Update to My FIRE Journey

Lately, I have been pondering a lot about what FIRE (financial independence; retire early) really means to me. Not just, “hey I do not need to work anymore.” – My views have changed a bit since I originally announced my journey.

I am not financially independent…. yet! However, the subject seems to cross my mind more and more as the days go by.

I feel like I am in a tunnel and way far off in the distance I finally see the fainted bit of light. Why? Well, my plan is solidifying and a more definitive timeline is starting to form.

Why do I want FIRE?

I notice that going to work every day is not exciting. In fact, its feels like a chore. Really, its the exact opposite from exiting. I hate working for the man and meaningless work. Anyone enjoy filling out expense reports? Mandatory quarterly compliance training? NO THANKS!

Oh, and I absolutely loath wearing a tie everyday. I now refer to my tie as my ‘corporate noose’  and it feels like I am suffocated a bit more each day. 

Sure, work pays my bills and allows me to save, and invest in real estate or dividend stocks. However, my work does not provide a source of fulfillment.

Now, I am not looking for work to provide satisfaction and meaning to my life, but its really draining when I do not give a damn about the work I am doing. Funny though, somehow I am on pace to be the top producer at my company this year.

Honestly, I am fed up with being forced to sit in pointless meetings where nothing is accomplished. Being confined to a cubical and having to sit all day is starting to take a toll on my body. Hell, I even read that sitting is the new (worse than) smoking… There is nothing worse than being forced to be somewhere from 9-5, especially when those are not even my best hours for productivity.

And don’t even get me started on some of my co-workers….

So not the 9-5, then what?

Spending 8+ hours a day on anything seems crazy. I rather divided those 8 hour days into 4 separate blocks of time.

I would love to spend 2 hours on my health and fitness (not just working out).

Another 2 hours would go towards volunteering and improving society or the local community.

I would also commit two hours to self-improvement (reading, learning, developing skills etc.).

Lastly, I would spend two hours devoted to developing and maintaining meaningful relationships with family and friends.

Early retirement does not mean sitting on the beach doing nothing all day. Though, there is nothing wrong with that. The beauty of FIRE? You can do what you want when you want.

Blinded by the Light?

As I mentioned earlier, I am started to see the light at the end of the tunnel. Cue Manfred Mann’s Earth Band’s – Blinded by the light. The light that is approaching quickly approaching has me distracted and dreaming about the other side.

A life with an abundance of free time comes to mind. Financial independence would provide such a thing. No need for an alarm clock if I retire early…unless I wanted to wake up early to go fishing or run before the heat. A life where I have time to regularly make it to the grocery store and cook (one of my favorite past times).

Plenty of time to travel and explore. I was tempted to turn in my two week notice earlier this month so that I could start hiking the Appalachian Trail. Unfortunately, this was not feasible. One day soon…

Less overall stress and better health sounds wonderful. No more worrying about deadlines or meeting performance goals. More time to workout and take care of myself.

This also means more free time to spend with friends and loved ones. Not just more time but better quality time. Sometimes, I feel that work bogs me down and I am not ‘fully there’ when I am with my family or friends – this is because work has me stressed or distracted.

How are you going to retire early?

Once my newest property leases up in the next month or two, it will increase my passive income to a level that is much closer to my FIRE number. However, this will not be enough to hit financial independence.

Ideally, I would like to buy one more rental property that provides strong monthly cash flow. After that, I would like to pay off my my first property (starter home).

This could be accomplished with three years (or less) of aggressively paying down my mortgage. I plan to use this property as my FIRE ‘home base’. I am fairly tired of house hacking and living with roommates.

No complaints though – house hacking has done wonders during my journey to financial independence and sped up my time to FIRE.

Not having a mortgage will help keep my cost of living down and at a level that I am use to spending.

Lastly, I would like to increase my cash reserves and non-retirement investment account income. This will provide a great buffer when I retire early. As such, I will not have to withdraw from my stock portfolio and can let the balance grow over time. Thanks compound interest!

the temptation

Well…. what is life without temptation? I am tempted to resign (retire early?) from my job next year after I collect my bonus check. Sure, this would be before paying off my home and I may or may not have achieved financial independence by then.

What I do know – the cash flow from my rental properties would (likely) be enough to support my life style and allow me to travel for 6-12 months without touching my savings/investments. Heck, my net worth might even go up during this hypothetical sabbatical depending on the stock market.

I also know that I would have adequate cash reserves during this FIRE test run to cover any potential major repairs. Absolute worst case, I could sell a few stocks in my taxable account if a doomsday scenario happened.

Would you be tempted to retire early or take a sabbatical at 27 (28 next year) knowing that you have a strong safety net to fall back on? Worst case, I can decompress for 6 months to a year. After all, I am truly burnt out after years of 80+ hour work weeks. After that, I could find another job and work for a few more years until I truly hit financial independence. Perhaps, I already acheived earned financial independence but need more of a buffer for peace of mind?

 

Announcing a New Guest Post Series

I love real estate and guess what? I am very excited to announce our new guest series “Making it Happen: Jr. Real Estate Investors” that will start next month. The series will share the stories of junior real estate investors who own 1 to 5 properties and we have some great AMAZING guests lined up.

The Mission

Our goal is to show the benefits of being a landlord. We hope our guests’ stories will inspire you and that you will see how real estate can positively impact your life. Real estate provides great passive income and is one of the best vehicles to achieving financial independence.

You will learn how our guests got their start in real estate. These investors will share their story and how real estate is positively impacting their lives.

These are real people with real stories. We hope that you will be able to relate to someone who just bought their first property and hope that you see yourself doing something similar.

Also, our guest will share some of the headaches that they may have encountered as a landlord. As you know, we will always aim for transparency. Real estate is not all sunshine and rainbows…. BUT its pretty damn awesome most of the time.

We hope you will follow our series over the next few weeks. Lastly, please feel free to contact me if you are interested in participating. We have a spot or two still open.

The Fixer-Upper

The tale of the rundown row home that turned into a gold mine.

Flash back to the spring of 2015. I was still working at MegaCorp and house hacking in my starter home. At this point in my life I was saving every penny I could find. This meant biking to work (which was awesome) and making all of my meals at home.

One afternoon, I was sitting on the couch updating my budget and net worth, which is is something I always do at the end of the month. My net worth was nothing impressive at the time and definitely less than $100k.

Curiosity got the better of me and I was wondering what it would take to become a millionaire by age 30. Running some random scenarios, I realized that I would need a miracle to join the two comma club by thirty.

First, I ran a scenario of what if I saved and invested $20k/year? Not even close.

Ok… What about $40/k a year? Still short….

How about $50k/ a year? Nope.

$70k/ year? Fuck! Still short

This caused me to to jump into action. I wanted to find a way to increase the gap between my income and my expenses. My spending was minimal and could not go much lower since I was playing strong defense. So, I decided to focus on growing my income.

By increasing the gap, individuals are able to save/invest more. As such, this creates a snowball effect and the funds being saved/invested start to grow exponentially.

[Side note: Now, just to be clear, I currently do not believe I will need $1 million dollars to retire. Back then I was less educated about Financial Independence; Retire Early (FIRE). I also thought I wanted to live a ‘baller’ lifestyle.]

The Plan

Having tons of free time, limited cash and being comfortable with leverage (debt) led me down one path… You guessed it, MORE REAL ESTATE. Oh, and a side hustle as a property manager learning from someone with almost two decades of management and investing experience. But let’s focus on the real estate part today.

I wanted to find a multiunit (2-4 unit) or single family home that was worthy of its own HGTV show. This type of property would provide me:

  • Better value for my money
  • Increase my purchasing power
  • Allow me to build equity through my renovations (sweat equity)
  • House hack and have positive cash flow while living at the property.

Often, these properties allow for the owner to live in one unit for free while the rents from other units cover the mortgage. The owner can even make a profit while living in the building.  This is one of the best forms of house hacking.

This lead me to look at 2-4 unit apartment buildings which have many benefits. One of the biggest advantages is that you can buy a building with 4 units or less with a 30 year mortgage and only a 3.50% downpayment (FHA loan).

My first property taught me many lessons. These growing pains laid the foundation to make my future investments better. For example, renting to your friends and charging below market rents is a nice thing to do but its not a savvy business decision. I wanted my next property to provide STRONG cash flow regardless if I lived in the property or not.

The Search

Unfortunately, developers in Washington, D.C. also love 2-4 unit buildings. Why? Well, the condo market is hot and developers convert these apartment buildings into condos to make BIG BUCKS.

As you might expect, I lost out on a few multi unit buildings. I had a higher offer one property but lost to lower all cash offer. Many properties sold for  more than $50k above the list price.

My 3.50% down, FHA financing offer was not attractive to many sellers; especially when there were all cash offers with no contingencies.

As a result, this lead me to expand my search to single family homes. This type of property can also provide options for house hacking and great investment returns.

The Rundown Row Home

Throughout my search, I also kept an eye on single family homes. There was an old rundown row home (in DC we call a townhouse a ‘row home’) in an up and coming neighborhood that was way extremely overpriced.

The property had been listed for sale for several months. The seller also reduced the price three times and still could not sell the house.

Light bulbs and alarms were going off! I called my realtor to check out the house.

We went by the house the next day. And… well… the house did not show well. Four generations of a family were living in the house, there was junk EVERYWHERE and the property was not well maintained. Mold was clearly visible in the basement. There was no central air. The list goes on and on but I am not going to bore you with all the details… You get the idea…

Most people were scared away by such things.  Which was… AWESOME! At least, for me it was awesome. The house was down right disgusting and I understood why no one wanted to buy it.

This was my diamond in the rough. Where others saw disgust, I saw beauty and opportunity. Also, I saw a seller with limited options and decided to make a lowball offer. The offer was accepted.

The Rehab Loan

The house was barely ‘livable’ and I planned to completely gut the entire place. Remember, I did not have a lot of cash so I needed to get creative.

Thankfully, I had a good mortgage broker (very important member to have on your real estate team). We used an FHA 203K loan which allowed me to use loan dollars (debt) to buy AND fix up the house. The best part? I only had to put 3.50% down.

This type of loan required a licensed general contractor (GC) and a budget for the renovations. The approved loan budget was $66,615.00 and there was a $9,992.00 contingency reserve fund for cost overruns. In total, the loan would provide up to $76,607.00 towards renovating the property.

The actual project would cost north of $100,000.00 which means I had needed to get creative and find a way to fund the difference. As a result, I opened three credit cards that provided zero interest for the first 12-18 months.

The renovation would take 3-4 months and I knew the house would provide strong cash flow once my future roommates moved in. The balance of the three credit cards peaked at around $25,000 in total. This debt was daunting to look at every month it essentially was an interest free loan; a loan that I paid back in  8 months without having to pay a single penny of interest.

Scope of Work

So… What kind of work did was needed? And you are probably wondering about the numbers (hang tight). Everything was from the 1970s (if not older). The house was originally 4 bedrooms and 1.5 bathrooms and I converted the place to 5 bedrooms and 2.5 bathrooms.

A few of the renovations include:

  • All new electric (wiring, switches, lighting, outlets etc.) and a heavy up
  • All new plumbing
  • Installing an HVAC system
  • Brand new kitchen, cabinets, countertops, and appliances
  • New floors for all three levels
  • 2.5 brand new bathrooms
  • Removing all interior walls on the main floor to create an open floor plan
  • All new windows
  • Treating the basement for mold
  • Creating an awesome fenced in back yard patio

The Hustle To Get It Done

I interviewed a half dozen general contractors. Most of the GCs gave me extremely highball offers and thought I was just ‘some dumb kid’ they could take advantage of.

Little did they know, I spent several years working/volunteering with Habitat for Humanity (amazing organization). I knew their pricing was unreasonable and at one point even told a guy to go fuck himself.

Some say, all is fair in love and war. I say, “all is fair in love and business is a war.”

Anyway, I about had it with GCs but my loan required that I have one. Thankfully, I found one guy who would GC the project, let me sub out the work to my guys and do some of the work myself. The kicker was he got to collect a fee for doing almost nothing and had to sign off on the work.

Managing the rehab felt like bit of a full-time job in its self. Many mornings I was waking up at 5:00am, grabbing my cup of coffee and hitting the road so I could make it to Home Depot when they opened. I was constantly selecting or picking up materials for the house. Frequent phone calls and in-person meetings with contractors were necessary to manage the workflow.

The Numbers

So, the part y’all been waiting for.

Drum roll please…… Here are the numbers for Property #2.

My lowball of $400,000 was enough for me to get the property under contract. Additionally, this was almost $100,000 less than the list price at the time and about $200,000 less than the original price.

Purchase Price: $400,000.00

Total Loan: $469,500.00

Down payment: $17,028.49

Additional equity for rehab & carrying costs: ~$32,700.00

Total Equity Contributed: ~$49,750.00 (let’s call it $50,000.00 for analysis sake)

Monthly Rent: $4,000 (plus I live here for free. The place would easily rent for $4,500-$4,700 if I moved out).

My total investment costs of  $50,000.00. The house easily rents for $4,500/month and my carrying costs are $2,408.57/month (my mortgage payment after I refinanced the construction loan). This means I will have $2,091.43/month ($25,097.16 annually; $19,097.16 while I live in the house) in cash flow after paying for principal, interest, taxes and insurance (PITI).

A basic return on investment (ROI) calculation:

$25,097 / $50,000 = 50.19% Return on Investment

This means I will recoup my cash invested in 1.99 years ($50,000 / $25,097)

This analysis is a bit simplistic. I self manage and do not have to pay a property manager (maybe one day once I hit FIRE). There were will be minor repairs and expenses overtime. Over the next 30 years I will have larger expenses as well. All repairs and maintenance items will be supported by the property’s cash flow. Thankfully, everything in the house is BRAND NEW…. Literally.

Summary

Buying a fixer-upper can be a lot of work, but it can also be very rewarding. My second property provided much stronger cash flow than my first home. I also found a way to eliminate my housing costs while getting PAID to live here. The property appraised for significantly more than what it cost to buy and fix up. A few months of hard work for a life time of cash flow seems well worth it.

What is your experience with renovating properties?  Do you have a success story of your own? Or, perhaps you want to start rehabbing homes? Please comment.

Q1-2017 Dividends – The Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. I provide quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The Goal

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

Q1-2017 Dividends

My Q1-2017 dividend income was $334.60, which left me scratching my head. Last quarter (Q4-2016), my dividend income was $1507.92; I fully expected this quarter to be lower since many of my funds have larger distributions in December. I even anticipated this in Q4-2016 Dividends – The Dividend Report. BUT, this was just crazy.

My Q1-2016 Dividend income was $344.93 which means year over year my quarterly dividend income DROPED $10.33. This still made no sense as I had five figures more invested in the market compared to last year. So I had to do some digging to find the answer.

I switched jobs late last year. The funds in my new company’s 401k plan are a bit different when it comes to dividend distributions. I still receive 4 distributions a year. However, the distributions are in April, July, October and December.

Ahhhh! So there is the answer to my problem. My new 401k plan will not provide any dividend income in Q1, however, I will have two rounds of dividends in Q4. This is odd but explains a lot.

To summarize – my last year’s first quarter dividend income was $344.93. This equates to a $10.33 or 2.99% decrease from the same quarter last year.

I would have increased my dividend income over 50% year over year if my 401k funds paid a dividend this quarter. I fully expect Q2-2017 to bounce back and be well above the Q2-2016.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

dividend

The table below outlines my quarterly dividend income dating back to Q1-2013:

dividend

New Purchases

No individual stock purchases in Q1-2017.

Landlord Report – March 2017

Hello there – welcome to the first Landlord Report. This monthly report will share my experiences as a landlord. The report will show EVERYTHING related to my rental properties….

I will discuss the rents that I collected, mortgage payments, and other ‘landlord items’. Other topics may include repairs, finding new tenants and any other items that might randomly pop up. The report will also share how much money I made and the amount of time (hours) it took. I want to show the world being a landlord is a wonderful thing.

I also manage ~50 properties for other people, but this report will not share information on my clients or their properties.

Throughout this process I aim to be as transparent as possible. Being a landlord is a wonderful way to earn (mostly) passive income. Please feel free to contact me with any questions – happy to provide insight.

Landlord Report – March 2017

landlord

This past month was much busier than a normal month. Never the less, the work load was very manageable. I closed on my new rental property and managed multiple contractors in preparation of renters (hint: this is the big reason why it was a busy month).

Let’s dive into this month on a property by property basis.

My property portfolio (2 now 3 – and not sure that counts as a portfolio… but hey! its growing) had a great month.

Rental Property #1

The Starter Home

The table below outlines all the revenues and expenses for property #1. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $2,275.00
Sublease fee $350.00
1st Mortgage $1,800.00*
2nd Mortgage $350.00*
Total: $2,625.00 $2,150.00
Profit $475.00

The tenants paid their rent of $2,275 (increasing $25/month next month) in full and on time. I stopped by on my way home from work to collect to the rent which took about 20 minutes of my time.

I typically collect the rent in person and will chit chat with the tenant(s) for a moment if they are home. This also provides a great time to see if there is anything wrong with the house or make minor repairs.

[pro tip: You will likely notice something is broken before a tenant will. Take a gutter for example. A tenant will likely only notify you once something is a problem for them. Being a present and proactive landlord can save time and money down the road]

Management Items

The young lady who lived in the basement room subleased her room for the next three months. She was required to pay a $350.00 sublease/assignment fee and this process took less than a half hour.

What was involved? The new tenant applied via my online application. I spent five minutes inputting his information into my vendor’s credit/background check website.

The guy had strong credit and a respectable rental history (verified by his previous landlord). I cannot stress this enough… Always ALWAYS require previous landlord references. Ask several questions and make sure its not their uncle or friend.

After that, I considered him ‘acceptable’ by my tenant rental standards (future blog post). Both of the other tenants also approved of their new roommate (requirement of the lease).

Next, I prepared a brief sublease agreement for electronic signature via Docusign. This process took about 10 minutes of my time. The new tenant sent me his first month’s rent and security deposit ($825 + $825 = $1,650) via paypal and moved in the next day. Moving forward, rent will be paid by check, cashiers check or money order.

Repair Items

One of the guys who lived at the house sent me a note about the front door on a Saturday night. The deadbolt had “become a pain in the ass. Like u gotta put your whole back into it to unlock”

Before you panic and think being a landlord is a nightmare (its not)… This is a VERY easy fix. I stopped by the house the next morning to look at the deadbolt. A little WD-40 and 5 minutes of my time, and the lock was working like brand new.

While I was at the house, I noticed the door knob/lock for the front door was sticking a bit as well. I figured I am already at the property and might as well save a future trip. Being proactive, I spent another 5 minutes taking the knob off, applying WD-40 and putting the knob back on the door.

This repair trip was the best possible outcome. All in all, the solution required 10 minutes of my time, a little WD-40 and no money (already had the can of WD-40. This is an essential for landlords/property managers).

The worst case doomsday scenario for this repair would have been a trip to Home Depot. And guess what? It would not be THAT bad. All I would need is a new lockset which costs less than $30.00

Rental Property #1 Summary

In summary,  property #1 – total income $475.00 and one hour of time. As a result, I earned $475.00/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

*My total monthly mortgage payment is ~$2,013.00 (dropping by $100/month in May now that my escrow account is properly funded… long story & will share more another time) and I am paying down additional principal every month. This is the only property I pay more than the minimum. Sometime over the next year or two, I will start aggressively paying this home off as I plan to live here when I start FIRE.

Rental Property #2

The Fixer-upper

The table below outlines all the revenues and expenses for rental property #2. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $4,000.00
Mortgage $2,408.57
Total: $4,000.00 $2,408.57
Profit $1,591.43**

The tenants/roommates paid their rent of $4,000 in full and on time. Since the tenants of rental property #2 live with me, collecting rent is easy. Everyone leaves their rent on one of the counters and I mobile deposit their checks. No trip to the bank required. The money literally comes to me…. Cannot beat that.

Management Items

One of my roommates’ leases expired at the end of February. As such, we were graced with a new roommate who moved in during the first week of March. This also means I did not have any vacancies at the property.

Finding a replacement was relatively easy. We put an ad up on Craigslist and circulated the information to our various social networks. We were fortunate to be ‘one and done’ since the first guy that showed up was awesome.

Like rental property #1, the new roommate/tenant had to go through my on-line application. He checked all the boxes as expected; most people with a government security clearance are pretty boring on paper.

Repair Items

Guess what? No, the answer is not chicken butt…. BUT! I had no repair items this month. This is ACTUALLY very common for a landlord. Real Estate is truly a great form of passive income and I will keep shouting this from the mountains.

Rental Property #2 Summary

In summary,  rental property #2 – total income $1,591.43** and one hour of time. As a result, I earned $1,591.43/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

**I also live in the house and get paid to live here. Pretty sweet right? House Hacking is awesome.

 

Rental Property #3

Rental property #3 is under construction. I will have an update later this week about the renovation process.

landlord

 

Portfolio Summary

To sum up this entire report, I spent about 2 hours of my time on existing rental properties. Property #3 is being renovated and that did eat up some of my free time (not included in calculations). However, I am comfortable with the upfront time and costs since the property will provide a nice passive income in the future.

This month I pocketed $2,066.43 or $1,033.21/hour. My renters also paid down $1,318.78 of my debt. That brings my monthly gain to $3,385.21 (or $1,692.60/hour). Not bad for a few hours of time? What is your excuse for not being a landlord?

My First Property

Flash back to the spring of 2014. I just turned 24, was less than a year out of college, working a great ‘entry-level’ job, and about to close on my first home. This home was very much a ‘starter home’ and probably more house than I should have bought (more details to follow).

You Bought a House at 24?!?

Common question. “How the heck did you buy a house less than a year after graduating?”

Answer: 3 reasons. First, my parents allowed me to live rent free for a few months in the basement to save. Believe me. I did EVERYTHING I could to stock money away for a rainy day (please save your breath – I do not want to hear your bull shit complaints of how I had it easy).

Second, I had some serious side hustles. Most notably, I woke up every morning at 3:45AM…. Yes, I know I am crazy…. to drive this awesome high school guy to swim practice. He was not old enough to drive and his mother paid me ($200/week) to take him to and from practice.  I lived off this income and saved my ‘9-5 paycheck’. As a side note, I used this time to work out or fire off work emails. Its amazing how productive you can be when no one is awake to distract you.

Third, and lastly, I had a respectable starting salary coupled with a low downpayment. How low? I used an FHA 3.5% down loan (we will get more into numbers later).

But…What were you thinking?!

l did not fully understand what I was doing but knew real estate belonged in my life. Oh, and who does know what they are doing on the first attempt? I viewed this as a trial run. Also, this property taught me a lot of what ‘to do’ and ‘not to do’. My investment thesis was based on the following:

  • I do not want to waste money paying rent to someone.
  • This provides a way to keep my cost of living affordable.
  • I want to build equity.
  • Real Estate is the best way to generate wealth creation PERIOD.

Diving a bit more into each of these points. Just like saving for FIRE (or retirement), I rather pay myself (first) than pay some landlord. You will never see your rent money again. A portion of your mortgage payment goes towards paying down the loan and the interest payments provide a bit of a tax benefit.

My monthly payment was fairly hefty (keep reading for the numbers) but I planned to house hack (see an example here) by renting out the extra rooms. The house had 3 bedrooms and 2 bathrooms and I planned to rent the extra two rooms to friends at below market rents (hint: this was one of the lessons I learned). Their rents would not cover my entire mortgage, however, I was ok with this. Why? The average 1 bedroom apartment in the DC area is well over $1,500. My logic was – Hey! I can own a home for a few hounded bucks a month? SIGN ME UP!!!

Owning a house is like having a piggy bank. Every month you stash a bit more equity into the property by paying down your mortgage.  Think of this as putting loose change into the piggy bank. Also, if you are lucky, the property value stays the same… Or even better increases. This further increases the equity built up in the property. Double win.

As we all have (hopefully) learned, real estate prices do not always go up. Property values may actually GO DOWN! People get into trouble when they rob their piggy bank. This would be known as taking equity out of their house or using their house like a credit card. DO NOT DO THIS. Thankfully, I picked an area that was a bit undervalued and has some long term potential. According to Redfin, my property value has increased about 10.0% since I bought the home.

Lastly, wealth creation. I started my career underwriting commercial real estate loans (yawn!). This experience allowed me to see first hand how wealth was created and how some of the best names in real estate structured themselves. I was junior and did not understand everything. BUT! I knew these guys were doing something right and they had something that I wanted.

The Numbers

Finally, the part you have all been waiting for. I bought the house for $358,800.00 using an FHA loan with a 3.5% down payment ($12,558.00 downpayment for those of you are either bad with math or lazy).

Thankfully, my interest rate was only 3.75% (hope I see that again). My original monthly payment or PITI (principal, interest, tax & insurance) was $2,307.16. I refinanced out of this loan as quickly as possible; more on this later

This mortgage payment number may seem pretty high….. well, because it was. Part of that was because of the $386.26/month for PMI (Private Mortgage Insurance), which is one of the down sides of FHA. Additionally, I only put down 3.5% which means I had a large loan…. $346,242.00 to be exact.

The Refinance

My goal was to lower my monthly payment by getting rid of PMI. Guess what? I did and it significantly lowered my monthly mortgage payment (figure below… keep reading).

I refinanced my house after about six months. But….How did I do this after only six months?!?

Typically you need to have 20% equity or an 80% loan to value (LTV) to avoid PMI. However, my mortgage broker was very creative AND good at his job. I also benefited a bit from rising property values.

Start with the property values first – a few houses on my street sold after I bought my home. Each house sold for more than the previous (aka more demand for my neighborhood). As a side note, all the houses are cookie-cutter and nearly identical. What do these sales mean for me? This meant the appraiser had better sales comps to justify my property being worth more. It also meant someone would likely pay me more for my house if I wanted to sell it ( I don’t).

Now for the loan part. Over six months, I paid my loan down a bit and benefitted from a rising property value. However, I was still not at 80% LTV and I was stuck with PMI payments. BUT….. My mortgage broker recommends a 80/10/10 loan. This means that I have one loan at 80% LTV with no PMI (this is a conventional loan), a second loan at 10% LTV and 10% equity in the property. WINNING!

Let’s look at how this new loan structure lowered my monthly payment. I now had two loans which were $1,682.28/month and $203.17/month, respectively. My total PITI was now $1,885.45. Conclusion, I lowered my mortgage payment by $421.71!!!! This lower payment also meant I could rent the entire house and earn a profit every month (more on that later).

Current Use

I moved out of my ‘starter home’ in late 2015. I came to the realization that I wanted to own more real estate… But more importantly, I wanted to own real estate that was CASH FLOW POSITIVE. I bought an old row home in DC and began renovating the building (I will talk on this more in another article).

I rented out my room while keeping my two other tenants. The entire house rented for $2,350.00 and my monthly PITI was $1,885.45. This meant I had $464.55/month ($5,574.60/year) in cash flow after paying my bills. Not bad for a property I never intended to have positive cash flow. This was a great trial run and gave me a ton of insight.

The house has been rented almost 100% of the time since I moved out. The rents have fluctuated a bit but nothing noteworthy.

Future Plan

I will continue renting this home for the foreseeable future. The returns are not amazing but I still have tenants paying down my mortgage.

I love this location, how walkable the neighborhood is, and the close proximity to biking/running trails. I might make this my FIRE home and moving back in once I ‘retire’. This house could serve as a great home base in between trips. Before moving back in, I want the house to be debt free. This will mean aggressively paying off my mortgage for a few years.  I will not do this for other properties since I plan to retire with over $1 million of Debt.

Blog Update: Future Direction

Hi y’all – I started this blog last June without much direction. I wanted to document and share my journey to achieving FIRE (Financial Independence; Retire Early)…. and so far I have…

Along the way, I have made a lot of friends blogging and had a few decent posts like The $30,000 Car That Cost My Friend over $240,000 and Passive Income: The Holy Grail of Financial Independence and Retiring Early. However, my blog has lacked a bit of a niche or direction.

I am not one to seriously budget, though I loosely follow one. Some consider me frugal but I am not one to be overly frugal. I keep my spending in check but splurge occasionally on travel.

Guy on FIRE’s New Direction

After much debate, and several conversations, my blog has finally found a bit of a niche. I will still post about my path to financial independence…. BUT! Future posts will focus more on real estate investing (and passive income), like my newest investment property. I firmly believe that real estate is (one of) the best way to obtain financial freedom and a great form of (mostly) passive income.

Moving forward, I will share monthly updates on ALL of my properties. I will let you, my readers, know ALL the details.

I will share information like collecting rents, mortgage payments, dealing with tenants, the random repairs and any other items that may pop up…. Believe me, I have seen some pretty crazy stuff as a landlord/property manager. I have also successfully house hacked my living situation so that I get PAID to live somewhere… Why pay for something if you don’t have to?

I am not going to sugar coat anything, but owning cash flowing real estate is pretty sweet (don’t judge my corny puns). You will get a full look into the good, the bad and the ugly of being a landlord (slumlord?). I hope my future posts will encourage readers to think about real estate and how it may help them achieve their financial goals.

Other Posts

I will still post about dividends since I believe they are a great…. no, AMAZING source of PASSIVE income. Such post will still be documented at The Dividend Report.

I still plan to have a few random posts related to FIRE, personal finance, and future travel plans. However, moving forward, expect a lot more about real estate investing and other forms of passive income.

Yours truly,

Guy

New Investment Property…. FINALLY!

I FINALLY HAVE A NEW INVESTMENT PROPERTY UNDER CONTRACT!!!! If you have been reading my blog for a while, you know that I LOVE REAL ESTATE…. AND… That I’ve been looking for MONTHS. Yes, MONTHS. I have lost several bidding wars…. BUT! Finally, I have won. We will be closing on the property in less than a week. More importantly, this property will bring me one step closer to FIRE. Wahooooo!

Selecting a Property

Many real estate investors preach about the 1.0% rule when looking for a rental property. The 1.0% rule provides a simple way to screen properties. For example, if a property is listed at $100,000 you would want the monthly rent to be at least 1.0% of the purchase price, or $1,000. The midwest region of the United States is great for the 1.0% rule. Heck! There are even 2.0% properties out there.

Read more about the 1.0% rule here:

Paula Pant @affordanything: Why the One Percent Rule Matters

or

Coach Carson @CoachCarson: The 50% rule

However, for us investors that live on the coast, we generally do not have that luxury. I have adopted a different approach to screening properties for areas with high property values. Over the years I have developed a simple “back of the envelope” method to screening deals.

First, I never want a ‘thin’ deal with small returns or little room for error. There will always be unknowns and unforeseen costs/events with real estate I aim for a 20.0% return on investment (ROI). This means I am getting all my money back in 5 years or less. Also, compounding at 20.0% means I am growing my net worth much faster than the average investor can expect from simply owning stocks.

My ROI calculation is fairly simple:

ROI: Annual Cash Flow / Total Capital Invested

Annual Cash Flow: (Monthly Rental Rate – PITI) * 12

Total Capital Invested: Down Payment + any renovation or improvement cost prior to renting

PITI: Principal, Interest, Tax and Insurance (aka your monthly mortgage payment)

This may seem a bit confusing, but I will provide an example later in this post. The example will use REAL NUMBERS from my new property.

About the Property

The property is a duplex with one unit upstairs and the other down stairs. Both units have two bedrooms and one bathroom. The brick building was built in 1939, has been well maintained and was modestly renovated about 10 years ago. The neighborhood is experiencing gentrification but still has a long way to go. The area is safe but not a premier location. Renting the property will not be an issue. The units show well and are at an attractive price point.

Home Inspection

We conducted the home inspection a few weekends ago. The inspection took damn near three hours. Two units means twice the systems, twice the time and twice the headaches. I anticipated $10,000.00 of work/improvements might be needed prior to the inspection. Generally, I am conservative with my assumptions. And guess what… I was! The property does require some TLC… BUT with me doing some of the work and farming other tasks out to my crew, I will only need to spend $6,000-$7,000 (still a conservative estimate) and a few hours of my time. Big Win!

Also, my first mortgage payment won’t be until May 1st. This means I have over 50 days to fix the property up and find tenants. I might even have a full month of rents before ever my first mortgage payment. Can you say winning? I have already lined up most of my contractors to start work the day after closing. Time is money and I am racing against the clock to get the property turned around. I do not want to come out of pocket to pay the bills. That’s what tenants are for.

Repairs

So… What needs to be done? There is nothing overly scary on the list and there will be several $5-10 trips to Home Depot (why do I not own their stock yet?).

Unit 1:

  • Adjust plumbing underneath bathroom sink (poorly installed)
  • Furnace tune-up and install triple wall
  • Replace water shutoff for kitchen sink (old)
  • Replace water shutoff for bathroom sink (old)
  • Electrical tune-up in the fuse box
  • Installing new plugs for the stove & refrigerator
  • Adjusting front left stove stop burner so the flame is not a mile high
  • Apply weather strip to front door
  • Change the locks (who knows who has keys to the current locks)
  • Water heater (Still functions but past its useful life. not necessary but will delay headaches for 7-10 years)
  • Replace outlets that were painted over
  • Replace kitchen GFI
  • Smoke/carbon monoxide detectors
  • Fire extinguisher

Unit 2:

  • Refrigerator (this unit does not have a refrigerator)
  • Furnace tune-up and triple wall
  • Replace the toilet’s wax ring and tighten bolts
  • Tighten shower knobs to stop leak
  • Electrical tune-up in the fuse box
  • Installing new plugs for the stove & refrigerator
  • Filing down two doors to shut properly
  • broiler plan for the oven
  • Apply weather strip to front door
  • Change the locks (who knows who has keys to the current locks)
  • Water heater (Still functions but past its useful life. not necessary but will delay headaches for 7-10 years)
  • Replace outlets that were painted over
  • Replace bathroom GFI
  • Smoke/carbon monoxide detectors
  • Fire extinguisher
  • Replace internal window frame that has water damage

Building:

  • The building has flat roof and roof needs a fresh coat. This project will require two 5-gallon containers and a few hours of my time on a nice spring day. I will never be the gentleman Andy Dufrense (From The Shawshank Redemption) but I am capable of tarring a roof and drinking a cold beer or two. Doing this work myself will save $2,000-$3,000.
  • Paint wall caps and roof hatch to prevent rust
  • Secure roof hatch to prevent unwanted entry (doubtful occurrence but better safe than liable)
  • Reinforcing the back stairs case
  • Pointing/ touch up to the brick exterior
  • Repair a section of the walk way leading up to the house
  • Touching up the trim
  • Install new window trim
  • Install extended downspout to keep water from foundation walls
  • Replace gutters and down spouts
  • Removed old shed
  • Add fence to prevent people from cutting through front/back yard

What Do the Numbers Say?

Purchase price: $359,000

Down Payment: $71,800

Renovation Costs: $7,000

Total Capital Invested: $78,800

Monthly Rent/Unit: $1,600

My total investment costs will be $78,800.00. Each unit will rent for $1,600/month ($3,200 in total) and my carrying costs will be $1,650/month. This means I will have $1,550/month ($18,600 annually) in cash flow after paying for principal, interest, taxes and insurance (PITI).

A basic return on investment (ROI) calculation:

$18,600 / $78,800 = 23.60% Return on Investment

This means I will recoup my cash invested in 4.24 years ($78,800 / $18,600)

This analysis is overly simplistic. I self manage and do not have to pay a property manager (maybe one day once I hit FIRE). There were will be minor repairs and expenses overtime. Over the next 30 years I will have larger expenses as well. All repairs and maintenance items will be supported by the property’s cash flow.

My calculation also does not account for potential vacancies. For many, this is an unreasonable assumption. However, I manage over 50 properties and we only had a half month vacancy on a single unit last year. This vacancy was by choice. We had several people willing to move in on time. However, the ideal tenant and the tenant we went with could not move in until the 15th of the month. We were willing to sacrifice half of a month’s rent to obtain the “perfect tenant”.  Also, we are very efficient and capable when it comes to finding and screening tenants.

Summary

The new duplex will provide me with great a passive income stream and meets my return requirements. The repairs are minor and will take a week or two at the most to complete. The property supports itself 50% occupancy which provides room for error (though I plan to manage the property much more efficiently). Real estate investors should never invest in a ‘thin deal’ with little room for error. There will also be unexpected expenses and unknowns along the way. I will recoup all of my expenses in less than five years and might enjoy appreciation as the neighborhood improves. What do you think of my approach and analysis?

The Frugal Weirdos Who Have No Fun

And live a life of deprivation.

I am sick of this stereotype about the Financial Independence; Retire Early (FIRE) community. Recently, a friend shared an article with me from AOL that called early retirement a fantasy. Boy….. Are they wrong!

Last month, Steve from ThinkSaveRetire retired at age 35. There are countless others who have done the same. Early retirement is not a fantasy but a goal anyone can accomplish with a bit of planning; a goal I will accomplish.

Early Retirement Ahead
The Argument

The awful AOL article says the path to early retirement is not sustainable. The author claims her husband and her were burnt out from extreme budgeting. Furthermore, she complains about having only one short and inexpensive vacation a year. She groans about the lack of material gift giving for Christmas, birthdays, anniversaries and other occasions. All of this is hog wash!

Additionally, the author argues that the early retirement crowd does not live in the present. Her article recommends finding a job or career that is enjoyable instead of extreme savings for 15 years (typically FI is achieved in 7-10 years). The author also thinks those who ‘retired early’ retired are frauds since many still work or have some form of income.

The Rebuttal

It’s decisions not deprivation…. stupid! Working towards early retirement or financial independence is not about extreme budgeting or depriving yourself of enjoyment. Rather, it’s about decisions and allocating resources to maximize your happiness and financial well-being. The Latin word for ‘decision’ literally means “to cut off”. Every time we make a decision we are saying ‘no’ to every other option by cutting off all other choices.

Ultimately, we all are responsible for our own decisions. I am debunking the frugal stereotype of the FIRE community with my upcoming travel plans. As a DC local, the inauguration is miserable time to be around the city. (*DISCLAIMER* Regardless of which party won. NOT a political statement. Read the city is flooded by tourist, prices are jacked up and roads shut down).

So… I am flying to Colorado. A long weekend filled with skiing sounds like the perfect getaway. Skiing is something that I enjoy LOVE and will do more of when I reach FI. My travel plans show that I am living in the PRESENT and enjoying life.  I made the DECISION to live in the PRESENT. This is at the risk of pushing back my early retirement a few months (years?). Saving money is still a big priority this year. I believe many of the FIRE community share the same view.

More Counter Arguments

While we are still talking about the present…  I am a forward thinker and will always look for ways to improve my future. I live in the present but I will never reach my goals without thinking about tomorrow. (Cue Fleetwood Mac’s Don’t Stop Thinking About Tomorrow).

The author came across very materialistic complaining about the lack of gifts. Perhaps she could try not being a materialistic person or try making her gifts like Gwen at Fiery Millennials.

The author of the AOL article also believes that life after retirement does not get any better. This statement blows my mind! Mr. Money Mustache and Go Curry Cracker seem WAY MORE happy than before they retired. Neither of them are dying to go back to a day job. Why would anyone want to waste 40+ hours a week to do something that is not necessary? Goodbye alarm clock and goodbye useless conference calls. Hello waking up when you want and traveling whenever you feel like it. Who would not want more time to spend with family or volunteering? FIRE provides freedom.

Lastly, according to AOL’s retirement calculator, I will need over $21 million to retire. This is just flat out laughable. Their calculator’s maximum savings rate is capped at 40% which is a shame. For a more accurate retirement calculator, visit the Mad Fientist’s Time to FI Calculator. What are your thoughts? Do you think early retirement (or financial independence) is a fairy tale? Maybe, FI is a a bedtime story we tell our kids. Or do you believe it’s a goal that can be achieved?

Q4-2016 Dividends – The Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. Moving forward, I will be providing quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

My Q4-2016 dividend income was $1395.26. Last quarter (Q3-2016), my dividend income was $521.31. This equates to a $873.95 or 167.64% increase from the previous quarter. The increase was solely due to 401k contributions that provided more dividends via index funds. Additionally, the funds in my 401k provide larger distributions at the end of the year. I anticipate a step back  in dividend income for Q1-2017.

Last year’s fourth quarter dividend income was $363.75. This equates to a $1,031.51 or 283.6% increase from the same quarter last year.

In 2015, my total dividend income was $1,164.03. I am proud to report that my 2016 dividend income was $2,715.01, which is $1,550.98 or 133.2% increase.

My average monthly dividend income is now $226.25 ($2,715.01 / 12 months = $226.25), which is 15.08% of my current goal of $1,500/month. I am now 3.50% closer to my goal; Previously I was at 11.58% of my goal.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

dividend

The table below outlines my quarterly dividend income dating back to Q1-2013:

dividend

New Purchases

No individual stock purchases in Q4-2016. During 2016, I purchased $DIS, $KHC, and $SBUX. Additionally, I added to my previously existing positions of $C and $WFC.