big decisions

i've been looking at our finances and looking at ways to improve our cash flow. on thing that has been jumping out at me is a rental property that we purchased about 8 years ago on a fifteen year note. the cash return on this property is pretty close to 0%, though, we obviously are increasing our equity position with tenants paying down the note each month.

in 7 years, we will own the property free and clear, and it will start returning us around $1,000 a month (after property management, hoa fees, insurance, and taxes) in cash.

we could pay this down early and start getting the benefit of this return today, though this would be a pretty big drain on capital, it's hard not to consider. the annual return would be around 12-13%, the only real concern that i have is the opportunity cost of putting all that money into play. over the long term, it's hard to refute this as the best play -- we have the money earmarked for investment, anyway. the other option would be to put that toward another property, but the cash return on that would probably be half.

it seems like a no brainer, but i'm still on the fence about it. when my wife and i got married, we joked that she is responsible for all the small decisions and i'm responsible for all the big decisions, and up to this point there haven't been any big decisions.

stay tuned . . .

property taxes

because we don't have a state income tax here in texas, our property taxes are relatively high -- on the order of about 2% or more of the assessed value of the home. so, for a while, i had been escrowing that, so it was included in our monthly mortgage payment. a few years back, i thought that there was clear benefit to holding that myself. our annual property taxes are around $12,000, so i figured that i could earn some interest on that money before i had to pay it out.

mathematically, it all works out, i even set aside an estimated amount at the beginning of the year so that i won't be caught off guard. but with interest rates these days, that amounted to little more than $10 this year! i'm going to shop around a bit for a better rate, but even if i find something that pays 1%, which at a glance seems like it would be doable, that would only amount to $100.

emotionally, there are a couple of factors at play. one, it's a bit painful to write that check every year, even though the money has been set aside. two, around about june, long after the pain of writing that big check has worn off, i get a exaggerated sense of wealth, because that money is sitting around. i know it doesn't make sense, but that's the truth of the matter.

from a purely mathematical standpoint, i still don't like escrowing, but there are clearly some advantages to it. and, every once in a while, you can benefit from it, as banks will do an escrow analysis only every once in a while, you can actually have less in your escrow account than what is needed to pay your taxes. this essentially amonuts to a 0% loan from the bank. of course, the opposite is also true, so it probably balances out.

for now, i'm still going to stick with my non-escrow plan, i feel that it gives me a bit for flexibility, but definitely something to think about.

reboot

i've been purposely anonymous (not just by name, but also in not divulging my age, profession, income, etc.) in my writing on this blog from the beginning because i felt that would allow a broader audience to read my posts.

an interesting thing happened the other day that made me rethink this approach, and made me think that i should narrow my focus and write with a very specific and personal audience in mind. you see, i was having lunch with a co-worker and the topic of goals, retirement, and the like came up. now, here's a guy i respect very much, who is about the same age as i am, about the same income level, and for all practical considerations, we could be practically twins on paper.

when the talk moved to retirement, i shared with him that my goal is to retire or semi-retire by the time i am 45 years old. i am currently 36. he was a bit shocked, and floated a big question my way: "what's your secret?"

i was perfectly honest with him. i don't have any secrets. for the most part, i am a pretty normal guy. i have not had any big windfalls occur in my life. i have not made a ton of money in stocks or real estate. i did not come into any family money by birth or inheritance. i am not an entrepreneur. i do not own my own company. i am a hard worker and make a decent wage.

there might be some small things that may separate me from my co-worker. i have never carried any credit card debt. i did not take out any student loans. the only debt that i have ever carried is mortgage and car loans. i have been an aggressive saver most of my working life.

i am married and my wife and i were dual income / no kids for about 7 years. my wife is now part time and we have 2 kids -- a one year old and a three year old. we live in the suburbs some 20 miles north of dallas, texas, in what is for most respects our "dream house".

i used to think that i'd need 2 million dollars to retire, but these days i feel like retirement or semi-retirement can be accomplished with far less. i could be dead wrong. but, this is what i am going to write about.

investment property #1

after weeks of looking and looking, i think we finally found a "deal". over the course of the past couple weeks and dozens and dozens of house that we looked at, we saw homes that were mainly overpriced. even some that were in a terrible state of disrepair were asking for a pretty penny.

then, this sunday, everything changed. we looked at two homes, and we liked both of them! one was a foreclosure and would need a good amount of work to get it into a habitable state, but it was at least priced right. the other had been sitting on the market for a while and had just dropped the price about 12%.

this second one was in pretty good condition and had been upgraded a fair bit. and, the listing agent was offering that the seller was "motivated". we'll see just how motivated he/she is as we'll be making an offer at a discount of another 7% of the list price.

my my figures, based strictly on cash flow and making some assumptions about the cost of maintenance, occupancy rates, etc. i'm guessing that we can make about 4.5% on money that we are putting in. that's based strictly on cash flowing from rent, over the long term, even assuming that the value of the property stays put, the return actually moves to 11-12% when you take the build up in equity over the course of the mortgage.

now, i'm a novice at this, so i may be way too optimistic with my models and assumptions, but i'm going to give it a try and i'll report back on the details.

mortgage rates at historic lows

now that rates are at all-time lows (well, at least -- to borrow a sports term -- in the modern era -- since 1971), i decided to pull the trigger on a refi at 4.75%. we were at a pretty attractive rate of 6% before, but by getting a 1.25% discount, we will be saving a good deal of money in both the short and long term. a number of online calculators indicated that it would take less than 6 months for us to break even, our monthly payments would be a couple hundred bucks lower, and we'd end up saving tens of thousands in interest payments.

it was a no brainer!

now, the only question is, what do we do with the extra cash? spend it? invest it? save it? put it back into the mortgage?