize yourself from real estate risk includes:

  • Having a big bag of cash sitting at the bank. How much? Think about 100% vacancy for a year.
  • Buying top quality property. This draws top quality tenants. It costs more but reduces the risk of renting to non-payers that must be evicted.
  • Renting in a landlord-friendly state. Hot tip: I don’t own rentals in California, and won’t in the foreseeable future.
  • Become a macroeconomic investor. Invest where the big indicators show a good rent-to-cost ratio (like Texas).

And never, ever, ever pass up opportunities to sell one asset if you find another that shows a consistent, sustainably higher yield. Because the higher the yield, the fast you can put that cash flow towards buying MORE quality assets to generate cash.

Good luck.

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.

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.

The right way and the wrong way to invest in real estate

As I often do, I turned on the radio and listened to a popular anti-debt radio show. Someone called in because they were in the midst of a financial calamity.

  • They had lost their job in the past month or two
  • They had relocated to a new area
  • They owned two rentals. One was vacant and the other hadn’t seen a payment from the tenant for five months
  • The caller had filed for Chapter 7 bankruptcy ON THEIR OWN
  • All 401K funds were depleted, and this person was flat broke
  • This person had no attorney to assist with the bankruptcy, but for some reason did have an attorney involved with the real estate

I was a bit shocked at all this. As radio host said, Chapter 7 bankruptcy is the “atom bomb”. It’s where you nuke all debts and simultaneously give up all assets, except possibly your primary residency. The caller had just moved and was trying to rent out their previous residency, but was failing. The host informed the caller that everything, including their leased car was going bye-bye.

The caller tried to argue, and the host told them they were crazy for trying to do a bankruptcy without an attorney. One of his first questions was, “Why didn’t you sell the rentals?” Answer: “There was a tenant. I couldn’t do any showings.” That is the most ridiculous thing I ever heard! Let’s see if we can walk through all this and see what mistakes were made.

Rentals don’t have to be empty to be bought or sold

Rental owners buy and sell all the time. There is no requirement to empty the unit out to sell it. Perhaps the tenant was being belligerent and making it difficult if not impossible to conduct showings. This would certainly make sense if they were five months behind on rent payments. The tenant knows good and well that a new landlord would probably have them evicted with no questions asked.

Don’t allow a tenant to stay in your unit and miss five months of payments

It may seem obvious, but the caller appears to be doing the land lording themselves, and they are doing a terrible job. When someone is five months behind, it’s time to evict them. The chances of getting caught up and then being on time are near non-existent.

Maybe there is something else missing, like a tenant that knows the legal system and has managed to fight making payments as well as fight evictions. They’re out there, but they are few and far between. From everything I’ve read, tenants that get behind are usually taking advantage of the owners.

I highly doubt this person had decent cash reserves

One of the most critical aspects to owning rental property is having plenty of cash to handle vacancies, repairs, evictions, etc. Think 6-12 months of mortgage payments.

You must be ready to go through the rough patches where you aren’t collecting any rent. Without cash reserves, you will be forced to dig into other sources of liquidity like 401K or just about anything. And it will also drive you to panic and make rash judgments. Having adequate cash reserves can calm you down and allow you to weather Murphy storms.

For some things, you NEED the experts

I wouldn’t dream of entering bankrupcy without a highly competent attorney. This is an area you can really screw up. I don’t know the law and what all my options would be. I would prefer to avoid bankruptcy altogether, but if it happened, this is where avoiding legal bills can cost you a whole lot. This person instead of selling the rental unit, is essentially throwing away a valuable asset.

Another area where it pays to find top notch experts is property management. If they had a good manager, that tenant would probably be evicted and someone much better, more stable, and better qualified would be in the unit and paying rent. The rental asset would be growing in value, not becoming a nightmare.

Finally, finding someone to scout up a tenant for the other unit is a great place to invest cash reserves. I have used someone to ensure my final unit was rented, and if I get another vacancy, I wouldn’t hesitate to hire her again. This is outside my expertise and I very well don’t expect the property manager to serve my interests in that capacity.

The likely outcome

This caller is probably never going to THINK of buying real estate ever again. Debt is probably off the plate as well. That means the idea of finding quality property, renting it to well researched tenants, and having professionals manage it are non-existent.

The results? This person will probably do everything to clear out any remaining debt, and then focus on investing in index funds and other things. That means that they might build up some pile of cash to retire on, but they aren’t going to get that nice retirement. I doubt they will scrape together enough money to be enjoying big cruise trips, but instead, will probably have to get a supplementary job to make up for what they don’t have.

The thing is, they won’t know what they’re missing. Sure they’ll have some peace of mind about having no debt, but they won’t exactly be living the high life either. It’s a form of survivorship bias, where you don’t know what you’re missing, and hence happy with what you got. If they are able to scrimp together $500,000 in index funds by retirement, they’ll probably be pulling $20,000/year before taxes. Could you live on that now? What about in 15 years? They’ll never never know what it means to be pulling $10,000/month+, tax sheltered because they got spooked from sloppy DIY practices.

Rippling effects from the lack of liquidity

I was sifting through twitter and saw something about a book reading involving the history of Superman and his creators, Jerry Siegel and Joe Shuster. The article mentioned recent court cases, so I did some digging.

Apparently, Jerry Siegel’s heirs won a case four years ago to retain 50% of the rights of Superman. But in a more recent case, the heirs of his partner, Joe Shuster lost due to a huge game changer. Jean Peavy, Joe Shuster’s sister, had struck a deal with DC Comics back in 1992 to pay off her brother’s debts and included receiving $25,000 a year for the rest of her life.

I don’t have all the details, but several disparate things I had heard recently came together in my mind, and I thought I would share them.

Liquidity can help avoid dangerous debts

I have mentioned before how cash reserves can protect from financial disasters. I don’t know the specifics of Joe Shuster or his sister, but I can speculate that if either one had maintained better cash reserves to shield them from hiccups, she never would have panicked and sold off her rights to Superman.

Or look at it from DC’s point of view. If you had the chance to buy 50% of the rights to Superman, an American icon connected with seven movies in the past 30 years that grossed over $1.4 billion at the cost of a little debt and an immediate annuity of $25,000/year for one person, would you do it? Heck yeah! In financial-speak, it’s called a steal.

How much is enough?

I have seen this example several times. If someone could promise you 5x your current annual income at retirement, would you take it? Would you trade in some cash flowing assets for such insurance? It sounds pretty big, right? But do you really know what things will be worth in 30 years?

I have a friend whose family owns a chunk of land down in Mexico. It includes mineral rights. This results in them getting rent payments periodically due to pipelines that run over the property. She has been told by her family to never, ever, EVER sell that land. And that advice is very good. Makes sense, right?

So what might cause someone to sell that land in the future? Tragic, badly managed debts that drives someone to panic. When we panic, we tend to make emotional decisions, not rational and well reasoned ones. We try to stop whatever is causing us to panic no matter the cost.

Thinking ahead

Someone that comes to mind when I think of future rights is George Lucas. When he was pitching the original script for Star Wars, a lot of people didn’t think he had much. He was finally able to get a studio to produce his movie, but he deliberately declined taking a director’s fee in exchange for a lot of rights including merchandise as well as the sequels. Back then, this was relatively unheard of. People that wrote a script and directed a movie didn’t do stuff like that. But George Lucas traded in a lot of immediate payments on Star Wars and instead held onto what would become a boon in intellectual property.

Now let’s be honest. If Star Wars had failed miserably, he probably would be relatively broke, so it was a risk. But because it was a success, George Lucas was able to start reaping an incredible flow of cash from toys, kits, books, future movies, and ultimately selling all of LucasFilm to Disney for $4 billion.

Anytime you have the opportunity to create something, whether it’s a business, a book, or something else, think about how much you can skip now in exchange for more down the road. Can you take a smaller payment in exchange for equity? Can you afford it? Do you have enough cash stored up in the bank to hedge such a risk? Are you taking steps right now to build up your cash reserves making you are prepared for these future opportunities?

The power of liquidity

Earlier this month, my family moved to a new house. This time, we had much more control over the entire process. We bought our new house, took the appliances and other things that we wanted, fixed up the old house, and then put it up for sale. This was all thanks to our liquidity.

Cash empowers you to make a better deal

We were not in a crunch to negotiate on the new house with any contingency clauses. Asking for a contingency clause on the sale of your existing home can make it harder to get the best deal, because the seller knows you may be tight. Remove the need for that clause, and you remove the “cost” of that convenience.

We also took what we wanted from the old house. This included the refrigerator, the window treatments, the TV & mount up on the wall, and some other things. Basically, with them removed from the property before a single potential buyer saw it, there was no need to negotiate $2000 here for window treatments, or $1000 there on the house price over a $400 appliance.

With everything gone, the house looks way bigger. It’s already a big house, but removal of all furniture makes it even more appetizing to prospective buyers.

My father-in-law and I were able to fix the handful of issues before even talking to a home inspector, propping up the quality of the house. This removes the things the buyer can complain about and start negotiating over. It doesn’t mean there will be no negotiations, just that there will be less on the table to argue over, allowing us to get to the real selling price much faster.

What made it possible? The fact that I had a big chunk of cash in the bank. With that, I’m able to carry the cost of two mortgages long enough to find the right deal.

Cash is just the first requirement

Of course, this requires having a fantastic selling agent (which I do) as well as a solid neighborhood. Since they finished every house in this subdivision over a year ago and finally finished the roads, things are ripe for the taking. Given that the comps on the house were noticeably higher than the original purchase price, and the past three years of mortgage payments had knocked out a chunk of debt, we were poised for a good sale.

But don’t forget: cash is the first requirement. Without a lot of set aside cash, many of these options simply don’t exist.

With enough cash, we can take our time, get a good price on it, collect our equity, and replenish the bank accounts. If we didn’t have such liquidity, we probably wouldn’t even have done this deal, and had to pass on this fantastic new house.