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.

 

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.)

http://www.truthorfiction.com/rumors/c/carlin.htm

"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
side.
 
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.......

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?

 

 

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.

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.

 

 

 



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.

  

 

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):

(RENT PROCEEDS) - (PITI) - (8-10% RENTAL MANAGEMENT) - (10% VACANCIES) = FREE CASH FLOW

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.

Update - June 2013

Life is full of adjustments.  When driving from point A to point B, how many micro and macro adjustments do we make along the path toward our destination?  A dozen?  Hundreds?  Thousands?  Obviously, the longer the trip, the more adjustments we'll make.  Most are small variations to the steering wheel to keep us between the lines, while others are more major: avoid hitting the dog crossing the road and road construction detours are just a couple of the more common examples.

It's time to adjust the plan...

Last month we were unable to make any additional payments to principal due to medical expenses and higher taxes.  Do I regret those major detours?  Of course I'd prefer to have been able to add the $3,400 to our mortgage payoff plan, but I have to remember how fortunate we are to have been able to meet these unforeseen expenses head on.  We paid them off in one fell swoop.  No payment plans, no additional debt.  Gone! 

 We have not really had much of an eFund since our business income is very secure and our cash cushion was in the magnitude of thousands of additional dollars each month.  Additionally, aside from the rental real estate, we are debt free.  However, I now see the need to beef up our eFund.  Initially, by making the full 2013 ROTH contributions for my wife and I, and, secondly by saving some additional monies in a non-retirement eFund account.  Then, only after these goals have been met, will we accelerate our rental mortgage payoff.  Whew!  Those are some major adjustments to be sure.

June 1 Stats:

Jan 1, 2013                                   June, 2013                     Amount Paid Off
============================================================

House #1 - $70,908               House #1 - $69,346                   $ 1,562
House #2 - $57,619               House #2 - $56,199                   $ 1,420
House #3 - $49,123               House #3 - $29,878                  $19,245
-----------------------------              ----------------------------          -----------------------
Total:        $177,650                     Total: $155,423                 $22,227 (-12.5%)

A couple of noteworthy points:  First, we broke the 30k mark on house #3.  We were able to prepay $2,000 for June.  That feels pretty good.  We are eager to pay that property off and add an additional $424.57 (Payment and Interest only) to our monthly rental income.  Second, we've paid off $22,227 since January of this year. 

The overall destination toward an accelerated payoff of our rental real estate has not changed; however, the route has been altered. 

What micro/macro adjustments have you made along the way toward financial independence or early retirement?  What decisions are you struggling with?  Feel free to share your journey.  I'd love to hear about it.

Update - May 2013

I've delayed May's update mainly because it's been a busy time and more honestly because we stumbled in our accelerated payoff plan.  We were only able to make the regular mortgage payments for May without anything additional being added toward paying down the principal.  What happened?

Several things:

First: Health care costs.  My wife had to have another shoulder surgery.  This was to correct an issue that resulted from her rotator cuff surgery late last year.  It appears that scar tissue developed around the area of the shoulder joint and had to be surgically cut to allow her proper shoulder movement.  Bottom line:  A couple of thousand toward medical deductibles in addition to out-of-pocket expenses. 

Second: Taxes!  We had our best income year ever last year.  While I've always done a good job estimating and pre-paying our estimated State and Federal income taxes, last year was just a little too good.  How terrible for us, right?  So, we paid off the Tax Man and told him to stay away for another year while upping the amount of deductions taken out of our salaries.  I suspect this year may even be better than last.  It's a good problem to be sure.

Getting back up and back in the race...at a more moderate pace.

The real issue is that we may be too aggressive in our accelerated payoff plan leaving too little room for the unexpected expenses that life will invariably throw at us.  Obviously, life's course is almost never linear; at least not for very long.  Unexpected things happen--both good and bad. However, if you do your best to roll with the punches, avoid discouragement and keep your eyes on the prize, you'll reach your destination...eventually.  Debt paydown should resemble a marathon more than a sprint.  At least by setting personal goals, your making progress. Like my friend once told me, "Even when you fall flat on your face, hey, that's still forward progress!".

I already see the need to back off and relax our mortgage debt paydown pace a bit.  Maybe an additional $2,000 applied toward principal instead of $3,400 would be a little more reasonable and allow for the inevitable unforseens while keeping a good marathon paydown pace.  I really don't know yet, but we'll be looking at this more closely over the next couple of months.

I hope you're all reaching your goals for the month.  However, if you've fallen flat on your face in your most recent efforts, hey, that's still forward progress!

Update - April 2013

This is the fourth month into working our plan.  Firm determination and laser-like focus are the name of the game here.   To be perfectly honest, I am always tempted to change the game plan.  For example:  "Do I pay just the first house off and then go back to making minimum payments on the remaining two while investing the rest in the market?".  "Do I take a break and build up some cash reserves and use these funds to buy more real estate?"  These are all viable paths to financial independence and no one path is necessarily wrong.  One of the above options that I have chosen not to pursue might even lead to greater long-term wealth.  Here comes that "personal" part of "personal finance".

 

Personal Finance is, after all, "Personal"

The goal of our journey is total, absolute and unequivocal debt-free living.  Therefore, that's the path we've chosen and the one we're determined to stick to -- despite frequent temptations to change course.  Like a marathon runner who strips down to his running shorts, we want our financial picture to be simple and unecumbered.  Carrying debt, even the "good debt", is like a marathon runner carrying his laptop or his briefcase during the race.  It will have a detrimental affect on his performance and he risks not reaching the finish line as a result.  We've chosen not to take that chance and, therefore, we'll stay the course we've chosen:  Pay off all our mortgages as quickly as possible to reach the goal of financial independence as quickly as possible.

Like a marathon runner who pictures himself crossing the finish line, we also imagine ourselves with the freedom and financial wherewhithal to quickly save to buy a property for cash, or to purchase large amounts of dividend growth stocks, or to do whatever we want to do with what will prove to be a substantial amount of freed-up monies to invest; and all in far less time that it takes for most people to pay off their note on a new car.

April 1 Stats:

Jan 1, 2013                                   April, 2013                  Amount Paid Off
=======================================================

House #1 - $70,908               House #1 - $69,974                 $ 934
House #2 - $57,619               House #2 - $56,770                 $ 849
House #3 - $49,123               House #3 - $32,484                 $16,639
----------------------------              ------------------------------          --------------------
Total:       $177,650                              $159,228                 $18,422 (-10.4%)

As you can see, we've paid off $18,422 or 10.4% of our total mortgage balance in just four months.  That's very exciting and rewarding.  Of course the added benefit of paying off the mortgages more quickly is that more is applied toward the principal and less toward interest.  In January, the interest paid on House #3 was $185.00 (principal: $239.46).  For April, the interest amounted to only $135.65 while the amount applied to principal was $288.92.  That means nearly $50.00 more is going toward the accelerated payoff.   Once this house is paid off, the PI (Payment & Interest) of the PITI (Payment, Interest, Taxes & Insurance) totaling $548.00 will be added to the $3,400 causing the snowball to grow and accelerate the payoff of House #2. 

Are you currently snowballing your debt payoff?  How's it going?  Feel free to share your experience.

My Secret Weapon

No...It's not a death-ray.  Nor is it a Derringer pistol up my sleeve. 

It's rental real-estate free cash flow.

Frankly, some months are harder than others when it comes to paying an additional $3,400.00 towards my rental real-estate mortgage payoff.  This month alone was full of budget-busting surprises.  Seriously, when it rains, it pours:

The truck blew a pump and took out my serpentine belt with it.  Potential repair expense: $500.00  My buddy and I worked two hours and spent $150.00 to repair.  We also took him and his wife out to lunch and spent another $50.00 for the four of us.  Savings: ~$300.00

Our paid off 2009 Altima with 64k miles needed an air conditioning compressor and a driver's side electric window motor replaced.  Total estimated cost: $1,328.00  Fortunately, I bought a 100k extended warranty for about $1,000.00 when I purchased the car.  That turned out to be a great purchase.  It included a "disappearing deductible".  My total out-of -pocket cost for those repairs: $0.00  Whew!

My rental management company emailed saying a fence needed repairs at one of my properties.  Contractor Estimate: $650.00  Again, because I had some spare time available, my buddy and I fixed it for the price of materials and a nice meal.  Total cost: $278.11  Savings: ~371.89

I had another rental house that needed some rotten wood replaced as well as some paint scraped and touched up.  I didn't bother with an estimate...Hey, I was on a money-saving roll and simply took care of it.  However, experience tells me I would have paid ~$300-$400.00 for this work.  I spent a few hours and fixed it for the cost of materials. (I still had left-over paint from the original re-painting.)  Total Cost: $14.07 for two boards and some nails from Home Depot.

Normally, I would simply ask for estimates and tell the rental management company to get it done.  However, I had the both the time and the know-how to do these projects and I was itching to save the money.  Why?  The "Secret Weapon".

You see, we all get the unexpected bills.  I try to account for the larger annual expenses by taking the annual cost and dividing by 12(months) and then adding 1/12 to my monthly budget as an accumulating expense.  When the annual bill arrives, I already have the monies saved and can easily pay the invoice.  This tactic has saved me from many numerous annual, budget-busting surprises over the years.  I do this with my personal budget, my business budget and my rental real estate budget.  It's a must!  But, I digress...

At times. the free cash flow from my rental real estate supplements the current $3,400 additional principal payout each month.  When the unexpected personal budget busters appear out of nowhere and seek to demolish my budget and speedy rental payoff plan, I turn to my "Secret Weapon": my rental real-estate cash in order to supplement my payoff.  This month I expect a shortfall of $826.00 due to my wife's medical bills and other unforeseen items.  Rental real-estate cash to the rescue!

If you invest in rental real-estate, you must seek cash-flow-positive rentals.  In my case, the free cash flow is helping me to pay them off in rapid fashion.  This month, I had the time and circumstances to preserve more of those funds and took advantage of those circumstances.  Most months I'm too busy pursuing other personal endeavors to do that.  However, my goal of a quick payoff has given me additional incentive to preserve those funds so that they'll be available to become my "Secret Weapon".

Update - March 2013 (Early)

The "March" onward continues (pun intended).  We made our mortgage payments a week early.  Nothing wrong with capitalizing on a little more interest savings, right?  Plus, we get the thrill of watching our debt drop by the thousands.  Now that's what I'm talkin' bout!

 

The Stats:

 

Jan 1, 2013                            March, 2013                     Amount Paid Off
==========================================================

 House #1 - $70,908            House #1 - $70,287                  $     621

 House #2 - $57,619            House #2 - $57,054                  $     565

 House #3 - $49,123            House #3 - $36,173                  $ 12,950

 -------------------------------          -----------------------------                ----------------------

   Total:     $177,650                           $163,514                   $14,136 (-7.9%)

That's a 7.9% reduction of our total rental property mortgage debt in three months.  It feels good to see it decline so significantly.  The lowest of the three, (the one we are snowballing), has been reduced by 26% in three short months.  Previously I had miscalculated that we would have this house paid off by the end of the year, but it now looks like it will be January of 2014, barring the inevitable unforeseen.

 

INCOME STREAM(S)

 

On the February update where I mentioned, "There is a part of me that would love to invest all these extra payments in Dividend Growth stocks, but we have a well thought out plan and we are determined to stick to it".  Someone commented that he felt I should do both since it would be better to fund another income stream.  That is a valid point.  However, in addition to my response, I should have pointed out that each house is an "income stream".  Even during the worst timing (including the housing bust of 2008 onward) I've never had more than two houses vacant at any one time.  It is highly unlikely that I would ever see more than 3 of our 6 rental houses vacant at any one time.  There is protection in numbers, especially when those "numbers" happen to be individual income streams in themselves.

Additionally, there is a degree of protection that is built into the numbers.  Every month 8% of the gross rents is set aside and left in the bank to cover the inevitable vacancies that occur.  Those monies can be drawn upon during vacancy periods to supplement our monthly cash draws when I reach the point where I will be relying on the cash flow to fund full retirement (I am currently semi-retired).

This pace is frantic and leaves little room for error in our monthly budget.  We have some traveling coming up this Summer (Alaska) that we will need anticipate.  We do have airline miles stored away and some vouchers that we're holding in reserve from having volunteered to be "bumped" on some flights.  Additionally, I do have a "secret weapon" which I'll probably talk about during the next monthly update.  Unfortunately, it's use comes at a cost.  The most important tool in the arsenal is controlled spending.  Like a tape measure in a carpenter's tool belt, it's the primary tool most financial bloggers are skilled in using on a regular basis.  I am still needing to master mine.

So far, so good.   Feel free to comment and let me know what you think.  What are you doing?  Share your story. 

Update - February 2013

February's rental mortgage payments brought the mortgage balances down a little.  What was really cool to see was the effect that the unexpected $9,000 additional principal payment we made in January had on the interest for February.  We applied all of the 9k payment to the lowest of the three mortgages:

Previous Balance of the lowest mortgage (January, 2013):  $49,123 

Principal & Interest Payment: $424.57 (Principal: 239.46  Interest: $185.11)

After making the $9,000 principal payment the February payment breaks down as follows:

Principal: 274.11 Interest 150.46

That means we saved $34.65 in interest and thus the same amount was applied toward principal reduction.

Following our February mortgage payments, our balances are as follows:

House #1 - $70,598
House #2 - $57,337
House #3 - $39,848
--------------------------------
Total:       $167,783

As of January, 2013 the balance of our rental properties totaled $177,650. We now owe $167,783, or $9,867 less than we did the month earlier.  That's a 5.6% reduction of mortgage debt.

This is a wonderful start and we are pleased.  The lowest balance should--barring unforeseen budget busters--be paid off by December of this year.  Then, $400.00 of the principal and interest savings will be snowballed into House #2 thus speeding up its payoff.

There is a part of me that would love to invest all these extra payments in Dividend Growth stocks, but we have a well thought out plan and we are determined to stick to it.  Even as the DOW rose above 14,000 last Friday, I console myself with the knowledge that my ROI is not less that 4.375% on any money directed toward paying off the mortgages.  When once I have paid off these mortgages, I can choose to spend or invest that which was previously sent to the bank.  The freedom will be ours to choose!

A little background...(Part 2)

It's the Summer of 2003.  I've been looking for a test subject to begin my foray into real estate investing.  The whole concept of buying a house in need of some light renovations on the cheap and transforming the "ugly duckling" into a "beautiful swan" for a profit was intriguing.  As a result of my intense self-education and reading real estate investing books and Internet sites, I learned what now seems an obvious lesson: A good neighborhood is an important factor.  Therefore, I searched relatively desirable locations coupled with a relatively desirable houses that theoretically wouldn't sit long on the market thus increasing my carrying costs.  My turn around time was 3 months:  One month to purchase and close.  One month to renovate.  One month to sell and close on the property.

Financing and "Fixing" the project

I intended to use the HELOC on my personal residence to self-finance in order to avoid all the hassles and expenses of a real estate loan.  I had $55,100 HELOC and credit cards that I could use.  Using this method would save on appraisal, inspection, loan fees and closing costs thus reducing the amount of my initial investment by thousands.

I found a 1900 sq ft. 4 bed 2 bath 1 1/2 story VA repo in a decent neighborhood.  Since it was a VA house, I would have to bid against other RE investors.  Sure enough, while I was looking through the windows another investor showed up and looked it over.  I decided to bid 59k.   I won!  I purchased the house with cash using my HELOC and cash withdrawals from my credit card.  I invested another 7k into renovations.  Fortunately, the house was in very decent shape and needed mostly cosmetics.  It needed bathroom and kitchen counters, sinks, fixtures, ceramic bathroom floors, ceramic tiled back splashes throughout, new wood laminate kitchen & dining area, lighting fixtures, new paint in/out and new appliances, etc... The roof was in "fair" condition and I was able to clean and restore the carpets to almost new condition (remember I have a commercial cleaning company).

I didn't have time to do all the work, and that wasn't my plan anyway.  So, I interviewed 2 handymen:  Handyman #1 came to the house smelling like a brewery at 10:00 a.m.  Not going there.  Handyman #2 was knowledgeable, respectful (always "yes, Sir...etc...) and sober.  I liked him and he was hungry.  His work turned out to be affordable, of excellent quality and he was expedient.  I was fortunate to find him even though I knew it wouldn't last.  "Vick" was TOO good and would be sought after by a construction industry with a powerful vacuum for knowledgeable and talented people.

The "Flip"

The realtor who helped me transact the purchase estimated the house would sell in the high 70s to low 80s. Another realtor I interviewed put the price between $87,500 and $89,500. I started doing my homework on the comparables and used a fairly simple method to arrive at the future asking price:  I took the last 3 years of comparables and divided by the total square footage.  As a result I came up with an avg. price of between $48.00 - $52.00 per sq ft.   When I applied this standard to my house (which was bigger than most of the surrounding houses due to a garage converted to a 2nd living area), I arrived at a value of high 80s to low 90s.  The numbers worked and I proceeded to transform this homely duckling into a beautiful and desirable swan.

Everything went well and I had a lot of fun with this real estate investing "experiment".  I still had much to learn.  I was worried about the appraisal process which would ultimately make or break my deal.  Would it appraise for my asking price?

In the meantime, I had a realtor ask if I was offering a "Seller's fee" to Realtors bringing buyers in.  "Yes".  That would be worth 3% to me.  The really cool and amazing thing was that I learned that the "woman buys the house".  In other words, if she loved it, her husband will often acquiesce to the purchase.  Therefore, all other considerations aside, kitchens and bathrooms must be immaculate.  Mine were. 

The first couple that surveyed the house just had to have it.  Sold!  $89,500.  The catch:  It was a military couple and they asked me to pay ALL closing costs.  I ran the numbers and decided that my "I-just-want-to-not-lose-money" project would net me around $14k in profit.  The whole experiment took 2 1/2 months from closing on the property to arrive at an acceptable contract. The property showed so well I never even had to list it.  The experiment was a success and a real estate investor was born.

However, I decided that Fix and Flips were not to make up the bulk of my future real estate ventures.  I would become a Landlord. 

To be continued...

It has begun...

 

My Pay Off My Rentals Wall Chart (The back of my 2012 desk calendar)

We're off and running!  We were able to take a special distribution from our Commercial Janitorial Business this month for $9,666.00, and as a result we've applied $9,000.00 of that to the lowest balance of our three rental houses.  The mortgage balance before that special payment was $49,123.  After applying this payment, the current balance is now $40,123.  In one fell swoop, the balance was cut down by 18.3%! 

What an invigorating and unexpected start to the new Pay Off My Rentals program.  The total balance of all rental property mortgaged has dropped to $168,650 from $177,650.

The bank did attempt to apply the additional principal payment to my regular February mortgage payment crediting a portion to interest and escrow.  However a quick phone call to customer service resolved the issue and the entire portion has been properly applied to the principal.  When making extra payments always be sure to verify that it was properly credited.  Usually a memo line or even an accompanying letter will suffice, but in this case I used my banks free online BillPay service and overlooked the memo line.

I doubt we'll be able to make too many large, one-time extra payments like this going forward.  The current combined monthly mortgage payments are $1,865.50.  We then add an additional $3,400 monthly principal payment.  Of course, the tenants take care of the first $1,865.50, but we're responsible for scraping together the $3,400 payment to principal each month.  We've certainly challenged ourselves here, and while there's no guarantee we'll be consistently successful going forward, it sure feels good to see the balance drop by such a significant percentage so soon.  I feel like a thoroughbred racehorse who got the jump coming out of the gate, but how will we fare until the finish line in 42 months???

I plan on updating the blog monthly following each mortgage payment along with the adventures that each respective month brings--for better or worse. 

A little background...(Part 1)

I never intended to become a real estate investor.  But I got caught up in the real estate investing mania sweeping the world following the Dot Com bust of 2001.  You could say I was late to the game.  My real estate experience up to 2003 was limited--to say the least.

Around 1997 we had purchased our first home--a single-wide mobile home in California, which resided in a mobile home park. It cost us somewhere in the neighborhood of $18k and we had to put 25% down to purchase. I remember sitting in the banker's office where he stated that it was worth a good deal more. I was pleased to have some equity in something resembling real estate even if it was a generally depreciating asset. Mobile homes aren't like houses, especially if they are parked in a mobile home park where someone else owns the land they sit upon. But it was ours! We paid it off in a few short years.

Little did we realize that even in the case of mobile homes, in an escalating real estate market, ALL boats rise with the tide. We had subsequently moved to Oklahoma and decided to sell it a couple of years later.  At best, we expected to sell for somewhere around $27,000.  This was closer to the real value of our 60' long x 14' single-wide mobile home on rented land.  We were pleasantly surprised--no...shocked--when the realtor told us that the market value justified an asking price of $55,000. Within a relatively few weeks we found a buyer and settled for $52,500. Wow! That was unexpected. We ultimately added that to our savings and both cashed out our IRA's for the lifetime $10,000 penalty free withdrawal (Total $20,000.00) and subsequently bought a 3 bedroom 2 bath brick house with a nice family room including a fireplace in SW Oklahoma for 77k cash. I can tell you that it was an awesome feeling to own our house outright.

A few years later (2006), we decided to move to Costa Rica. While living in Costa Rica we sold that house for $105k just before the housing market crashed in 2007.  However, I'm getting ahead myself...

Back to the beginning of our real estate investing adventure...

With our personal residence fully owned, we easily qualified for an ING HELOC of $51,500.00 This turned out to be a useful tool for our first real estate investing venture in 2003--a "fix and flip" project.

I had done a lot of reading and though a little late to the real estate party, I decided that a "flip" house could be both fun and interesting, (if not a little scary). Having owned several small, successful janitorial businesses since high school, I had some financial acumen, but was modestly aware of my limitations. Therefore, this first investment had a very simple stated goal, "I'll be happy to just break even". I'm not a construction guy, per se, but I can do minor repairs of the handyman type fairly well. I can construct spreadsheets, and I was debt-free. These were all advantages to venturing off into the real estate investing universe.

Soooo....I bought real estate books and I read, and read and read some more. I read online, I talked with other RE investors and I looked for my first test property.  Found...one vacant property.

To be continued....

Pay off my rental real estate = Financial Independence

Welcome to my "Payoff  My Rentals" Blog!

I have been a small-time real estate investor since 2003 (Arguably right in the middle of the formation of the largest real estate bubble in the history of the world.) 

Where we are now vs. where we want to be by July, 2016 (42 months or 3 1/2 years)...

We live in SW Oklahoma and currently own our home.  Three years ago we paid $74,700.00 for a small, remodeled 2 bedroom house.  We put 20% down on a 30 yr. FRM and proceeded to pay it off in 19 months because we couldn't stomach having a mortgage on our home.

In addition to our home, we have 6 rental properties ranging in value from $105,000 down to about $20,000 for a small studio house for which we paid $10,000 cash several years ago. 

List of Real Estate Assests (Excluding personal residence):

              Property                   Approx Value                    Owing         Rents
---------------------------------------------------------------------------------------------------------

• House 1:  3 bed/2 bath        105,000                         57,619          850.00
• House 2:  3 bed/2 bath          90,000                         70,908          895.00
• House 3:  3 bed/2 bath          80,000                         49,123          850.00
• House 4:  2 bed/1 bath          56,400                                  0          585.00
• House 5:  2 bed/1bath           40,800                                  0          595.00
• House 6:  Studio House        20,000                                   0          400.00 

===============================================================
Total owing on mortgages:       $177,650   (as of 1/13/2012)

Notes:  All mortgages are currently 15 yr. FRM's averaging 4.375% 
             (Be sure to read the latest monthly update to see how we're progressing since this initial post.) 

The Goal:  Pay them off in 3 1/2 years by adding an additional $3,400 per month toward the lowest mortgage and snowball the prepayments until the last one is paid off.  The net result will be the savings of P&I (Payment and Interest) totalling $1,476.46 per month.  When added to the current free cash flow (after subtracting Rental Management, Maintenance & Vacancy allowances) of $985.00 per month, that will give us a free cash flow of $1,476.46 + $985.00 = $2,461.46 per month.

This is our early retirement fund.  You could compare it to an inflation adjusted annuity, or to living off the dividends of a stock portfolio.  For example: A portfolio totalling $590,750 invested in dividend-paying stocks averaging 5% will throw off the same income of $2,461.00 per month or just under $30,000 p/yr.   If you choose to compare it to a portfolio with a 4% withdrawal rate, you would need the equivalent of $738,428 invested.

With frugal living and a paid off house, this is a very livable income.  It should essentially adjust with inflation as rents rise to cover expenses.  The principle (the houses themselves) is safe and untouched.   There is no drawdown or 4% rule.  The income is perpetual.

The money is safely invested in paying down the loans and the return is guaranteed at greater than 4%.  While I'm a big believer in Dividend Growth Investing, that still carries a higher degree of risk.  Therefore, my choice after much soul searching, reading and taking into consideration my personality and character, is to de-leverage while taking the >4% guaranteed return.