Wednesday, December 4, 2013

The Payoffathon

<<<WARNING!!!!>>>>  Be advised that the following post contains some really exciting news...

When I was a youngster living in California I thought it'd be really cool to do the annual Walkathon (walking marathon).  It was a 20 mile course and it took the better part of the day to complete.  It was for a good cause, the fight against Muscular Dystrophy as I recall.   While it was a selfless act aimed at doing my small part in the battle against a debilitating disease, it isn't as if I personally got nothing out of it.  First of all, I received the greater joy of giving.  I also got the really cool feeling of accomplishing something I still think is extraordinary: I walked TWENTY STINKING MILES!  It started off fun.  Thousands of people all excited and eager to reach the goal of walking all those miles for a good cause.  Then, as the miles drew on, it just got harder and harder.  The crowds began to thin and there were noticeably less and less people walking the walk as the day drew on.  Some simply got tired, others bored,  having lost their enthusiasm.  Now understand that you're not obligated to complete a Walkathon in order to benefit the cause.  You'll get credit for each mile you walk as you pass the checkpoints and get your card stamped.  Then your sponsors--who agreed to contribute "x" amount of money per completed mile--would be obligated to donate the resulting sum.  It's a neat concept and one not too dissimilar to paying off one's mortgage(s).
In the beginning, it's exciting and your full of energy and zeal to get the payoff race going.  With the course plotted, you're off and running!  Then, as the pay-down continues, it gets harder and harder to maintain that initial burst of enthusiasm.  As each additional payment to principle and interest leaves your bank account, all you have to show for it is a slightly reduced loan balance each month; very much like getting your Walkathon card punched at the completion of each mile.  How does anyone maintain the zeal to get to the end of a long debt payoff journey?  At some point you must decide upon whether you want to look at how far you need to go in order to complete the journey, or how far you've already come; what you've already accomplished.  The former can be discouraging  while that latter encouraging.  Then, (and I speak from experience here), as you get closer to the finish line, things reverse.  Now you begin see how far you've come and how little you lack towards reaching the goal...completing the long journey.  Yes, much of personal finance is mental and emotional.  It's rarely about cold, hard math.  That's why personal finance blogs are so popular.  They do what a simple calculator can't, they encourage us.  They stimulate us.  They keep us determined and resolved to complete what we've started, especially when we're beginning to feel tired and bored with the seemingly endless journey.  In the end, however, just as I will never forget that I walked TWENTY STINKING MILES, you'll be able to say: "I PAID OFF $75,000 or $100,000 or $200,000 STINKING DOLLARS OF MORTGAGE DEBT!!!"  It's a tremendous accomplishment and a race that's worth the sacrifice.
Well, this month I just had my Rental Mortgage Payoffathon card punched.  I paid off one of three remaining rental property mortgages.  The mortgage on House #3 is now officially history!   I walked into the bank, asked for the payoff statement and subsequently paid $1.00 for a cashier's check to pay off the balance of $3,499.63 (including a $13.00 "Release Fee").  Upon handing the check to the customer service rep, she took care of a few housekeeping details and returned to congratulate me.  Done!   I have now accomplished something really outstanding...I own--free and clear--five of seven houses (one of them being my personal residence)!

Jan 1, 2013 (Beginning Bal)                        December 31st, 2013                    Amount Paid  =======================================================================
House #1 - $70,908                                        House #1 - $67,437                        $  3,471
House #2 - $57,619                                        House #2 - $54,459                        $  3,160
House #3 - $49,123                                        House #3 - $   0                              $49,123
-----------------------------                                   ----------------------------          ---------------------------
Total:       $177,650                                                         $121,896                        $55,754 (-31.38%)

As you can see, we've paid off nearly a third of our total rental real estate mortgage debt this year alone.  I don't know if we can keep the same pace up this year or not.  I have some dental work I need done as well as a trip to England & Ireland we are saving for.  That trip will be paid off before we take it, rest assured.

I still lack two more checkpoints to finish this rental mortgage Payoffathon.  I should be able to accomplish that in approximately 2.5 years or a mere thirty months.  At that point I could conceivably go from semi-retirement to early retirement.  I relish the thought of greater freedom.  Freedom to pursue more fully the things that bring the greatest pleasure and fulfillment.  That's the goal.  That will be the final stamp on my Rental Mortgage Payoffathon.


Monday, December 2, 2013

Update - December 2013

2013 is about to wind up and be retired to history.  I know it's been a tremendous year of accomplishment for many of you out there.  You've set and achieved goals:  Investing, debt reduction, weight loss...umph...ok so we didn't reach ALL of our goals, but, hey, this is a Personal Finance blog and not Weight Watchers, so we won't sweat the last one too much.
What have we accomplished this year?  Well, aside from nearly paying off one of my rental properties (more on that later) we travelled to Mexico and saw some really cool sights and met some awesome people.

Pyramid of the Sun - Teotihuacan, Mexico
While I obviously think it prudent to prepare for the future, I must remind myself that I'm living in the present.  There is a whole world out there to see.  There are people we love and need to enjoy while we have them.  Here is a moving retrospective that helps put things in perspective while we zealously work toward achieving Financial Independence.  (The following excerpt has often been rumored to have been written by Comedian George Carlin, but that is apparently not the case.)

"The paradox of our time in history is that we have taller buildings but
shorter tempers, wider freeways, but narrower viewpoints. We spend more,
but have less; we buy more, but enjoy less. We have bigger houses and
smaller families, more conveniences, but less time. We have more degrees
but less sense, more knowledge, but less judgment, more experts, yet more
problems, more medicine, but less wellness.
We drink too much, smoke too much, spend too recklessly, laugh too little,
drive too fast, get too angry, stay up too late, get up too tired, read too
little, watch TV too much, and pray too seldom. We have multiplied our
possessions, but reduced our values. We talk too much, love too seldom, and
hate too often.
We've learned how to make a living, but not a life. We've added years to
life not life to years. We've been all the way to the moon and back, but
have trouble crossing the street to meet a new neighbor. We conquered outer
space but not inner space.
We've done larger things, but not better things. We've cleaned up the air,
but polluted the soul. We've conquered the atom, but not our prejudice.
We write more, but learn less. We plan more, but accomplish less.
We've learned to rush, but not to wait. We build more computers to hold
more information, to produce more copies than ever, but we communicate less
and less.
These are the times of fast foods and slow digestion, big men and small
character, steep profits and shallow relationships. These are the days of
two incomes but more divorce, fancier houses, but broken homes.
These are days of quick trips, disposable diapers, throwaway morality, one
night stands, overweight bodies, and pills that do everything from cheer,
to quiet, to kill.
It is a time when there is much in the showroom window and nothing in the
stockroom. A time when technology can bring this letter to you, and a time
when you can choose either to share this insight, or to just hit delete.
Remember; spend some time with your loved ones, because they are not going
to be around forever. Remember, say a kind word to someone who looks up to
you in awe, because that little person soon will grow up and leave your
Remember to give a warm hug to the one next to you because that is the only
treasure you can give with your heart and it doesn't cost a cent. Remember,
to say, "I love you" to your partner and your loved ones, but most of all
mean it. A kiss and an embrace will mend hurt when it comes from deep
inside of you. Remember to hold hands and cherish the moment for someday
that person will not be there again. Give time to love, give time to speak
and give time to share the precious thoughts in your mind."

I appreciate those words (regardless of who wrote them) as they help us to step back and meditate on whether we have our priorties in the proper order.  While I pursue my goals and ambitions, I never want to lose sight of what's most important in life:  Meaningful relationships with our Creator, our families and our friends, and the true enjoyment of life's experiences with them and not at their expense.

Now...on to this month's achievment:

Jan 1, 2013 (Beginning Bal)                           December, 2013                       Amount Paid  =======================================================================
House #1 - $70,908                                        House #1 - $67,437                        $ 3,471
House #2 - $57,619                                        House #2 - $54,459                        $ 3,160
House #3 - $49,123                                        House #3 - $  3,486                       $45,637
-----------------------------                                   ----------------------------          ---------------------------
Total:      $177,650                                                          $125,382                      $52,268 (-29.42%)

So, so close to paying off House #3.  I'm aiming to pay it off by December 31st, essentially right on schedule.  That way I can clear it off the books and simplify tax preparation for the next tax season while beginning to re-focus on House #2 starting January 1st.  Next step:  Request a "Pay off Statement" from the bank while scraping the money together to make an early final payment.

Stay tuned.  I may have a celebratory post later this month.......

Tuesday, November 5, 2013

Update - November 2013

"The journey of a thousand miles begins with a single step" 

--Chinese philosopher Laozi (c 604 bc - c 531 bc)
While many have quoted the above proverb searching for inspiration to begin a long and arduous journey, I would venture to say that the Chinese philosopher Laozi probably never had the long road of debt reduction to travel.  And what a long road it can be month after month, year after year...
However, once we've mustered the courage to begin, I believe most of us need continuing inspiration along the journey.  That encouragement to continue can be found in the form of smaller successes along the way.  For example, I started blogging about my rental real estate payoff journey in January of this year.  All is going well as I am now nearly crossing a smaller, intermediate goal line of paying off the first of three remaining rental houses. (More on that to come.)
Really, however, my payoff journey started in earnest just over three years ago in July, 2010 when my mortgage debt totalled $255,025 (including my personal residence).  Although we had just bought our freshly remodeled 900 square foot, 2 bedroom/1bath home for $74,500 (Yes, houses are cheaper in this part of the country.)  putting 20% down and financing the remaining $59,600 for the next thirty years, I really, really wanted to get our personal residence paid off quickly.  So, we took the first step of a 59,600 dollar journey and 19 months later, we owned our house free and clear!  </begin rant>I don't care what the mathematicians say.  I couldn't give a hoot about the lost investment profits that could've been.  We own our house!  It feels great!  It feels secure!  It was worth the effort.  Don't ever let anyone tell you differently.  Of the hundreds of blog comments I've read over the past several years on paying off one's home, I've never read about anyone regretting, I mean truly regretting paying off their home because they left some potential investment profits on the table in the process.</end rant>
That early success is being built upon with this new soon-to-be success:  Another paid off house.  More than that, the $255,025 debt we owed in 2010 is now nearly half that original amount: $129,495.  Even better is the fact that this payoff will yield returns in the form of free-cash-flow...$425.00 p/month of it.  Put another way: If I were to create an investment portfolio of dividend-paying stocks paying an average of 4% annually, or $425.00 p/month, it would require a portfolio valued at roughly $127,500.  Those "dividends" in the form of no more mortgage and interest payments will begin to accrue in January.  I can't wait.  The journey has been a little rigorous, but we are well along.
Jan 1, 2013 (Beginning Bal)                           November, 2013                      Amount Paid =======================================================================
House #1 - $70,908                                         House #1 - $67,758                          $ 3,150
House #2 - $57,619                                         House #2 - $54,752                          $ 2,867
House #3 - $49,123                                         House #3 - $  6,985                         $42,138
-----------------------------                                     ----------------------------                   ---------------------------
Total:       $177,650                                               Total: $129,495                        $48,155 (-27.10%)
Soon, this will mean that our home plus four of our six rental houses will be paid off.  Five down, two to go.  Is that light a horizon we're beginning to see as we approach the end of a long, long journey of 255,025 dollars?

Wednesday, October 2, 2013

Update - October 2013

October is here and a whisper of Autumn is in the air.  In my part of the world you tolerate Summer to get to Fall and Winter to get to Spring.  The weather is rarely boring, or, as they are fond of saying here:  "If you don't like the weather, wait ten minutes and it'll change".  Truer words were never spoken.
Something else that's changing is my percentage of ownership (or "Equity") of my rental real estate portfolio.  At the rate we're moving along I am three months away from owning House #3 free and clear!  Three more payments and it will be mine I tell you, MINE!  BWAAAHAAAHAAA!!!!!  I apologize for that moment of insanity.  That's just shy of $50,000.00 in one year.  Don't think I haven't been tempted to stray from my course...I have.  But we're so close now that it would be foolish to not see this through.  We will reap the reward of an additional $424.57 or $5,094.84 annual cash flow.  That's 10.4% cash on cash return on that $49,123.00 going forward.
I am thinking of adjusting the strategy beginning January, 2014, however.  While having one less monthly mortgage payment in itself amounts to an additional layer of security, I am considering lowering the additional monthly principle payments from the $3,400 range to more like $1,800 to $2,000 and banking the remainder in savings to serve as yet another layer of security going forward.  Then, when I can pay the balance of the mortgage off with the savings, I will write one check and be done with it.  This will slow the payoff process a bit because those large payments really shrink the amount of interest each month.  But it's a trade off I'm willing to consider for the safety it provides.

Here are the numbers for October:
Jan 1, 2013 (Beginning Bal)                 October, 2013                          Amount Paid  =======================================================================
House #1 - $70,908                                  House #1 - $68,078                    $ 2,830
House #2 - $57,619                                  House #2 - $55,044                    $ 2,575
House #3 - $49,123                                  House #3 - $10,470                    $38,653
-----------------------------                             ----------------------------                 ---------------------------
Total:        $177,650                                 Total: $133,592                          $44,058 (-24.80%)
My total equity for those three rental properties has increased by 25% (rounding up) just since January of this year.  It will be so exciting to pay off that property and have only TWO monthly mortgage payments totalling  $1,317.39 (Payment, Interest, Taxes & Insurance)!  I can hardly wait.

Whatever the case, rest assured, we'll keep you abreast of the situation.

Tuesday, September 3, 2013

August - September Update

What a busy, busy summer it's been.  Here in Oklahoma, we were socked by several tornadoes and my wife and myself along with several friends spent a good portion of that last few months helping victims of the Moore, and OKC tornadoes.

Moore, OK  Ground Zero

It is a horrific scene to witness.  Once tranquil neighborhoods with manicured lawns and streets populated with playing children completely unrecognizable.  I took the above photograph within days after the May 20th F-5 tornado. However, a week and a half later, more tornadoes swept through the El Reno/OKC region which were in some ways even more destructive than the May 20th tornado.
Despite all the devastation to lives and homes, the people of Oklahoma are a resilient people.  Try living through ten years of dust bowl conditions with a Great Depression thrown in the mix.  The rebuilding is moving along nicely and we were honored to assist over 160 families get their lives back on the track to "normal."
In the meantime, a good deal of progress was made on the Pay Off My Rentals front, too.  Last month we were able to pay an additional  $14,845.00 toward the lowest balance mortgage.  We are confident that it will be completely paid off by December 31st, right on schedule!
September 1
Stats:             Jan 1, 2013              Sept, 2013                        Amount Paid Off
House #1 - $70,908                  House #1 - $68,397                    $ 2,511
House #2 - $57,619                  House #2 - $55,334                    $ 2,285
House #3 - $49,123                  House #3 - $14,092                    $35,031
-----------------------------                  ----------------------------            -----------------------
Total:         $177,650                Total:         $137,823                  $39,827 (-22.42%)

A couple of noteworthy points: First, we broke the 15k mark on house #3. We've paid off nearly $40,000 since the beginning of the year.   I've decided to continue with my original goal of only concentrating on paying down the mortgages and will not be contributing to the ROTH IRA's until they are paid off.  This just works better for me.  It is not subject to the tornadoes in the market and gives me a guaranteed return.  Bottom line:  I just feel better sticking to the aggressive payoff plan.

Monday, July 1, 2013

Update - July 2013

I spent some time today updating our budget and something amazing jumped out at me...


We've paid off $100,517 in only three years!

While updating our July 1st mortgage balances, I rolled my cursor over an Excel "comment" field on my budget that was dated July 31st, 2010 showing a total balance of $255,025 spread over five different mortgages.  Among the now dead and buried are our personal residence and one rental property, both of which are now owned free and clear!  Now some folks don't seem to get very excited over paying off mortgage debt, but I do.  I think deleveraging is both wise and prudent.  Moreover, just as a growing porfolio of dividend paying companies gives one a feeling of security and satisfaction, the same can be said for disappearing debt...ANY DEBT, even the "GOOD DEBT".
We're not finished.  We'll continue to whittle away at the remaining mortgage debt totalling $154,508.   I am especially interested in getting property #3 paid off as quickly as possible because doing so will increase our monthly cash flow by $424.57 or $5,094.84 annually.  That's just the principle and interest portion of the monthly loan payment, or in other words the portion you get to keep once the mortgage is retired.  How large of a portfolio stocked with dividend-paying companies would it take to bring in an annual dividend income of $5,094?

Drumroll please...

A portfolio totalling $127,371 earning 4%.  You see, at this point I can bring home income equivalent to a $127,371 portfolio for only $29,565!  But wait, there's more...kidding.  The only problem is that I can't and won't see a dime of that extra cash flow until the mortgage is paid off in full.  Banks just won't give a partial credit for that amount until we've paid off every last cent.

Monday, June 17, 2013

Rental Finances 101

How does a Rental (or Income) Real Estate Investor manage the finances on his rental properties?  However he wants to...Gosh!  Well, while I jest a bit, that's essentially true.  Everyone has his own style and comfort level as it pertains to finances, but I'll give you a peek into what I do and what has kept me out of financial worry throughout the real estate and financial crisis of 2008 onward.

Where the troubles often begin

Let me deal with three more common issues:  1) Cash Flow  2) Maintenance & Repairs  3) Vacancies

No free cash flow:  Unfortunately, too many people buy rental properties that are not cash flowing.  In other words, after receiving their rent monies from the tenant and paying the mortgage PITI (Principal, Interest, Taxes, Insurance), they either break even, or are left in the red and must "feed the alligator," as we call it in the business. This is a very risky way to run a rental business.  An income property should be able to pay for its direct costs AND leave enough monies to cover ongoing expenses.  However, many compound this financial short-sightedness with other problems...

Underestimating Maintenance & Repairs:  If you are rolling the dice just hoping you will not spend major money on ongoing repairs and maintenance, you are walking a financial tightrope on a windy day!  Contrary to what many want to believe, with few exceptions, you will spend 1% of the value of the home every year on maintenance & repairs.  That's $1,000 a year on a $100,000 house.  You may not spend that grand in year one, or even year two, but you WILL spend it.  Carpets needs replacing, HVAC systems break down, roofs need replacing, walls need painting, etc, etc, etc.  If you don't set those funds aside, their absense will come back to haunt you when you least expect it and can least afford it. I set aside 10% of the monthly rents.

Vacancies:  The vacancy rate depends to a large degree on your rental market.  In some areas, multi-year tenants are the norm, and a blessing.  In my market, the average tenant stays approximately 18 months to 2 years.  Everytime they move, you lose the rent proceeds for at least a month, often longer.  That adds up, especially while you must continue to make the mortgage payments.  I set aside 8% of the monthly rents.

You must also consider whether you want to manage your rental real estate yourself or hire a rental management company to do the heavy lifting.  I started off managing my own, but decided that that was not as passive as I'd like.  For the past 6 years or so, I've used a rental management company.  This comes at a cost:  While some charge on average 8-10% plus the first month's rent upon locating a new tenant, mine charges a floating scale percentage of the rent proceeds each month the house is occupied by a tenant.  In my opinion (and given my semi-retired status), this option is well worth the cost.  No phone calls at inconvenient times for repairs, no rent collections, interviews, walk-throughs, inspections, bookkeeping, etc.  My rental real estate operations are as passive as I want and need them to be. 

If you purchase a rental property at what you consider "break-even," but have not factored in the above three categories, you're very likely to fail in your rental property venture.  At the very least, you will add as much stress as the person who brings an alligator into his house and lets him roam free.  I can't imagine living that way, can you?

How to avoid the alligator...

Is it possible to sleep well while owning rental properties?  Of course!  But you must purchase the property with sufficient cash flow to accommodate everything mentioned above.  To accomplish this you must,  1) Purchase cash flowing properties.  2) Be realistic about expenses and make sure the cash flow is sufficient to pay for all those expenses month in, month out.  You must budget for these on an ongoing basis and accumulate the funds until they are spent.

Here's the formula for a typical rental property (a single family dwelling):


Let's look at some real-life figures using my Property #3 which we're attempting to pay off quickly:

+Current Monthly Rent:             $850.00
-PITI:                                          $548.11 (Principle & Interest: $424.57)
-Rental Management Fee:           $75.00
-Maintenance & Repairs (10%):  $85.00
-Vacancies (8%):                         $68.00
Total Free Cash Flow                  $73.89

Assuming no repairs or vacancy in a particular month, the proceeds roll over into accumulation mode until they are needed.  Like any good budget, this one helps to eliminate the nasty budget-busting surprises and expenses along with the additional stress of now trying to make a mortgage payment while fixing a plumbing problem or whatever the maintenance du jour.

For me, this system works, and it has worked well for many years.  It keeps me above water even during times of higher vacancies or unforeseen repairs.  However, like many systems, you must be faithful to it.  For example:  Avoid the temptation to spend your accumulated reserves just because they become many.  Been there, done that.  Ouch!

Rental real estate is not without its problems, and the above scenario will not play out in all geographic areas around the country.  Additionally,  you will get the occasional bad tenant who disrespects your property or doesn't pay the rent and has to be evicted.  That's par for the course.   However, a rental management company coupled with a good financial plan takes the edge off and allows you to sleep at night while giving your tenants the privilege of buying you a house...or houses.  Not a bad deal...when done right.

Any thoughts or questions?  I welcome them.