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Learning, Sharing, and Teaching => Case Studies => Topic started by: joenorm on November 06, 2018, 07:47:31 AM

Title: My Basic numbers: Just getting started
Post by: joenorm on November 06, 2018, 07:47:31 AM
Hello all and thank you in advance for your input.

I have always been a conscious spender, never crazy, but I never would have described myself as frugal. I like nice things and figured that is why I work day in and day out, to enjoy the things I like. Don't get me wrong, I'm not the fancy car or too big a mortgage type, I do pretty well in that regard.

I was fortunate enough to have a very high paying, season job for a 4 year stretch back around 2008-2012. During that time my dad was investing in out of state real estate. I had extra money so he asked if i wanted to partner on a few houses with him in the midwest.

House 1: Purchase Price: $65K, ZEstimate today:$129K, currently rented at $995 per month
House 2: Purchase Price: $78.5K, ZEstimate today:162K, Currently rented at $1050 per month
House 3: Purchase Price: $65K, ZEstimate today: 116K, Currently rented at $1025 per month

These are managed though a company that does everything, we communicate with them when things need to be fixed or when renters are late on payments. We are way too far away to manage ourselves so this is necessary, wouldn't want to anyway. Keep in mind I am a half owner of these 3 houses, everything is split down the middle with my dad. We own them with no mortgage.

I posted in the Real Estate section earlier about my personal home.

Bought 5 years ago for 100K, have sunk countless time and money into it, now the bank says it is worth $430K but that might be a little exaggerated, could probably get between 350-400K pretty easily for it(it has ocean view). I have already refinanced this year in order to purchase property next door to me for 110K (also ocean view). My plan is to build on that lot this spring.

 With my cash out refinance I have about 100K in the bank waiting to start on the house next door(I will do a lot of the work to keep costs lower)

My Mortgage is $1725 a month on about $270K

I do not have very high earnings at the moment. Last year I made around 70K, this year I stand to about 60K.

I have a ROTH IRA with about $8.5K that I hope to put a maximum contribution toward every year

I work in the trades and find it to be very hard on the body. I may be starting my own business in the next coupe years but would like to set myself up with my assets to where a lot of the stress of pushing really hard at work is relieved. This is part of the goal with the new house, to be sell the first one and be mortgage free. This seems like it would take a lot of pressure off.

I am 34 years old and although I have been lucky so far with acquiring some nice assets, I have not taken financial freedom too seriously until now. I have no grand illusions that I can retire anytime soon, but I am inspired by this blog to be able to maximize the usefulness of the things I already have, and develop a plan for future savings good habits.

I already do a lot of the things suggested here, nothing too in excess. I grow a lot of my own food(as much for fun and health as cost savings), I build my own dwellings and have a rooftop PV system I installed myself. I like to live a pretty "low impact" lifestyle.

Any suggestions as far as investing, or how to maximize my situation are welcome. Please ask any questions necessary and I will fill in the blanks.

thanks again





Title: Re: My Basic numbers: Just getting started
Post by: ysette9 on November 06, 2018, 09:25:59 AM
How about some basic details such as how much you spend, what your savings and investing accounts have in then, and what your long-term goals are?
Title: Re: My Basic numbers: Just getting started
Post by: Watchmaker on November 06, 2018, 01:09:04 PM
As ysette9 says, we can be more helpful with more information.

But, from what you've said--

You work in the trades and you already own 50% of three rental properties as well as your own house and a neighboring lot.

That's pretty much all of your net worth tied up in real estate. This is risky.

I'll add that I'm anti-RE for myself. You seem to be someone in a much better position to invest in RE, but you already have quite a bit. I'd focus on diversification.

You mentioned plans to max out a Roth IRA. That's good. Do you have access to a 401k?
Title: Re: My Basic numbers: Just getting started
Post by: robartsd on November 06, 2018, 03:26:03 PM
Since you are so deep into real estate, I'd recommend reading the Real Estate and Landlording forum here and visiting www.biggerpockets.com to learn more about how to make money in this space. The math probably says that mid-west house #2 should be sold if that zestimate is close to the real market value (unless you can increase rent quite a bit - currently only 0.65% of value monthly). What is your plan for the second ocean view home? My guess is that selling one of the properties after you complete the second home would be the right decision based on typical real estate investment math.
Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 07, 2018, 08:03:04 AM
I have misplaced my basic expenditures worksheet that I just came up with.

I seem to remember my base expenses being in the $2500 per month range, that includes the big hitter of $1725 mortgage for the two properties.

My goal is simply use the resources I have as wisely as possible. I have been encouraged on this forum to sell the house I am in to take advantage of capital gains. At that point I may be able to live in a brand new house, mortgage free. Then I can focus a lot more on saving what I earn and putting into the market.

So here is a question: I have a Roth IRA held in one, single Index fund. Should I diversify this? How do you you choose index funds?
Also, when it comes time to start investing more than $5500 per year into the Roth, where do I put that money?
Can I just dump my savings into an index fund that I can access like a bank account? I do not fully understand this concept yet.
People who have a large sum of money in Index funds and are living off the dividends, how are they accessing those funds?

I have a Vanguard account with my Roth, should I just start putting extra money into different funds as well?

Someone asked about a 401K, I do not have one. I have never had an employment situation that offered it. Can I have my own? Should I?

Watchmaker said they are "Anti-realestate." Can you explain why or maybe someone else can explain why they may have that view? I suppose I always have seen RE as a solid investment, something tangible(people will always need housing), rather than just having faith in a complex economy continuing to grow without ever being able to understand all the factors.

thanks for the replies!



Title: Re: My Basic numbers: Just getting started
Post by: seemsright on November 07, 2018, 09:30:01 AM
I am anti RE. My view is I want to keep my time and freedom...I flat out do not want to deal with any sorta problem or tenant. There is enough problems and work owning a house that we live in. (we own outright)

The issue I see is you do not have a 401k(or the like...SEP) account, you have all of your money tied up into RE. And then you are a partner in 3 of properties so getting your money out of them if you need to is not only going to be a pain in the ass but take a shit ton of time.

If your take is own properties and be a landlord then that is not something I can help with. Sure you can tie up all of your money into properties but that is not going to give you much flexibility IMO. Sure your net worth might be high, but getting to that money is not going to be easy. In general you are putting all of your money into one bucket. Owning properties is one thing, but look into other buckets also. Index funds, 401k (or a SEP).
Title: Re: My Basic numbers: Just getting started
Post by: ysette9 on November 07, 2018, 10:27:15 AM
What specific index fund do you have your Roth IRA in? If you choose a broad, diversified fund then there is no reason to have more than one fund. Keeping things simple is a good idea.
Title: Re: My Basic numbers: Just getting started
Post by: Watchmaker on November 07, 2018, 10:59:27 AM
A single index fund can be a perfectly diversified option--that's the great thing about index funds. Are you invested in a total market, S&P 500 fund, or perhaps a target date fund? Those are all good choices that offer a huge amount of diversification.

When I said I am anti-real estate, I could have been more clear. I'm not completely against it, I am just against concentrated bets in RE, which can pay off big or lose big. And I also believe owning RE is more like a job than buying stocks, and if you properly account for the time you have to put into it, it is a less attractive investment.

Now, I don't have any of the skills that are useful for working in RE: I can't fix things up myself, I wouldn't be good at collecting rent, etc. If you've got those skills it could be a good choice for you. But you already have a lot of real estate investments, I'd focus on understanding those better (like robartsd said, one of the three homes you own seems to be under-performing a common rule of thumb) and also on building other investments.

Do you have any self employment income? If so, you can set up a 401k yourself. Otherwise you should consider opening a taxable investment account for investments. A good place to start understanding investments better is William Bernstein's If You Can:

https://www.etf.com/docs/IfYouCan.pdf


Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 09, 2018, 08:21:51 AM
My Roth IRA is in what is called a Life Strategy Growth Fund through Vanguard (VASGX)

Thank you for the link to the article, such well laid out advice.

I still do not fully understand where else to be saving besides my IRA.

According to the advice in the article I need to build up an emergency fund. Would I put that in a CD at my bank? Can I put that in a different account with Vanguard?

As someone without a company doing any matching for me, I'm wondering how saving looks (physically). I'm taking bare bones basics here. Right now I receive a paycheck and it goes into my checking account and that is where it stays until I spend it.

How do I move that 15% portion of my income around efficiently? Is something I calculate out every paycheck? Or every month?

Just trying to get an idea from people with good habits on how to make this happen.

An example, Lets say I want to put every dime I make from the rental properties I own away for retirement. The money first arrives to my checking account, some will go to max out my IRA. How and where does the rest go?

I know these are beyond basic questions. But I think its these are the hurdles that month after month, just stop me (and I imagine a lot of people) from really getting on track.

Thanks so much for everyones input. I appreciate all the help.

Title: Re: My Basic numbers: Just getting started
Post by: Tuskalusa on November 09, 2018, 08:32:53 AM
I think your plan to sell your current house and to smoke into the new one you build will help you reduce your holdings and debt, and to diversify. The trick will be to keep the costs down on the new house and to expedite the building process so that you can make this happen in a reasonable timeframe.
Title: Re: My Basic numbers: Just getting started
Post by: Lucky Recardito on November 09, 2018, 08:44:14 AM
I still do not fully understand where else to be saving besides my IRA.

According to the advice in the article I need to build up an emergency fund. Would I put that in a CD at my bank? Can I put that in a different account with Vanguard?

As someone without a company doing any matching for me, I'm wondering how saving looks (physically). I'm taking bare bones basics here. Right now I receive a paycheck and it goes into my checking account and that is where it stays until I spend it.

An example, Lets say I want to put every dime I make from the rental properties I own away for retirement. The money first arrives to my checking account, some will go to max out my IRA. How and where does the rest go?

Emergency fund: The simplest is a savings account at the bank of your choosing. I recommend on online bank with a reasonable interest rate; I use Ally and have been very happy with it. (If choosing a new online bank is a blocker/hurdle, just use whatever bank you're with right now and don't sweat the details.) The amount is up to you and can be justified in all sorts of ways; for starters and to avoid over-complicating, 3 months of living expenses is a good starting goal.

Savings account > CD in my opinion because an emergency fund is there to use when needed (and a CD is locked away for a term). No need to put this with Vanguard, either; you don't want your emergency fund invested in the market (where it could go down in value), and a basic bank will meet your needs better.

Saving/investing outside of IRA: You want a regular, taxable, "brokerage" account with Vanguard, and you want to invest that in your preferred mix of index funds (VTSMX being probably the easiest place to start). You'll need $3,000 to open this account.

All-in, here's what I'd suggest for you, in this order. I'm assuming you've already maxed out your IRA contribution for 2018:
Title: Re: My Basic numbers: Just getting started
Post by: DS on November 09, 2018, 08:57:38 AM
Read this post and edit your original with any new data: https://forum.mrmoneymustache.com/case-studies/how-to-write-a-'case-study'-topic/
Title: Re: My Basic numbers: Just getting started
Post by: robartsd on November 09, 2018, 01:09:01 PM
My main accounts are with an online bank. I have my paycheck direct deposited into my main savings account. I have scheduled transfers into my checking account to cover my regular spending (including my recurring orders at Vanguard to invest on a schedule). If I get a raise or bonus, my checking account doesn't see it. My savings account holds my emergency fund and planned "lumpy" spending and I make an extra one time transfer from savings to checking to cover those events.

I do have accounts (both checking and savings) with a local credit union as well - I use it to write checks and for cash deposit and withdraw (paper checks received are deposited using my online bank's mobile app). I keep enough for small cash emergencies there. Some months the only transactions on these accounts are applying monthly interest. I set up one time transfers between my local bank and online bank as needed (perhaps a few times a year).
Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 10, 2018, 09:29:29 PM
Thank you all for the input! This has been helpful.
Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 24, 2018, 08:01:52 AM
I just went to look for Vanguards VTSMX and it says "closed" beside it?

Why would it be closed? What would be the next recommended mutual fund for non-IRA savings

thanks
Title: Re: My Basic numbers: Just getting started
Post by: Ben Kurtz on November 24, 2018, 08:42:19 AM
Within the past week, Vanguard decided to lower its prices for small investors by lowering the minimum buy-in on its lower-fee Admiral share classes to match the buy-in previously required for its higher-fee Investor share classes, at least on its most popular funds. It then closed the Investor class shares to new purchases in those funds.

You're now looking at ticker symbol VTSAX for the index fund, which now has a minimum buy-in in of $3,000, down from the previous $10,000 buy-in for Admiral shares.

TL;DR: Buy VTSAX instead of VTSMX. Vanguard just did you a favor.
Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 24, 2018, 09:37:50 AM
Thanks.

Is VTSAX a "better" fund? I know that stuff is up for debate.

Why do you say its a favor? can you elaborate?

thanks
Title: Re: My Basic numbers: Just getting started
Post by: ysette9 on November 24, 2018, 04:38:35 PM
It is the same fund except the expense ratio is lower. So in a sense yes, it is a “better fund” but only because you are getting the same thing for less.
Title: Re: My Basic numbers: Just getting started
Post by: Ben Kurtz on November 24, 2018, 07:21:39 PM
VTSAX and VTSMX are two share classes in the exact same underlying index fund. VTSAX is the better share class because it has a slightly lower expense ratio. It used to be that the price for obtaining that better expense ratio was a higher minimum buy-in ($10,000), relative to the smaller minimum buy-in ($3,000) for VTSMX, but last week Vanguard changed their policies to allow the smaller buy-in for VTSAX. This makes VTSMX obsolete, so they closed that share class to new investors and are slowly converting existing shareholders to the cheaper share class.

Word on the street is that they did this to remain competitive with Fidelity and Schwab, who have been doing a good job keeping fees down on their own lines of index funds.
Title: Re: My Basic numbers: Just getting started
Post by: SwordGuy on November 25, 2018, 09:25:51 AM
First of all, you are doing great!  Congrats!

I agree, if you can sell your current house and end up mortgage free, you'll be in great financial shape.   You won't need to make much and it looks like your current rental income would cover that.   That will take a huge worry off your back.

You'll need a good reserve for RE repairs, stuff wears out, etc.

And I just ignore the folks who go on about how much work rentals are.  We have a property management company.  I spend about four to eight hours a year on our rented rental properties.   That's not bad for about $15,000 a year.   Oh, yeah, about half that time is going to the bank to deposit the checks.   I'll get around to setting up direct deposit from the property management company one of these days, I suppose.
Title: Re: My Basic numbers: Just getting started
Post by: Finances_With_Purpose on November 25, 2018, 07:45:39 PM
I think your plan to sell your current house and to smoke into the new one you build will help you reduce your holdings and debt, and to diversify. The trick will be to keep the costs down on the new house and to expedite the building process so that you can make this happen in a reasonable timeframe.

This.  Was going to suggest exactly this before you even mentioned selling your own house.  That way, you avoid capital gains and you can walk away mortgage-free, which will immediately alleviate a lot of stress.  Then you're just getting by plus saving up whatever you can for retirement. 
Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 26, 2018, 06:50:42 PM
Thank you for the responses and support!

It looks like the consensus is to sell my current home. It really isn't an ideal home anyway, so this is starting to make a lot of sense to me.

It is really sentimental though, as I've poured lots of care and time into it. Parting with it will not be easy. Hence the earlier idea of holding onto it and trying to do an AIRBNB or something. I see how it doesn't really pencil out compared to selling.

Keeping costs down building a house is always challenging. Materials costs are at record highs and same with contractors because the economy is booming, in my area they can charge whatever they want(if you can find anyone to even do the job.)

Luckily I am a builder and electrician, and plumbing isn't too difficult. I plan to be the general contractor for the project and do a lot of the work. If I sell my home I would have the money to be able to pull this off which would be really fun to do without a ton of financial stress.

The trick will be the timing. It seems like the market is cooling off but prices are still pretty high, so selling ASAP would be good. At the same time I still need a place to live! Maybe I can move into a trailer or something :-)



Title: Re: My Basic numbers: Just getting started
Post by: joenorm on November 27, 2018, 07:55:05 AM
.......and I am really curious where the line is drawn for selling the house.

Let's say the market drops enough I can only get 325k for it instead of the appraised 430K.

It was so immediately obvious to sell for everyone who read this. But at what point is that decision not as obvious?