Real Estate Archives - Lazy Man and Money

Should I Move?

September 21, 2020 by Lazy Man 11 Comments

Should I move? That’s the question that many people are likely asking themselves these days. If not, maybe they should be asking themselves that question.

Nearly 8 years ago, my family moved from the San Francisco Bay Area (aka Silicon Valley) to Rhode Island. We had lived there for 7 years and it was a difficult decision to leave all those friends behind and start a new life. I had never lived in Rhode Island, but I lived in Massachusetts for the first 30 years of my life, so I figured it would be relatively easy. I won’t get into all the specifics, but it hasn’t been easy at all.

[Editor’s Note: This article was started last week. The focus is on a move within the United States. After the death of Ruth Bader Ginsburg, I’ve seen some talk on social media about moving outside the United States. That’s a topic that I won’t be covering here at this time.]

I’ve been talking with some friends from San Francisco and they’ve sent me some crazy pictures about the wildfires there. The sky was simply red all day. Their rooms were dark orange. My memory of the area couldn’t be more different. The Bay Area had the best climate in all of America. It was about 75-80 and sunny almost every day. No one needed air conditioning because it only got hot for 2 weeks in the summer. My only complaint was that you didn’t get all the seasons. You’d have to drive a couple of hours to Lake Tahoe to go skiing.

Nowadays, I don’t regret our decision to move across the country. In fact, some of my friends are looking to move to New England as well. I don’t blame them. Who wants to live in fear of wildfires and extremely poor air quality?

Of course, the wildfire problem isn’t only in the Bay Area. It’s millions of acres in multiple states all along the west coast… and of course, that’s just the fires. I hope they prepared for an emergency ahead of time.

I’ve been talking with another friend of mine (who writes as Kosmo on this website) about a natural disaster that hit close to his home. The Midwest derecho leveled Iowa in August. He was lucky to have missed most of the damage, but millions of people lost utilities. Last week he told me that they cleaned up 250 million pounds of tree debris and it was still going on.

It barely made the news as this Washington Post article notes.

This made me reach out to a couple of other friends (completely tapping out my network):

I have a friend in Jacksonville, Florida, who roughly represents the southeast portion of the US that has to deal with hurricanes. This year the storms are so bad, they literally ran out of names and had to start going with Greek letters of the alphabet. I asked about her long-term plans. As I guessed, she has plans to move in the future. The hurricanes are just too much.
If you live in Alabama, Lousiana, or another state in the southeast, perhaps you’ve had similar thoughts?
Arizona has always been a very hot state. However, it seems to just get hotter and hotter with more and more days over 100 degrees every year. I contacted Abigail from I Pick Up Pennies who lives in Arizona to see if she is thinking of moving. While she isn’t a fan of the extreme heat, good friends and a low cost of living make it bearable.

To spare you any further gloom and doom, I won’t skip over thoughts of flooding and rising sea waters.

All of these thoughts are presented in much greater detail in Propublica article on climate change. It is a long read, but well worth it.

It’s hard to read that article and come away with any conclusion other than people in the United States will start moving to Maine and Vermont. While those states typically get feet of snow at a time nowadays, the snow may be more moderate over years of climate change.

What does all of this have to do with personal finance? There are a lot of places with expensive real estate that may not make sense over the long term. In my own area, Newport, Rhode Island has many million-dollar

Should I move? — If your city looks like this, it is time to move.

properties on the coast. It’s not like we have the money to buy them. However, if we did, we’d have to think long and hard about whether it would make long-term sense.

What are your thoughts on climate change? Do you think you’d consider relocating in the next decade or two due to climate change? Let me know in the comments.

Reviewing the Profit/Loss of Our Condo Sale (and Subsequent Purchase)

August 18, 2020 by Lazy Man 2 Comments

This is a continuation of yesterday’s reveal: our tenant texted us that she is breaking the lease.

Almost exactly 7 years ago we purchased our investment property. Our oldest child was almost a year old and our other child would be born 4 months later. It was quite an interesting time in our life.

Now we are looking to sell the condo. Today I thought I’d take you through the numbers.

We ended up paying $95,000 for the condo. My wife had previously bought in the same complex, so we knew that they typically range from $140K-175K. However, this was 2013, and there was still a big housing slump. When the market got hotter, we were able to get $16,000 a year in rent, which is extremely good for a $95,000 property.

During that time, we were paying condo fees. We also got a condo assessment of around $15,000 – ouch. While the condo looked great on the inside, the whole exterior of the property needed replacing. At least it looks great now. We had to do the typical maintenance inside, but it was all minor stuff.

In the end, we put $23,750 (or 25%) as a down payment. We are expecting it to sell for $170,000. It may go for less, but that’s what the comparables are. It seems that the properties move fast, within a couple of days. We started ours a little higher and haven’t gotten any bites in the first few days. I don’t expect the final numbers to change too much, so I feel fine with using these as projected numbers.

I’m terrible at keeping track of all the expenses that we had to put in for maintenance. I could pull taxes for seven years, but I’m much too lazy. For the most part, we’ve been able to cash flow about $200 a month while paying down a 15-year mortgage. We’ll have to use that as rough measure of ongoing costs.

(Side Note: Thanks to 2020 being what it is and COVID, there’s a war brewing between landlords and tenants. The full story on our three rental properties is that this the only good one. The other two my wife and I bought when we were single to live in. My wife’s military transfer and housing collapse made landlording the best viable option for us. Those properties have recently only matched the price we paid after 15 years. So I view the numbers of this probably as representing a successful attempt at dollar-cost averaging.)

I’m hoping we can get about 172K, which would give around 160K after closing costs. If it sells for less and we get $155K that not a big deal. We owe the bank $45,000 for their part in financing the property. That would mean that we paid $23,750 for around $110K-115K of profit. However, as I mentioned above, we did have a big condo assessment. We took a loan on that and it seems that will be the buyer’s responsibility. We may end up needing to make a concession at a lower price because of that.

Hopefully, we’ll be able to roughly say we spent around $25K to make $100K. That’s a good rate of return. Thanks to the Rule of 72 (done twice), we can see that quadrupling is about a 22% annual return (72/3.5 for the first double, and the same for the second double).

The stock market has done well in the last 7 years too. It was certainly more passive (as it always is.) However, it “only” averaged 9.5% over the same time. That’s was enough to double your money, but I’ll take a quadruple to a double any day.

What will we do that with that $100K in profit? If you read yesterday’s article, we plan to buy another condo. This allows us to use a tax vehicle called a 1031 exchange. A 1031 exchange allows you to sell one property and buy another and avoid paying taxes on the profits.

We have a property in mind, but we couldn’t move forward before we listed the current property. We also have to rope in some lawyers, especially a 1031 exchange specialist, and our mortgage company. Each of these steps has about 5 sub-steps of paperwork and red tape that is simply tedious. It would be nice to make an offer, but all those pieces take several days, or even a week to get in place. It’s slower in a COVID world.

If we are able to get the condo we have our eyes on, we’ll pay around $205K for it. We’d put the $100-110K net proceeds towards it and get a 15-year mortgage on it. That would give us a mortgage similar to what we have now, but hopefully able to get $1800 a month in rent. The numbers would be much better at the old place, but this place would be closer and easier to maintain. That’s a lot less stress for us, which is the big driver to sell.

I’m disappointed to have to go back to waiting for 15 years to be mortgage-free when we were 8 years away. We could get a 10-year mortgage or make larger payments to be mortgage-free faster. The 10-year mortgage rates don’t seem enticing. It’s painful for me to pay off a mortgage at 3.5%. That’s the kind of interest rate that I want to keep long term.

At the same time, I’m excited to move to a property that I feel has more room to appreciate and will be easier to manage.

There’s one additional x-factor of all of this to consider. Our kids are able to be a part of the process. At ages 6 and 7, almost all of this is going over their heads. However, this is a review of a Teen Titans Go! episode that they’ve seen many times. So far, they are dreading everything about this process. I don’t blame them – it’s adult stuff and not fun for kids. However, sometimes kids need to suck it up and do things that aren’t fun. I like them getting some exposure to this now. It builds character, right?

Perhaps someday they find this article and realize that real estate investing is exciting after all.

Tenant Text: “We’re Breaking Our Lease”

August 17, 2020 by Lazy Man 4 Comments

That’s the text my wife got a couple of weeks ago. As a landlord that’s the worst way to deliver (arguably) the worst news. You just know that your life is going to be chaos for a few weeks or more.

However, because it’s 2020 and the world is upside-down crazy, it was the best-case scenario – given the circumstances.

Our tenant chose to move out of due to financial hardship. Based on her occupation, I think she still has steady work, but it’s not the kind of thing I would begin to question. I’m actually surprised that we haven’t had to cross this bridge with one of our three tenants already. With COVID and high unemployment, there’s a lot of financial hardship going around, and we are in a position to help (to some extent).

We could have talked about reduced rent, but she had already moved out when she sent the text. She had already paid for last month’s rent giving us almost all of August to find someone new. Given the laws in MA right now, she could have stayed there. We couldn’t evict her. We’d have to scramble to talk to our mortgage lender and see what our options were before we begin to deplete our emergency funds.

This is a best-case scenario for us given the circumstances.

We could have immediately looked for a new renter, but my wife thought of something different. What if we took advantage of the sellers’ market and sold it?

The property is a couple of hours away. Without a property manager in the area, it’s hard. We’ve lost a few whole days to some minor fixes. I realize that we should be able to get a handyman, but we’ve been through a half-dozen and something comes up such as them retiring or move far away.

I was originally thinking that we should keep it. We are seven years to owning it and being able to pocket around $10,000 a year. When my wife brought up the idea of getting a different property closer to home, I started to warm up to the idea.

We could do something that I always wanted to try: a 1031 exchange. That’s when you sell one property and buy a new one within 45 days. Why would anyone purposely choose to subject themselves to this special kind of hell? If the new property is more expensive you don’t have to pay taxes on the gains. (As always, check with your tax attorneys, we are contacting a 1031 lawyer to help us with it.)

Since the property has appreciated quite a bit, a 1031 exchange is very useful. We’ll be able to keep that equity working for us instead of giving it to the taxman.

I’m keeping this short for today. Tomorrow, I’m going to dig into some of the (projected) numbers of the gains of the property as well as the potential purchase of the new property.

Should I Refinance?

July 15, 2020 by Lazy Man 10 Comments

Quick Housekeeping Note

If you’ve enjoyed reading Lazy Man and Money this year, or any of the previous 14 years, please nominate me for a Plutus Award. I’ve never won, but I was nominated for a Lifetime Achievement Award several years ago.

I’m not sure what category is the best fit, because I certainly do family, financial literacy for children, real estate, investing, underserved communities (mostly through my MLM content), side hustle, and traditional retirement. I just don’t specialize on any one particular area.

If you want some kind of reason why you should nominate me here’s a brief 14 year history of this blog. I may have been one of the first FIRE blogs… and probably the longest-running one. What’s missing from that article is all the years that I fought the MLM/pyramid scheme industry. I like to think that my 12 million page views have maybe impacted a billion dollars in people’s financial lives. (I don’t know if it’s true, but it sounds like it could be, right?)

I’ve kind of wondered what it would be like to walk across the stage to receive a Plutus Award. I kind of feel like this could be my year… simply because there will be no stage to walk across.

Now let’s get back to the original question

Should I Refinance?

There are a lot of questions that people have asked during COVID-19. One of the ones that may have been overlooked, for obvious reasons, is that there are historically low-interest rates for mortgages. That leads to the question, “Should we (or you) refinance?”

Before I get into our situation, mortgage rates are around 2.74% for a 15-year fixed (our preferred option) or 3.17% for a 30-year fixed according to Bankrate. I’d like to think that most people would be better off refinancing, but a variety of circumstances may make it not work for you. For example:

You might not have the best credit to get these best rates.
From what I’ve read, banks aren’t very eager to refinance during these uncertain times
You might already have a great rate. After all, mortgage rates have been low for a while.

If you have a rate that’s .50% or .75% above those rates that I mentioned above, it might be smart to do an internet search for a mortgage calculator. That will give you an idea if it’s even worth moving forward. If so, it may be time to call some banks. I prefer local banks for mortgages because they know they stand a good chance of getting your other business.

Side note: I completely understand if you are busy managing work and kids during this time. If someone had even suggested that I do anything more a couple of months ago, I would have bit off their head. Things have settleed down with school being out. Hopefully, like me, you have a little more time to move forward with projects and financial things like these.

Our Refinance Situation

We refinanced our home in 2012. It was a particularly great time to refinance. We hit the interest low getting a 2.75% rate on a 15-year mortgage.

You might be thinking… “Umm… that’s today’s rate.”

Yep. On the surface, it wouldn’t make a lot of sense to refinance to the same rate. However, we’ve been living close to paycheck-to-paycheck for a while with 3 investment properties (that don’t make money until their mortgages are paid off), kids’ private school, saving for retirement, and our general costs of living.

This creates a lot of stress. It’s not end-of-the-world stress, but I feel like I worry about money more than I should.

Refinancing would allow us to lengthen the payments over a longer term. On one hand, we’re more than halfway through our 15-year mortgage and only have 7 more years left. On the other hand, refinancing it over another 15-years would lower our payments of $1,061 according to one mortgage interest calculator.

While it’s tempting to have an extra thousand dollars a month, it would mean that we wouldn’t be mortgage-free until 2035. By that time, we’ll all be vacationing on the moon, right? (I’m joking.)

The calculator also said that we’d pay $13,161 more in interest. Yikes, that’s an expensive decision.

In this case, it’s just what the guidelines say… it doesn’t make sense for us to refinance. I was fairly sure that was going to be the case, but it can’t hurt to kick the tires every now and again when the opportunity arises. This is certainly one of those opportunities for many people with mortgages.

Mortgages: To Pay Off Early or Not to Pay Off Early…

May 28, 2020 by Lazy Man 18 Comments

… that is the question. Whether ’tis nobler in the mind to be free of debt, or to invest, perchance to dream of outrageous fortune.

If you thought I was going to continue writing in pseudo-Shakespeare, you don’t know me very well. Or maybe you know me too well, because I do love a good writing challenge.

There’s a lot of debate in the personal finance community about whether you should pay off your mortgage early if you can afford to. I’ll share my opinion on that in a little bit. Before I do, I want to make it clear that this is a topic with no definitive answer. Even with my own strong feelings on this one, I can look at the other side and say, “I understand and appreciate your view.”

So if you aren’t going to find any definitive answers, why continue reading? It might help you decide what is best for you and your situation.

Let’s review what each camp has to offer:

Pay Off Your Mortgage Early

There’s a psychological weight to being in debt. While most will agree that mortgage debt (especially at current rates) is good, responsible debt, it is still debt. Until you’ve paid off your mortgage, it’s likely your biggest expense. After you’ve paid off your mortgage, it may be transportation, or food, or property tax. You are a lot closer to financial independence when you eliminate such a big expense like a mortgage.

There’s also a component of certainty. If you have a 5% mortgage, you are getting a guaranteed 5% return on your money by paying off the mortgage early. You can’t get that in a bank account – especially now. You can’t get any kind of guarantee in the stock market which can move in crazy directions from day to day. We’ve seen that happen a lot this year.

Invest the Mortgage Money Instead

Another school of thought is that it’s best to invest any extra money instead. Most people expect the stock market to earn about 7% or more over the long run. That’s a lot better than most of the mortgage rates out there which are probably around 4% (or could be less with refinancing).

Most mortgages are 30 years long – plenty long enough to smooth out the gyrations of day-to-day stock market. Even 15-years (like the other popular fixed mortgage option) is almost always enough time to see stronger returns on stocks.

Almost no one disputes the math of investing in stocks is better than mortgage debt. Even the people in the “pay off your mortgage early” camp typically won’t argue the math. Instead they’ll point to the psychological benefits of alleviating the burden of debt. They’ll also point to the guaranteed X% return noted above.

My Choice: Pay Off Mortgage or Invest?

I strongly prefer mathematical solutions to psychological ones. Sometimes our brains play tricks on us. Math is consistent – it doesn’t play tricks on us.

Let’s say that I have $200,000 left on my mortgage (4%) and somehow lucked into $200,000 (it’s hypothetical, work with me). That mortgage has 25 years left on it. If I pay off the mortgage right away, I’ll save myself from having to pay $533,167 in mortgage payments and interest [Calculation: ((1.04^25)*200000)]. That sounds like a great move. However, if I invest instead, I would have $1,085,486 [Calculation: ((1.07^25)*200000)]. There are some minor things like taxes and inflation to consider, but they are not enough to make up for the fact that investing is mathematically speaking almost twice as good as paying off early.

I’ve heard some people say that they are so happy that they paid off their mortgage – especially now*. With unemployment so high and income so uncertain, being mortgage-free has to be a great stress reducer.

However, we’ve been saving and investing since we bought our house in 2012. We’ve enjoyed a fantastic ride on the stock market. However, even if it was an average ride, we’d have enough saved up that we could choose to be mortgage-free as fast as the banks can make the money move.** Plus we’d have a lot of money left over. That’s what I consider my great stress reducer.

One of the problems I have with paying off your mortgage faster is that the money is gone right away. You don’t have the money under your control any more. If you put all $200,000 into paying off the mortgage, lose your job, and your car breaks down, can you come up with the money to fix it? If you’ve invested the money and still have control of it, you can continue to make mortgage payments, fix your car, and eat if you lose your job. You have the money to buy you time in making all those payments in such a terrible scenario.

As strong as I feel about investing, we went with a middle ground. We got a 15-year mortgage with a lower interesting rate (a very, very nice bonus!). This forces us to pay off the mortgage earlier than most people. This past weekend, a friend of mine said that she’d never be able to pay off her mortgage. (It’s done in 2037, which can feel like never, but probably comes up on us quicker than we think.) In 2012, it seemed like 2027 would be “forever”, but it doesn’t feel like that anymore.

We are also able to save money each month to invest. We saved and invested a lot over the last decade. I feel that a 15 year mortgage is ideal if you have the income.

Final Thoughts on Paying Off Mortgages Early

I was inspired to write this by an article that had nothing to do with mortgages. Miranda Marquit wrote about her Taxable Investment Account/Emergency Fund and I thought, “That’s somewhat similar.”

Most gurus would say that you shouldn’t put your emergency fund in a taxable investment account. Emergency funds should be very safe liquid investments. However, she has a tiered approach with some safe liquid cash and more in invested in equities. It’s worked out very well for her and provides her with a larger emergency fund today than she would have had otherwise:

This tiered approach allows me immediate access to cash while I liquidate investments. It works for me because I end up with a higher rate of return with the money in a taxable investment account. For example, I’ve got a 13.3% cumulative time-weighted return with the taxable investment account, since the beginning of 2010, when my return with my savings account has been 3.6%.

Marquit has some safety, but also a lot of growth. This seems similar to investing with extra money instead of paying off your mortgage early. I feel I get that safety of control over the money, while growing my nest egg for more safety (or enjoyment) down the line.

What do you think? Let me know in the comments below.

* Is that the 4th or 5th time I made use of “especially now”?

** Most of our investments are in retirement accounts, so we would get a penalty if we cashed out to pay off our mortgage. However, we could do a partial cash out of a little of our investment profits to buy us a year or two of mortgage payments.