Now July will be a slightly different story. I reported in my last post that I received a nice raise at work! I was hoping for a modest raise of 5% that would out-pace the rate of inflation, but I was given much, much more. While unexpected, the extra income will certainly be welcome. It didn’t take effect in June, but I will see the increase in my July paycheck. As a result, I went ahead and made an update to our 2007 financial goals, upping our end-of-year net worth goal.

I’m anxious to see how July will pan out.?? But for now, here is the June 2007 update:

For the second year in a row, though, my worries have been put to rest!?? I received the highest marks in all measured categories (ok, I have to boast a bit) — and my boss has been very pleased with all areas of my work.?? At last year’s annual review, I was promoted into a leadership position within my department and was given a sizable raise in pay.?? While a new promotion is not in the cards this year, another sizable increase in my salary is coming my way.?? Just like last year, the increase was much larger than I could ever have expected.

It does make me feel good that I am appreciated at work and that my contributions are being recognized.?? The salary increase was a nice bonus and a great cap to another wonderful year at my company.?? Of course, after getting home and sharing the good news with my wife, my mind naturally switches over the question — “now what should we do with this additional money?”?? My wife and I were not expecting the increase that I was given; and so we have decided to put most of it away into our investments.?? The types of investment category (retirement or non-retirement) has yet to be determined, as I will be taking a little time to analyze the tax implications of the new salary.?? I suspect that we’ll move to maximize our 401k contributions in order to reduce our tax burden?? at the end of the year.?? But that has yet to be determined.?? For now, I’m just enjoying my status on “cloud nine!”

1. Stock Market — the stock market continued it’s upward trend, which certainly helped our net worth gains for the month.?? It’s been a good year so far; and I hope to see it continue the upward gains during the second half of the year.?? I may not have made the post yet, but my wife and I have already maxed out our Roth IRA contributions for the year.?? I accelerated our monthly contributions in order to get to this point.?? If the market continues it’s upward trend, we’ll benefit even more because of it.
2. Rental Unit — May is the first “rented” month for our new rental property.?? It certainly helps to have that rent check coming in at the first of the month now that I have to start making mortgage payments, insurance payments, and tax payments on the property.?? We rented the unit on a shorter-term lease than our standard, but we are compensated by a higher rent because of this option.?? For the next three months we’ll have a higher cash-flow on the property than the cash-flow on our standard one-year lease.
3. Spending — I have never went into a deep analysis of our spending on the blog, but this is an item that represented a negative for the month of May.?? My wife and I were on the road a lot during May and spent a considerable amount more on dining out (and fast food) than we usually spend.?? Hopefully we can bring this spending under control in June, although we will be traveling about the same amount as in May.

I have had a great year in both mutual funds and individuals stocks. I feel our excess funds sitting in our money market account would best be put to use in these types of investments. Therefore I will begin to move several thousand dollars (around $14,000 to be exact) into different mutual funds and individual stocks starting tomorrow. I expect the process to take up to one week as I pick and choose where I want this money to be allocated. I still plan to leave about $9,000 in our money market account to cover any unforeseen expenses and to have enough in case I need to pay off our 0% balance transfer bills rather quickly.

In a way I feel as though I am “borrowing from myself” in order to squeeze out some additional gains. I expect to put this money back into the money market funds
slowly over time. Although the money is lumped together into a money market fund, in reality my wife and I have allocated these funds to various items such as vacation fund, tenant deposits, credit card balance transfer deposits, wedding gift money (to be used for furniture eventually), and others. Since many of these items represent things we will not purchase until much later, I feel it’s alright to use these funds in more productive ways for the time being.

1. My wife switched companies in early April. Due to the nature of her line of work, her old company did not want her to continue working during the two week notice period. Therefore, my wife began immediately at the new company — but still received a paycheck from the old company for the remaing two weeks. My wife got paid double-time, which helped!
2. The stock market rebounded tremendously. We are getting to the point that we have a lot of money invested in the stock market. The solid gains in April certainly bouyed our overall performance.
3. We rented out our newest rental unit. Financially this did not affect the April numbers, since the deposit wasn’t made until May. But, I still want to mention the point because I’m excited!

• I would like to spend less time each week working on my finances.

Now this doesn’t mean I want to get away from the blog and talk less about my financial situation — quite the opposite, in fact. I simply want to spend less time managing the day-to-day and week-to-week activities and find ways to automate my system to free up my time for additional activities — including writing more posts on my blog.

As of lately, it has been a daily routine for me to look at my planning spreadsheets, Microsoft Money account balances, and check stock/mutual fund quotes. The addition of our new rental property in March has meant additional bills to pay; all with varying due dates. I’m not one to be lax with my payments, so I have been working on my finances to some degree each and every day to make sure I do not accidentally skip a payment or forget an upcoming payment due date. The complexity comes in because I try and manage the balance in our checking account to be as minimal as possible. If we have extra money sitting around, it gets sent to our money market account to earn interest. Then when a payment is due, I transfer money back into the checking account and authorize (either electronic or over the phone) a payment to be made.

My planning spreadsheet helps out tremendously because I track when income is supposed to arrive (ie, paychecks for my wife and I) and when expenses are going to be due (ie, regular monthly mortgage, credit card, utilities payments, etc). I am able to keep the checking account balance at a minimum and the money market account balance at a maximum. This is all great and dandy, but it’s starting to take up more and more of my time.

To combat this situation, I am going to begin automating several tasks as best as possible. I have already taken steps to do this for some items; mainly our student loan payments. My next step is to automate all the mortgage payments (our house and our rental property) and find ways to automate my deposits into our money market account. There are several deposits that are equal from month to month — might as well make it as easy as possible. As I make improvements to my overall financial system, I’ll try and keep you updated. Wish me luck!

Aside from the rental, there was not much else interesting for us during the month. It has been a lot of work to get the property ready — and I honestly will admit that I’m wondering if I’m better off in the rental business or better off putting the money into the stock market. Many of my recent (within the last two years) investments are up 20%+ since purchasing them. If I can keep that record up, the real estate market and rental business (includes all the work involved in maintaining a property), may not be the place for my money — or my time and effort. That may make for an interesting discussion in the future. I just wanted to admit that the thought had crossed my mind.

Tony said,

on March 22nd, 2007 at 3:24 pm

Congratulations on your purchase.

By the way, what is the state and general area of your property for the purchase price of $73,600, if you don???t mind me asking? Around my area, it???s closer to $500,000, ins @ almost $1000/yr (State Farm), prop taxes @ $6000+/yr.

One more question, what is ???principal paydown??? and how did you come about with it at $68?

Thanks for the congratulations note, Tony. My wife and I are excited — but VERY anxious to finish all the work. Painting has become quite the chore and is taking longer than I predicted.

Our home and our new rental property are located in the Midwest. The typical 3-bedroom, 2-bathroom single family home is around $160K to $180K. Of course, there are similar homes with lower prices (and higher prices) — it mainly depends on the area you’re looking at. But that range is typical for a nice home in a nice area.

Now ours was a lot less for two key reasons: (1) located in an outlying suburb and (2) its one half of a duplex building. The purchese price of our property was $92,000. We made a down-payment of $18,400 and took a loan for the remainder, which was $73,600.

The princial paydown refers to the amount of the bank loan that I am paying off each and every month. The mortgage payment I make to the bank includes two components: (1) interest and (2) principal. Now my payment is fixed, so the monthly mortage payment will always be $466. We can figured out the principal paydown amount using a couple different ways — one would be to create an amortization chart and another would be to use a simple math formula. The math formula is easier to talk about in this comments section, so I’ll discuss that one below.

First, I need to know the interest that will have accumulated by the time I make my first payment. I’ll use that information and add it to the loan amount to find out what my new loan amount is BEFORE I make my first payment to the bank.

73,600 — Beginning balance of bank loan
(+) 399 — Interest, calculated as: 73,600 * (.065 / 12)
—————-
(=) 73,999 — Owed to the bank the day I make my first payment

I’ll then take this number and subtract my fixed payment amount. This will give me the new loan amount AFTER my first payment is made.

73,999
(-) 466 — My fixed, payment amount.
—————-
(=) 73,533 — New amount that is owed to the bank AFTER I make my first payment.

The last step is to calculate how much the loan balance decreased. This is the “principal paydown”.

73,600 — loan amount BEFORE making payment
(-) 73,533 — loan amount AFTER making payment
—————-
(=) 67 — principal paydown

Now, another good question is, what does this number represent? When my wife and I purchased the property, it could be said that we fairly valued the property to be the same as our purchase price. (Yes, this is looking at it in simpler terms) So in this case, we believe the value of the property to be $92,000. Since we took out a loan with the bank, in essence we do not own the entire property yet. Instead, my wife and I only own $18,400 of the property —- which was the amount of money we paid as a down payment. This number is the equity we have in our home. The bank owns the remainder, which is $73,600.

As we make payments to the bank each and every month, slowly but surely our loan balance is going to drop. We are paying down the principal of that loan. After our first payment was made, the bank now only owns $73,533 of the property and we now own $18,467 of the property. So as time goes on, we’ll own more and more of the property as our “equity” in the home increases and the “loan balance” from the bank decreases.

This is probably a LONGER answer than you may have been looking for, but it’s a great refresher for many of us. The other thing to remember is that over time, the interest and principal portions of our fixed monthly payment will change. The amount of interest we are paying will slowly decrease and the amount of principal will increase. Our “principal paydown” numbers will continue to increase with each and every payment. Now how did I come up with the “principal paydown” amount from my previous “Numbers” post? I looked at the principal paydown numbers for an entire year and found the average. Over the course of a year our bank loan will decrease by $822 or, roughly $68 per month.

I hope this answered all your questions. It’s a good excercise for me to go back through the numbers and make sure I have been calculating everything correctly. Thanks for the great question. Let me know if I can clarify anything further. Perhaps I’ll upload an image of our amortization chart (done in Microsoft Excel) in the near future. It’s a great visual that is an alternative to running these calculations by hand.

• Paint ceilings
• Paint walls (primer + regular coat)
• Paint doors
• Steam-clean carpet
• Replace air vent covers and air intake covers
• Replace all window blinds
• Replace thermostat
• Replace outlets and light switches
• Replace outlet and light switch cover plates
• Purchase refrigerator
• Clean, clean, clean!

It seems like a tall list — and it is! My wife and I knew the property needed some extensive repairs before it would be ready for rental. I’m pleased to report that I’ve made quite a bit of progress on my repairs, though. I’ve been busy painting all the ceilings and preparing the walls/trim for priming this weekend. Also, I purchased all the parts/items we needed from Lowe’s because of a nice Lowe’s 10% Off Coupon that is given to new/existing home purchasers.

Now that I have all the items and I’m well into the middle of my “to do” list, I’ll begin thinking about putting an advertisement in the newspaper and placing a sign in the front yard of the property. Basically, I need to start taking actions to get people calling me and get people walking through the property. This will be my first priority after paint is on the walls.

As I mentioned during our February Net Worth Update, I expect our expenses in March to increase considerably due to the closing costs associated with the home purchase and the materials I intend to purchase to clean, repair, and get the property ready for rental. The property needs a little work, to put it lightly, so hopefully these expenses won’t get too out of control during the month. The race is now on to get everything finished and find a renter for this property!

I exchanged money from our money market account into my Roth IRA account to make the purchase. I plan on making the purchase for my wife’s account in the upcoming days. Both of us had planned on accelerating our purchases during the first part of the year. Up until last week that would have sounded like a great idea. With the recent performance of the stock market, however, it might make sense to spread out our purchases equally throughout the year.

The other highlights from February is my shifting of money between the taxable brokerage accounts and the cash & savings account. This shift is evident because of the LARGE increase in cash & savings. Most of the moves into the account took place during the last week in February. This is all in preparation for the closing on our additional rental property. Our closing date has been delayed a half-week due to some last minute complications that arose between the sellers sale of the old house and their purchase of their new house. The complications have been resolved and we’re on track to close this week. At that time the money in our cash & savings account will decreased dramatically because of the down-payment and closing costs that we expect to pay.

That’s about it for February. I’m anxious to see how the month of March plays out because of the home purchase. I expect to see our expenses rise considerably as we purchase cleaning supplies and other items that will be used in preparing the rental property for rental. Let’s hope it doesn’t get too out-of-hand.

1. Mortgage Payment — We are financing our property with a fixed-rate, 30-year loan. We intend to make a 20% down payment and will finance the remainder. The interest rate is 6.50% and there are no points to pay on the closing date. This means that our loan with the bank will be $73,600 and our monthly payments will amount to $466.

2. Property Taxes — The property has an assessed value that is higher than the contract sales price. While this may not typically mean much, in this case we have a good amount of evidence (sales price, appraisal, comparables in neighborhood) to appeal the assessed value from the county. I’ll talk about this process in the coming months as I prepare my appeal. For these purposes, however, I’ll assume that yearly property taxes will equal the amount paid last year, which was $1,400. This amounts to a monthly payment of $117. My wife and I do not have to escrow this payment, but each month we intend to add it to our money market account to earn interest before the property tax payment is due at the end of the year.

3. Home Insurance — I did not do much shopping around for home insurance on this property because of time issues and the rapid approach of the closing date. Therefore I purchased a policy from our regular homeowners and auto insurance company, which is State Farm Insurance. Our yearly premium is $379, which amounts to a monthly payment of $32. My wife and I do not have to escrow this payment, but each month we intend to add it to our money market account to earn interest before the homeowners insurance payment is due.

4. Improvements/Repairs — Even if the property is brand-new, there will still be periodic improvements and repairs that need to be made. I put aside money each month into an ???improvements/repairs??? fund for my rental property. Through my own calculations I have determined the need for $77 a month into this fund.

Adding these four amounts together gives me a total monthly expense of $692. At the very, very least I will need to rent the property for this amount. I have every intention of listing it for a higher price and I believe the neighborhood can support a monthly rent of $830. At that rental amount, I would have a cash-flow of $138 per month. My cash-on-cash rate of return for the year would be 7.89%, assuming full rental throughout the year. If I included the principal paydown, which is the amount of the bank loan that gets paid off each month, my rate of return for the year would be 11.77%. Please note, I’m using my down-payment PLUS anticipated closing closes when determining these rates of return.

Cash-Flow Profit per Month:
$830 rent - $692 monthly payment = $138 cash-flow

Total Cash Investment:
$18,400 down payment + $2,600 closing costs = $21,000 cash investment

Cash-on-Cash Rate of Return:
($138 cash-flow x 12 months) / $21,000 cash investment = 7.89% return

Rate of Return, including Principal Paydown Numbers:
(($138 cash-flow + $68 monthly principal paydown) x 12 months) / $21,000 cash investment = 11.77% return

There are three key elements I’m leaving out of my calculations. The first is that I’m assuming full rental throughout the year. In reality, this will not always be true. To come up with more accurate numbers, I should assume a certain level of “vacancy” in the rental property. This would LOWER the rates of return listed above.

The second element is that I’m not taking into account potential appreciation of the rental property. The home should appreciate in value over time. Eventually, when my wife and I decide to sell the property, we will be able to “cash in” on that appreciated value. However, for our regular purposes of renting the property, this element does not affect us much. If we were to estimate a certain level of “appreciation value” in the property, this would INCREASE the rates of return listed above.

The third element is the effect on my wife and my income tax return.?? Having a rental property gives us several benefits during tax-time that effectively lower the cost of having and running the property.?? If I were to include these benefits in my calculations, this would INCREASE the rates of the return listed above.?? However, as the rental property begins to generate positive income after all the expenses are taken care of (and yes, this includes depreciations since we’re talking about income tax returns), my wife and I will have to pay taxes on those profits.?? If I were to include these benefits in my calculations, this would LOWER the reates of the return listed above.
Well, there you have it. Those are the base numbers for this rental property. As you can see it is difficult to get a definitive rate of return calculation without making some assumptions.?? For this rental property and this neighborhood, I am making certain assumptions that I may not make with other properties — mainly my confidence in keeping it rented the entire year.?? I’m sure I’ll have more discussions on this in the future, but for now, wish my wife and I luck as we go into our closing date for this new property!!!

]]> http://www.networthchallenge.com/2007/03/the-numbers/feed/ http://www.networthchallenge.com/2007/02/additional-rental-property/ http://www.networthchallenge.com/2007/02/additional-rental-property/#comments Fri, 23 Feb 2007 00:05:35 +0000 N.W. Rental Property http://www.networthchallenge.com/2007/02/additional-rental-property/ After some intense negotiation (well, maybe not as intense as I’m making it sound), we have come to an agreement with the sellers and will be purchasing an additional home to use as a rental property. This additional property is a single-family, attached dwelling — basically a half-duplex. The previous owners purchased the unit as a townhome for $96,000 about a year ago, but have since outgrown the place. The property originally listed for $99,000 and my wife and I negotiated the price down to $92,000. We are very excited about our purchase and look forward to renting it out in the coming month.

Our negotiations ended a couple weeks ago, right after my last post that talked about our loan pre-approval process. Since that time I (yes, my wife is leaving this work up to me) have been frantically finalizing the terms of our loan, coordinating a home inspection, ordering an appraisal, preparing to purchase home insurance, and planning the transfer of funds into our checking account. I’ll talk briefly about each of these items below:

• Home Inspection - Although this is not required by our lender, I still feel better having a thorough inspection done by a licensed professional. The home inspection did not turn up anything drastic, which I was pleased to hear. I consider it to be a well spent $225.
• Appraisal - This is an item required by the lender and typically ordered by the lender. However, as the home buyer, my wife and I have to pay the bill at closing. The appraisal came in at $93,000, which I believe to be lower than the value of the property. The positive result from this appraisal will be the fact that I can appeal the assessed value that the county has recorded for this property. Currently the county values the property at $110,000 — and charges property taxes based on that assessed value. If I can successfully appeal that assessed value, which hopefully will be easier with the appraisal document, I will be able to lower my yearly tax bill. The appraisal cost us $425.
• Home Insurance - I have been working with State Farm Insurance to get a rate on home owner’s insurance for this property. Since it will be used as an investement property, the insurance merely has to cover the structure and not the contents. It will be up to our renters to obtain rental insurance in order to protect their belongings. Our preliminary rate for the year will be $330. This number may change after a thorough inspection is conducted by State Farm Insurance today or tomorrow.
• Planning the transfer of funds into our checking account - This may seem like a small step, but it’s important for me to plan out the transfer in order to minimize my tax liability for 2007. A majority of the money we are using to purchase this home exists in our “house fund”, is invested in a mutual fund. Selling part of our mutual fund creates a taxable event and we will have to pay capital gains taxes on any profits from our investment — which should be significant (that’s good and bad). Therefore, I am trying to shuffle around money that is held in cash, checking, or money market funds in order to minimize the amount of mutual funds that we’ll have to sell. I will not be to avoid selling part of our mutual fund, so it is a certainty that next year I’ll have some capital gains taxes to pay.

All of these items have been taken care of and our closing date for the purchase of the property is NEXT WEEK!!! Since the closing takes place in March, our net worth update for February should not be affected too greatly — but the numbers from March will certainly be different than originally expected. I’ll try and share some additional numbers regarding this investment property over the weekend.

]]> http://www.networthchallenge.com/2007/02/additional-rental-property/feed/ http://www.networthchallenge.com/2007/02/loan-pre-approval/ http://www.networthchallenge.com/2007/02/loan-pre-approval/#comments Tue, 06 Feb 2007 23:52:21 +0000 N.W. Rental Property http://www.networthchallenge.com/2007/02/loan-pre-approval/ I mentioned a few weeks ago about our intention to purchase another rental property this Spring. After gathering the required financial documentation (statement of assets/liabilities, current account statements, etc) I was able to get preliminary information from our bank — in essence a loan pre-approval. The reason I use the word ‘preliminary’ is because I had asked the bank to not pull a credit report. Until I’m completely certain of intention to purchase a particular property, I do not want to have any unnecessary inquiries on my credit report.

We intend to use the home as a rental property, therefore the bank gave us their investor rate, which is slightly higher (about half a percent) than the primary residence rate.

• 20% Down Payment: 30-Year Fixed @ 6.675%, 0 points, and small closing costs
• 30% Down Payment: 30-Year Fixed @ 6.500%, 0 points, and small closing costs

Loan rates have certainly increased since our first purchase, which was a duplex a few years ago. However, these numbers are certainly manageable for our next rental property endeavor. I had the bank give me two rates, using a 20% down payment for one and a 30% down payment for the other. Originally I was not interested in purchasing the property with anything less than 20% as a down payment, but I may ask the bank to quote me a rate using a 10% down payment — just to see what the numbers look like.

Now that I have the rate information I need, my next step is to begin evaluating potential properties. As I mentioned earlier, I have been searching for several months and have created a list of properties that I consider great candidates for rental homes. There is one in particular that I am prepared to make an offer on today. I’ll post the details about that in the upcoming days.

]]> http://www.networthchallenge.com/2007/02/loan-pre-approval/feed/ http://www.networthchallenge.com/2007/02/january-2007-net-worth-update-792350/ http://www.networthchallenge.com/2007/02/january-2007-net-worth-update-792350/#comments Sat, 03 Feb 2007 18:25:11 +0000 N.W. Net Worth Updates http://www.networthchallenge.com/2007/02/january-2007-net-worth-update-792350/ My wife and I are off to a great start in 2007. We experienced the best of both worlds because our assets increased and our liabilities decreased, resulting in a nice increase of $7,923.50 to our net worth. Our savings rate is holding steady and our expenses were well under control for the month. We are making contributions to our Roth IRA accounts, 401k accounts, and House Fund according to our 2007 Financial Goals.

I am very pleased with our start in the New Year. Let’s hope to see similar gains in the upcoming months!



]]> http://www.networthchallenge.com/2007/02/january-2007-net-worth-update-792350/feed/ http://www.networthchallenge.com/2007/01/next-rental-property/ http://www.networthchallenge.com/2007/01/next-rental-property/#comments Sat, 20 Jan 2007 05:43:45 +0000 N.W. Rental Property http://www.networthchallenge.com/2007/01/next-rental-property/ My wife and I have been very pleased with the purchase of our duplex a couple years ago. Instead of purchasing a home, we decided to purchase a rental property that would “kick start” our rental portfolio. Our plan was to purchase an entire duplex building, live in one side, and rent the other side out. Although my wife originally wanted the house, she has been very happy with our accomodations and has no regrets when it comes to the choice we made. The side we live in is very nice and truly feels like a “little home.”

Well, it’s been a couple years and again my focus has turned to the rental market once again. I would like to purchase an additional property to add to our portfolio, but this time the focus is a little different. This time around we are looking for a house that would make a great home for my wife and I, but also would be a great rental when it came time for us to move on. We are going to keep the duplex and rent out both sides when we move out and into our new home. Eventually, when we outgrow this new home, the plan is to keep it and rent it out.

For the past several months, I have been actively searching through real estate listings and trying to keep a pulse on the market. I have stepped up my search during the last few weeks and have notified our realtor about our intentions. I have also organized the necessary paperwork in order to begin the bank pre-approval process. I expect to receive information from one bank tomorrow and will post that information when it comes in. Since I am only looking for preliminary rate information, I have asked the bank to not pull my credit report at this time. I do not want any unnecessary credit inquiries on our credit reports until we get closer to finding a property.

During my search I have been utilizing some great, online sources of information. I typically visit the following types of sites in order to get the best feel of the local market:

1. Local Realtor Websites - Used for routine home searches and for viewing photos of properties.
2. Google Maps - I often find that the local relator websites have clunky mapping interfaces that are difficult to use and not nearly as clear as Google’s alternative.
3. Zillow - This is a great site that attempts to show specific values of homes. In my area, the values are inflated beyond what the local market truly is priced at. However, I find this to be a useful tool when viewing specific neighborhoods. I can easily see where higher and lower priced homes are located compared to the home I am looking at. It gives me a great, neighborhood perspective.
4. County Tax Records - Logging onto my local county’s website allows me to sift through mountains of great data. First, I am able to pull up tax information and even recent sale information on specific houses. Second, I am able to compare the house I am looking at to the other houses on the same street. This is valuable information that was once only available to realtors. Now, because of technology and local county’s pushing for easier access to public records, I am able to utilize this information in my initial search.

These are just four of the main resources I use when I initially search for homes online. After I’ve compiled a list of homes that meets my criteria, then I’ll call up my local realtor and ask to visit the homes.

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