WOW! What a Snowball!

Now that's a snowball!  Once that baby gets rolling downhill, it will take out just about anything in its path. And that's just what you need to take out massive amounts of debt:  A massive snowball getting ever larger, reaching critical mass, gathering momentum while destroying all debt in its path. 

Of course, my snowball didn't start off nearly this big.  When I started this debt-free journey with just a small snowball in hand last year, I knew I had a monster-sized challenge...Pay off $177,650 of mortgages in forty-two months.   How does one start?  I started plotting my attack by plugging numbers into amortization payoff calculators like these from The Mortgage Professor:

http://mtgprofessor.com/CalculatorArticles/Mortgage%20Payoff%20Calculators.html

It's really cool to see what an extra payment each year, or each month, or what an occasional one-time large payment (like a tax refund or bonus or money from selling something) can do to wiping out a mortgage over the long term.  Play with the calculators and see what I mean.  I was convinced that I could destroy these 30 year mortgages (now 15 year) in just a handful of years.  In fact, they convinced me that if I got really aggressive, I could wipe out my $177k of mortgages in less than four years. But how? 

Due to the wonderful combination of being both consumer debt free as well as having some additional cash now freed up from paying off our home in only nineteen months, I now had quite a bit more money available to begin increasing the size of my snowball.  My dollars had a noble purpose.  My cold, hard cash would now become a cold, hard, debt-destroying snowball!

In true snowball fashion I chose to pay off my mortgages from the lowest to the highest.  The first mortgage--at the time totaling $49,123--would free up about $425 per month that could be added to the snowball.  Twelve months later, mission accomplished!   (In the spirit of full disclosure, after paying off house #3, I did take a few months off and put the snowball in the freezer.  The payoff effort was intense and I just needed a personal break.)  By April I was refreshed and ready to move on to house #2.  That one was a little larger at just under $55,000 by the end of the year.  We are now into month number 19 of 42.  Where do we stand?

Jan 1, 2013 (Beginning Bal)                           July, 2014                       Amount Paid Off

=======================================================================

House #1 - $70,908                                         House #1 - $65,160                     $  5,748
House #2 - $57,619                                         House #2 - $25,692                     $31,927
House #3 - $49,123                                         House #3 - $ 0                             $49,123
-----------------------------                                        -----------------------------               -----------------------------

Total:       $177,650                                                            $90,852                    $86,798 (-48.85%)

I'm astonished at these numbers!  A few notable highlights:

• Nearly 50% of the mortgage debt has been eliminated in a mere nineteen months
• We are now solidly under the $100k mark for total mortgage debt.
• We may be able to eliminate the mortgage on house #2 by year's end.

When we accomplish the third bullet point and eliminate #2's mortgage, that will add another $498.01 to the snowball.  The only problem is that there may be some reduction on the personal income side as our company may loose a lucrative contract and the effects will melt the snowball a bit.  If that happens, I will accept that and adjust accordingly.  We've had a pretty good income this past year and a half and I'm thankful we didn't squander it.  After all, regardless of what happens to our snowball going forward, we are certainly better off having one or two less mortgages.  That's what it's all about:  Remove the risks associated with debt and enjoy the sweet feeling of increased personal financial safety and security.  Let the snowball continue! 

How's your debt payoff or investing snowball coming along?

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!      

Rev Up the Payoff Engine...again

It's been a nice little hiatus.  Last year was pretty intense having paid off one of three remaining rental house mortgages.  It wasn't easy, but then few worthwhile goals ever are.  Worthwhile goals require sustained focus and determination in order to achieve them.  However, once achieved, the level of satisfaction is hard to beat.  Such was the case last December when I achieved my stated goal and paid off house #1 of 3.  Let's do it again!!!

My next house (House #2) had a balance of  $57,619.00 when I started this blog in January, 2013.  By December, 2013 the balance was down to $54,459.00.  I'm excited to report that I just made a $9,000.00 principle payment yesterday thus reducing the current balance on House #2 to $43,979.00.  When house #2 is paid off by this time next year, an additional $498.01 will be added to my monthly income.  The interest rate is 4.5% on that 15 year mortgage, so any additional payments toward principle equate to a guaranteed 4.5% risk-free return.  Not great, but not bad either.  I, however, am looking at it another way.  $498.01 x 12 (months) = $5,976.12 in annual income.  To see my return in terms of percentage of "cash on cash" return I'll divide the $5,976.12 by $54,459.00 to achieve an 11% annual return.   Granted, that's a very rough calculation, but it helps me to visualize the reward side of the equation.

The income is only half of the equation.  The elimination of the mortgage debt is just as satisfying.  After house #2 is paid off, then all focus will shift to the third and final mortgage on House #3 which currently stands at $65,816.00.  The goal is to see all of this accomplished by July, 2016 or 3.5 years from when I started this Mortgage Payoff Marathon.

Paying off debt while increasing passive income is what it's all about.  By July, 2016 I could theoretically retire early (or be considered "Financially Independent").  My rental income would be in the neighborhood of $2,300.00 per month.  With a paid off house and zero debt that would be doable to be sure.  Likely, I'll begin to put any additional income into Dividend Growth Income equities.  That is where my heart lies.  But I started in real estate investing back in 2004 and will see it through.  While real estate makes for excellent diversification and inflation protection, I'm really looking forward to building a DG portfolio!  I don't want to do both at the same time.  I want to eliminate ALL remaining debt while increasing my passive income; (arguably "passive" as I use a rental management company to care for all the day to day headaches of being a landlord).

So, I'm back, rested and ready to continue with this aggressive goal:  Eliminate $177,650.00 of mortgage debt in only 42 months!  Far less time than it takes most people to pay off a new car loan.  We're now 17 months along with just over two years remaining to achieve our worthwhile goal.  At this time we are exactly where we're supposed to be.

We'll try to keep a balance while achieving this goal.  For example, we intend to travel to England and Ireland later this year and Costa Rica the next.   Fun times with good friends will keep us from burning out along the way.  Let the Marathon continue!

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.