My Rental Payoff History ---Update - June 2014

If you've read the last eighteen months of my Rental Mortgage Payoff blog posts, you'll often see that I speak of three mortgages (now two) that we are working hard to pay off.  The fact of the matter is that when we reach our goal of paying off the remaining mortgages, we will have paid off a whopping $360,000 of real estate which we purchased between April, 2004 and February, 2010.  In fact, we were on such a real estate investment tear that we bought 4 houses in a span of only five months back in 2004!  At that point in my life I really knew what I wanted to do when I grew up, and "Mr. Real Estate Investor" was my name.

Excluding a couple of other houses which we flipped for profits during that period, we were expecting to pay these puppies down over the next THIRTY YEARS.  At the time it seemed like a great plan.  Well, as is frequently the case in personal finance, times change and plans evolve. 

For example, a couple of years ago I decided that beginning with our personal residence we would eliminate ALL mortgage debt from our lives.  ALL OF IT.  We were already "debt free" when it came to consumer debt.  But as liberating as that can be, I don't view that as true freedom.  In my mind, even when one is Consumer Debt Free, the Mortgage debt is like a terrible aftertaste that lingers after you've spit out a mouthful of something rotten.   So, being consumer debt free wasn't good enough for me.  No, sir.  I decided to completely rinse away all lingering mortgage debt aftertaste and get a fresh start.  I wanted to be truly debt-free.  There was no so-called "good debt", it was all bad.  Thus, this blog was born.

Mortgage debt payoff history

We currently own a total of seven houses.  Six are single-family rentals and one is our personal residence.  They range anywhere from a 420 square foot studio house (which we paid cash to acquire) to a 1558 square foot 3 bed/2 bath home sitting on an acre of land.  The complete mortgage payoff history looks like this: (Arranged by order of payoff date)

HOUSE      DATE BOUGHT       AMNT PAID          DATE PAYOFF     LENGTH     BALANCE
---------------------------------------------------------------------------------------------------------------------------
Rental 6              7/2004                 $11,500               PAID CASH                 0                   0              
Rental 5              5/2005                 $44,000                     8/2007               2 yrs. 3 mos.     0
Rental 4              9/2004                 $30,400                     2/2012               7 yrs. 5 mos.     0
Rental 3              6/2004                 $56,000                   12/2013               9 yrs. 6 mos.     0  
Rental 2              4/2004                 $65,600                      -----                      -----           $39,654 
Rental 1              6/2005                 $77,000                      -----                      -----           $65,488
Residence          2/2010                 $74,700                     9/2011               1 yr. 7 mos.       0
=======================================================================
TOTALS:                                       $359,200                                                                 $105,142

As you can see, we've paid off $254,858 (or more than a quarter of a million dollars) of mortgage debt since 2004.  However, $72,508.00 of that debt has been paid off just in the last eighteen months alone!

When all is said and done in about two more years we will have paid off nearly $360,000 of real estate in approximately twelve years.  Of course, we can thank our tenants for helping is in this grand endeavor.  They have paid for a good chunk of that real estate.

What will we do after we finish this mortgage pay-off-a-thon?  I really don't know.  Like I said, personal finance plans and goals evolve.  The history of this blog is proof of that as I have wavered back and forth at times.  However, what I do know is that we will have more options to choose from.  For example, we could choose early retirement.  How cool would that be? Or, we could continue working and use the rental proceeds to buy more rentals--with cash, thank you very much!  Perhaps we'll choose to diversify our investment portfolio by putting together a dividend growth basket of companies to add to the passive income pool.  What a terribly wonderful position in which to find ourselves in a mere twenty-four months!

True, the nerd math will tell you we've done this all wrong.  We should've put all that money in the market and made ever more money.  NO! NO! NO!  This is better.  This removes the market risks and associated anxiety.  This is TRUE FREEDOM!  In retrospect, I don't regret one dollar spent on this debt elimination plan.  Not one dollar!  You can throw math at me all day long and it won't make a speck of difference.  The plan works for us.  The plan works!      

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.......

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.