Increasing my portfolio/investments income.

[1tolivesimply]

Hello MMM community, although I have been reading the blog since almost the beginning,  this is my fist post on the forums. I'm also a fellow Coloradan from Fort Collins.

I'm writing because I'd like to get some outsider opinions about my current situation - which is basically my only option since all my friends/relatives are broke/antimustachians!

As the thread title suggests, I'm interested on finding ways to increase my portfolio/investments income.

About me: I'm 30, single (and looking lol) and planning on retiring at 35.

This is what I have so far:

Job Income.......: ~$140 K

Rental 1...........: ~$ 85 K - owe $59K
Rent.................: ~$800
Expenses.........: ~$500

Rental 2...........: ~$190 K - owe $145K
Rent.................: ~$1400
Expenses.........: ~$1000

Home...............: ~180 K - owe $105K

I understand that these may not be the most profitable rental properties, however, they are doing great when compared with similar ones in my city (this is not NV or FL where you can get huge ROI). I got "great deals" from the bank (they were forclosures & yes, meth tested)

401(k)..............: ~$65k - on autopilot, what should I do with it?
Cash................: ~$60k - depreciating on a couple of savings accounts.

I know I shouldn't have this much cash!! Some of my ideas are:

- Use it as a down payment for more rental properties - I'd like a duplex but they've been hard to find/expensive in the last few months.
- Buy another (better) house for me to live and retire on and rent my current home -  I've looked at some 200~250K ones online, but I'm still not sure that's the route I want to take at this time, I do
want a nicer house at some point though.
- Other investments - which ones?
- Use it to pay down the mortgage on my current home - which would not increase my portfolio income.

Any advice on what route I should take based on my current situation?
 
Thank you!

PS: I could provide more information about income/expenses but that was not the point of this post. I do believe there are many areas where I could cut my spending and maximize my savings, I might start a different thread soon.

[Another Reader]

Tell us a little more about the rental property income and expenses.    What are the mortgage rates and terms?  What are you including in rental expenses?  How fast are you accumulating cash?

There's an obvious match between your cash and the mortgage on Rental 1, but more information is needed.

[twinge]

Like AR, I think more information is needed to give you really good advice, but a couple of things came to mind:

1. What is your cash flow like besides from the rentals, and do you have adequate funds set aside or access to good credit lines to finance any issues that come up with the houses? With 3 houses, there's a greater chance for "emergency" repairs? Yes, your cash is "depreciating" but you need to have some plan for unexpected maintenance costs--and more than just an ordinary homeowner would have.

2.  Consider whether you feel you are "real estate heavy" particularly given that you are not living in one of those places where the ROI on real estate is unusually amazing right now.  Rather than buy another property or pay down your mortgage, you may want to consider diversifying with greater stock investments--e.g. Roth IRA, upping the contributions on your 401k, or a taxable stock index account if you want to keep it more accessible.

[1tolivesimply]

Hello anotherreader/twinge,

To answer your questions:

As far as the fixed monthly rental expenses:

Rental 1:
Mortgage+Ins+Taxes $410 @ 5.5%
HOA $85
Cash Flow: $300.

Rental 2:
Mortgage+Ins+Taxes $907 @ 4.62%
Cash flow: $488

Other than this, my cash flow comes from my day job, an average take home pay of $7000 a month, it varies because I don't work the exact same amount of days every month, but it comes out to about $140K a year (it has been increasing every year since 2008, but I doubt it will go any higher next year), some months I can save 6~7K or more, others (like last month that I remodeled my kitchen - will post in on the "DYI" thread) not so much.

The funds, would be the 60K I mentioned in my original post, I have great credit and no debt (other than the mortgages of course) so I assume I do have access to good credit lines.

Stocks would be a good option, however, after reading way too many books about stock investing, I still don't consider myself savvy enough to start putting my money on the stock market. In any case, I would be interested on dividend stocks, since I'd rather invest long term and get a piece of the action every year, than buy and sell, etc.

[Jamesqf]

I wouldn't suggest investing in individual stocks, unless you actually enjoy doing the sort of research needed to make sensible purchase decisions.  Instead, buy some mutual funds from companies like Vanguard or T. Rowe Price who do the research for you.

In your situation, I'd suggest keeping $10-20K in a balanced income fund (that's your emergency fund), then split the rest between an index fund and an international stock fund.  That should diversify investments that are (IMHO anyway) way overweighted in real estate.

[alandjackson]

The stock market historically gives better returns, but there would be nothing wrong with paying down the mortgages to get more free cash flow.  Paying down rental 1 is a guaranteed 5.5% return.

[Another Reader]

Based on years of experience with rental properties, I think you are overestimating your net income over time.  You have not allowed anything for vacancy and collection loss, repairs and maintenance, or the capital improvements you will have to make over your ownership of the properties.  Search the "50 percent rule" on this forum or at Bigger Pockets.  You will need some reserves to cover these issues.

Dividend stocks have a place, but the risk/reward ratio compared to real estate should be considered.  Also, I prefer to but assets when they are on sale, as real estate has been for several years.

Can you refinance the rental that is at 5.5 percent?  If not, I would look at paying it off once I had a bit more in cash reserves.  If there are still really attractive deals on property in your area, I might look for Rental 3 as well, as long as I had substantial cash reserves.

[1tolivesimply]

AR, I didn't mention it on my previous post, but I have a different "RE properties" account, I only have about $6K on it though, of course, if there is an unexpected expense over the amount I hold in that account I would take money from the other accounts to cover it. In other words, I'm not using the rental income for anything other than to pay for rental expenses.

Back in 2011 there were many properties "on sale", it's very different now, I've been checking almost daily for the last year and prices are actually increasing in my area. That was my plan, I wanted to buy an extra property (while they were on sale), then start "diversifying"; it's been difficult to find one though, so that's why I'm thinking about changing the plan - investing on something else now.

It would be difficult to refinance, It's only 59K, many banks will not even consider it, others charge fees, so it's not worth it. I'm sure I can have 90~100K by the end of the year, but that's the thing, I do not want to continue accumulating cash (other than reserves).

Edited to correct typos and such.

[kudy]

I don't have any advice for you - maybe use a chunk of money to play on lending club?

I just wanted to say that it's cool to see another Ft Collins forum member, welcome!

[1tolivesimply]

Thanks Kudy, It's good to know you're from the area.

[Another Reader]

I don't see anything about any major life changes such as marriage and kids coming up.  If your job is stable and you do not think you will be moving out of town in the next few years, I would look at turning the current house into a rental.  That's if the numbers make sense to do so.  Prices are going up, but if you can secure a mortgage in the 3's, you will have a low payment on what will likely be an appreciating asset over time.  I love the idea of buying a well-located, desirable single family home every few years and converting it into a rental after living in it.  This allows you to accumulate a portfolio of properties financed at owner-occupied mortgage rates.

You are not eligible for a Roth unless you can get the AGI below the limit, so I would max out the 401k.  Then I would look at taxable accounts for buying stocks.  If you want to take some risk, get to know other real estate investors and look at some hard money lending opportunities.

BTW, the stock market does not necessarily give better returns than real estate.  Most of the comparisons out there compare the total return on stocks (appreciation plus dividends) to the appreciation rate of real estate.  When you add in the net income from the real estate, you get a different answer.....