Our House by the Numbers

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Neither Mr. PFL or I want to sell our house to fund our paycheck-free life. Instead, we’d like to rent it out and/or get roommates when we leave. A brief summary from a previous post:

Our House: Mr. PFL and I moved to our current house in October 2011.We purchased it for $430,000. It is a 3,303 square foot single-family home with 3-beds, 2-baths and a detached 2-car garage. Our house is a brick Victorian built in 1898. The interior was gutted and redone after a fire about 8 or 9 years ago. The county auditor’s newest proposed value is $468,000. Our house is across the alley and two houses north of the Condo (we literally moved across the street).

Our House is close to downtown in a very desirable neighborhood, within walking distance to the main entertainment district, professional sporting events, concert venues, a major university, and several large corporate headquarters.

The cash flow estimates I foresee are as follows:

Rent: $3,750


Mortgage/Taxes/Insurance: - $2,391

HELOC from Condo: - $250

General maintenance: - $250

Vacancy: - $300

Property Management: - $300

TOTAL CASH FLOW: $259

While these numbers are very rough, they are realistic. Our house was not purchased with the intent of being a rental property but, instead, our forever home. The possibility that we could leave for a year or two without losing money, and without losing our house, is exciting.

We also have equity in this property. If we listed it, I believe we could sell for at least $500,000. Our real estate agent suggested a list price between $550,000 and $575,000. The mortgage balance is about $323,500. We also have a second mortgage HELOC on this property with an outstanding balance of $30,000 that is paid by the rental property LLC. We are still looking at a profit of at least $150,000 if we did decide to sell.

Money Management Partnership

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Jack Johnson, a hockey player for our local NHL team, made national news this week by declaring bankruptcy. Long story short, it seems he trusted his parents to manage his money and they took advantage of him. Although making around $20 million in his career, at age 27, he has about $15 million in debt and less than $50,000 in assets. Hopefully Jack will have learned one of the most important lessons of life: Money Management is a Partnership.

One of the best “eureka moments” I ever had was when I realized that nobody cares as much about my stuff as I do. It doesn’t matter how much I pay them; without an ownership interest, they just don’t. That is why I believe, and thousands of articles have been written suggesting (for example: this one and this one), that you must be involved in your own money management. I would go one step further, and say that managing your money must be a partnership.

Obviously, if you are in a coupled relationship, your partner should be your money management partner. But what if, like Jack (above), you are single? Or, what if you are a couple, but have never managed money before? You must seek out an experienced partner - but it must be a partner, not someone that simply takes over. Your money management partner could be a professional, or, as Mr. PFL and I did, your own independent research can be your partner. There is a wealth of information available, but you must be committed to finding it and understanding it. If you have an adviser, they cannot simply be the leader; they must be a partner. You must take responsibility for your own money. It is yours.

I’m not suggesting that each person needs to know everything down to the last penny; delegating some money management responsibilities can make a lot of sense. In our own situation, for example, Mr. PFL pays for the recurring household bills from his paychecks (mortgage, gas, electric) and I’m responsible for keeping us fed, clothed and traveling. I honestly don’t know how much we pay for electric, but I do know that Mr. PFL always has plenty of money in his checking account (I have access to his bank accounts if I want to check); we’ve never received disconnect or foreclosure notices; and I don’t have to worry about it. Mr. PFL also downloads all of our accounts into personal financial management software so I can get an overview any time.

We do discuss major financial decisions. We are both willing and able to do research before making a major financial decision. We decide on major financial decisions together. We both have an equal voice, a partnership. This partnership has allowed us to take risks, but also to avoid any major trouble. The sum of whole is greater than the parts. Neither of us, individually, would be where we are today without the other. While we have reached out to experts for information, we have the final say. Because no one else cares as much about our money as we do.

Forward Progress Update 11/21/14

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Mr. PFL and I toured one of the units in the 5-unit apartment building after work yesterday. I still love the location, but there are some major drawbacks, and major dollar signs, attached to this property. The biggest problem is the lack of off-street parking. There really isn’t a solution for this issue, unless we would also be able to buy one of the vacant lots across the street and turn it into a parking lot, and that is unlikely to be a realistic option. The units would also need, to attract the type of tenants I’d like, a complete makeover inside. The units are almost twice as big as the ones we worked on earlier this year, so I must admit to being overwhelmed by the time and energy it would take to get them ready. The kitchens are also extremely small (oven and fridge can’t be open at the same time), so removing a wall might be necessary to make them even usable. The positives, though, are that I still believe in the area, the bedrooms and main floor are large, there is a big backyard that could be fenced to give each unit private outdoor space (they are townhouse/row-house style with private entrances), there seems to be newer plumbing and mechanicals, and it is currently fully leased, so any major projects could wait a few months. Mr. PFL and I will discuss and make a decision sometime soon. If we do make an offer, it will be substantially less than the list price of $149,000. I’d say there is a minimum of at least $50,000 worth of updates that are immediately apparent (new windows, gutter issues, new kitchens/appliances, new bathrooms, etc.) and I’d expect to list the units at about $750-$850.

I’m currently waiting for a call so I can run across the street to the Condo and have the new washing machine installed. After Mr. PFL and I were unable to remember the origin of the washing machine (our best theory is that it came from Mr. PFL’s apartment prior to buying the condo in 2002), I found a Black Friday deal for a new machine online. I also did some research about why the dryer door keeps popping open and discovered that the door latch gets worn out. I am going to attempt to replace the door latch with the replacement part that cost less than $12, including delivery (thank you, YouTube, for all your help!). Unfortunately, within the last 24 hours, the tenants have also reported an issue with getting enough hot water and that the furnace isn’t kicking out enough heat. Apparently we are in the midst of the 5% of property ownership that is difficult right now; 95% of the time it is easy, in my opinion.

If the washing machine ever comes today, I have a lunch meeting planned with potential travel agent clients that do group travel. I went to a training on Wednesday night that had a representative from the hotel that they indicated they’d like to stay at for one of their trips, so I’m feeling confident that I should be able to get them organized. I also finalized some details for my very first travel clients who are leaving for their trip soon.

I almost forgot that I’m planning to put up new blinds in one of the bedrooms at the Condo. It currently has broken, dirty mini-blinds from 1997. Woohoo! Just got a call from the delivery guy. Time to head out for some repairs!

Forward Progress Update

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We are on our way home from Minnesota. Just sat through a bit of de-icing at Chicago Midway, but we should only arrive about 15 minutes late (which is basically early for me). I’m looking forward to getting home after two straight weekends in Minnesota, but I’m not looking forward to the expected weather. We are likely going to be dealing with our first snowfall of the season by the time we get up tomorrow. Thankfully I was proactive enough to leave messages for a couple snow-removal companies on Thursday to get a quote for BD (the 6-unit building). One company finally called me back this morning and we agreed to a one-time trial service. It is much more expensive than I was anticipating, but it is a necessary expense (unless I did it myself) and required by Ohio law due to the number of units. Since I failed to reliably get my car out of the garage when it snowed last winter, a snow removal service makes the most sense. We only had two tenants in the building for most of last winter and they were used to shoveling and salting; the new tenants will expect the snow will be removed.

A couple weeks ago, I reached out to our real estate agent and a contractor regarding our current home. Our real estate agent finally got back to me with some comps and a projected listing price for our home. The comps varied dramatically, from about $200,000 to almost $700,000. His opinion is that we could list our house, as is, for somewhere between $550,000 and $575,000. This is more than the projected value for our net worth purposes. It is also $120,000 to $145,000 more than we purchased the home for in October 2011.

I reached out to the contractor we had used for some exterior work to get an estimate for adding a full bath. Unfortunately, we haven’t gotten together yet. He called me when he was about 3 minutes from our house one evening, and I was in the middle of making meatballs for dinner, so I asked to reschedule. I haven’t heard from him again. Our real estate agent sent over the name of a contractor last week, so I’ll need to call him soon. Our agent also warned me that adding another bathroom isn’t likely to affect our sale price much, if we decide to sell. He said that, generally, you only get back about 70% of what you spend on a bathroom addition. I am hoping that, if we do decide to add a bathroom, we can just pay to have it roughed-in and pass any inspections. Mr. PFL and I should be able to do all of the finishing work (tile, attaching the sink and toilet, painting, etc.) since we have plenty of experience now after working on BD. I’d hope this would save us a lot of money, but I still have no idea.

Speaking of experience, a 5-unit apartment building I had my eye on this Summer is back on the market. It is only a few blocks from BD in the same general neighborhood. I see a similar potential in that the grand home directly across the street is in impeccable condition. The 5-unit is currently listed at $149,000 (and was when I saw it a few months ago, too). I’ve asked our real estate agent to look into it and to try to set up a showing this week. I’ve also already reached out to the lender we used when purchasing BD last year. The bank that we worked with was a small, local bank, and was purchased by a regional bank a few months ago. Thankfully, the lender that we worked with last year was still employed there. She seemed pretty impressed that we were able to get BD fully rented; I invited her to stop by at the end of November last year when we were in the middle of the renovations and two units were still completely empty; she seemed a little underwhelmed at the time. When we were talking to her about financing last year, there was also a police-involved shooting only a couple blocks away, so she seemed a bit skeptical of my plan to market the apartments to young adults with jobs. I reported that I was able to rent the five renovated apartments for $550/month for the 1-bedrooms and between $625 and $675/month for the 2-bedrooms. My expectation for the 5-unit building would be similar. We haven’t been actively looking for another rental real estate project, but if the price is right, the neighborhood is right, and the timing is right, it should be worth the risk.

But first, it is time to check on the washer and dryer at the Condo. I’m hoping appliances are on sale somewhere this week…

Personal Finance Management Software

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If you are serious about tracking your finances you almost certainly need to invest in a Personal Finance Management software (PFM). I started using PFM in the late 90’s however I lost a number of years due to some technical issues so my official records start in 2002. Originally, I used Microsoft Money and had a difficult time due to how it was setup and my ever growing set of accounts. I won’t bore you with the details but let’s just say I was not a big fan of how it works and had a lot of headaches with it. At the time though (late 90’s) it was either Microsoft Money or Quicken and they both had limitations. Nonetheless, I made it work and started tracking everything up until 2002 when my PC hard drive decided to die and as a result I lost the license key to my Microsoft Money software. Not the data mind you, I lost the stupid license key to “activate” the software when you purchase software from Microsoft. When I tried to reinstall the application I couldn’t “activate” the software because I lost the key. I had purchased the license several years before all of this and Microsoft stopped supporting Money right at this time…. so that meant I couldn’t purchase a new license anymore and I couldn’t figure out a way to get my existing version of Microsoft Money to activate. Thus, I became a free agent in search of a new PFM.

I did the usual searches that we all do and read all the reviews. In 2002 there were more options hitting the internet so the choice expanded beyond Quicken which I gave a long look. Ultimately, I decided to try my luck with MoneyDance and I couldn’t be happier. At the time I had a net worth of about $70k and 75% of that was my 401k. The rest was a personal brokerage account I had on eTrade with $2500 split across 4 stocks I purchased in March of 2002 and then ~$20k in cash. The $20k was used as my down payment on the Condo which I purchased at in March of 2002 for $239k. So it all came together in 2002 as I converted to MoneyDance and really started the journey to Paycheck-Free Living!!

Since that time I have tracked almost every transaction over the last 12 plus years. With the advent of debit cards being accepted EVERYWHERE, the level of tracking is ridiculous as well. I have it down to a science now and spend about 10 minutes every other week updating the data. MoneyDance let’s you customize just about everything and so I can see all my income and expenses, my assets and liabilities, my net worth, investment performance, reminders, budgets, and on and on. I have several customized reports covering just about anything you can think of from Net Worth to Investment Performance to Asset Allocations. It even works great for our side business (rentals) as it allows me to categorize all those transactions separately.

I could go on and on about the power of Personal Finance Management software… and I am sure I will in the future. I can’t say enough about how much it helps me make sound financial decisions. On top that it really provides proof to me that if you keep doing the right things, maxing out your 401k from day one, paying down debt, balancing your portfolio, and diversifying your assets, that it does work!! I see that when I run a net worth report or when I look at 2008 and how we managed to eke out ahead. It gives me motivation to keep at it because Paycheck-Free Living is on the horizon.

Entrepreneurship

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I imagine most sane people aren’t trying to run three small businesses at once, and adding blogging and learning to teach English as a Second Language on top of it. I am, though. I have my law firm, my travel agency, and our rental property business. At least that marathon is over and I can walk almost normally again. I have been sleeping extremely well this week, too, mostly due to exhaustion.

Entrepreneurship is a blessing and a curse. It is liberating to have total control over my work-product, but that requires that I produce. I also have the ability to schedule any time off that I want, but I can’t expect to make any money (PTO=fantasy) if I’m not working and I also need to be available or have someone ready to cover for me. While I can also technically set any hours that I want, demands are always placed on my time and schedule by clients and the court. Working on the rental properties can quickly kill an entire weekend. There really aren’t any true “days off.” It is impossible to “leave it at the office” when the office primarily resides in my computer and my brain, which are both always with me. Besides Uncle Sam, I don’t need to share any of my profits, although he might take more than his fair share.

After being in control for so long, it is going to be difficult to find someone I trust to manage the rental property business when we move on. The rental property business is the linchpin to our ability to be paycheck-free, so the importance of this decision cannot be overstated. I’m getting used to the idea that I won’t be a full-time lawyer for much longer and I’m glad. I’m hopeful that I’ll be able to sell my practice to some young, aspiring attorney. The stress of dealing with everyone else’s problems isn’t something that I will miss. I also won’t miss clients deciding not to pay their legal bills - you wouldn’t believe me if I told you how often this happens.

I’d like to devote more time to building my travel agency business. I simply don’t know where to fit it in right now. Work continually ebbs and flows, ebbs and flows, so I’m confident that the time will materialize soon. At least I’m following my own best advice about starting a new business and keeping my overhead low (write that down - it is a good one). Right now, though, I better get back to work. I think I’ll start with the pile on the left…

Investment Diversity

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With the recent ups and downs of the stock market, I got to wondering how the performance of our investments compare to the overall market. I track all of our finances using an application called MoneyDance and I am a huge fan of personal finance management software in general. I have kept track of my own finances since 2002 and added Mrs. PFL along the way. The best part of MoneyDance is the ability to run reports and with the time I have put into managing the data I can easily do comparisons. So this morning I decided to take a look how the DJIA (Dow Jones Industrial Average) performed as compared to our various stock investments for 2014.

First a couple (randomish) thoughts…

  • The DJIA in just the last month has been CRAZY!! By my quick analysis.. the DJIA closed at a high of 17,280 on Sept. 19th, dropped to 16,117 at the close on Oct. 16th and then peaked again just this week by closing at 17,391 on Oct. 31. That is some volatility.
  • Our stock investments are comprised of several different portfolio’s. I basically manage these and more can be found on my Assets Explained post. For a quick recap, our investments consist of my 401k, my Roth IRA, my ESPP (employee stock purchases), my personal brokerage account, Mrs. PFL Roth IRA, her SEP IRA, and her 529 account.
  • Because I use MoneyDance I can easily see how all of my assets are split across all of these. I can tell my market cap size (large cap, small cap, etc), by type (individual stocks, mutual funds, ETF’s), by portfolio (401k, SEP, Roth) and I can look at all of this by individual accounts.
  • Any graph that involves my 401k tend to have big jumps and big drops. The reason for this is due to the fact that those assets are only purchased the 1st and 15th of each month when I get my paycheck. That means the prices for those assets are only updated when these transactions occur and because my 401k is by far the biggest piece of the investment pie, when the market drops/rises over two weeks it looks more like one big drop/jump on the 401k.

So here are the results as shown in graph form. I find this to be pretty interesting myself but I am a nerd. It looks like we are fairly well diversified if I do say so myself. I also like to see that even with those big dips it seems to continue trudging it’s way forward.