Time for another Houston apartment update! This report is much nicer than the last one. Occupancy has increased to 93% from 90% in January. This is a very nice improvement over the declining values we were seeing the last couple of months. As occupancy rose, so too did revenue – a $10,000 increase in April over March. Management expects another $5,000 increase in revenue in May. Rent concessions are down about $2,000 from March, but still at a fairly high $20,000 (!). Hopefully, as occupancy increases and the economy improves, this number will continue to decrease. As a comparison, the budgeted amount for concessions is $5,000 per month.
The good news of increasing revenue was counter-balanced somewhat by some not so good news. Our monthly real estate tax escrow amount increased by almost $9,000 per month. This was partially offset by a decrease in insurance escrow of about $6,500 per month. (The new insurance cost is about half of the old cost.) The silver lining is that the property’s assessed value declined by 5.5% in 2010, so the real estate tax escrow next year will go down again.
Expenses increased a bit. The quarterly unit inspections took place and resulted in an increase in the Repairs and Maintenance category. Some capital expenses also took place - one of the central water heaters failed and had to be replaced.
Overall, the property still lost money in April – about $17,000. Hopefully, the property will return to profitability soon!
Loan Calculations
I seem to be in a financial clean up mode lately. First, I started converting all my paper bills and documentation to electronic form. Now, I’m taking on our debt. I pay off our credit cards in full each month, so typically the only debt I have is my home mortgage. But, last month, we bought two new cars. Prior to that, we had been car-payment free for several years. In all honesty, the idea of having two car payments makes me a little uncomfortable. That’s $900 a month of expenses I didn’t use to have that I now do. I’d love to go back to not having any car payments.
We recently got our tax refund – almost $10,000. Normally it’s never that big, as I don’t believe in giving Uncle Sam an interest free loan, but I spent most of last year working as a self-employed, independent contractor so I was able to take advantage of some nice deductions, the biggest of which I think was my mileage deduction for commuting. I’ve got a 66 mile round trip commute, so that really adds up over a whole year. My first thought was to put the refund towards my car loan. This loan amortization calculator is really nice in that it gives you options to add a couple different types of extra payments to the mix and show you how they will affect the loan. By applying my tax refund to the loan, I will shorten the length of the loan by almost two years (it’s a 5 year loan) and I’ll save about $1,500 in interest charges. Nice.
Then I went to lunch and another thought struck me while eating. I had just made a hard money investment that was earning 10%. I had some additional money saved up in a bank savings account. Maybe I could combine my savings with my tax refund and invest that and then use the income from that to pay my car loan. That’s the basic tenant of passive income – have your money work and make your payments for you. I did some calculations and discovered that, in order for investment income at 10% to cover my car payment, I’d need to invest close to $55,000. That’s a bit more than I have available, so this option is out. (Although my car loan is at 4.25% and I could invest at 10%, I’d need to invest a lump sum of more than twice my loan balance to cover the loan payment because my loan payment includes amortized principle repayments, whereas my passive income would be interest only payments.)
Back to the original plan. Paying off my car loan two years early is nice. It still means I’d have a car payment (two actually, since my wife has a new car too) for at least three years. I just couldn’t really get too excited about this.
Then I started looking at our budget. I’ve been using this great iPhone app called iReconcile for a couple of months now and I’ve also been meticulously categorizing each expense I have. The result is that I have a couple months worth of actual expense data I can look at and report on. I ran through our budget numbers and saw we’ve still got a decent cushion in our income, so I should have no problems sending extra money towards our car payments. Then another thought struck me. We are currently budgeting 15% of our income towards savings. Been doing that for years. We’ve got a nice size emergency fund built up now that should be able to cover us for several months should either my wife or I lose our job. What if, in addition to putting my tax refund towards the loan, I also redirect that 15% from savings towards my car payment? Using that nice amortization calculator again, I saw I could have my car paid off in 11 months!! And I’d save over $2,300 in interest!! Wow! And after my car was paid off, I’d switch to sending that money towards my wife’s car loan in addition to her regular payment and her loan would be paid off in the following year! Awesome!! And, carrying this further, I figure that after two years of doing this, I’d be well-versed in making due without the money I had been sending to the loans, so I’ll keep sending the money off – to my savings account this time. I figure I’ll be saving close to $2,000 a month. After doing that for a while, I should have a nice chunk of change to invest in hard money lending at 10% (hopefully the return will be back to the more normal 12% by then). I’ll build that nest egg up so the next time we need to buy cars, we will be able to use our passive income to pay for them!
There is a drawback to this plan – I will not be putting any money towards savings for two years. As I mentioned earlier, I’ve already got a several month cushion built up, so I’m comfortable with that. Furthermore, the extra loan payments are voluntary. If I suddenly run into a situation where I need to start saving again, I can just stop sending the extra payments in to the loan. Lastly, my wife works for Arizona State University. Due to state budget cuts, there is a good chance that if the one cent sales tax increase that will be voted on next week does not pass, she will lose her job due to the Draconian cuts that will have to be made in education spending at all levels. The general consensus is the tax will pass, but I think I’ll wait a couple days to make sure before I start sending any money anywhere.
This isn’t probably exciting for many readers, but it is for me. I feel like I am *that close* towards finally having enough passive income to pay for something big. This is a goal I’ve been striving towards since I started this blog almost 6 years ago. I also am starting to see and feel the “snowball effect” of saving and investing. It takes a long time to get a good chunk of money saved to generate any kind of significant passive income, but once you get there, things just start growing faster and faster.
We recently got our tax refund – almost $10,000. Normally it’s never that big, as I don’t believe in giving Uncle Sam an interest free loan, but I spent most of last year working as a self-employed, independent contractor so I was able to take advantage of some nice deductions, the biggest of which I think was my mileage deduction for commuting. I’ve got a 66 mile round trip commute, so that really adds up over a whole year. My first thought was to put the refund towards my car loan. This loan amortization calculator is really nice in that it gives you options to add a couple different types of extra payments to the mix and show you how they will affect the loan. By applying my tax refund to the loan, I will shorten the length of the loan by almost two years (it’s a 5 year loan) and I’ll save about $1,500 in interest charges. Nice.
Then I went to lunch and another thought struck me while eating. I had just made a hard money investment that was earning 10%. I had some additional money saved up in a bank savings account. Maybe I could combine my savings with my tax refund and invest that and then use the income from that to pay my car loan. That’s the basic tenant of passive income – have your money work and make your payments for you. I did some calculations and discovered that, in order for investment income at 10% to cover my car payment, I’d need to invest close to $55,000. That’s a bit more than I have available, so this option is out. (Although my car loan is at 4.25% and I could invest at 10%, I’d need to invest a lump sum of more than twice my loan balance to cover the loan payment because my loan payment includes amortized principle repayments, whereas my passive income would be interest only payments.)
Back to the original plan. Paying off my car loan two years early is nice. It still means I’d have a car payment (two actually, since my wife has a new car too) for at least three years. I just couldn’t really get too excited about this.
Then I started looking at our budget. I’ve been using this great iPhone app called iReconcile for a couple of months now and I’ve also been meticulously categorizing each expense I have. The result is that I have a couple months worth of actual expense data I can look at and report on. I ran through our budget numbers and saw we’ve still got a decent cushion in our income, so I should have no problems sending extra money towards our car payments. Then another thought struck me. We are currently budgeting 15% of our income towards savings. Been doing that for years. We’ve got a nice size emergency fund built up now that should be able to cover us for several months should either my wife or I lose our job. What if, in addition to putting my tax refund towards the loan, I also redirect that 15% from savings towards my car payment? Using that nice amortization calculator again, I saw I could have my car paid off in 11 months!! And I’d save over $2,300 in interest!! Wow! And after my car was paid off, I’d switch to sending that money towards my wife’s car loan in addition to her regular payment and her loan would be paid off in the following year! Awesome!! And, carrying this further, I figure that after two years of doing this, I’d be well-versed in making due without the money I had been sending to the loans, so I’ll keep sending the money off – to my savings account this time. I figure I’ll be saving close to $2,000 a month. After doing that for a while, I should have a nice chunk of change to invest in hard money lending at 10% (hopefully the return will be back to the more normal 12% by then). I’ll build that nest egg up so the next time we need to buy cars, we will be able to use our passive income to pay for them!
There is a drawback to this plan – I will not be putting any money towards savings for two years. As I mentioned earlier, I’ve already got a several month cushion built up, so I’m comfortable with that. Furthermore, the extra loan payments are voluntary. If I suddenly run into a situation where I need to start saving again, I can just stop sending the extra payments in to the loan. Lastly, my wife works for Arizona State University. Due to state budget cuts, there is a good chance that if the one cent sales tax increase that will be voted on next week does not pass, she will lose her job due to the Draconian cuts that will have to be made in education spending at all levels. The general consensus is the tax will pass, but I think I’ll wait a couple days to make sure before I start sending any money anywhere.
This isn’t probably exciting for many readers, but it is for me. I feel like I am *that close* towards finally having enough passive income to pay for something big. This is a goal I’ve been striving towards since I started this blog almost 6 years ago. I also am starting to see and feel the “snowball effect” of saving and investing. It takes a long time to get a good chunk of money saved to generate any kind of significant passive income, but once you get there, things just start growing faster and faster.
First Investment With Self-Directed IRA
It’s been a very long time in the making – five months – but I am now making my first investment with my self-directed IRA! I opened the bank account two weeks ago, the hold on my initial deposit check ended last week, and now I’ve found a new hard money investment. This one will be all the more sweet since it will be made using funds from my self-directed Roth IRA, and thus the profits will be tax-free!
My partner has another hard money lending opportunity. This one is for a mortgage of $224,000 on a property the borrower purchased at auction for $321,000, giving us a 70% LTV ratio. (Well, loan to purchase price ratio, anyway. The actual value of the property is somewhat variable, as I mention below.) The property is a single story, single family home in central California. It was built in 1951 and is a 3 bedroom / 2 bath property with 1020 square feet. It has an attached single car garage. The previous owners were out of town owners renting it out.
Comps range from $380,000 to $420,000 from another investor who has never seen the property, but knows the area, to $370,000 from automated sources (Zillow and ForeclosureRadar) to $350,000 from a Realtor who looked at pictures of the property but did not check the MLS. Given the wide variety in comp values, I would expect this property to take a little longer than typical to sell. Back in 2007, the last time it was listed in the MLS, the average days on market for the area was about 4 months. And the listing price for this property back then was $600,000. This property is located in the same city the property for hard money #10 was in.
Investment is standard terms – 10% interest only payments, loan term of 1 year with balloon payment due at loan end. This loan will be labeled hard money #13.
My partner has another hard money lending opportunity. This one is for a mortgage of $224,000 on a property the borrower purchased at auction for $321,000, giving us a 70% LTV ratio. (Well, loan to purchase price ratio, anyway. The actual value of the property is somewhat variable, as I mention below.) The property is a single story, single family home in central California. It was built in 1951 and is a 3 bedroom / 2 bath property with 1020 square feet. It has an attached single car garage. The previous owners were out of town owners renting it out.
Comps range from $380,000 to $420,000 from another investor who has never seen the property, but knows the area, to $370,000 from automated sources (Zillow and ForeclosureRadar) to $350,000 from a Realtor who looked at pictures of the property but did not check the MLS. Given the wide variety in comp values, I would expect this property to take a little longer than typical to sell. Back in 2007, the last time it was listed in the MLS, the average days on market for the area was about 4 months. And the listing price for this property back then was $600,000. This property is located in the same city the property for hard money #10 was in.
Investment is standard terms – 10% interest only payments, loan term of 1 year with balloon payment due at loan end. This loan will be labeled hard money #13.
Harry Potter And The Mountain Of Paperwork
Last week, I wrote about my decision to try to move all my documents to electronic format. I've spent the last week converting some of them. Luckily, several of the companies I deal with provide access to electronic statements online, even if you had not signed up for them in the past. This means I was able to download, for example, the last 10 years of my brokerage statements from Charles Schwab. That saved me a lot of scanning. For the things I couldn't download, I have slowly been scanning documents. I've gotten through about one and a half drawers of my 4 drawer file cabinet. Here's a picture of the documents I've converted to electronic form so far:
In case you can't read it, that's a tape measure hanging off the pile. It's showing the stack is 9 inches tall. I just waved my trusty scanner at the pile and Reducio! Gone! Now I've got lots of shredding to do.
My online backup has also been proceeding over the past week. It's currently backed up about 60% of the 50 GB of data I have selected. (Since I have unlimited storage, I selected others things to back up besides the electronic documents I am creating, such as my photos and MP3s.) Once this initial backup has finished, subsequent backups will be almost instantaneous.
In real estate-related news, it would seem the market in California, or at least one part of Calfornia, is recovering. The property I made hard money loan #11 against is finished being rehabbed and is now on the market. It was put up for sale on a Monday. By Saturday, the seller had received seven offers at or above the list price! We figured it would sell for $700,000, but it looks like the seller may be able to get $725,000 for it. If the seller accepts an offer and all goes well with escrow, the loan should be paid off by mid-June.
I also finally got everything all finished in setting up my self-directed IRA. I opened a bank account for the LLC yesterday. Now I just have to wait 1 week for the bank to release the hold on my deposit check and I'll be able to start hard money lending with my IRA!
In case you can't read it, that's a tape measure hanging off the pile. It's showing the stack is 9 inches tall. I just waved my trusty scanner at the pile and Reducio! Gone! Now I've got lots of shredding to do.
My online backup has also been proceeding over the past week. It's currently backed up about 60% of the 50 GB of data I have selected. (Since I have unlimited storage, I selected others things to back up besides the electronic documents I am creating, such as my photos and MP3s.) Once this initial backup has finished, subsequent backups will be almost instantaneous.
In real estate-related news, it would seem the market in California, or at least one part of Calfornia, is recovering. The property I made hard money loan #11 against is finished being rehabbed and is now on the market. It was put up for sale on a Monday. By Saturday, the seller had received seven offers at or above the list price! We figured it would sell for $700,000, but it looks like the seller may be able to get $725,000 for it. If the seller accepts an offer and all goes well with escrow, the loan should be paid off by mid-June.
I also finally got everything all finished in setting up my self-directed IRA. I opened a bank account for the LLC yesterday. Now I just have to wait 1 week for the bank to release the hold on my deposit check and I'll be able to start hard money lending with my IRA!
Taming The Paper Beast (Updated)
I have three filing cabinets in my home – a tall four drawer letter size model for personal stuff, a two drawer lateral file cabinet for my real estate-related documents, and a two drawer letter size filing cabinet for my hard money lending documents. The four drawer cabinet is full, the lateral cabinet is getting there, and the two drawer one is still relatively empty. I’ve thought about going paperless before, but have always been somewhat afraid to pull the trigger. I did not want to give up the security of a physical bill or invoice. Over the past several months, I’ve become more comfortable with electronic documents, as I’ve used them more and more. And now, I’ve been inspired by Cliff to try to go paperless as much as possible. This means not only signing up for paperless statements from my utilities, brokerages, etc., but also converting my existing documents to electronic versions. The benefits are too great to ignore – I can rid myself of reams of paper and at the same time, create records that I can store longer and move easier than paper records.
I already have the needed equipment – a legal-sized scanner with auto-feed capability, a shredder (for destroying documents after I have scanned them), and a computer. The second important piece of this puzzle is a method for backing up the electronic copies. I currently have an external drive that I back up my computer to daily, but I also want an off-site backup location in case my house burns down.I think I’ve decided to go with SOS Online Backup. They are definitely not the cheapest – they charge $50 a year for 15 GB of storage, whereas most other companies give you unlimited storage space for the amount. What swayed me to them was their great reviews from PC Magazine and what seems to be their ease of use. I also like that they can back up files that are in use, which is important because I leave my email client open all the time and the .pst file will still be able to be backed up. In addition to my electronic documents, I will also be backing up my digital photos, which are priceless. Right now, I have about 8 GB of data. That leaves another 7 GB for my new scans. I figure if I need more and SOS can’t provide it, I can always switch to another online backup provider.
An added benefit of switching to electronic records is that now everything will be searchable. Windows Search can, with a plug-in, index the contents of PDF files, which is the format my electronic records will be in. The old documents I am scanning myself will not be indexed because I will just be making images of them and not running any OCR software against the images, but going forward, the documents I get from the companies I deal with will be searchable.
The final step of this process is deciding on a filing method. How will I organize these files on my hard drive so that I can find what I need quickly? I actually read an article about this a week or so ago, but I can’t find it again. I can’t even remember if I read it online or in an actual magazine. Anyway, the typical choices in how to file come down to two methods – grouping by date or grouping by type. In other words, should I put all my invoices from January in one folder, or all the invoices from my electric company in one folder, all from the gas company in other, etc.? I’ve opted to go for the later method. I’ve also broken it down somewhat more by breaking out documents I only retain for one year and those I want to retain forever. Here is an image of the folder structure I’ve come up with. It’s not perfect and there are some holes – for instance, what if I get a combined bill for different services, such as internet and television from one provider? That doesn’t really fit into this scheme (unless I made a new folder labeled “Entertainment”), but I currently don’t have any situation like that, so I’m not going to worry about it. This will probably change a bit as I add items, but I think it’s a good place to start.
I also want to come up with a naming convention that makes it easy for me to identify what the contents of the document are without opening it. I’ve decided on the following: Company-N-Description-MMYYYY. “Company” will be the company the document is from, “N” is a single letter that will indicate if the document relates to me, my wife, or my daughter, “Description” will be a brief description of the document, and “MMYYYY” will be the month and year of the document. For example, a scan of my Roth IRA statement for this month would be named “Schwab-S-Roth IRA-042010.pdf”
With all the planning out of the way, I’ve started contacting the companies I have accounts with and switching to electronic records where possible. The longest part of the process will be scanning in all my old paperwork. And I still won’t be completely paperless. You’ll notice in the above folder structure that there is no spot for tax returns. I’m still hanging on to those in paper form for a while. Old habits die hard.. I also do not have any spot for my business documents – real estate buying and selling contracts, my business banking statements, etc. Those I’ll add in later. For now, I’m going to concentrate on my largest pile of paperwork, which is personal stuff. After that, I’ll move on to my business stuff, and then, hopefully, to stuff like owner’s manuals and documents for big ticket items I’ve purchased like entertainment systems, televisions, washers and dryers, etc. And at that point, I may be able to get rid of a filing cabinet or two!
And in other news, as I predicted a little while ago, hard money loan #4 has been paid off. I received the final payment yesterday.
Update: I tried the free trial from SOS Online Backup and have decided I don't like it. My first attempt at backing up files resulted in a status message that said "xxxx files backed up, 8 files not backed up. They will be backed up next time." What? They didn't say why or which files were not backed up. Their software does not have a log viewer. They have a log, but it simply gives the date and time of when the last backup was run. I was able to hunt around on my PC and find a more detailed log that listed the files that were skipped, but that info was buried amidst a bunch of other stuff. I have instead gone with Carbonite. That is the vendor my work uses, so I've got some experience with their product. For $55 a year, you get unlimited storage. I also like that their software gives you an option to put a colored dot on file icons. Green means the file has been backed up, yellow means it has a back up pending, and no dot means the file is not being backed up. If you are interested, Google "Carbonite coupon code" and you will find a link you can use to get a 10% discount.
I already have the needed equipment – a legal-sized scanner with auto-feed capability, a shredder (for destroying documents after I have scanned them), and a computer. The second important piece of this puzzle is a method for backing up the electronic copies. I currently have an external drive that I back up my computer to daily, but I also want an off-site backup location in case my house burns down.
An added benefit of switching to electronic records is that now everything will be searchable. Windows Search can, with a plug-in, index the contents of PDF files, which is the format my electronic records will be in. The old documents I am scanning myself will not be indexed because I will just be making images of them and not running any OCR software against the images, but going forward, the documents I get from the companies I deal with will be searchable.
The final step of this process is deciding on a filing method. How will I organize these files on my hard drive so that I can find what I need quickly? I actually read an article about this a week or so ago, but I can’t find it again. I can’t even remember if I read it online or in an actual magazine. Anyway, the typical choices in how to file come down to two methods – grouping by date or grouping by type. In other words, should I put all my invoices from January in one folder, or all the invoices from my electric company in one folder, all from the gas company in other, etc.? I’ve opted to go for the later method. I’ve also broken it down somewhat more by breaking out documents I only retain for one year and those I want to retain forever. Here is an image of the folder structure I’ve come up with. It’s not perfect and there are some holes – for instance, what if I get a combined bill for different services, such as internet and television from one provider? That doesn’t really fit into this scheme (unless I made a new folder labeled “Entertainment”), but I currently don’t have any situation like that, so I’m not going to worry about it. This will probably change a bit as I add items, but I think it’s a good place to start.
I also want to come up with a naming convention that makes it easy for me to identify what the contents of the document are without opening it. I’ve decided on the following: Company-N-Description-MMYYYY. “Company” will be the company the document is from, “N” is a single letter that will indicate if the document relates to me, my wife, or my daughter, “Description” will be a brief description of the document, and “MMYYYY” will be the month and year of the document. For example, a scan of my Roth IRA statement for this month would be named “Schwab-S-Roth IRA-042010.pdf”
With all the planning out of the way, I’ve started contacting the companies I have accounts with and switching to electronic records where possible. The longest part of the process will be scanning in all my old paperwork. And I still won’t be completely paperless. You’ll notice in the above folder structure that there is no spot for tax returns. I’m still hanging on to those in paper form for a while. Old habits die hard.. I also do not have any spot for my business documents – real estate buying and selling contracts, my business banking statements, etc. Those I’ll add in later. For now, I’m going to concentrate on my largest pile of paperwork, which is personal stuff. After that, I’ll move on to my business stuff, and then, hopefully, to stuff like owner’s manuals and documents for big ticket items I’ve purchased like entertainment systems, televisions, washers and dryers, etc. And at that point, I may be able to get rid of a filing cabinet or two!
And in other news, as I predicted a little while ago, hard money loan #4 has been paid off. I received the final payment yesterday.
Update: I tried the free trial from SOS Online Backup and have decided I don't like it. My first attempt at backing up files resulted in a status message that said "xxxx files backed up, 8 files not backed up. They will be backed up next time." What? They didn't say why or which files were not backed up. Their software does not have a log viewer. They have a log, but it simply gives the date and time of when the last backup was run. I was able to hunt around on my PC and find a more detailed log that listed the files that were skipped, but that info was buried amidst a bunch of other stuff. I have instead gone with Carbonite. That is the vendor my work uses, so I've got some experience with their product. For $55 a year, you get unlimited storage. I also like that their software gives you an option to put a colored dot on file icons. Green means the file has been backed up, yellow means it has a back up pending, and no dot means the file is not being backed up. If you are interested, Google "Carbonite coupon code" and you will find a link you can use to get a 10% discount.
