February 28, 2016

Does The 1% Rental Rule Really Make Any Sense?

I'm not sure the 1% rule for rentals makes any sense.

If you aren't familiar with it, the 1% rule for rentals says simply that your rent for a rental property investment should be 1% or more of the purchase price.  So for example if the property costs $100,000 then you'd want a monthly rent of $1000 or more to pass this rule.

I have a few problems with the rule.   Mostly its applied too broadly and the exact costs differ too much for the 1% rule to really be useful.     I also don't know the origins or logic of the rule so I don't know how we could modify it to individual situations or to evolve over the years.

First big flaw I think the 1% rule has is that it is applied equally across the nation even though situations vary a lot.    For example, the property taxes and insurance rates are going to vary across the country but this is never accounted for in the 1% rule.   Here's an example of a couple houses to illustrate :

Texas :
Price $100,000
Rent : $1200
Tax : $2400
Insurance : ~$600
Tax and insurance = $3200 or 3.2%

Northwest :
Price : $100,000
Rent: $900
Tax : $1200
Insurance : ~$300
Tax and insurance = $1500 or 1.5%

The taxes and insurance alone are a $1700 annual difference or 1.7% of the purchase price.

I estimated the insurance rate for that Texas house.    But I think thats a fairly good guess.

Interest rates in 1980 were around 10%.    Today they are around 4%.   (see history of mortgage rates) If you finance the property with 25% down and a $75,000 loan then you would have been  paying $7500 a year in interest in the 80's and only $4000 a year now.   Thats a $3500 annual difference in interest you'd be paying from then to now.   Thats pretty huge.

Second, the 1% rule has been around for decades but hasn't evolved with the changes in the interest rate environment.   Interest used to be a lot higher in the past than it is today.  If it made sense to buy a house as a rental under the 1% rule in the 80's when interest was higher then it should make more sense to buy such a house today.

A house in Texas in the 80's could have had $7500 in interest costs and $3000 in tax and insurance costs for $10,500 total costs.   You'd almost have to hit the 1% rule then just to over your basic carrying costs.   You'd be a "success" with the 1% rule if you took a mere $1500 net a year.   If the house above with its $1200 rent was bought in the 80's then its net would be just $3900 after interest, tax and insurance.

Buying today in the Northwest by comparison you'd have $1500 in tax and insurance and just $3500 in interest and that $900 in rent would give you $10,800 gross for a net $5,800.   Yet this Northwest house at 0.9% rent / purchase is a failure.

If you combine the difference in interest, tax and insurance and buy in different locations in the 80's versus now then you could get :

Northwest house today :   Rent is 0.9% and nets $5800
Texas house in the 80's :  Rent is 1.2% and nets $3900

Yet the 1% rule has not changed and would have been applied the same in the 80's in Texas as it is today in the Northwest.

Third thing the 1% rule fails at is accounting for any other costs.    What if your rental has a HOA fee and it requires you to pay the water, garbage and heat?    Where does that money come in versus a property with no HOA where the tenant pays all utilities?     I have a single family home where I pay no utilities so those costs for me are $0.   My dad has a four plex where he has to pay water, garbage and (until recently) he had to pay the heat and its not in a warm region.   My dads bills for utilities would have been running easily $300-400 a month for that property or $75-100 per tenant.  My dad changed the heat setup a few years ago so he no longer pays those utilities.    But the 1% rule would treat these properties the same and doesn't consider the different utility costs.


February 26, 2016

Best of Blogs for Week of February 26th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week

Inc. via Slate tells us How This Company Makes $70 Million Selling Random Stuff on Amazon


February 25, 2016

BPT Share Prices vs Oil Prices

I've owned BPT shares for a while now.    With the plunge in oil prices the performance of BPT hasn't been pretty lately.

If I were to try to time the oil market (which I am not recommending), then I think that buying some BPT right now might be a good idea.   The shares are trading just under $29 as I write this.   If oil recovers, as its likely to eventually do, then BPT will go up.    BPT doesn't track oil exactly but its very close and the price goes up and down with oil.

To see how well BPT tracks oil I got the last 10 years worth of monthly prices and charted them together.

Here is the chart:

I used the monthly closing prices of BPT off Yahoo finance.  Note thats just the share price and does not account for dividends paid.
Crude oil prices are from the EIA and are the WTI Cushing, OK price.

I'm actually not thinking of doubling down on BPT right now and in fact I'm considering closing out my Roth IRA with Scottrade and transferring to Fidelity.

February 24, 2016

$20 Cash Back on $20-40 Gift Card Purchase at Raise via TopCashBack (new users)

This is a special promo from TopCashBack.   The deal is for new TopCashBack users only.

If you buy a $20-40 gift card at Raise.com via TopCashBack then you'll get $20 cash back from TopCashBack.

Deal details :

- open until 11:59pm PT on Thursday, February 25, 2016
- available on gift cards priced between $20 and $40
- subject to supplies and shipping location availability
- applicable for online sales only, for purchases made directly after clicking through TopCashback.com

One per customer.

Note the links here are referral links and if you use these links to sign up with TopCashBack then I'll get a referral from them.
--This article may contain referral links which pay this site a commission for purchases made at the sites.

February 23, 2016

Don't Try To Live in S.F. or NYC on Minimum Wage

You really should NOT try to live in a very expensive city like San Francisco or New York City on a minimum wage income.   A young woman named Talia apparently did not realize this.   She recently publicly whined at her companies CEO about how little money she makes and how she can't afford to eat.

Talia Jane's : An Open Letter To My CEO:  You can read the whole thing if you want but the key of the letter is where she says: "got paid yesterday ($733.24, bi-weekly) but I have to save as much of that as possible to pay my rent ($1245) for my apartment".    You really can't expect to afford to eat, drive, pay utilities, etc with the $200 a month left after paying rent.

There is a  customer support specialist job opening at Eat24.    But I would not recommend taking that job then trying to live in S.F. on that income alone.  

I doubt that job opening is just because they fired her after her rant.   Its more likely that they have that job open continuously.     Customer support service jobs are entry level high turn over positions.   They likely go through people on a continual basis and are always having to hire and train different people as others leave after a few months or maybe a year or two.

The Yelp CEO says he agrees SF is expensive but that her firing wasn't his doing.

Minimum wage is currently $12.25 in S.F.  But if she waited a few months she'd get a nice raise.
 S.F. minimum wage is going up... $13 in July $14 in July '17 $15 in July '18 I'd like to get 6.1%, 7.6% and 7.1% in the next 3 years but I know that ain't gonna happen.    I don't think we can really expect more help from the city of S.F. in this matter.  

I'm not sure what more we can really expect from Talia's employers.    $12.25 an hour for an entry level job that doesn't require college plus apparently has 100% free benefits and free food at work isn't a bad deal even in a city like S.F.  

I wonder what Talia's roommate thinks about all this?    Oh, wait, she never said anything about having a roommate and didn't talk about paying half of the $1245 a month, so apparently Talia doesn't even have a roommate.    Wow.     Seriously?      Trying to live in one of the most expensive cities in the nation, if not the world, on minimum wage AND doing it without sharing housing?   I mean really... ?     Even the totally unrealistic financial situations we see in TV sitcoms or dramas like Friends or Girls make it pretty clear that low wage earners in SF or NYC don't get the luxury of single occupancy housing.

I wouldn't try to live on minimum wage in most any city without a roommate.   Its really not going to work any better in most any city, not just the most expensive places.  

But even if Talia did have a roommate it would still be a significant struggle to try and live on ~$800 a month after rent is paid.     Its not impossible like living on $200 and maybe she could manage it but it would probably be pretty hard.    I wouldn't recommend it.  I recommend making more money if you've got a choice.   Eat some cake too while you're at it.    Or maybe Talia should follow the example of one of her ex coworkers and move to a city where minimum wage is a livable wage, if a low wage is all her skills and experience and career aspirations are going to get her.   Theres nothing wrong with wanting to get an English degree and then wanting to go write snarky comments on Twitter for a living.   Just don't expect corporate America to throw money at you for it.    And definitely, absolutely don't expect to be able to live in an over priced city like San Fran or NYC on your minimum wage without a roommate.     Its not Talias ex employers that made that plan fail.   that plan was Talia's plan.   That plan was doomed to fail from the start.


February 22, 2016

Best of Blogs for Week of February 19th (late edition)

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week

I see I forgot to hit the 'publish' button on this one Friday afternoon so its going out Monday.

MyMoneyBlog questions Best Asset Allocation Plan: 100% Stocks, Forever?

They also discuss Real Estate Crowdfunding 10-Month Update – Patch of Land


February 21, 2016

My Sapphire Aspirations Denied : Chase 5/24 Rule

Late last year I applied for a Chase Sapphire card.  The card has a 50,000 point bonus when you spend $4000 in the first 3 months.    That is good for $625 in travel.   Thats a nice bonus.   My credit score has been over 820 for a few months and I haven't signed up for any cards for a while so I figured its about time to get some more bonus money.   Chase turned me down.     I was too ashamed to talk about it until now.  Not really.

This is the first time I recall being turned down for a credit card forever.    I can't remember it happening before.   I imagine it might have happened at some point in my early 20's when I was broke, unemployed and in debt but even then I am not sure.   They used to throw credit at college kids.  I was slightly offended that Chase did not deem me worthy to carry their Sapphire card.   It could be a little puzzling given that they already gave me a Freedom card and a IHG card with a very high limit as well as serving as our primary bank.    They know I'm good for it.    But I figured that the obvious answer was that they thought I had too many credit cards.    I've been signing up for cards more and more lately to cash in the bonus money.  

My suspicions were proven when I heard about Chase's 5/24 rule.     There is a FAQ covering the topic at Flyertalk     Various other sites discuss it as well.   Apparently the rule is that Chase will deny applications for their Sapphire or Freedom cards if you have opened 5 or more cards within the past 24 months.

Most recent cards I've applied for :
3/14 - Barclay Salliemae
3/14 - Fidelity Amex
3/15 - Amex Blue
3/15 - IHG chase
4/15 - USBank Cash+
4/15 - Citi Thankyou
11/15 -  Chase Sapphire - denied

So given that history, it will be next month when I'm past the point of having 5 cards opened in the previous 24 months.   I should then be able to apply for the Chase Sapphire card and hopefully not be spurned yet again sometime post March.

Or my wife could just get one.  


February 18, 2016

Are We Due For An Inflation Spike?

When I was a kid the country went through a really bad period of inflation.   I was just a kid at the time so I didn't know what was happening at the time and I actually don't remember any of it.   I only now hear my dad occasionally recall bitterly about the >10% interest rates he was paying on a mortgage.   Recently inflation has been very tame.   Its hardly an issue.  But could we be due for another period of high inflation?

First I'd like to get a picture of how frequently we have seen high inflation periods.   The WSJ published A Brief History of U.S. Inflation Since 1775 which has a chart showing inflation back to 1775.   In that chart we can see periodic periods of high inflation.

There were large peaks of inflation around the years 1775, 1795, 1815, 1865, 1915, 1945 and 1975.
Those peaks are separated by 20, 20, 50, 50, 30, and 30 years respectively.  We haven't gone longer than about 50 years without seeing an inflation spike.   The last inflation spike was about 50 years ago.   We seem due for an inflation spike.

Of course this doesn't mean we're gonna have an inflation spike any time soon.    If you look at the chart from 1775 to 1835 you'd conclude that inflation spikes happen every 20 years and that in 1835 we'd be overdue for one.   But then it took another 30 years after that to see a spike.   For all we know right now we're in a rare long period of low inflation that could last 100 years in total.

Most of the high inflation periods had a cause.  War.   We saw high spikes of inflation near wars : The Revolution, War of 1812, Civil War, WWI, and WWII all coincided with major inflation spikes.
I found the article War and Inflation in US History, Not Worth a Continental at The MarketOracle that also has a graph of US inflation history and points out all the wars that matched inflation periods.   They show how each war the US has been in has had an inflation spike associated with it.   That is at least up until the most recent conflicts in the middle east.    So maybe the impact on inflation due to war is different now.

Monetary policy changes can also cause inflation.  In that article from Market Oracle they point to a couple changes in currency policy in the US that coincided with inflation spikes.   People are worried that the monetary policies that the Fed has had for the past several years will ultimately cause inflation.   The quantitative easing policy has effectively printed a pile of money that should, one would assume, result in inflation sooner or later.   But that hasn't happened,, and continues to not happen and not happen,... even though some people have been predicting "hyperinflation" any day now for the past 7-8 years or so.

You'd expect recent wars and monetary policy to cause inflation but it hasn't.   Maybe things have changed and we've learned how to control inflation.   Its hard for me to think that we've truly tamed inflation and that we'll never see an inflationary spike again.    It could all turn south any day now and inflation may be on the near horizon as an inevitable result of the Feds actions.  Or maybe not.  Maybe we'll continue to see the low inflation we've seen the past few decades.   We might have a big war (relatively speaking) that will result in high inflation.   Or maybe not.  

Given what we've seen in history, I think its reasonable to expect a decent spike of inflation at least in some point in the next 20-50 years.   Its not a given but it could very well happen.    Its something you should consider and prepare for the possibility.

Bottom Line:  Are we due for an inflation spike?   Maybe.  Maybe not.

February 16, 2016

SimpliSafe2 System at Amazon for $220

Amazon has a SimpliSafe2 home security system for sale at $220.   This kit has a smoke alarm and a water sensor.    Buying this kit direct at SimpliSafe would normally cost you around $300.

SimpliSafe2 Wireless Home Security System 8-Piece Plus Premium Package

Looks like a limited time sale, but I don't know when the deal expires.

We've had a SimpliSafe system for over 3 years now.   See my review.   Monitoring is $15 /month with no contract.

--This article may contain referral links which pay this site a commission for purchases made at the sites.

Vehicle MPG by Income Level

This is kind of a random piece of data but I found it interesting.  

I got the numbers below out of a report titled Household Income and Vehicle Fuel Economy in California  That report is specific to California but its probably similar to national figures.    Its quite likely that trends differ some based on region but probably not by a lot.

Here is the table :

gal/day mi /day MPG
$0 to $25k 0.9 20.7 23.9
$25k to $35k 1 24.1 24.6
$35k to $50k 1.2 29 24.8
$50k to 100k 1.5 36.7 25.6
over $100k 1.9 47.2 27
all incomes 1.3 31.7 25.2

People with higher incomes have more fuel efficient cars.   I'm going to hazard a guess that this is in large part because people with higher incomes generally drive newer cars and newer cars have gradually better MPG ratings.

People with higher incomes also drive more in general.   I assume this is a combination of factors.   A lot of lower income households are people who don't work or are retirees and thus have less need to drive.   And of course the cost of gasoline keeps lower income people from driving as much.


February 14, 2016

Opinion: 50's to 70's Classic Cars Will NOT Appreciate As Well Moving Forward

Classic and antique cars have been a fairly good investment in the past.    CNBC wrote last year that Classic cars outperform global stocks.   Though that data only looks at cars over $500k so its not your typical car buyer.   But the general trend still holds.    Cars have been a good investment if you buy the right ones.  

I don't think this is going to continue as the Baby Boomer generation ages.   For two key reasons.  First they are going to gradually age and pass away and their cars will enter the market.  
Second the younger generations don't have the same nostalgia as the Boomers do for 50's 60's and 70's cars.

Fortune magazine has already reported what they saw as  The bear market for classic American cars back in 2014.   That seemed to be mostly 50s cars but I assume it will start with the older cars and then progress into the 60's as people age.

If you're considering buying a 60's or 70's car now and consider it an investment then I'd certainly be wary about the future value longer term.     For investment purposes an alternative might be to buy 1980's cars now.  Cars from the 80's are less likely to have collector value today but as the Gen X people like myself age some the value is likely to increase.       Tricky part is finding the right cars now that will develop into classics.    Hagerty has a list of THE GENERATION X TOP 40/40/40: THE 1980S subtitled "40 Collector Cars, Built In the Past 40 Years, That Cost Under $40,000".    Those kinds of lists can give you some ideas, but any such investment is speculative in nature.   Its feasible that us Gen X won't start buying cars of our youth as we have mid life crisis and increased disposable income.


February 12, 2016

Best of Blogs for Week of February 12th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week

DoughRoller explains How to Pick the Best Student Loan Repayment Plan


February 11, 2016

Could I Retire Today? - Feb. 2016 Edition

In August of 2014 I asked the question Could I Retire Today?    The answer was yes, but it would require us to move to my hometown where my dad still lives which has a cheaper cost of living and lower housing costs and rental returns.

A quick summary of that possible retirement scenario from 1.5 years ago was :
We would keep the rentals we jointly own with my father and try and beef up earnings on them by me helping my dad to renovate.
We'd sell all our other properties we own in our current city and move to my dad's city.
This would net us about 300k to spend on a house and some rentals.
I figured total income would end up about $33-42k including $12k from retirement accounts (using 72t early withdrawal) and a range of $21-30 from rentals.
I figured basic living expenses of about 25k which would give a good surplus.

That was the situation in 2014.

I took another look now and after some rough figuring, I think I could retire right now and stay in our current city.    To do it we would have to downgrade our current house to something cheaper.  We would also sell the out of town rentals and then pay off our mortgages.   In the end we'd end up with three paid off houses here.   That would include two houses we already own as rentals.    The two rentals would give us about $20k of income.    With the $12k from our retirement accounts we'd have about $32k annual income.   With the same $25k budget for basic expenses that would give us $7k a year for entertainment and margin.

I could modify the plan by keeping the rentals in my dads home town and using their income to continue to pay the mortgage on one of our current rentals.   That would be about a wash because the profit on those properties just about equals the mortgage interest and principal payments.   If I did that we'd avoid tax bills on those properties and I'd have the opportunity to spend some time in my dads town working on those properties to renovate them and improve their income.   And even if we didn't have any plan to keep those properties long term we could hang on to them until its more opportune to sell them.  

The only real change I'd have to do to switch to this kind of early retirement is to downgrade our current house into a cheaper home and then start drawing down retirement.


February 9, 2016

What Are Binary Options?

I know only a little about stock options.   Generally you can buy an option to purchase or sell a stock at a future point.   I have had options at work granted to me by my employer.  They allowed me to buy my our company stock for a set value, say $20, and then if the stock went up I'd be making money.   So when I hear about Binary Options, I think this is some fancy way to invest in stocks.   Nope...

Read this article at Forbes : Don't Gamble On Binary Options

They do a good job explaining that binary options are really just a form of gambling.

Also be aware that they are often unregulated and read the warning from the SEC : Binary options and Fraud

So what are they?  In short :
You can make a bet that a stock will go up or down for a very short time period.  For example you buy a $100 option that it will go up.   5 minutes later if you are right you get $170.  If you are wrong you get $15.    Do that 1000 times spending $100 x 1000 or $100,000 and get it right 50% and you make $92,500 and you lose $7500.    The allure here I think is that people think they can make informed guesses about what a stock or commodity will do.   But you can't.

Avoid binary options.  Its just gambling and the odds are stacked against you.    Plus its unregulated and prone to fraud.


February 7, 2016

Gasoline Price Component History 2000 to 2015

Gasoline should be cheaper than it is today.   It will likely fall further in the next few weeks.   Oil dropped from about $50 a barrel down to around $30 in the past 3 months.   That should cause gasoline to drop further than it has.    But theres some delay between gas price drops and drops at the pump due to the time to refine and distribute and then sell gas at retail.   We could see gas hit  around $1.50 level within a month.    Anyway... that line of thinking is what lead me to the information below.

EIA has a breakdown of the component prices of gasoline for refining, distribution, taxes and oil.

Here's a graphic :

(data source: EIA.gov ; click for full size)

Taxes are the only constant.   Refining and distribution bounce up and down a bit.   Oil is main factor that causes the larges swings in the retail prices.


February 5, 2016

Best of Blogs for Week of February 5th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week

DQYDJ shares Makeup of the US Workforce by Generation, 1962-2015: a Calculator

TheSimpleDollar lists Eight Common Myths About the FAFSA, Busted


February 4, 2016

If You're Buying a Fixed Annuity Then You Might NOT Want To Wait For Better Interest Rates

Right now interest is low and this is causing the payout on fixed annuities to be low too.   I figure if you're considering buying a guaranteed life fixed annuity right now then it might make sense to wait a little while and see if rates go up so you can get a better monthly payment.   But after looking at the numbers a little, I'm not sure if it will pay off to try that.

I tried to find historical rates for fixed annuities and couldn't come up with much.   The ImmediateAnnuities site has a chart going back to 2003.    Thats not very far but it does show how annuity rates do seem to track in proportion pretty well to AAA corp. bond rates.  

Today if you're buying a fixed annuity then a 65 year old male can get about $534 per month for $100,000.   A 70 year old would get about $598.   So simply buying later will get you more which is based off the lower life expectancy for a 70 year old versus a 65 year old.  

Lets say that you simply lived off of your savings and spent the same $534 per month for 5 years.    You could take about $32,000 and put it in a 1% savings account and drain that down over the 5 years.   The other $68,000 you could put in CDs for 2% and end up with about $75,000.    At 70 years old that $75,000 will only get you about $448 at todays rates.    Now the idea with waiting is that you should be able to get a better annuity rate in a few years if or when interest rates go up.    But in order to get back to at least the $534 a month you'd have had if you bought at age 65 you'd have to have rates go up about 20% from where they are now.    This is actually relatively likely.    But its no given.  

I'd figure roughly that interest rates will need to go up about 2% in that 5 year period just for you to get back to the break even point.   Thats not a safe bet.   Its not a bad bet but its not something you can really count on either.  

February 3, 2016

Costco Membership Plus $20 credit and AA batteries, other coupons - $55 at LivingSocial (new members)

LivingSocial has a deal right now for : Costco Membership + Bonus $20 Costco Cash Card and Coupons 

The deal is only for new members or people who haven't been a member since at least Oct. 2015.

The voucher costs $55 which is the same as the normal cost for a Costco membership.   But you also get $20 cash card, a 72 pack of AA batteries, a free pizza and some other items along with it.

If you use Discover Deals to buy the LivingSocial coupon then you can also get 10% cashback which will make your net cost $49.50.   Or you can look for other cash back portal deals at CashBackMonitor.  

If you ignore the batteries and pizza then this is like getting a Costco membership for net cost around $30, or almost half off.

--This article may contain referral links which pay this site a commission for purchases made at the sites.

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