Lazy Man and Money

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

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rental property investmentThis 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.

Money’s 7 New Rules of Financial Security (Part 1)

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Money Magazine’s big headline this month is the 7 New Rules of Financial Security… and Why You Need to Know Them. I have to admit it’s a pretty sweet headline – it certainly caught my eye. I flipped right to page 50 to see what I needed to know why. With that in mind, let’s take a look:

Rule 1: Risk

Old thinking: If you can stomach the ups and downs that come with risk, you’ll be rewarded.
New rule: Risk isn’t about your stomach. It’s about making or missing an important goal.

Money Summary: – Money notes that it becomes much more difficult to retire when you reach a bad stretch in the market. The money you have left over is not enough to build up to where it was. Since you aren’t likely adding new money in retirement, you can’t capitalize on cheap stocks. “This bear market’s lesson is… only risk how much you can lose and still meet your basic goals.”

Lazy Man’s Take:

I didn’t think it was new to only risk what you can lose. I thought that was a universal truth. I see people go into casinos with this mentality all the time (unfortunately not 100% of the time). I agree that it makes sense to bring down your risk exposure as you near retirement. However, the new question is how much? Previous philosophy said that even at age 65, you still may have 15-30 years left, so you need to make your money stretch that long. That requires risk exposure.

Perhaps part of that answer is diversified income streams? Don’t put all your eggs in the equity markets, but have a rental property as well? Perhaps build some businesses that deliver cash flow that can be used in retirement. I don’t know if this website will be around in 35 years (I hope so), but there’s a chance it could get me through some lean years. Just don’t look into selling MonaVie.

Rule No. 2: Cash

Old thinking: Keep enough money in ultrasafe accounts to cover life’s emergencies, but no more.
New rule: Relying more on cash can rescue you in an “asset emergency.”

Money Summary: – The old emergency fund needs to be re-evaluated. Instead you need to look at big potential future purchases in the next three years: “tuition, wedding, down payment on a house.”

Lazy Man’s Take:

I think this is fairly basic knowledge as well. That’s why they have 529 plans that re-adjust with the child’s age to reduce risk. It’s really not much different than the previous rule except it’s not focused on retirement. They could have just as easily said here, “don’t risk what you can’t lose.” I hate to be all bah humbug here, but in an emergency situation weddings can take a back seat. Also, I know few people who need to buy a house. Know what you are risking, and if you are risking too much than know you may have to cut back.

Rule No. 3: Human Capital

Old thinking: The longer your time horizon, the more stocks you should own.
New rule: Time isn’t everything. You must also consider your earnings potential.

Money Summary: – Think about your job security as part of your overall risk profile.

Lazy Man’s Take:

This is sound advice that I don’t often hear. My wife has the near equavalent of tenure at her job. It’s allowed us to be a little more risky than we might have been. I’ve been able to take some time off and work on building other businesses. Put another way, if you are going to be in a band and have a hit song, you might want to put a pile of that money in a safe place in case your the next Soft Cell.

Perhaps this goes back to Rule #1 and diversifying your income streams. You don’t want to be completely dependent on equity markets. In my personal life, I found that someone is willing to value my human capital more than my side businesses, so I switched back to take advantage of that situation. Six months from now, it may be different and I’ll go back to building out my side businesses more and more.