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!