About a month ago, I wrote how our real estate empire was built. Now, I’m here to say that it’s going to be out of date very soon.
We’re selling the second property that I mentioned. It’s a 2 bed, 2 bath townhouse about a half-hour west of Boston. I had paid $278,000 for it in 2005 only to watch it climb for 18 months… and then fall dramatically to $178,000 (according to Zillow) in the 2009 crash. Now, 17 years later, I’ve accepted an offer of $385,000. There is a big difference between accepting an offer and having the process completed. For this article, let’s assume that everything goes according to plan.
That $100,000 gain turns out to be about 2% appreciation a year. I guess that’s the power of leverage. Refinancing the mortgage to 15-years helped us pay down the loan a lot. The end result is that we’ll have $300,000 after we pay the bank. From that $300,000 we’ll have to pay the realtor, lawyers, taxes, depreciation recapture, butcher, baker, and candlestick maker fees. I can’t do all the math to figure out what we’ll have left, but I think it will be more than $225,000.
Liquidity, Sweet Liquidity
Our net worth would lead most people to think we are rich. For years, I’ve written that we don’t feel like it. It’s the typical, millionaire next door story. For the last 15+ years, we’ve been doing our best to max out our retirement savings. We also have four mortgages at 15-year-fixed rates – three of them being rental properties. As a result, our net worth is 90% real estate and retirement savings – stuff that’s hard to get at. A large portion of the rest is in cars, 529 plans, and private equity – also hard to access. Overall, we have only about 4% of our net worth in cash that we can access. Even that cash is scattered in business accounts such as this blog or the real estate LLC.
In a lot of ways, we live paycheck to paycheck. However, we do so knowing that we can do several things to get some cash if necessary.
In January, I wrote that we were planning our first non-retirement asset allocation. We hadn’t decided on selling this property at the time, but we can use this to guide our investments. It’s almost like starting all over with saving and investing. It will be exciting to have all this cash available. I’m hoping that we can invest it conservatively and make 6% a year. Maybe we’ll be able to count on $15,000. We’ll try to reinvest as much as possible, but my wife is thinking of military retirement soon, so $15,000 in income plus her pension will help cover expenses until the rest of our mortgages are paid off.
The Power of Forced Savings
The most overlooked advantage of real estate investment is forced savings. You have to pay that mortgage every month. Most of the months it went smoothly because we had a tenant in place. Some months haven’t gone as smoothly. We rolled with the punches when there have been condo assessments or when the HOA fee has gone up.
There were certainly times when paying these expenses wasn’t easy. If we had a choice we would have skipped those months. Then we might have said, “Well the world didn’t fall apart, so maybe we can skip another month and use the money for a well-deserved treat.”
It really works great. I recommend that you give it a try if you can.
However, all that’s going away now. As my wife recently said, “We’re going to have to put this money somewhere. I’m afraid I’m going to spend this money on jet skis.” (“Jet skis” is our little code for a large, unnecessary expense that will probably sit around not being used.) I told her that I’m on it and I have a plan (well, at least part of the plan).
We thought about doing a 1031 exchange as we did with another property about 18 months ago. However, it seems to be the wrong time to buy into the market if you don’t have to. It feels like the housing bubble in the mid-2000s when we bought this property. I’d much rather invest in stocks and bonds and wait for another buying opportunity like in 2011. I feel that it will come in the next 3-5 years, but if it doesn’t, that’s fine too.
What are some ways that you’ve forced yourself to save money over the years? I can really use the tips. Leave me a message in the comments.