January 31, 2010

Worrying Too Much About Minor Frugality Items

I find myself thinking about saving money in my daily activities pretty frequently.  Three examples that come to mind:  I can get annoyed that a light is left on in a temporarily unoccupied room.   I am worried that the refrigerator door isn't closed quickly less some extra heat get in there.   I am careful with the amount of detergent used for a load of laundry so that I don't use 'too much'.  

If I add up all this stuff it really doesn't amount to all that much money.    Leaving a light on all day will only add up to $5-10 dollars a year.   A 10% increase in electricity use for our refrigerator would add $5-$10 to our electricity bill.   A 20% increase in our laundry detergent is probably $10 a year.  So I add these 3 items up and I'm talking about $30 a year in total cost or savings.  

Saving $30 a year is good.   However the problem I have is that I spend an inordinate amount of time worried about these 3 items compared to the amount of money that I'm saving.  

This is of course not to say that I think everyone should leave all their lights on, open the fridge door and use triple doses of detergent.   Being wasteful is not financially smart.    But its also not smart to worry about small things like this too much.

I shouldn't sweat the small stuff so much. 

January 29, 2010

Best of blog posts for week of January 29th

Two very interesting blogs found via other blogs.   Psy-Fi blog is about psychology and finances and it comes to us via BadMoneyAdvice.   FreeMoneyFinance points to the blog called PostSecret where people anonymously share their secrets.

Jim W at Bargaineering thinks that Overdraft Protection Is A Good Thing and honestly I agree with him.   I know some banks have abused the system to their benefit to maximize fees, but otherwise overdraft protection is better than a bounced check.

Bargaineering also tells us How Does the IRS Pick Tax Returns to Audit?

Real estate prices versus REIT prices

I talked about my experiences with the rental properties that my wife and I own recently.   For the first and second rentals we've seen about 7% annual appreciation and 5-8% return on equity.   Thats a pretty good investment.   But then I wondered  "hmmm.. what if I'd just bought a REIT instead?".   Might I have also seen 7% appreciation and a 5-8% return via dividends?   Possibly.   That line of thinking brought me to the general question :  How do REIT prices correlate to real estate prices in general?   I'd assume that the market price of REITs will go up and down roughly equal to the increase or decrease in real estate values in general.   Seems like common sense, so this should be an exercise of proving the obvious.

To test this I decided to compare a REIT index fund to a general real estate price index.   For REIT prices I chose to look at the Vanguard REIT index (VGSIX).    For direct real estate values I used the data from the S&P Case-Shiller index off the S&P site.   I then normalized both indexes to 100 starting in 1996 and plotted both up until most recent data for Nov. 2009.

Below is a graph showing the price of VGSIX versus the Case-Shiller index:  

You can see that the correlation between the two is pretty strong.  However the REIT index prices are a bit more volatile.  That should be expected since the market can easily react and dump a very liquid REIT but actual physical property is much less liquid.    If you exclude the last 13 months post Oct. 2008 then the trends of both are very similar.   In the fall of 2008 the values of REITs dived drastically as a reaction to the real estate bust and credit crisis.

The performance of REITS has been worse in this arbitrary snap shot mainly because of how badly REITs were battered during the recent recession.    I could break down the numbers a lot more but I don't want to read a whole lot into this.  The point was to see if theres a close relationship between REITs prices and real estate prices and I think the graphic shows that to be true in a general sense.

REIT prices and real estate values are close in performance but REITs are more volatile.

January 28, 2010

Can you Keep Your Home if You Declare Bankruptcy?

(Disclaimer:  I'm not a lawyer and this information is only as accurate as the sources I got it from.  If you need legal advice then talk to a lawyer.)

Chapter 13 bankruptcy will allow you to keep your home but you have to make arrangements to repay your debts including your mortgage.   If you restructure your debts under chapter 13 then you can hang on to your home.

If you file Chapter 7 bankruptcy you will wipe clean all your debts.   You can exempt some property from chapter 7 if is considered "exempt".   Each state has set up different limits in their laws on what can be considered exempt property.   Most states have some protection for your home from bankruptcy and allow some level of home equity to be treated as exempt.   So depending on what state you live in and/or how much equity you have in your home you may be able to fine Chapter 7 and keep your home.    But it doesn't seem that you can do Chapter 7 and keep a home that has a mortgage or lien on it.   You can only exempt home equity if you own it outright.

How much home equity can you exempt from Bankruptcy?

I found a list of all the individual state exemptions for how much of your home equity (homestead) you can exempt from bankruptcy.

A few states allow you to exempt unlimited home equity: Florida, Iowa, Kansas, Texas

New Jersey, Pennsylvania & Washington D.C. allow NO state exemption for your home.   However for these states it looks like you can instead elect to take the federal exemptions of $18,450.

About 2/3 of the states listed allow you to exempt only a portion of your home equity with figures ranging from $5,000 to $50,000.   

The rest of the states allow varying other exemptions in the range between $50,000 and $500,000.

Married couples may be able to double the exemptions.  

This information is subject to change of course.

January 27, 2010

How to Find 'Good' Renters

The other day when I wrote about one of our rentals I got a comment from DebtMaven asking exactly how you go about finding 'good' renters.   Thats actually a pretty large topic so I figured the answer warranted a post on its own.

What is a 'good' renter?
To me a 'good' renter is someone who pays their rent on time every month, doesn't damage the property, is lawful, obeys the basic rules of the property and is generally courteous and conscientious.  Now I don't expect anyone to be a 'perfect' renter and I wasn't one myself.  But I would like to see people paying the rent on time and not damaging things or breaking rules.    Every landlord should try to get tenants who pay the rent and don't damage the property, it only makes good financial sense.

Know the laws that apply to landlord and tenants in the US, your state and city.   If you don't know the laws in advance than you can easily make a mistake and it can bite you in the end.  This bit isn't so much about finding good tenants but knowing what you can and can't do when going about screening tenants and how to do it properly.  Before you rent a property make sure you know the laws.  It is important that you do your tenant selection legally and an important part of that is not discriminating as defined by the applicable laws.   The exact laws and rules vary from state to state and some cities have extra laws so its important to do the research for your specific region.

Make your rental appealing.   Good renters don't want to rent slums.   To attract good renters you should keep your property in good shape.  You want to make sure it looks good and everything is in working order.   If a good renter walks into a rental and sees that you haven't mowed the grass for 2 weeks and that the a window is broken then they will expect that you won't do a good job maintaining the property or repairing damage.

I like to set the rent at the lower end of the market.   This a personal preference and I'm sure many landlords would disagree on me about this one.   I think lower rents help in a few ways.   With a more affordable rental you get more applicants and it allows you to be more selective.  It also helps you keep renters in your units longer.   If you rents are priced higher then you get fewer qualified applicants to choose from and more turnover and vacancies.  Of course I wouldn't set the rent too low either or you're just throwing away money.

Prepare a detailed lease document in advance and require a lease term.  When you do start showing the rental and actually get the ball rolling on applications you'll need to have a good lease document.   The lease should have lots of rules that help protect you as the landlord.   Think about any problems that a tenant might cause and see if you can avoid that with rules in your lease.   You should make sure that your lease is all legal so thats another reason to make sure you know the applicable laws before hand.  I would generally prefer to require a 6 or 12 month lease term.   If you do not have a lease and rent just month to month then you will attract more transient tenants and people who may leave a at moments notice.  

Advertise the property to a wide audience.    I like to use Craiglist since it is free and seems to reach plenty of prospective renters.   Your ad should help you target the right renters.  Explain the nature of your property and list your key rules.  Indicate that a background check is required and a screening fee will be payable by the applicant.   Good tenants want you to be picky about who you rent to since that will ensure they have good neighbors and they won't have a problem passing screening.  Bad tenants will be turned off by rules they don't want to follow or background checks they know they won't pass. When I advertise a rental I like to give the specific street address in the ad so that tenants can drive by and take a look themselves.  In some smaller cities Craigslist may not be as effective.   You may also want to consider paying to advertize in a local newspaper classified section or finding other free listing services.  

Prescreen prospective tenants on the phone.   The screening should have a few basic facts about their situation and employment.   I would ask :  Where do you work and how long have you been there?   Have you been evicted or declared bankruptcy?  Also ask how many people would be living in the unit.  I would also explain basic rules to the tenants that you may have : No pets and no smoking.  I'd also make sure to point out that there is a background/credit check.   Simply telling people there is a background check will weed out some undesirable tenants.   I'd also ask them if they've driven by the apartment and if they haven't suggest they do so.  That will filter out people who dislike the location or appearance of the unit.

If interested applicants pass your prescreening then schedule to show them the property.   I prefer to schedule a few showings at the same day and time.   If I have 3-4 people call over a few days and seem to be potentially good tenants then I'll ask them all to come meet me at the rental at 2pm on Saturday.  That way I'm only making one trip and if a single tenant is a no-show then I'm not wasting trips.

Act professionally and don't be a pushover.   You are running a business and you should be professional in the way you run your business.   Remember that good tenants are looking for a good landlord as much as you're looking for a good tenant.    If you act like you don't know what you're doing then this will be seen as a sign of an inexperienced or incapable landlord which is a turn off for good renters and potentially appealing for bad renters.  If you send negative signals to tenants then you can scare away your good renters.   You also don't want to give a bad tenant the idea that all your rules are flexible or that being late with rent would ever be acceptable.

Don't let emotions guide you.   Maybe you have soft spot for cats and your potential renter is a cat lover, so you decide you like this person.   That kind of thinking doesn't make for good tenant screening.   Remember you're running a business and your emotions and 'gut feelings' shouldn't be guiding your choices.

Look for tenants with good steady income and no history of financial problems.   Ask for proof of employment and income and do a background / credit check.   Personally I prefer to only run the background / credit check and do all the paper work on people who I'm pretty serious about potentially renting to.  If someone doesn't make enough money to afford the rent then you shouldn't rent to them.  That may seem straight forward but tenants may try and convince you how they can manage it.  If someone has a good solid employment history then they are going to be a better bet as a renter.   An eviction or bankruptcy on someones record is a clear sign that they have had problems in the past and are much more likely to have problems in the future.     

'rich' doesn't mean good tenant.  Just because someone has a high income doesn't mean they'll be a great tenant.   And just because someone has a moderate to low income doesn't mean they'll be a bad tenant.  You want a tenant that can both afford the rent and someone who has demonstrated history of paying rent on time and acting as a good tenant in previous rentals.

Ask for and check references.   You should ask for references from previous landlords and then call those landlords to ask about the tenants.   Look for gaps in rental history and ask about any such gaps.  They may be omitting a reference since they know they had problems somewhere.

Don't be afraid to wait for a good tenant.   I'd rather wait a couple more weeks to weed through some applications to find a good renter than rent it to the first marginally acceptable person that shows up.   That good tenant will last longer in the end.

Avoid renting to friends or relatives.   It might seem like a perfect solution to rent your property to a friend or relative.   While your friends and relatives may be good tenants I would not rent to them to avoid inevitable complications that will arise.  It might work out great in most situations but eventually your friend or relative will break the rules or be short on their rent.  Since they are your friend or relative they will likely expect special treatment and you'll probably feel obligated to be more lenient.

Its Impossible to be perfect.   No matter what you do and how careful you are in screening you will eventually end up with a bad apple.   Someone who looks like an ideal tenant may turn out bad.  They might be extremely good at lying or circumstances in their lives may change for the worse.  The goal is to screen out as many bad tenants as possible and aim getting as many good tenants as you can.  If your diligent and careful in your tenant screening processes then you should end up with a majority of great tenants.

This covers all the general tips and strategies that I can think of for screening for good tenants.   I'm sure there are more things that can be done. 

January 26, 2010

Rental #4 - Time is Money

Our fourth rental was originally my wife's home when I met her.    When we got married we decided to move into my home together and then rent out her home.

Currently the house has about 50% equity in it.  The house is worth about 50% more than what it was bought for about 7 years ago. It has appreciated around 5.5% since the initial purchase. We are netting a small cash flow of maybe a few hundred dollars a year.  But that would easily be eaten up if we ran into any repair or maintenance bills.  On the other hand we do get a decent tax deduction and the loan principal is being paid down faster now which puts us a bit ahead financially overall.   Best case we're getting about 6% return on equity but the month to month cash flow is negligible.    So far we're doing fine with this rental financially but it has not been a rental for very long.   And we've had minimal repair and maintenance costs and no vacancy problems and its only a matter of time before those costs things hit us.

The notable story on this rental was what happened with the preparations before we rented it.

When we first decided to rent the house we had to clean out my wife's belongings and make some repairs.   Cleaning out the house took a while.   If you've ever had to clean out a house full of 'stuff' that has been accumulated over several years then you know how time consuming it can be.    As we were moving in together we also had to sort out which of her belongings to keep and which of mine to keep.   We couldn't fit all her stuff and all my stuff into our current home and we had duplicates of many things (two toasters, two beds, etc.)   Once belongings were sorted out we had to haul them somewhere, usually to a charity or the trash.   This whole process ended up taking 2-4 months.

The cleaning and repair work we had to do wasn't very extensive but there were a few things to get done.   We had to clean up the place, paint and then fix some damage to the kitchen floor and bathtub.   We ended up doing all the work ourselves with the help of a couple relatives for the more complicated things.   In addition to the main things we did there were a ton of little projects that added up to a substantial amount of work.  I'm not sure how long we spent in the cleaning and repair stage but it was probably 1-3 months.

Altogether it took us 5-6 months to get the house prepared to rent it.   That is 3-5 months more than it should have taken us.  Every extra month we took was a months lost rent so the wasted time lost us 3-5 months worth of rental income.   

Let me repeat that:  we wasted 3-5 months total time while preparing this rental for market and lost 3-5 months rental income in the process.

We wasted time in a number of ways.   Part of it wasn't exactly our fault.   My wife's house is on the other side of town and it can take 1-2 hours to get there depending on traffic.   That makes it a bit harder to get more time there to do work.   But most the time wasted was our fault.   We decided to do all the work ourselves.   That seemed like a good idea since paying people to do repairs is expensive.  But in hind sight if we'd paid professionals we'd have gotten things done much sooner and it would have saved us money in avoiding lost rent.    We also got help from our relatives which meant doing things on their schedule.   We weren't very efficient with our time usage and often spent just 2-3 hours at a time working which is an easy way to turn a few days work into a month.    One of the biggest reasons we spent so long was that we didn't feel a sense of urgency.    In several cases we underestimated how much work we had to do and how long it would take to do the work.   We also spent a lot of time planning and deciding what to do rather than doing it.  Lack of an initial overall plan wasted us a lot of time.  We started out without really thinking of everything that needed to be done and so we didn't have a real overall plan to get all the work finished.

Summary of reasons it took us too long: 
1) travel distance, 2) doing work ourselves 3) working around relatives time schedules, 4)  inefficient use of time, 5) lack of urgency, 6) underestimating time to do work, 7) indecision, and 8) lack of overall planning

To be fair to ourselves we didn't plan to waste 3-5 months.    This is another situation where hindsight is 20/20.  We had some good intentions in doing work by ourselves to save money and we didn't initially realize just how fast time was going by and how slow our work was progressing.    At the time it didn't seem like a bad thing that we were only spending half of most weekends and additional weekday hours working on our property ourselves.  Seeking the skilled help of relatives also seemed like a good idea at the time but then trying to work it all into coordinating your free schedule with their free schedule and you can turn around and a month has gone by.  Maybe we should have known better in the first place, but if we didn't know better then we do know better now.  

Next time we'll know to treat the work with a sense of urgency up front. Every wasted day is wasted rental income.   In hind sight I'd try and get the work done as fast as possible and hire professionals to do it.   The amount of work we had to do could have been accomplished within a month without that much difficulty.   I would have done preparation for moving first which would be the biggest time sink then I'd simply hired professionals to do everything else.   Hiring people  certainly would cost us more than doing it ourselves but it would have saved us money.   For example : Paying someone to fix the floor in the kitchen probably would have cost us $500 but wasting a month to do so lost us more rent.    I wouldn't always hire professionals for everything.   I would have done the painting myself.  It only took us a part of a weekend to paint the house  and we probably saved $1000 or more so doing that ourselves still makes sense.   I'll also make sure that I have a strong plan with a good assessment of all the work that needs to be done.  And I will make sure I don't underestimate the amount of work required.  

Overall this rental has been a good investment and it has worked out fine.   The key learning from this rental was that we should not waste time doing work and renting a unit faster will pay off in higher rents.

January 25, 2010

Rental #3 - The out of state property manager horror story

Before we were married my wife lived on the East coast for a few years during college and afterwards.   Eventually she decided to move here to the West coast.  She owned a house on the East coast at the time and decided to keep it as a rental after moving here.

My wife bought her East coast home about 7 years ago.  She bought it a few years before the real estate bubble burst.   I'm going to take the more conservative view that the house is at the lower end of its value range on Zillow which would mean the value is about equal to the mortgage balance so we've got 0% equity right now.   It could be worth a bit more than that if you take Zillows high end so best case we might have 10-20% equity.   The house has not appreciated much if at all.

We are currently renting the property for a little less than the mortgage payments.   We also pay a property manager 7% of the rent to manage it.  We're losing money every month which is not a good thing.    The negative cash flow isn't substantial but any negative amount isn't good.  If you add in the tax deduction impact and the principal payments on the loan we're actually coming out a little ahead.  But I generally wouldn't recommend buying a rental that has a negative cash flow.  

Note this story started before I met my wife and then continued through when we were engaged and proceeds now after we've been married.   I'm not sure of the exact chronology about what things happened before or after we met or were married.  So my references to my wife or we are mixed up here its cause I don't know which points I was more or less involved. Sorry if its confusing.

The property manager nightmare

When people think of buying rental property they often decide that hiring a property manager is the easy way to avoid doing much work.  That is a good idea in general as long as the costs work out, but you are very dependent on the property managers abilities and trustworthiness to make your rental a success.   Unfortunately one property manager my wife eventually ended up with was not trustworthy at all. 

When my wife originally decided to rent the home she did the research and found a good property manager and signed her up.   Everything worked great with that first property manager until she abruptly decided to leave the business.   My wife was then left scrambling to find another property manager form the other side of the country.  My wife hired another property manager that the first property manager referred her to.  It turns out the second manager was just someone the first manager "heard of" not a trusted peer.   That very important detail wasn't clear at the time.

The second manager was OK but she generally didn't answer the phone but instead called back after you left a message (red flag).   Things were fine for a while until the tenants moved out.   That is when the second manager started to show how bad they were.  She failed to get work done when she said she would (red flag).  It took two or three months to get the home cleaned up and it sat vacant that whole time.  (red flag)  Thats one or two months longer than it should take and thats lost rental income out of our pocket.   Furthermore they did not give us real receipts or invoices direct from contractors for work they said was done  but instead only gave an invoices they created (red flag) so in hindsight we don't even know if the work was really done or if they just pocketed the money.  That may sound cynical but just keep reading.

After 2-3 months of inaction and run around by the manager my wife gave up and decided she couldn't keep paying a mortgage without rent coming in.  So she called some realtors and decided to just sell the property. As soon as the manager found out my wife wanted to sell the home they ran out and found a tenant.  Its remarkable that they couldn't find someone for 2-3 months then magically rented it in a day or two.   (red flag)  Now that the property was rented the pressure was off and the rent coming in would pay the mortgage (mostly).    At this point it seemed as far as we really knew the manager had not done anything worse than been too slow to find a tenant.   That isn't necessarily something you fire someone for on the first offense and its hard to say if that kind of thing is the managers fault entirely or not.   My wife decided to hang on to the property at this point.   There wasn't a clearcut case for firing the manager plus selling the home from 3000 miles away would have been pretty difficult to manage.

Less than a year went by and the property manager failed to get us the rent payment a couple weeks into the month.   The manager claimed to be having some personal financial problems (giant red blinking neon flag) but they said they would fix it soon.  I think this is the point that the red flags added up and it really sunk in that the property manager was not capable or trustworthy.  So my wife waited and called and called.  They didn't answer the phone nor return calls much and when she did get ahold of the manager she gave assurance they'd send the money soon.  The old "check is in the mail" routine.  Then next month came around and we were now owed two months rent by the manager.   My wife found out the renters had in fact paid the manager the rent but the manager then apparently spent it or simply pocketed it.   The manager stopped returning calls.   So at this point we hired a new manager to immediately take control of the property.  In hind sight we should have fired the bad manager much earlier but the extent of the problems weren't clear.

The problems created by the bad manager didn't end after we fired her.   The tenant they rented the house to was not a great tenant.  They mostly paid their rent on time but they did a fair amount of damage and we didn't have a copy of a lease or a security deposit.   When that tenant left about a year later there was significant damage and repairs needed that ended up costing us several thousands.  Its not clear when the damage was done.  It might have been problems that occurred during previous tenants under the bad managers management.   But either way the bad manager either rented the unit to tenants who did a lot of damage or failed to properly repair earlier damages.

Our current manager has done a great job and we're very happy with her.  The property has actually had three managers now and two of them have done a great job.   I would assume that the majority of property managers will do a decent job and that the chances of having a property manager basically steal money from you is not likely.   But it only takes 1 bad apple to ruin it for you.

The red flags probably should have added up

I noted a lot of red flags above.   At the time some of these weren't obvious or they gave us excuses that we bought.  Maybe we should have acted much sooner to fire that manager but its hard to know when someone is just a little slow or makes an excusable mistake.   It can take a little while for all the red flags to add up.   We hadn't dealt with a bad property manager before.   If we encounter problems with a manager again then we'll be better able to spot the red flags as they happen instead of recognizing them in hindsight.

No effective legal recourse

My wife investigated taking some sort of legal action against the property manager but given the amount of money owed it wasn't practical.  Generally the main option in this situation would be small claims court and you have to do that locally which would mean flying across the country.  We figured we'd win the case but thats no guarantee we'd get any money, as far as we know the manager is bankrupt or has since moved out of state.  Local law enforcement in that area were no help.

Out of State Rentals are harder

If this rental was local then we wouldn't have needed a property manager at all.   Or if we did hire a property manager for a local rental then we'd have a much easier time keeping an eye on things.   Worst case if a local property manager ripped us off then we'd have a much easier time taking legal action locally via small claims court or local legal system.    I wouldn't recommend doing an out of state rental investment unless you have a very trustworthy person to manage it for you.   This is not to say an out of state rental can't be a success but the horror story above can and does happen so make sure you trust your property manager.

Be Thorough When Screening Property Managers

You should be careful when hiring a property manager.  This person is going to be your employee in a way.  You'll be trusting them with your money and giving them power to get work done.   Get references and check up on them.  Interview them like you're hiring an employee.  When you have hired a manager make sure you get before and after pictures as well as receipts for everything.  

To sell or not to sell?

Since the rental has a negative cash flow and the problems we have had it would seem like we should sell it.  We've thought about selling the house more than once.   But after the real estate bust selling a property wasn't exactly easy.   If we sold it now we'd have to pay a realtor commission and end up losing several thousand dollars out of pocket in the deal just to offload the property.   Our expectation (hope) has been that the property would go up in value within a few years so if we could hang on to it for a while it would be in a better position to sell it.  However we didn't expect to have to pump several thousand dollars into repairs the past year either.   It may very well be a mistake for us to hold on to the property, but hopefully the market will turn around and we can recover our costs.   Honestly I am torn about this and I don't know if we should cut our losses now and sell it at a lost or if we should hang on a few years and wait for it to recover value.

January 22, 2010

Best of blog posts for week of January 22nd

BadMoneyAdvice asks Is Prosper.com a Good Investment?  and finds that the answer is  'no'.  Maybe thats a surprise but makes me wonder why myself and others ever thought that lending money to strangers with bad credit was a good idea?

Consumerism Commentary wrote  19.99% APR On My Citi Credit Card, True Cost of Credit
The interesting thing there is what the banks and credit card companies charge in fees to merchants to simply process a credit card purchase.   You can find out what the fees are for your card with the True Cost of Credit calculator.

My Money Blog has a list of promotions for free or discounted purchases of TurboTax software  : TurboTax 2009 Discounts For Early Birds

My Second Rental - Quick Action Made the Deal

I bought my second rental about 3 and a half years ago.  I again bought the property 50% / 50% with my father.  This time my father was the one that found the property.  In fact he had a Realtor he knew that bought the property to his attention. 

The property was a 5 plex on the market for roughly 80% of market value.   The owners had bought it less than a year before that and they had paid about $10k less than they were selling it for though I didn't know their purchase price at the time.  When the previous owners bought it they started to convert 3 of the units into a single family home for themselves.  But they didn't really seem to know what they were doing and accomplished little more than tearing down a couple walls.  They rented one unit to a friend of theirs.   So the property had only one tenant and a some walls half torn down.    Overall the property was in decent shape but it needed some repairs and renovation.   Nothing really major but some of work that needed to be done.

We acted quickly and offered them $5,000 less for the property and they accepted it.   Within just a day or two after we made our offer 2-3 other offers came in at full price or $5,000 higher.  We were lucky to have made the offer as fast as we did or we wouldn't have gotten the property.

My dad did a bit of work to fix it up and restore the walls that they previous owners had torn down.  Other than returning the 3-plex to 3 separate units by restoring a couple walls the buildings did not require any major work.  Most of the required work was cosmetic, surface level changes like paint and new  fixtures and such.

The property is now worth 20-60% more than we paid for it according to Zillow.  As a 5 plex we could easily sell it for a 30% profit over our purchase price.  That gives an annual appreciation rate of about 7.5-8%.   With rents netting a return on capital in the 5% to 6.9% range. 

This is another success story in rental purchase but its possible we could have had a failure here as well.   If we'd bought the property with a hefty mortgage and then had difficulty renting the apartments then we could have had negative cash flow.   If we had bought the property with little or no experience as landlords then we might have selected tenants poorly and ended up with deadbeats, lots of property damage and no rent.    If we had some bad luck the property might have had major repair requirements that could have cost us substantial amounts of money.   Theres always a little good or bad luck involved in a property.

In our case we profited from this deal because we were able to act quickly and make an offer that was accepted.   If we had waited just a day or two more than competing offers would have won the property.   I'm not saying you should rush into buying property or make hasty decisions.   But if you have your financing and other ducks in a row then quick action can benefit you.

January 21, 2010

My First Rental - An awesome bargain

This is the first of four articles I'm going to be writing about the rental properties that my wife and I own and the experiences that we've had with each.

About eight years ago I made my first rental property purchase.  My father had already been invested in rentals and he owned three units at that time.   He had been a landlord for about twenty years.   So he knew the rental business pretty well and I'd seen his experiences with it.

I had been periodically searching Realtor.com looking for good investments.    I came across a four plex for sale in my parents city going for an extremely low price.   It was selling well below market at the time.  I'd say it was selling for half of what market value would be on a 4 plex.   It looked like a true 'steal' but there had to be a 'catch'.   I told my dad about the property and he decided to check into it.  I live in a neighboring state a few hundred miles away so I couldn't see it myself.  My dad contacted the Realtor and viewed the property.    There were in fact some problems.  The property had some bad renters, it was 25% vacant, it had some notable structural damage and a $10,000 sewer hook up bill.  With all the problems it would be unlikely someone would even be able to get financing on it.

We decided to go ahead and buy the property.  Even with all the problems the property had we felt the discount price made it worth buying.   I bought 50% and my parents bought 50%.   We made an offer and ended up getting it for $5,000 less than they asked.   We paid cash so we didn't get a loan or need any financing.   At the time I didn't have the full amount in cash for my half on hand immediately so my parents loaned me some of my portion for a short term.   We also later paid off the $10,000 sewer bill in full.  

My father did the structural repairs and improvements himself.  He remodeled one of the apartments quite a bit and fixed up two others somewhat also.   The costs of the repairs and improvements were paid for out of the rental incomes.  My Dad is very frugal and there weren't significant building materials required to do the repairs.   So we could pay for the work out of rent as he did it.   It took him a year or two of working in his spare time to get the place completely fixed up.

It also took a little while to rotate in some better tenants.  The tenants we had originally weren't that bad that they needed to be evicted by two of the three left on their own before too long.  One tenant was getting a big discount on his rent for acting as the property manager and we didn't need a manager.  As far as we could tell he never did much management work other than mowing the lawn anyway.  We increased his rent and he didn't stay too long.   One of the other tenants left on his own accord at some point. 

Since my Dad does all the work, I'm acting as the 'silent partner' in the deal.  I feel I'm getting an unfairly great deal since I'm not doing any of the work.   However my father refuses to take any compensation for his labor.   I've also suggested he just hire the work done but he wants to do it all himself.  I don't like taking advantage of the situation so I do what I can to pay him back in other ways.

We have no mortgage so there is good cash flow.   Currently we're netting a few thousand a year off the rents after expenses and we get a good tax dodge from the depreciation.   The actual profits go up and down a bit year to year. Sometimes an extended vacancy or rash of vacancies will bring the rent total for the year down.   Or some years a rental will be 100% occupied the entire year and you'll get maximum rent.   You also get random expenses due to needed repairs or tenants damaging a unit past what their security deposit will pay.

The property has appreciated fairly well from what we paid.  Based on the value in Zillow our property is worth 2-3 times what we paid for it.  So assuming we went doubled our money in eight years then that is an annual appreciation of 7.7%.   A lot of that appreciation is because the property was in poor shape and we bought it for well below market value of a 4-plex at the time.   Plus we've earned rental income that whole time as well.   The rent profits have gone up over the years but currently we're making about an 5.5% to 8% annual return on capital from rent.

Why was it successful?   The key reason this property has been a financial success is that we found a bargain being sold under stress.   If we'd paid 2 times what we did for the property we'd have lost money on the deal.   My fathers experience and knowledge in running rental properties and repair and remodeling work are also key reasons we were financially successful.  If we were both inexperienced in running rentals or had to pay someone to do all the work we may have made some big mistakes and overpaid for the repairs.

The other side of the story.   Not all rental investments go well and you only have to look at the previous owner for a good example of a bad experience.  The woman we bought the property from lost over 2/3 of the money she paid for it just 18 months previous.   And it seems like she overpaid by about 50% when she bought it.  I'm not sure why she overpaid so much, but she apparently did.   The woman lost 70% of her investment in less than 2 years!    She also ended up with poor tenants and damage to the property.   She was paying a tenant an excessive amount to manage the property and he was doing very little actual work.   She had bad tenants, a property in disrepair and lost most of her money.   We were told that the woman would rather "poke needles in her eye" than be a landlord.  Talk about a motivated seller!

How we got lucky.   Other than having the luck of finding a bargain property in the first place and me having my dad as competent partner there are other ways we were lucky in the investment (or at least ways we avoided bad luck).   When we bought the property I sunk almost all of my cash of my savings into it.  I should have held back some cash for an emergency fund or financed the purchase with a loan.  Buying the property made me cash poor and exposed and unable to handle to any emergency financial problems.   The property had some structural damage but nothing significant that we didn't know about.  If the property had had worse problems we could have ended up with a money pit. 

Can you emulate this success?   The biggest factor in this property success was finding such a bargain in the first place.   Properties like this don't come along that frequently or if they do they are usually snatched up before they hit the real market by savvy Realtors or their friends.   So finding such a bargain is the biggest hurdle.  You also probably don't have someone like my father and his knowledge and construction skills to rely on.   If you were to buy such a property you'd have to pay out of pocket costs to perform the structural repairs.  I expect that would amount to an extra $10,000 to $20,000 in costs.   Most of us also don't have the luxury of ready access to enough cash to buy a property without financing.  And again I relied on my parents there to give me short term loan for part of the money.  

If you found this property, bought it with a loan or seller financing, paid someone to do all the improvements then paid a property manager to run it then you would have had different financial results.   Even if you hired all the work you'd probably still have had 4% appreciation based on higher out of pocket costs and 4-6% return on capital after paying a manager.   So if you found this property or a similar bargain then yes you could emulate this success.

Finding a good property:   First you have to have your finances setup in advance.   You will either need a large pile of cash  which most don't have or some form of financing established.   That would generally mean getting preapproved for a loan.   Then you'll need to watch for good properties.   You can do what I did and search Realtor.com frequently or better yet I'd recommend finding a buyers agent to do that work for you.  If you have a good Realtor  they can keep their eye out for good investment opportunities. And of course you'll need some luck.  

Construction knowledge or good help.    For this property to be a success we had to do some major structural repairs.   That kind of work can be very expensive.  Doing the work yourself like my father did can be a major difference between a good investment and a loss.   If you can do construction work yourself then buying fixer uppers can be a good investment.  But if you're not very skilled or knowledgeable at construction repairs then you may still be able to find good, dependable and inexpensive contractors to do work for you.   Finding a good, cheap and dependable contractor is no easy feat.  If you're not savvy with construction or have good help then I wouldn't recommend fixer uppers.

Bottom line:   Finding a good buy is key to financial success with a rental.   We found a bargain and benefited from fixing it up ourselves.   The previous owner was distressed and eager to sell.  We were lucky to find the bargain and be in a position to buy it and further lucky that being cash poor didn't bite me.  This property ended up a great investment.  

January 19, 2010

Researching More Stocks to Buy for my Roth IRA

I have funded my Roth IRA for 2010 so I now have more money to invest.   Now I have to decide what to invest the funds in.  My main desires for investments are those with a decent yield but still have solid financial and some growth potential.

A while back I talked about stocks & ETFs that I had on my watch list.  I'll start with those.

Vanguard REIT ETF (VNQ) - Yield 5.1%.  Expense ratio 0.11%.   This is a Vanguard ETF that invests in an index of REITs.   I like REITs in general and this is a good way to be in REITs in a diversified way.  However the yield isn't as good as I can find with individual REITs.
ishares high yield bond ETF (HYG) - Yield 7.8%   Expense ratio 0.5%,  This ETF invests in junk bonds.   The yield is very good but theres risk that interest rates will go up and the price of the fund would drop.   Theres no potential for growth in bonds like I could get from company stocks.
SPDR S&P dividend ETF (SDY) - Yield 3.72%, Expense ratio 0.35 This ETF invests in the stocks that comprise the S&P 500 Dividend Aristocrats.   The Dividend Aristocrats are the stocks in the S&P 500 that have raised their dividends every year for 25 years in a row or more.   The appeal for this fund is that its nicely diversified across companies with a proven track record and it pays a decent yield.
B P PRUDHOE BAY UTS (BPT) - Yield 8.0%    This is an oil trust.  So while its not an ETF I threw it in this pile since its not a standard company stock.   I talked about Investing in Oil Royalty Trusts before and BPT seemed to be one of the better bests in this field.

Looking at some individual stocks I was watching:

Dupont (DD) - Yield 4.78%, 5 yr avg 3.9%, payout 216%, PE 46, Market cap $31B
Pfizer (PFE) - Yield 3.7%, 5 yr avg 4.4%, payout 79%,PE 15.9, Mkt Cap 155B
BP (BP) - Yield 5.4%, 5 yr avg 4.1%, payout 118%, PE 21, Mkt Cap 193B
Verizon (VZ) - Yield 5.9%, 5 yr avg 4.6%, payout 94%, PE 16, Mkt Cap 90B

Dupont seems to be faltering on their earnings.   Pfizer has already had a pretty good run up in its price and its yield is only 3.7%.  BP's payout and PE are relatively high.    Verizon's numbers look OK with a 5.9% yield and PE of 16.  Plus Verizon's stock is down about 33% from its high from a couple years ago.   Overall Pfizer and Verizon look best among these.

Looking at Utilities

I ran a filter in Yahoo and looked for companies with market cap >= $5B, PE of 15 or less and yields of 4% or more.   A number of the results were energy utilities so I figured I'd take a look at some of those.

FirstEnergy Corp. (FE)  - Yield 4.68%, 5yr avg 3.5%, payout 61%, PE 13.07, Market cap $14.31B

Progress Energy (PGN) - Yield 6.3%, 5yr avg 5.3%, payout 97%, PE 15, Mkt Cap $10B
Ameren (AEE)  - Yield 5.6%, 5-yr avg 5.5%, payout 65%, PE 9.9, Mkt Cap 9.9B
2008 Annual Report Cut their dividend in early 2009 by 39%.  Has Baa3, BBB- and BBB+ rating with Moodys, S&P and Fitch respectively which is barely investment grade.
Xcel Energy (XEL) - Yield 4.5%, 5yr avg 4.5%, payout 66%, PE 14.6, Mkt Cap 9.8B

The yields on these energy companies seem pretty healthy and the risks don't seem very high for a utility.  Ameren seemed like a decent buy in this group.   But I don't see much room for growth in these companies in general.  

What about more REITS?

I also previously wrote about a couple REITs that I was buying for UpDown.  Those are :  GTY & MPW
But right now I've already got over 1/3 of my existing Roth IRA assets in REITs so I'm not really wanting more exposure to that sector.  I've decided against buying more REITs for now.

No decisions Yet

Right now I'm still doing research so I'm not going to buy anything immediately.   I want to continue to dig into the details and see what other stocks or funds I might want to buy.   From my research so far I'm leaning towards:  BPT, VZ, PFE, SDY, and HYG.   I may or may not buy some or all of those.

January 18, 2010

Will Kodak Printers Save You Money?

A few months ago my sister bought a Kodak printer in order to save money on their printing costs.   She had seen advertisements from Kodak advertising their cheap printer ink.  Kodak ink is $10 for black cartridge and $15 for a color cartridge.   That is much cheaper than the ink cartridges for other printers.  Our HP printer cartridges seem to cost about twice as much.

The Kodak printers seem to start over $100.    The cheapest I could find on Newegg was $120 and cheapest on Amazon was $100.   HP printers can be found for under $50.    So you've got about $50 higher up front cost to go with the Kodak printer.

Kodak's own analysis claims annual savings of about $120 over the average printer.    The HP models seem to be less than average and about $70 more than Kodak.  So it would seem to take less than a year to recoup the higher cost of the Kodak printer.   However the catch is that Kodak's analysis assumes average printing of  150 photos, 800 pages B&W text and 500 pages mixed text and graphics.   That seems like a LOT of printing.    I don't know if that is really a typical amount for a household or not.   It is definitely much more than my wife and I print.   I'd say that their average usage is around three times as much as we print.   If we print a third as much as they assume then we're only saving about $70 / 3 = $23.33 a year in ink using the Kodak compared to an HP.  At that rate it would take over two years for us to recoup the higher cost of the Kodak printer.   If you print very little than the Kodak printer will take years to pay for itself.

What is the quality difference? 

I bought my current HP printer because the quality on my previous Lexmark printer wasn't good enough.  So if I'm going to buy another printer then I would want to make certain that the quality is as good as my HP which I know has good print quality.

This article from the Boston Globe concludes that the Kodak is cheaper but the quality is lower.   But this article from Yahoo had a more positive view of the Kodak printers.   Skimming the customer feedback on Amazon it seems that HP printers have generally higher reviews than the Kodak printers.   I'd have to do a bit more research to get a clear picture of the quality difference but it seems HP has higher quality.

Bottom Line

I do think that Kodak printing is cheaper in the long run compared to most inkjets.   However if you aren't printing a lot then the higher initial cost of a Kodak printer may not be worth it for the lower cost ink.   Quality of the printouts may be a concern, if you're thinking of switching to Kodak printers then I'd compare the print quality first to make sure it meets your needs.

So the real answer is :  It depends.

If you do a lot of B&W printing then also see my previous topic:  Should you Buy a Laser Printer to Save Money?

January 17, 2010

Why Are Programmable Thermostats Better?

A while back I pointed out that you can save money with a programmable thermostat.

Programmable thermostats save you energy by simply helping you to automate turning the heat on/off.   If you manually turn your heat on/off the exact same way then thats the same impact.  The programmable thermostat is automatic so you can't forget.  Some fancy programmable thermostats have some built in logic to optimize the heat use, which means it will turn the heater on /off just enough in the right way to make it most efficient.  But most programmable thermostats are simply timers.   When it comes down to it a programmable thermostat is a convenient way to automate turning down/up your heat.

Keeping a constant temp is not cheaper than turning the heat down for 8 hours at night or when you're at work.   But turning the heater on/off for short periods is not going to save you anything.

However some people believe that if they leave temperature of their home at a constant level that it is more efficient.  I've seen this repeated on the Internet  myself.

From the government site on energy savings they say:
"A common misconception associated with thermostats is that a furnace works harder than normal to warm the space back to a comfortable temperature after the thermostat has been set back, resulting in little or no savings. This misconception has been dispelled by years of research and numerous studies. The fuel required to reheat a building to a comfortable temperature is roughly equal to the fuel saved as the building drops to the lower temperature. You save fuel between the time that the temperature stabilizes at the lower level and the next time heat is needed. So, the longer your house remains at the lower temperature, the more energy you save."

January 15, 2010

Best of blog posts for week of January 15th

A piece from the Consumerist on how Best Buy Optimization Is A Big Stupid Annoying Waste Of Money  tells about a $40 "optimization" service of questionable value that BestBuy pre-installs on PCs then pushes on customers.

Jim at Bargaineering asks Are Prepaid Legal Plans Worth It?  Its something I've looked into myself at my job and decided against.

Slightly Used Space Shuttle 30% off! Now only $28.8M.

If you've been looking to pick up your own used space vehicle now might be the time.   NASA has put their used space shuttles on sale for 30% discount off the original asking price.    They originally wanted $42M for them to buy a used shuttle after they were retired but now they have dropped it down to just $28.8M. 

Is it Worth it to Get a Costco Executive Membership?

This weekend we were at Costco to pick up a couple things and at the checkout the cashier tried to sell us on their Executive Membership.   With the Executive Membership you pay an extra $50 above the normal membership but you get 2% cash back on your purchases at the end of the year.    Deciding if the Executive Membership is worth it or not is pretty straight forward.   All you have to do is find out the breakpoint where the 2% back will be worth more than the $50 cost.

Costco Executive Membership is worth it if you spend more than $2500 a year at Costco.

There are a couple other considerations to keep in mind.   You should have a decent amount of certainty that you'll spend at least $2500 before you sign up for Executive membership.   I wouldn't spend the extra $50 on a vague chance you might hit the $2500 mark.     And if you're brand new to Costco then I wouldn't jump straight to the Executive membership without getting a good idea of how much you actually spend there.  Also note the cashback is in the form of a Costco store credit.  Presumably store credit that is usable to you since you're already spending thousands at Costco, but its worth noting that the rebate is not hard cash.

January 14, 2010

Why Do We Tip So Much?

I usually tip 20% on my bill when we eat out. I do this because thats the system we have. I tip lower if I get crappy service. Usually my low end tip for sub par service is 15% and maybe down to 10% if they are particularly bad. I feel I'm pretty generous with the tips. I can only remember one time that I left no tip and that situation was very warranted in my mind.

Overall I don't really like the system of tipping that we have in the USA.  I certainly don't have a problem with people making money.  Its just that the system we have just seems arbitrary to me. If you work at McDonalds you get minimum wage and no tips. If you work at a buffet you might get sub minimum wage and minimal tips. If you work at any restaurant that serves food then you are expected to get sub minimum wage plus 15-20%. So 3 different people doing basically the same job get none, some or most of their wages via tips.

I do think that people who work in restaurants should get a decent wage, but I just don't like the structure of the tipping system.

I also don't like the fact that tipping is a % of the cost of the meal. If I order a $25 steak then I'm supposed to pay $5 for the waiter to write my order down and hand me the food. But if I buy a $5 burger then writing that down and bringing it to me is only worth $1. Doing the same amount of work gets different pay rates simply based on the nature of food I order.   Of course the counter to this is that the service level and expectations at a fancy restaurant are higher so the compensation should be higher.

Tipping rates have increased over time for some reason. This report on tipping has a bit about history of tip rates. They cite references from 1895, 1928 and 1937 that said that 10% was the established standard for tips at the time. Then they have a 1984 reference stating 15% tips were typical and by 1997 someone mentions the figure moving to 20%. This MSN article from 2008 states 20% is the new 15%. So in my lifetime tipping has gone up at least from 15% to 20% and I am pretty sure I remember the range being 10-15% when I was younger. I don't know when we went from 10% to 15% for the minimum and it might have actually been before my time. Why have tip % rates increased? You might argue its to keep up with inflation but the price of food has been going up so tips would go up too. Why did we as a society decide that we should pay waiters 100% more over the past 100 years?

The system isn't even consistent from state to state due to differences in minimum wage laws.   In 7 states wait staff gets the full minimum wage. My state is one where wait staff gets the full minimum wage which here is over $8. So its not like most states where servers earn $2.13 per hour plus tips. They get over $8 as the minimum and tips are all on top of that. My sister used to average $15 an hour in tips at a smallish family restaurant with average price food back about 20 years ago. I can only imagine what people pull in at more expensive restaurants here nowadays.

Would service suffer if we had less dependence on tipping?   One argument for tipping is that it gives the servers an incentive to work harder.   I'm not sure how well tipping works as a reward or incentive for good work.  It seems that servers have the expectation that they'll get 15-20% in tips and if they don't then the customer must be a cheapskate.  If we tip people 15-20% all the time then they aren't really seeing much feedback on their performance and the status quo is that they get 15-20% in tips.  For tips to be a good incentive for performance we'd have to have better and clearer feedback.   In Europe they do not have much tipping that I've seen and in my limited travels there I didn't see bad service from wait staff.

 I would much prefer if we had less dependence on tipping and just had higher base wages.  

Photo by Unlisted Sightings

January 13, 2010

Samsung Bluetooth headset for $1 after a mail in rebate

Adorama has a Samsung Bluetooth headset for $1 after a mail in rebate.    Their price is $24 and the mail in rebate is for $23.   They also have free shipping.

I found this one on Slickdeals.net

When It Is Worth Moving Tax Deductions From One Year to Another

If you can move a significant chunk of your itemized deductions from one year to the next then it might save you on your taxes.   Are you just short of having enough deductions to itemize but you're able to move your deductions from one year to the next?  IF so then it might save you some taxes to move those deductions and consolidate your itemized deductions in one year.

Everyone gets at least the standard deduction no matter what.   So if you have deductions that could be itemized but which aren't enough to exceed thee standard deduction then carrying them forward another year might pay off.  

Simple example: If your only itemizable item is  $5,000 of charity a year then thats not enough to exceed the standard deduction, but if you made donations of  $10,000 in one year and nothing the next year then you can itemize and claim the full $10,000.

Here is a more detailed example:  

Emily is a single person making $45,000 a year.  She rents and does not have a mortgage deduction.   Her state taxes run her about $2,700.  Her only other itemized deduction is her charity contributions.   She gives  $2,500 a year to charities via cash contributions and donated items.   Between her state income tax and charity deductions her itemized deductions come out to $5,200 a year.   This is below the standard deduction ($5,450 for 2009) so it doesn't pay for Emily to itemize.    However if Emily delayed her charity giving from one year and instead gave double the next year she could claim $5,000 in charity giving for that year.   In other words instead of claiming $2500 in 2009 and $2500 in 2010 she could give $5000 in 2009 and $0 in 2010.   For the one year with double charity giving combined with the state income tax she pays she would have $7,700 in itemized deductions for that year.  Then for the year with no charity giving she could just claim the standard deduction.  With a standard deduction her tax bill is $5,200 but with the $7,700 itemized deductions she'd drop her taxable income by $2,250 and cut her tax bill by $547 to $4,653.

Even if you do have enough deductions to itemize then it can still make sense to move some itemized deductions from one year to another.

Another  example:  A married couple who has $9,000 in deductions from mortgage interest, property tax, and state income tax plus $3,000 in charity donations a year.   Normally they have $12,000 in deductions per year.   If they make $6,000 in one year and $0 in the next year they'll have $15,000 in one year and claim the standard deduction of $10,900 the next year.   Thats a $1,900 reduction in taxable income.

When it doesn't make sense

If you have annual deductions that that you can't really move and are more than the standard deduction then you won't benefit by moving other deductions.   

Here's an example:  Say you're a single person making $75,000 and you pay $6,000 in state income taxes.   The $6,000 is above the standard deduction so you will want to itemize in any case.   You'll get the full benefit of your other deductions

Generally if your mortgage interest, state taxes and or property taxes add up to more than the standard deduction then you may as well itemize every year.

January 12, 2010

My Mortgage Loan Horror Story

When I first bought my house around 11 years ago I found a mortgage broker in the local newspaper.  They advertised a good interest rate.  They even had the word 'integrity' in their name so they must be trustworthy, right?   I didn't do any research or ask anyone I knew for references.   Big mistake.

I called the company and I got preapproved.  I did not get a 'good faith estimate' from them in advance.  It was my first time buying a house or getting a mortgage and I didn't really even know what a good faith estimate was.  I was approved for the loan and everything seemed just fine.   I proceeded to hunt for a house and found one that I really liked and got an offer accepted.  Then when I went to sign papers to close on my home purchase the closing costs were about 100% more than expected.    I don't remember exactly but I think it was about $3,000 to $4,000 high.   I was shocked.   But then I looked at the papers I had and didn't have a solid quote on closing costs from them.   This was when I realized they were trying to rip me off.

Thankfully I stopped and decided to delay closing rather than sign the papers and go through with the mortgage.  I of course called the mortgage broker and asked what was going on.   I was first told everything was normal and these fees are nothing unusually.   Later I was told that the loan they'd approved had been mishandled.   Their manager called and tried to sell me on a different 80/20 style loan which I didn't want.   I eventually gave up as they weren't doing anything to really fix the situation.   They got a little angry at that point and told me they were sending the matter to their legal department.   I called that bluff though.   They weren't a big company and likely didn't have any kind of legal department and I doubted they even had a lawyer.  I hadn't signed anything committing myself to anything and I hadn't given them any money.  I was pretty sure they had no legal argument against me and nothing came of their threat.

Having given up on the crooked broker I now had to make a last minute scramble and get approved for another loan in order to buy the house.  Thankfully it worked out and I found a good lender that my realtor pointed me to.  The closing costs were much lower and the interest rate was fine too.  It all ended well.

I googled the name of the scam broker and there are legal notices and cease and desist orders filed online from the state about them breaking some rules.   They were fined at least once for operating under a name that wasn't filed with the state properly.   The owner of that company is in Linkedin with her last job listed as a branch manager at Countrywide mortgage.   I'm not surprised she ended up at Countrywide given their various legal problems, she would fit right in there.

Here is what I could have done better and will do in the future:

Shop around for a mortgage lender more.
Get references
Make sure you get a 'good faith estimate' up front and fully understand all fees
Don't fall for a very low interest rate and examine all the fees and points involved

January 11, 2010

Buying more REITs in UpDown

Practice invest

This article is about pretend investing that I do in the online site Updown.   I'm documenting my stock picking choices so that in the future I can look back and learn from my mistakes and successes.

I've been sitting on a pile of cash in Updown from stuff I've sold.    I've seen some of my REIT purchases go up quite a ways and I just sold off half my HPT to cash in profits.   So I figured I should go looking for some new good REITs to buy.

I ran a filter in the stock screener at Yahoo starting with just any REIT with a yield > 5%.    From there I examined the financials of REITs with attractive yields to see if any were good value.   I crossed off any REITs that seemed to be having troubles or otherwise on a downward path.   If I was interested after checking out their basic stats and finances I then skimmed through the last annual report.   After eliminating a few less attractive REITs I ended up with a couple REITs that I thought would be worth buying.  

Heres some detail on the two REITS and what I liked and didn't like about them:

Getty Realty Corp. (GTY) -   Getty owns and leases gas station and convenience store property.   The REIT was created as a spin off of the real estate assets of a gas station owner.   That company is called Getty Petroleum Marketing which is now Getty Realty's primary customer.  They are paying a dividend of 8.2%.   They have consistent revenue and profits with good funds from operations.   Their debt doesn't mature until 2011.   Pros:  Fairly safe business that is generally recession proof, good financials and low debt risk.  Con: Rely heavily on one customer Getty Petroleum Marketing.  2008 Annual Report.   Current Price: $23.09 Target : $26.50

Medical Properties Trust Inc. (MPW)  - As their name implies Medical Properties Trust owns hospitals.  Their financials are pretty solid.   Right now the yield is 7.7%.   They don't have significant debt due until 2011.    Pros:   Relatively safe sector.  Con: Not much upside, high executive pay.  2008 Annual Report   Current price: $10.28  Target $12.

Note the current prices listed are from a few days ago since I'm writing this after I did the initial research.

I bought both REITs in Updown then put in some sell limit orders to sell 50% of my stake if they hit my target prices.

January 10, 2010

Appliance Rebate Programs by State

The federal government has about $300M in rebates for energy saving appliances.    The money is being handled individually by each state.   So the details of what rebate you can get and how it work will depend on which state you're in.   You can visit this Energy Savers page to find out what rebates are available in your state.   If you're looking to replace an older appliance or make energy saving improvements then check out the details for your state to see what you might qualify for.

January 8, 2010

Best of blog posts for week of January 8th

Frank at BadMoneyAdvices asks Was the Last Decade Lost?  Its a response to an NY Times article that I was going to write about myself but Frank beat me to the punch.

10 Steps to Financial Success in 2010 from Get Rich Slowly is a good all around post on getting your finances in order.  If you read only one  personal finance post this year then this is a good choice.

The Digerati life brings us a money saving idea with How To Buy Cheap Eyeglasses Online.  Eyeglasses can be ridiculously cheap online.

Plus from Wisebread check out : Watch All The Documentary Movies You Can Handle, Free Online - And Yes, It's Legal.  Because I know you're all itching to get some free documentaries.

Get Rich Slowly tells us  The Best Time to Buy Almost Everything

All Financial Matters made a nice graph showing  A Ten-Year Look Back at Sector Returns for the Dow Jones Total Market Index

$25 ING Direct Signup Bonus Referrals

 If you want to get an extra $25 for signing up with an ING Direct savings account then you can get referrals via the Bargaineering ING Direct referral page.

If you're looking for a good online savings account then ING Direct is a good option.  I've had an account with them a few years and I've never had a problem.  

December Heat Bill Down 30% from Last Year

Since I got my home insulation improved I've been tracking my electricity bill this year compared to last to see how much we've been saving on our heat.   October numbers were down 50% and November was down 21%   

Our electric bill for December came out at $241.99.   Last year in December our bill was $313.   If I assume that the non-heat related electricity is about $80 then that means we spent $233 on heat last year and $162 on heat this year.  Thats a 30% savings on heat bill this December over least year.

December 2008 : $313
December 2009 : $242

The month of December was a little bit colder in 2009 compared to 2008.  In 2009 December had about 854 degree days here and in 2008 it was about 875.     I am also working with the general assumption that our electricity usage has not varied significantly this year compared to last year.

December 2008 : 854 degree days
December 2009 : 875 degree days

If you look at October, November and December combined we can get a better picture:

Total electric bill:
Oct - Dec 2008 : $679
Oct - Dec 2009 : $543

Estimated Electricity used for heat
Oct - Dec 2008 : $439
Oct - Dec 2009 : $303

 Difference = $135 or 31% savings in heat bill so far this winter

This winter has been a little colder than last year.
Total degree days
Oct - Dec 2008: 1,718 DD
Oct - Dec 2009: 1,827 DD

January 7, 2010

Key Financial Goals for 2010

It is important to have goals. I decided to lay out some financial goals for this year.

Fully fund Roth IRAs by $10,000

My wife and I would both like to fund our Roth IRAs. The maximum funding is $5000 so to fund both accounts is $10,000. I plan to fund the IRAs at the start of the year to get it done quick.

Pay $20,000 towards Home Mortgage principal

In 2009 we paid and extra $800 or $900 a month towards our mortgage. In 2010 I'll continue to pay extra towards the principal and have the overall goal of paying $20,000 extra on the mortgage. I'll do that by making $900 extra payments monthly and then making additional payments as funds are available.

Earn 10% return on 401k & Roth IRA accounts

I have about $35k in a 401k and my Roth IRA which I manage. I'd like to get at least a 10% increase on my assets on those accounts for the year. The larger chunk of my retirement savings are held by my employer in a pension fund and I don't manage that money.

Keep Household Spending flat

I expect that spending on our household "needs" bills will remain the same. I don't want our bills to go up so I'll do what I can to keep that spending from increasing.

Cut Discretionary Spending by 5%

Given our household income I don't think our discretionary "wants" spending is too high. But it would be great if I could cut it by 5%. I will try to do this by looking for bargains, making sure we're not wasting money on things we don't need and otherwise simply watching the budget.

January 6, 2010

Credit Line increase Denied!

Out of curiosity more than anything I decided to see if I could get my credit line on my Citibank Mastercard increased. For me they had a short form to fill out where you tell them your income, bank account # and amount of credit you want. I already have a $24,100 credit limit so that is awfully high and I got that limit a couple years ago when banks were a lot more free flowing with their credit . So I'm really not offended or surprised they declined me. One reason I tried for the limit increase is that I'd heard a higher available credit line is supposed to help your credit score.

Below is a slightly edited version of the message I got from Citi:

Dear JIM xxxxx:
Thank you for your interest in obtaining an increase in your
revolving credit line on your Citi® Dividend World account.
We are unable to approve an increase for you at this time. Our
review of your total income and credit profile indicates that you
already have the maximum amount of revolving credit our policy
will allow.
If you have any questions regarding your request, you may contact
us at the address above. If you have any other questions
regarding your account, you may contact our Customer Service
Center at 1-866-xxx-xxxx.
[Guys name]
Mgr., Consumer Credit Services

Sick Cat = $160 Vet Bill

We noticed recently that our cat was sick with something. She was sneezing a lot, her eye was a little runny and she was acting a little weird. My wife took her to the vet and they said she basically had some sort of flu virus. It doesn't seem serious and the cat should be OK thankfully. The vet gave the cat some antibiotics and fluids and also gave us a couple different medicines to give her. Overall the bill ended up about $160. Thats not bad in my opinion for an office visit and medicine. Thankfully our cat should be fine.

This is a reminder that pet expenses can get high. You never know when a pet may get sick or injured and vet bills can be significant. When my previous cat got sick the vet bill was a few hundred dollars. I have friends and relatives who have had vet bills for over $2,000 level.

Previously I looked into getting pet insurance but I didn't find a policy that seemed like a good deal. My preference for paying for vet bills is to have a designated pet emergency fund. By this I mean that you should set aside some funds in a savings account labeled pet emergency fund. You can put $100 or so into the fund automatically every year to keep it funded. I don't officially have such a fund setup myself but have a large standard emergency fund so we could dip into that if we need to pay a large vet bill.

January 5, 2010

FREE 20 pack of Nicorette for Costco members

If you're a smoker then I strongly recommend you get sign up for this FREE 20 pack of Nicorette gum.  From that page, click on the 'get a sample' link.    There you give your name, address and some details about your smoking habits.   You have to be 18 years old.

I quit smoking using nicotine gum and it worked great for me.   Quitting smoking is good for your health and your finances.

I found this offer via a link from Wisebread.

High Efficiency Gas Furnaces are a Very Good Buy

Recently we had to replace a furnace in a rental. We paid about $2000 for the furnace and we didn't shop around for an efficient unit. Unfortunately rentals do not qualify for government energy savings tax credits or I'd have an extra incentive to get an efficient unit. Plus we were in a bit of a rush to get the heat back on considering its the winter. We really should have shopped around a bit more but $2000 seemed like a pretty reasonable price and honestly we rushed it. If it were my own home I'd have very likely gone for the high efficiency model.

In your primary home you can get a 30% tax credit from the federal government for a higher efficiency furnace so it can make getting the high efficiency unit a no brainer.

First Price example

Its a little hard to find pricing data on furnaces but I found a website that has some prices. Keep in mind this is just one example of prices and what you'll pay locally will likely differ. This is a discount website so their prices are lower than most I'm sure. So don't read much into the numbers please they are just for example sake. An 80% efficient 90k btu furnace is $833. To get a 95% efficient 90k btu unit you have to pay $1069. That is a $236 difference. You can get a 30% tax credit for the higher efficiency unit, so the government will pay $320 of that cost. With the tax credit the more efficient unit is actually cheaper.

80% unit = $833
95% unit = $1069 - 30% tax credit = $748.30

So the basic cost of the furnace itself is cheaper with the higher efficiency unit. Thats a no brainer to me. With the tax credit your out of pocket cost is lower for the better furnace so its the better option for sure.

Another price example

Costhelper says this about furnace costs: "Replacing an older gas furnace in a central heating system with a mid-efficiency (73-83 percent) unit when there's existing useable ductwork starts around $1,700 -$4,000, but depending on complexity and location can run $5,000 -$7,500 or more" and "A replacement high-efficiency (90-97 percent) gas furnace when there's useable existing ductwork starts around $2,500 -$6,000 but depending on complexity and location can be $7,000 -$10,000 or more."

The $1700 to $4000 range for mid efficiency and the $2500 to $6000 range for high efficiency is pretty broad range. But you're looking at a $800 to $2000 difference in the costs. Say you had a quote for $4000 for an 80% and a quote of $6000 for a 95% then thats a $2000 difference for the high end furnace. But with the tax credit you get 30% of the $6000 for $1500 (max credit). That makes the difference only $500.

You'll Also save Lots of Energy

Plus you have to remember the higher efficiency unit will save you heating costs as well. The 95% unit will save around 15% more than the 80% unit. So if your bill with the 80% unit would have been $1180 your 95% unit would be only $1000. Thats a $180 savings per year.

The energy savings are big.

Lets look at the savings long term. Consider this if you compare the cost of buying an 80% furnace versus a 95% furnace over 10 years:

80% furnace
purchase cost = $4000
Energy cost x 20 years = $1180 x 20 - $23,600
Total cost for 20 years = $27,600

95% furnace
purchase cost = $6000
Tax credit = -$1500
Energy cost x 20 years = 1000 x 20 = $20,000
Total cost for 20 years = $24,500

Savings over 20 years = $3,100

High efficiency gas furnaces are a great buy compared to mid or low efficiency units. Next time you're shopping for a new furnace make sure to look into a furnace with an efficciency rating >95% and take advantage of the government tax credits.

Photo by Brandon Stafford

January 4, 2010

Updown Performance = +22% for 2009, +2.8% for Dec.

Practice invest

My Updown account is currently up about 22% for the year. I'm up 2.8% in Dec. The S&P 500 is also up 2.8% this month but for 2009 total the S&P is up 26% total. So the S&P 500 beat me by 4% in 2009 overall.

Overall I'm up a total of 4.7% since I started in March 2008 and the S&P 500 is down 15.3% in that time. So I'm beating the S&P 500 by over 10% for the past 21 months.

Here is a chart showing the monthly performance of my portfolio versus the S&P 500 :

I beat the S&P in about half the time in the past 7 months. I'm about 3.3% ahead of the S&P 500 since June. Not bad for little over half a year.

In December I made a few minor trades. I sold off AET, BEE, UL & HPT. I sold AET, BEE & UL to dump them and cut my losses. I sold HPT to cash in some profits.

I dumped AET & UL since they weren't performing and never really did. I honestly don't remember my exact logic or rational when I bought them. I probably used a filter on PE, PEG, earnings, or something similar. This brings me to a point I've learned: You should document the reason you buy a stock when you buy it. That way in the future you can look back and know exactly why you bought something when you did. I won't learn from my mistakes and failures if I don't remember why I did what I did in the first place.

Updown is a fun game. I play it for entertainment purposes mostly but it is also an OK learning tool. I can use Updown to try out stock trading without risking my real money.

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