What a self made multiple millionaire would do in your shoes to increase your net worth.
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Anonymous
OP here. You are right that it was likely appreciating, but you could have used the same money to buy something else that was appreciating AND providing cashflow. You really should sell this property and buy something that will generate better cashflow. As for renting in DC, I have scores of tenants. I rarely have a problem. Screen your tenants well and allocate for rental loss and you will be fine. That said, you should not buy another rental until you sell your old residence. You have to change your mentality first. Until your mentality is about cashflow, not appreciation; it is not a good investment for you. As to your savings, you seem afraid to invest it (this is a common problem). $300K is way too much to have saved liquid with no plan. Your rate of return is so low that it is likely loosing money when inflation is factored in. I'm not a huge fan of the stock market as the returns are nominal. To be honest I use the stock market for retirement and to have a certain amount in what banks consider liquid fomr (it helps me get loans and leverage my other returns). Saving money like that will prevent you from getting wealthy. You have to get out of a saving mentality and into an investing mentality. Obviously you need a certain amount in savings. Figure out how much that is for you and then I want you to get the rest out. I would prefer you to be more aggressive than this, but one good thing you can do with your money is convert retirement funds to a Roth. You can only do this is your retirement funds are not with your current employer, but you should begin converting. This makes sense for you because you income is very high and it is likely that it will remain high in retirement. Tax free income is a beautiful thing. You should seriously consider doing it in 2012, as tax rates are lower than they will be next year and I would bet in all future years for a long time to come. It also gives you some very good estate tax deferral strategies, which are probably going to be relevant based solely on your salary. Incidentally I noticed that you complained about not being able to find an 8% cash on cash return. Please give me a neighborhood that you would like to invest in and explain why that neighborhood. I will show you a property with your desired return (or point out a better neighborhood and why) |
Anonymous
Your DH is right. My only comment on this is that you ideally should not have spent money on your house that you didn't plan on getting back in cash shortly after spending. I'm sure i will elaborate on this comment further for someone else (I had no idea how many people would post). |
Anonymous
I call BS - Troll. There is no place in DC (and this is DCUM) where there is 8%-plus net return on RE investments. Except, high risk (ghetto) neighborhoods where risk out weighs potential gain. What a bunch of crap. Silly advice on marginal investment improvement ( get 2.2% instead of 1.9% in my brother in laws company!) is total bull shit, not helpful except to feed the amateurs that look here for advice. Show me a high risk, high return possibility and I'll listen. High risk low retrun nonsense is just that. |
Anonymous
You are in good financial shape and a lot of "experts" would probably say keep up what you are doing. I have no doubt that you will have a comfortable life and retirement. However, to be wealthier, you need to take more risk. You have too much liquid and earning insufficient return (you are in fact loosing money because of inflation). Frankly you can afford the risk and by taking calculated risk it is actually more foolish not to take it. The out of state property is interesting. I have a limited knowledge area for real estate. It holds me back. I presume that you know something about this other area that you have a property. You probably should try to duplicate this property. To be certain I need more information on it. Can you tell me: 1) property taxes 2) insurance 3) condo/ HOA fee 4) any other recurring fees (not maintenance- ie utilities, alarm, etc) 5) how long has it been a rental. How many months in that time has it been vacant Once I have that we will contrast it to something here (please provide the neighborhood here you would consider and why). |
Anonymous
OP here. Yes. In fact understanding it is really important. I live and know DC very well, so my example will be in DC. Bedrooms are very important as they drive up rental income. I look for the lowest bedroom to sales price. I just did a search on the MLS and see that 207 R STREET NW Unit# 7 was listed as a short sale at $299K. You can get an investor loan at 20% down. Accordingly a $240K loan, $60K down. I would write an offer for $299K with seller paying all closing costs. $158K at 4% for 30 years is $1145 (I use mortgagecalculator.org to check quickly). Add $201 for taxes and $310 for condo dues and $10 for insurance you get $1667. It is a 2 bedroom and you should be able to rent at $2200+ per month. $1100/bedroom should not be hard including utilities. It is a condo, so it should be easy to manage. $2200 x 85% = $1870. $1870-$1667 is $203 x 12 months is $2426/year. $60K down payment divided by $2426 results in a 4.04% cash on cash rate of return. If you factor in the amount you are paying down the loan the total rate of return is increased $217/month for a total rate of return in excess of 8%. If you manage it yourself you only need to multiply times 90% (management should be easy because it is a condo). Total return is increased to 10% (6% cash on cash and another 4% loan pay down). The above is an illustration only. This is not a property I would buy. I think the cash on cash return is too low, but the return is better than most people on here are currently getting. What I like a lot is that the rents in this area are going up. The property is a condo and easy to start with. Mortgage rates are very low now and there is a lot of logic in locking in long term low interests rates. Property value should increase (but I never count on it). I could buy this property, hire a property manager and ignore it for the next 30 years. I would in 30 years time be receiving after expenses a minimum of $1350 per month (inflation adjusted). It would take the equivalent of 405K in the stock market to get the same return (and to get that same return in stocks you would not be able to take cash of $217/month, inflation adjusted). Does that make sense? You have to check scores or hundreds of properties to find ones that work, but they exist. |
Anonymous
The property was inherited and has only been a rental a short while. It took less than a week to find a renter. The property is in an area where the real estate market is in the dumps but the area is still desirable so rents are decent. Taxes 1450, insurance 1200, Condo 500/mo; 10% realtor fee, but no other fees, thank goodness. I'm not sure what you mean by what other area I'd consider and why. The main thing holding me back in this area is the sky high prices I suppose, though I think I'd would be hesitant to buy in any place less gentrified than Mount Pleasant. I'm fairly familiar with Northern Virginia, but not at all with Maryland, and I'm not at all familiar with the apartment or condo markets, since we've never looked at anything other than SFHs. As you've recognized, we are risk averse. We're just not sure how to calculate that risk you're talking about (although your helpful benchmark from a couple pages back makes me feel good about the rental property). |
Anonymous
This one is hard. It is hard because you don't have sufficient cashflow to do anything. Its not the amount that you make or have left over, but the amount as a percentage of your income. You made a mistake buying a single family house (or condo) of that value. You couldn't afford it (and invest) and it will inhibit your ability to build wealth. Of course you technically have enough money, but not enough to invest. Housing cost is not a variable, so there is little I can do to help you in the near future. Frankly your options are to earn more, sell the house to free up cashflow or accept that you will not be able to do any investing for a good 10+ years. Most people in your shoes would choose the last option. I would choose the first. That said, I can offer some general advice that will help (but not make you rich). If your employer has a 401K match you must take it. It actually makes sense to put into a 401K if the employer is matching if you have to take credit card cash advances (nowhere can you get 50%-100% rates of returns, like employers provide when they match). Then the 8% loan, then the 6%. Do not pay the other one more quickly. The rate is way too low (in fact it would be a mistake to pay 1 penny more on this than what is due monthly). I would also refinance from the 5/5. I love the 5/5 product, but rates are too low to not do a fixed mortgage today unless you know you are going to move. Children are very important (I have 2) and we had to do fertility treatments. It is expensive. This is ultimately about choices. Being wealthy is a choice and it involves sacrifices. Personally, I think you need to revisit your priorities. You may decide that you are happy where you are, but you should revisit them to confirm. I mentioned this to a prior poster about a rental property. i told him to sell it if he wouldn't buy it as a rental today. My advice is the same to you. Based on where you are today, does it make sense to downsize the house, sell a car, have less children or delay financial comfort longer. There is no right answer, but you should own your decision. |
Anonymous
OP here. This is easy, but you may not love the answer. The best thing you can do is buy a multi unit property to live in. I admit that I know DC the best and at your income you may not be looking in DC (where multi family is more prevalent), but I promise you that if you can find something with a basement rental it will make a huge difference financially. It will be minimal to start, but as rents rise and your mortgage stays the same you will ultimately have your mortgage vanish. If you move later in life you will keep the property as a rental. You can do an FHA loan and put down just 3.5% You should do this, as the cash is better kept for investing (I try never to part with cash, unless I am almost certain I can get it back quickly). And a comment about the car. Drive it until it is dead. I can think of no greater waste of money. |
Anonymous
What ares do you want to move to? Describe your current property (location, type, bedrooms, etc). You save $60K per year, but have no money in investments or savings? ages? |
Anonymous
OP here. Its not income that matters. It is percentage of income that comes in passively to the amount you have outgoing. when that figures exceeds 100% you are rich. Most people are below 15%. Mine is in the upper 80s and I that is only because we moved to a substantially larger house recently. Technically it is mistake for me to do this (I was over 100% before), but given the ridiculous interests rates currently I considered it calculated risk that what I would save in interest was worth the gamble that I could get back there in 2 years. |
Anonymous
You do not have enough risk in your portfolio. You are majorly exposed to inflation, which I expect to be very high in the coming years. You need a major hedge. I would look into mortgaged real estate. You should do a Roth Rollover. The taxes suck, but you should begin rolling, especially with taxes where they are today. The company stock worries me. It is too much tied up in one place, but not enough (presumably) to give you any real benefits. I've never done this before, but presuming it is publicly traded stock, I would put a margin account on it and buy other stock. Margin accounts are non recourse so if the value of the stock goes down they will force sell the stock for you, but never come after you. It is margined against just the company stock. By margining it you get to keep the stock, but buy something that is a hedge to it dropping in value. Margin interest is very low, so this strategy should increase your return by a few percent, while minimizing your exposure. Generally you can margin to 50% of the stocks value. |
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Anonymous
OP here. I think. the key is cashflow, not dollars. |
Anonymous
Definitely refinance, but not to a 15 year. The rate difference is not worth the compulsory higher payments. It is better to pay it like a 15 year, than be obligated to it. 4.65% is not competitive currently. You do not have enough risk exposure. Look into real estate or if there is a business opportunity. You might also want to consider investing in private mortgage notes. With a lack of experience it is best to pool your money with a company like Bluewater Funding (I have no interest in them). Have you rolled the retirement you can to a Roth? |
Anonymous
OP here. Please provide a breakdown of your monthly expenses. |
Anonymous
OP here. How much in savings and investments do you have? Your retirement accounts are very high for your age (DH and mine are slightly higher but we are slightly older; but I own a business and put in $40K several years- please elaborate on how yours got so high) . Are any of the retirement funds in a Roth? Where do you currently live? |