It’s time for the latest Investing 100 Percent of My Income update – where did my money go last month?
(Note for new readers: Will and I are a couple who have pledged to invest 100 percent of my 2012 income while living solely on his income. You can read about the pledge here.)
In January and February, I dumped every cent I earned into my Roth IRA and came really freakin’ close to maxing out my $5,000 contribution limit.
(Last month I discussed how on an “accrual” basis I earned more, but on a “cash” basis I’m a couple hundred dollars shy of hitting the $5,000 mark. If you don’t know what those terms mean, you can find out here.)
My plan for the month of March was to finish maxing out my 2012 Roth IRA contribution. I’d “snowball” this savings goal, cross it off the list, and move on to the next item at hand.
But something unexpected happened: I bought a second rental home. I hadn’t planned on buying another house at that moment, but I spotted a deal that was too good to refuse. Will and I had been saving to eventually buy a second home, so we were prepared to pounce on it.
The house needs a ton of repairs. So every cent (and more) that I earned last month went into fixing up the place.
Here’s the breakdown:
- Garage door – $576.73, including installation plus removal/disposal of old door
- Carpet – $1240, including installation plus removal/disposal of old carpet
Labor Only:
- Tearing down and rebuilding a 10×12 deck – $375
- Painting the house interior – $900
- Laying vinyl flooring in kitchen/bath – $200
- Repairing laundry valves – $200
- Patching drywall holes and painting garage – $200
- Installing countertops in kitchen and bath – $150
- Patching drywall throughout house – $100
- Removing and re-hanging interior doors – $100
- Sanding and painting kitchen cabinets and bath vanities – $250
- Replace fascia and rotted roof decking – $370
Total: $4,661.73, mostly for labor. The only material included in this figure is the carpet and the new garage door.
In addition, we also bought materials such as paint, primer, caulk, drywall compound, vinyl flooring, decking, cement, roof shingles, screws, nails, and LOTS of wood. I haven’t processed the exact figures – you should see how thick my stack of receipts is! — but I believe this figure comes to roughly $2,000 – $3,000. I’ll post a more precise update once I spend a few hours inputting everything into a giant spreadsheet.
There are still more repairs needed: I need to replace the gutters and water heater, tune up the HVAC, take a few huge loads to the dump (or rent a dumpster), paint the fascia and termite-proof the house.
In short: I need to pour every cent into this house to get it rent-ready. Everything else is on hold.
Why Not Do It Yourself?
Our first rental building – the triplex in terrible condition – taught me that doing-it-yourself costs time. It’s dollar-cheap but time-expensive.
Here’s where we get into a quandary: on one hand, I believe in being frugal with time, not money. On the other hand, it’s tough to part with hard-earned cash.
Our happy medium solution is to do the most expensive things ourselves, like electrical work and plumbing, and to outsource the most time-consuming tasks, like paint and drywall.
As I’ve discovered, collecting quotes from contractors and comparison-shopping for materials like vinyl and carpet eats up about 10 hours per week. Driving to the house to check on the progress eats another 2-5 hours per week.
Of course, that doesn’t compare to the time-cost of doing the actual work ourselves, which could eat away 60 hours a week if we were serious about finishing it quickly so that it can go on the rental market.
Opportunity Cost
The good news is that we bought this house in cash, so I don’t have the stress of needing to make mortgage payments while we repair the house.
The bad news? Lack of a mortgage is a double-edged sword. Without that stress, I’m less motivated to work quickly. I find myself putting off calling contractors for “just one more day,” until those days add up to a week.
Logically, I know that every month this house isn’t rented is costing me hundreds in the form of “opportunity cost,” or lost income potential. But humans are hardwired to be more motivated by losing actual money (money we’ve gone through the trouble of earning) than theoretical money (opportunity cost).
Setting deadlines helps: my goal is to get this house rented by May 1. Creating a reward for myself also helps: as soon as this place is rented, I’m rewarding myself with a flight to Austin, Texas to visit one of my good friends. That gives me the motivation to continue managing this project.
Sounds like another good month!
Personally, we outsource just about all the work on our properties. First, because we don’t know how to do a whole lot of it and if we could, someone else can do it better. And Second, because I’ve always felt like my time was better spent elsewhere: looking for more property being #1 on the list!
We got our hands dirty on the last turn-over we had. She left it a mess so we spent a day leaning the place up and doing minor fix ups: changing locks, replacing blinds and the doorbell. We hired out the painting and carpet.
@Dollar D — Doing the work yourself is too time-consuming! It’s a more-than-full-time job. Contractors can work cheaply (around $25 per hour) and can do the job much faster than we can!
Congrats on the new rental property. It may go against your 100% investing goal, but in the long run it is sure to be worth it. I don’t own any property, but I’d probably want to just contract out the work too. Sure I could handle some of it, but most of it would just be too time intensive, especially if I’d have to learn how to do everything properly. Good luck getting it all ready for May 1st!
@Modest – No, no, it doesn’t go against the 100% investing goal at all — on the contrary, it fits the goal completely! As I said in the post announcing the goal, I’m investing 100% of my income in a combination of real estate investing, online business startups and retirement funds. This falls into the “real estate investing” category!
Sorry, I don’t know what I was thinking there. It most definitely is investing in real estate. For some reason my mind was thinking of it as just an expense, but it really is an expense towards your investment.
@Modest — LOL!
Many people, especially during the housing bubble, would justify major renovations to their home as “investments” when really it was just consumer spending. I think the litmus test is: “Does this put cash in my pocket every month or not? Does this generate additional income?”
So true! I’ve heard that justification all the time…’well it’s going to add value to my home’. Meanwhile they have no intention of selling anytime soon. They just wanted a better home and found what they thought was a good excuse.
@Modest – It’s tempting to try to justify consumer buys by telling yourself that its a “capital improvement.” I find that a good litmus test is: “Will this put additional cash into my pocket every month?” If the answer is no, then I’m just tying up money that could otherwise be producing dividends/interest/income.
Great job staying with the goal 3 months in. You’re already 1/4 of the way there! Will the rental income from this place also fall into the “invest 100%” camp?
@Money Infant – Yep! My “invest 100 percent” goal is to split that investment between rental properties, online businesses and retirement funds, so this falls into the rental property category.
Nice job Paula….nothing wrong with being opportunistic. Good luck on getting the new place rented.
@BusyExec – Thanks! I can’t wait to get this place rented and be done with it!
Quick note about retirement savings. If you are self-employed, you can open a solo 401K account. The contribution limits are much higher: $16,500 (and something like $22K if you’re over 50). The beauty of a solo 401K is that it is a phenomenal tax shelter; you can put 25% of earnings into the 401K on top of the retirement limit (that’s after paying SS taxes). Your best bet is to check out the Fidelity solo 401K info center. They have fantastic customer service. PS Not sure how it works if you already have a Roth IRA – might be good to check with Fidelity.
@Carol – Solo 401k accounts are great! I have one through Vanguard.
Maybe I am missing something Paula, but isn’t fixing up an asset you own just investing in a different asset vehicle? You didn’t fail anything.
@Evan — Yes, I agree … maybe I didn’t express it clearly in the post. I refrained from maxing out my 2012 Roth IRA last month because I switched to investing in a rental house. But yes, this is still in line with my plan to invest 100 percent of my income. My plan is to invest that income in a combination of rental properties, online businesses and retirement funds — so yes, this is in line with that.
Great choice to maximize your potential for rental income quickly. Personally, since we don’t have an investment home, any repairs completed on our primary home are done by us, when we have the time. It definitely means that work may not be completed for months on end, so if we had an investment property, we’d probably outsource the work as well.
You know what I like about you and this post Paula? It’s that you set amazing goals for yourself, but you’re not dogmatic about it. And when you recognize an opportunity that contributes towards your over all long term goals, you seize it, even if it means a minor set back in your immediate goals. Great job on this, Paula, I’m excited to see the progress on your home.
It’s that you set amazing goals for yourself, but you’re not dogmatic about it. Thanks for sharing your thought with us.