Investing

I Want To Invest In Real Estate #2: I’m Too Emotional to Buy a House

May 1, 2012 by Justin Weinger

Remember Post #1? I shared one of my biggest financial goals: to own and invest in real estate. It is still my second biggest priority (after getting out of debt), but I think I need to admit to myself that I am just not prepared yet. Let’s say I get approved for a mortgage, find a place that would make sense as a rental property and come up with 10-20% down. If I do that, I would have probably 45 cents left to my name following the closing of the house and zero slush funds to take care of buying appliances, maintenance, repairs or anything else. And then what? Well, shoot, we need a washer and dryer, so it’s off to Home Depot for the zero-percent interest card! And Macy’s! And Lowes! And Bed Bath and Beyond (just kidding, I hate that place)! I would be back to growing my debt in a heartbeat.

There are a lot of other things I need to consider before buying my first place:

1) I need to reduce my credit card debt: I have a horrible confession. I realized last month that while my overall debt has been going down, my credit card debt has stayed almost exactly the same from when I began tracking it last June! I have four debts, two being credit cards and taking up two-thirds of my total debt and the other two being my student loan and car which are less than $10K combined. I’ve brought my Discover card balance down somewhat, but I need to attack the remaining $4,300. It needs to be gone in less than six months. Being down to three accounts and that much less in credit card debt will make my repayment a lot more manageable and a mortgage a lot more obtainable

2) Additional, dedicated house funds: I need at least a $5,000 slush fund just for the house (separate from the down payment) for unexpected closing costs, appliances/stuff for the house and funds to cover at least two mortgage payments in case I became unemployed. Current amount: Um, $10?

3) Who’s living here: me or tenants? I asked Money Mamba the question a few weeks back: do you buy real estate investment property when you rent your own home? He made some great points as did the other readers and it doesn’t come down to any hard and fast rule, but what makes sense for you. On the one hand, the area I want to buy in is not bad at all (it’s in Orange County and all of the OC looks idyllic compared to LA, where unless you’re in Brentwood, it can look like one endless strip of dingy corner stores and broken sidewalks), and I would be 100% comfortable livng in the place I eventually plan to rent. But does it make sense to make a move from LA down to OC, relocate, set up the condo with appliances and whatnot, just to move out in 6 months to rent to a tenant? And will we have another 20% down payment ready for a second place or will we go back to renting? I haven’t decided at all because I’m so hell-bent on just getting a place, which brings me to the title of this post…

4) I’m Too Emotional to Make Rational Decisions in Real Estate: Maybe it’s our culture (I’m Iranian), but I grew up around a lot of real estate talk and near-real estate worship. I know more real estate agents in the Southern California area than seems reasonable. I’ve spent many a weekend house-hunting with friends, family, heck even acquaintances if they invite me (I love open houses). So I have always, always, always wanted to buy a home, or maybe lots of homes, or maybe an apartment building, or a mall or a parking lot, or JUST SOMETHING, damn it. Sometimes it feels like I have a “To Do” list for my life and it looks like this:

It’s true. I put the pressure on myself and I let it get to my head. I think I am way behind in everything because I don’t own any real estate yet. But it’s not a small decision. It’s not something you just jump into because it seems like the right thing to do and everyone else is doing it. More importantly, I chose to live a different, non-traditional life for a couple years and made no effort to save money or stay in one place. I loved it and will never regret it. So why do I beat myself up over something I chose? It’s irrational. It’s emotional. Its like PMS, but worse because it’s in my head every day like some grating video game background music that loops over and over and over again because you didn’t shut off the Xbox. What I am trying to say is that I can’t trust myself to make reasonable decisions that aren’t intricately tied up with my expectations of lifestyle and perhaps wanting to impress people or show them I’ve made it when it comes to real estate. I don’t like that part of my thinking and I need to get it straight on my own about why I am buying a place and why it makes sense. And I have to understand that owning real estate with a mortgage is not going to magically solve all of my financial wants/needs and keep me from worrying about money ever again. It’s more stuff to think about and new stuff to take care of. I think a good next post in this series will be getting past my more immature expectations of real estate.

The market in Southern California has started to recover, but interest rates remain low and there is still plenty of inventory in Orange County and Los Angeles (not so much in San Diego). So if I really want to buy that house and not just dream about it, I need to get serious about paying off my credit card debt, separating out savings for a house fund, and not getting rushed into something for “fear of missing out”. That’s been one of my biggest flaws in my thinking, which is worrying just a little too much about what others are doing and how I compare to them. I loved Mo Money’s post on that idea, that sideways glance (how did he get that?) and she has some great advice on getting over it and living your life or, to put it in a more annoying way, “do you”.

I still dream and obsess over real estate. But I need to develop patience. I’ll continue to read and stay current with the market. I’m just getting my head in the game so I can do this thing right.

Do you guys have any great real estate first-time experiences to share? Is there something you wish you had known before you purchased your first property? Would you buy a property to rent if you didn’t own the home you live in? Or if you already do that, does it still make sense for you?

Financial Simplicity Carnival, Lucky Number 3 / 21 Jump Street Edition

March 18, 2012 by Justin Weinger

First, 21 Jump Street has best new bromance written all over it:

21-jump-street-photo_s640x384 — Photo: Columbia Pictures

Second, if ever there was a superstitious person, it is me. I have lucky numbers, times of day, jeans, socks, parking spots (the one at the north corner of the block), ad nauseum. With 3 being my luckiest, favorite-est number, I knew this edition of the Financial Simplicity Carnival was going to be a good one. I had to pick the best 20 posts from the submissions and got to pick a few posts that were submitted to the earlier carnivals. So let’s get started!

Editor’s Pick: It was close, but Dr. Dean made so many great connections in The Girl With The Dragon Tattoo: Ten Personal Finance Lessons! posted at The Millionaire Nurse Blog. Let’s not forget that this movie has one of the most horrendous rape scenes in the history of filmmaking and kept me from sleeping well for a week, but the lessons to be learned are wise nonetheless.

Making Money

What did you think of the Homeless Hotspots at SXSW? There are certainly greater implications in creating this trend, as Nick presents Homeless Hotspots: Too far? posted at Step Away from the Mall.

Savvy Scot presents 4 Things They Didn’t Tell You About Life posted at Savvy Scot. Absolutely loved this post. If we all keep the Scot’s #1 point in mind, we’ll be much happier for it.

The personal finance blogosphere is blowing up! Besides the American and Canadian PF conferences, Karen Bryan lets us know about the Write on Finance Blog Up Leeds which is taking place in Leeds (that’s in England) in late September. It sounds like a spot of fun (British reference!) and with tickets being just 20 quid (more British references!!) for personal bloggers, I think every self-respecting UK personal finance blogger/writer ought to go. And yes, this section does sound better if read with a British accent. Right then.

Research actually shows that customers who had a problem which was solved, are generally more loyal than just a regular customer. Karl presents Complaining – the art of getting what you want posted at CultOfMoney. Great advice and a good reminder that acting righteous and too huffy/puffy is no way to get what you want.

Madison presents 6 Free eFile Tax Return Options posted at My Dollar Plan.

Spending and Budgeting

Dave Hilton wrote the very touching and heartbreaking Frequent Family Financial Frustrations at Debt Black Hole. It’s so difficult to change our own bad habits let alone anyone else’s, and Dave is dealing with the reality of this with his father. Read his story and give him your most encouraging and wise advice.

Jim gave us solid advice on How to Get a Great Credit Score posted at Bargaineering.

Conventional wisdom says that to be something you must have something but we see people with money who are not happy and people with jobs that are unsatisfied. So how does “having and being” connect? John Chappelear presents Having vs. Being posted at Innovative Solutions For Positive Change.

Glen Craig presents New Technology Makes Shopping With Your Credit Card Easier posted at Free From Broke , which is one of my favorite blogs ever.

Teacher Man presents Happiness = Having Kids or Not Having Kids? posted at My University Money. Great read worth further contemplation on the kids/no kids debate.

And Teacher Man was at it again with another great post What Do Teachers Know About Financial Literacy? posted at Youngandthrifty. If most teachers don’t take the time to learn about personal finance, what message can they communicate to students when they teach personal finance? I really enjoyed his insider’s insight in this article.

FMF presents Spend like you want to grow rich posted at Free Money Finance, an excerpt from Millionaire Teacher: The Nine Rules of Wealth You Should Have Learned in School. I want to read the whole book.

Want specifics on index funds? Then check out Srinath’s Best index funds posted at The University of Money.

Boomer presents The Best Time To Start Saving Is Now posted at Boomer & Echo.

Steve presents Investing In Your Health posted at The Loonie Bin. He’s worried writing about being healthy will send him to the darkest caves of the PF world, so let him know you agree that being healthy is absolutely part of a rich life by visiting this post.

I really enjoyed SB’s post Gold Vs. Silver, What is the Better Investment? at One Cent at a Time. Here’s the thing, diversifying in terms of silver or gold coins can be a great new asset in your portfolio and this post can give you insights on whether silver or gold may be your better fit and just how you can invest besides holding on to the actual metals.

Dividend Growth Investor has 17 Cheap Dividend Aristocrats on Sale posted at Dividend Growth Investor. They’re just ideas and you’ll need to research each company, but why not consider certain dividend stocks that could meet the standards for creating an impressive additional income?

Debt Reduction

Jefferson presents One at a Time, Zen Master posted at See Debt Run. Trying to do everything at once because you’re so excited to be on this great self-improvement path and EVERYTHING is going to be awesome always? Whew, calm down and read this post first.

Lastly, I wrote about 9 Ways I Could Have Avoided Debt. Hindsight is always 20/20, isn’t it?

It was fun hosting my first carnival! I wanted to include ALL of you, but that doesn’t mean you won’t be included in the next edition. You should submit weekly at the Financial Simplicity Carnival.

The Price of Active Management

March 15, 2012 by Justin Weinger

Note: The following is a guest post from Money Smart Guides. His site is a great resource that will help you understand investing and develop your own approach. I know I’ve been neglecting the investing side since I’ve been so focused on paying off my debt, but we definitely have to consider investing as well to make real progress. I have some questions myself which I will be asking in the comments section. Let Money Smart know your questions!

I am a passive investor. This means I buy low cost mutual funds and hold them. I don’t sell when the market drops and buy when the market rises. Actually, that isn’t entirely true. I am always buying, so I do buy high. But I don’t sell unless my portfolio needs rebalancing. I have a long-term time horizon and have the mentality that I will invest and not worry about the day to day fluctuations of the market.

To me, investing is like driving. I could get mad every time a person cuts me off to get to the off ramp, or tailgates me while flashing his lights. Sometimes I do get mad. But overall, I am only concerned with getting to where I want to go. I try my best to ignore the short-term distractions and look at the long-term. The same holds true with investing. I sometimes get caught up in the media hoopla, but overall, I am focused on the long term.

Why do I choose to pick passively managed funds? The main reason is because the majority of the time (roughly 80%) active managed funds do not beat the market. One of the underlying reasons is because of the fees they charge.

The average domestic actively managed mutual fund charges 1.46% in fees. Compare that to the average domestic passive mutual fund which charges 0.18%. You may be asking what the significance of 1.24% is. Since we all love math, let’s look at an example.

You have two mutual funds. Fund A has an expense ratio of 0.18% while Fund B has an expense ratio of 1.46%. $10,000 is invested in both funds for 10 years. Both funds return 5% annually. In 10 years, Fund A is worth roughly $16,000 while Fund B is worth about $14,000. Why the difference? The fees!

By investing in Fund A, you paid $215 in fees in those 10 years. With Fund B, you paid $1,800 in fees. You cost yourself over $1,500.

If we expand the example to a return of 8% annually over 30 years, what happens? Fund A is worth over $95,000 and Fund B is worth just under $65,000. In Fund A, you paid about $2,100 in fees and in Fund B you paid close to $13,500 in fees.

So not only did you pay more fees by investing in Fund B, but the higher fees forced you to earn a lower return. By paying more in fees, your compounded returns are less each year compared to a fund with lower fees. This results in lower returns as there is less money that compounds upon itself. (Read here for a refresher on compound interest.)

The story is worse when you look at international funds. Average expense ratios for passive funds is 0.33% while they are 1.64% for active funds.

Some readers may argue that two funds will not return the same percent each year for 10 years. I agree with this. But sadly, as I mentioned above, 80% of active managed funds DO NOT BEAT THE MARKET. I was being generous comparing two funds with the same return. In reality, the active managed fund will have a lower return over the course of the time period making it even more evident that passive investing is the way to go.

I know you want to get rich quick. Everyone does. Many people think that by beating the market they will get there quicker. They won’t. Most times actively managed funds don’t beat the market. Combine that with the opportunity cost of lower returns from higher fees, it’s a wonder why anyone invests in these funds. Save yourself time, money and energy. Invest in passive mutual funds and enjoy the ride. After all, fees are one of the few things you can control when investing in the stock market.

Get Ready to Dominate Money in Your Thirties

March 9, 2012 by Justin Weinger

This post is part of Women’s Money Week 2012. For more posts about Money in Your 20’s/30’s/40’s/50’s/Retirement see Money in Your 20’s/30’s/40’s/50’s/Retirement Roundup.

What happened to my twenties? Wait, I’m still in them. For another year and a few months, I’m a pretty average 20-something: single, no kids, no mortgage, decent job and…debt. What! How dare you! Confession: I was a bit unrestrained for the better part of my twenties. I needed to figure life out, which was great, but I also took a long time to figure money out, which was not so great for my wallet. I’m lucky to have done everything I did in my twenties, but I’m also lucky that I finally got serious about paying off my debt, saving and figuring out how to make more money independently of any job. So while I don’t regret a single minute of my 20s (and they’re not over yet!), I’ve got big plans for my thirties. It’s my chance to be a little more mature but still have plenty of energy to take on new projects, meet new friends and start new businesses. Here’s my plan of attack as I get ready to dominate my finances in my thirties.

Money in Our Thirties Starts to Get Complicated

The good news is that by the time I hit 30, I am on track to have paid off all or nearly all of my personal debt (credit cards, a student loan and an auto loan). I will have been saving with automatic bi-weekly contributions for a year and a half and contributing to my retirement accounts for several years. But there are also much bigger things that happen in our thirties like mortgages, marriages, children and providing for family members that start to make the overall picture more complicated. So what will be different in my thirties and how can I start preparing for it now?

1. Be Cash Flow Positive: The biggest change for me will be coming out ahead each month. Even if it is just $200, start preparing now in terms of expenses, income and future purchases so that you will always have some money left over at the end of each month, after accounting for expenses, debt payments (hopefully none) and savings.

2. Stay Consistent: My 20s were basically filled with instances of me starting jobs, quitting jobs, switching industries, moving to a new town, leaving the country, coming back, leaving again, looking for a new job and basically confusing the hell out of myself. Calm down, self. Sit down, drink a glass of water. One thing at a time. If you were never consistent in your 20s, your 30s are a new start. Focus on developing good habits, developing a career you can continue and progress in and finding out what works with you. You know what makes sense for you when it comes to exercise, work and everything else. Doing something consistently for two years or longer will start to show you returns you never thought possible-whether it’s taking up a sport, learning a craft, working or starting a new business.

3. Develop Ideas and Nurture Your Talents: We all have great ideas. I start my days with big ideas and end my nights brushing my teeth and mulling my latest idea over. The key is developing those ideas and being willing to take the next step. It’s knowing which ideas have to sit for now (creating and marketing a non-alcoholic beverage) and which ones need immediate action (improving my eBay inventory and listing strategy, finding new listing clients, etc). I love selling on eBay and it’s one small thing I’m developing. The success I have with eBay in turn motivates me to do the next thing well. It’s a happy slippery slope.

4. Make Savings a Priority: Make savings an accepted part of every dollar that comes in. Even if it’s just 5 or 10%, you can set up automatic savings transfers with almost any bank account and feel rewarded at the reminder of your growing balance. That savings account begins to represent many different things as you grow older. It is protection against unexpected loss of income, it is security for your children and family. I always feel the most vulnerable when it comes to my family. I want to do everything that I can for them. With debt or crazy financial obligations, I won’t be able to do that. I want to be more grounded in my thirties and a healthy amount of savings is just one small part of that.

5. Find Investments You Understand: Not everyone is going to make money doing complex options trading, volatile commodities trading, or currency trading. Some of us prefer investments we can see, touch or grasp more quickly. You don’t need to be a technical trader to make money off of your money. There are stocks and index funds that you can buy and hold and expect to appreciate in value. There are still real estate properties that can make excellent rental properties. There are also peer-to-peer lending clubs which allow you to invest in individual borrowers based on their credit rating. Start small, but begin your research. Don’t feel intimidated by people who love to use business jargon. Ask questions.

6. Plan Ahead for Upcoming Big Purchases: Most of us in our twenties had a few big purchases like cars, appliances and furniture. Hopefully you were able to purchase these items outright, but you’re not alone if you financed something in the $1,000-$20,000 range. In your thirties, you can expect that there will most likely be another car to buy, more furniture and kid’s expenses. Sub-divide your savings into individual categories so that you will be prepared for your next big purchase. Your thirties will be a lot more comfortable if you do not have a lot of small payments to deal with.

7. Make Your Dreams Come True: We all stumble in our teens and into our twenties. It’s a time of fun, exploration and learning about your own character. You’ll come out of your twenties wiser and more confident. What are your thirties going to be like? Do you know what you want to happen? Do you have big dreams and passions? Do you think you can do it? I say: Start believing in your destiny. All the great ones do. If you don’t, your thirties will pass you by before you know it.

I’m looking forward to my thirties. At 23 and 24, I dreaded getting older. Now I am exactly where I want to be in life. Did you (or do you) dread turning 30, 40 or 50? What did you learn in your 30s that you never thought about in your twenties? I can’t wait to read your comments!

I Want to Invest in Real Estate #1: Here’s How I’m Getting Started

January 25, 2012 by Justin Weinger

Welcome to the brand-new I Want to Invest in Real Estate series! I have always wanted to invest in real estate and own mutliple properties. I’ve always been interested in building, design and land development, but I never knew how to take the next step and my financial missteps also stood in my way. So this series will cover all of my baby steps towards buying my first place. I have no idea how this will turn out. It may develop slowly or gain steam quickly. I may be approved for a loan on the first application or the 10th application (or 100th?). I really don’t know! I hope you will take the time to comment on this series as your insight will be extremely valuable to me.

An Introduction

arrested development model home — Please tell me this looks familiar.

Before we get into the serious part, let me tell you that growing up in Southern California is hazardous to your health. I have an unnatural love of pre-packaged plastic experiences, women whose body parts and bleached hair look ridiculously fake and model homes. Most of all the model homes! I grew up in San Diego in the 1990s, which means that there was a new subdevelopment popping up every three months and you can bet that me and my mom were there to check it out. Later this pattern would be repeated with friends (my last visit to a model home was in March). Model homes are the best aspirational marketing tool ever, because you can pretend you live a perfect life in this perfect little house with the plastic fruit and the Homefill computer and flat-screen TV. The bedding in each room is elaborate and immense, only in model homes and movies have I ever seen beds with 14 different pillows. Which is all to say that I grew up wanting to live in a model home. Eventually, I started looking beyond the interior furnishings and began to appreciate homes for what they are: an intrinsic value. No matter what the housing market or the economy says, homes, land and all real estate have an intrinsic value that will never be zero. People need housing. People are interested in land based on its location and may repurpose it from its original use as a single family home into multifamily housing, office space or retail space. Owning real estate is an important way to build wealth and a monthly cash flow.

I want to buy real estate and rent these properties out to create a monthly cash flow. Based on my brief introduction to this topic, I believe that smart decisions made in choosing and acquiring properties can set you up to have a positive monthly cash flow on investment properties. It is not an easy game, nor do all of the pieces take care of themselves (property inspections, sale terms and conditions, financing). I believe if you can be patient and play it right, real estate can be a tool to build wealth even in the labyrinth of Southern California. It can also be as passive or as active as you make it to be, as an absentee landlord with a property management team, or as a landlord/property manager in one.

Why Now?

Why do I want to buy a place now? Well, that’s pretty easy. There are properties in Southern California that are in decent, respectable neighborhoods (all condominiums, single family homes are still mostly at $300,000 and up) that are at prices which I believe could translate into cash flow properties. I rent now, so I could buy my first property and start living in it while we do minor renovations (my boyfriend, along with many other close friends and associates have general contracting and construction backgrounds) and save money to buy our second property. The first property then becomes a rental unit, which, because we bought it at a good value, is able to provide a very small positive cash flow. The tenants continue to pay the mortgage down on the first unit, we live in and pay for the second unit. Then this plan can be repeated. If there is an opportunity to sell the first unit at a profit, I would try that as well. But the overall plan is to start buying units to hold as rentals.

An Education

I’ve been reading about real estate investing for the past few months, but not nearly as much as I could be. I admit I’ve only dipped my toe in the water, but here are the books I’ve read so far on the subject:

1) The Weekend Millionaire’s Secrets to Investing in Real Estate by Mike Sumney and Roger Dawson

2) Investing in Real Estate by Gary W. Eldred

3) The 106 Common Mistakes Homebuyers Make (and How to Avoid Them) by Gary W. Eldred

They were all very insightful. No one promised me I would get rich quick. All have warned me of the dangers of over-leveraging (that’s being in debt over your head with not enough cash coming in, or completely screwed, for laymen). But it can be done. If you can be patient and thorough, you can find values and good deals in any market. I have learned that price and terms are the most important when it comes to completing a real estate purchase, but many, many other factors need to be taken into account. I will do separate posts on financing a real estate purchase, choosing a location (neighborhood analysis), and different ways to profit from real estate.

I’ll be continuing my reading on the topic daily (let me know if you have any must read blogs or books), but more importantly I want to start speaking with people who know their stuff in the local real estate market, which includes real estate agents, property managers and local real estate investors.

A Reasonable Amount of (Zero) Experience

Who the heck do I know who knows anything about real estate investing? Real estate is a favorite topic of practically everyone I know in real life, and yet I was not able to think of anyone who owns more than their own home and one investment property. But then my friend told me her mom has a few rental properties and is an active real estate investor, so I plan to talk to her once this gets more serious. My favorite blogger, GeniusTypes, also has a wealth of real estate information, so I will start there. The authors of Weekend Millionaire are also available by email. I have another friend of a friend who owns over 20 properties and has made money in real estate by fixing/flipping, renting, as well as buying and selling commercial real estate. I am trying to get a chance to sit down and talk with him. He’s been doing this for over 30 years and now is able to make all of his purchases with cash. But at some point, he started with his very first purchase, which was an apartment unit in Los Angeles, so I know that you can start, even if it seems daunting (very! incredibly!) at first.

I am going to reach out to all of these people and more. Let me know if you want to lend your wealth of real estate knowledge over here so I can feature you in the next post.

The Matter of Money

We all know that I have some debt. I also lost a chunk of my retirement savings. So where is this 20% down payment coming from? Well, I can come up with a 10% down payment if I pull every penny out of my savings and retirement accounts. However, having spoken with a few friends who have purchased their homes and having read the 30/30/3 rule, I think that is not going to cut it. The wise ones all put down 20% or more. And there are closing costs to consider, which can be up to 11% in California. I want to buy something under $200,000. To come up with $40,000, it’s time to start getting serious about building up savings. More side work. More projects. More advertisements? There is potential in all of these. But I have to be serious. I want to buy a place in 2012. No more coming home to watch 5 episodes of Breaking Bad in a row. MUST FOCUS.

On the plus side, I have been at my job for two years and my salary is decent. We have been able to handle rent of $1,230/month for the past year, and before that our rent was actually more expensive at $1,445/month. My boyfriend would also be able to help with the down payment and monthly mortgage. Our credit scores are decent. Actually I don’t know what his is, I’ll have to find out. Mine was at 719, but has dropped because of my high debt utilization. That’s going down monthly though and I signed up for CreditKarma and told my boyfriend to sign up today as well. I will be watching it to see if it improves. Our credit scores and employment record are going to decide what interest rate we get, so I am working to make us look as awesome as possible. In each I Want to Invest in Real Estate post, I’ll do an update of money matters so you guys know I am ready to do this and not just dreaming while I read the Sunday real estate listings!

Next Post: Choosing an Area to Invest In

The next post should be really interesting. Every city, country or neighborhood I’ve so much as passed by I have considered buying real estate in. Not that I was ready or able to buy real estate, but because I can’t stop thinking about it. When I had a stopover in Riga, Latvia, I was asking around about housing prices. I’m that obsessed. So the next post is going to look at three potential real estate markets I’ve considered and the one I am now considering for this first real purchase (since I’ve bought thousands of homes mentally).

What do you guys think? Am I taking the right steps or am I completely naive? Do you think anyone can invest in real estate? Well, maybe not anyone, but anyone who is willing to work really hard, give up all forms of Cheetos snacks and run the numbers and calculations herself and understand the deal, market, and financing inside and out? Let me know! I can’t wait to get your input.