Investing 100 Percent of My Income: May Edition

investing 100 percent of my incomeTime for the next edition of Investing 100 Percent of My Income, and I have just one question:

How is it June already?!

For those of you who are new readers: Will and I are a couple who have pledged to live on one income and invest the other. He gets a steady paycheck, while my income fluctuates because I’m self-employed. So we’ve decided that in 2012, we’ll live on his income and invest 100 percent of mine. (This makes financial planning a heckuva lot easier!)

By the end of last month’s update, I maxed out my Roth IRA, renovated a rental house with a 14.8 percent cap rate, and paid quarterly taxes.

That was the easy part. Those were no-brainer moves.

Now comes the hard part. It’s time to make strategic decisions about how to invest the rest of my income for the next 7 months of the year. Here are a few lessons I’ve gathered:

#1: Spending Money is a Full-Time Job

Spending money requires hundreds of hours. I have to brainstorm ideas. Research options. Gather quotes. Run spreadsheets. It makes me wonder: How does anyone have the time to earn AND spend?

This website’s maxim says you can afford anything, but not everything. If I want to grow this website, I can redesign the site OR hire assistants OR start podcasting.

Alternately, I can focus on real estate. I can save up to pay cash for another rental house OR hire a bookkeeper OR upgrade my triplex building.

Every dollar I spend on X is one less dollar I can spend on Y, so I need to compare the options. Emotion says, “I want it all!” Reality says, “Make a spreadsheet.”

#2: Avoid Too Many Irons in the Fire

Last week I reconnected with a friend from college whom I haven’t seen in years. I described my various projects: building websites, buying real estate, running a freelance business.

“Sounds like you have too many irons in the fire, none of them are getting hot fast enough, and you’re sweating,” she replied.

Wow. She hit the nail on the head.

Diversification is a central investing tenet for good reasons. It’s prudent, up to a degree.

But it also carries the risk that you’ll throw money at an investment you don’t understand. You can’t be an expert at everything.

That’s why I mostly avoid buying individual stocks: I don’t have time to read balance sheets and trade journals. I buy a few broad-market index funds and move on with my day.

The same thing needs to happen the rest of my investments. There are a zillion possible directions I could take. I can’t pursue them all. I need to narrow my options, make a decision, and roll with it.

So What Did I Do Last Month?

Last month, I did a lot of thinking, a lot of reading, and a lot of tinkering with spreadsheets. I spent time with several potential contractors in both the real estate and website world. I started a few negotiations.

And I didn’t spend a penny.

“You mean you’re just sitting on one month’s pay?”

Yep.

I know, I know: this doesn’t make for riveting reading. You’re probably yawning as we speak.

But I assure you, there’s a ton of activity in my tiny little brain. Lots of thoughts being processed. Options considered. Numbers crunched.

Stay tuned.



Thanks to ShedBoy for today’s photo.

We Bought a Third Rental House!

I can’t believe I’m saying this: Dear Readers, I’d like to introduce you to Rental House #3.

“But Paula, didn’t you just buy a house? A couple months ago?”

Yep, it feels fast to me, too.

Check out the pics, and meet me below the photos to hear the details.
(If you’re reading by email, click “display images” to see the photos.)

bought rental house - making repairs

We removed the 1970’s wood paneling from this room …

bought rental house - repair wall

We removed a closet to add more space to a bedroom …

bought rental house - repair kitchen

The kitchen is decent, but not amazing …

bought rental house - repair man

… so we’re adding a skylight to the kitchen. Hooray for natural light!

bought rental house - repair stairs

These used to be the steps to the front porch.

bought rental house - repair porch steps

These are the new steps to the front porch! Much better!

The LowDown

The basic stats are normal: 3 bedrooms, 1.5 baths, built in 1965, neglected and needs repair. Up to this point, the description sounds remarkably similar to House #2.
repairing the home
Its location sets it apart. Will and I have “stuck to our core competence” by only buying rental properties that cash-flow. We’ve diversified pretty heavily, though, when it comes to location.

As background: the Atlanta metropolitan area is encircled by a highway, 285, which we call “the Perimeter.” City lovers look for homes “inside the Perimeter,” while suburban-dwellers live “outside the Perimeter.”

Generally speaking (there are many exceptions), the suburbs north of Atlanta are more educated and moneyed; the suburbs south of Atlanta are less.

House #1, the triplex, is in the urban heart of the city, with a view of the skyline. House #2, a single-family home, is “outside the Perimeter” in the faraway suburbs to the south of Atlanta. (That’s why it only cost $21,000.)

House #3 is in a location that Atlantans would call “AT the Perimeter” — in that grey zone where urban meets suburban, within a mile of the 285 highway. It borders the suburbs to the north of Atlanta, in an area with good school districts.

Sorry if I’ve bored you with too much detail, but location is the most important aspect of this project. Many real estate investors decide to specialize in ONE location — sometimes limiting their search to only a few blocks — and there’s a ton of merit to that strategy. If I start flipping houses, I’ll most likely follow that approach.

Will and I are taking the opposite tactic for our rentals, because we’re buying-and-holding for the long run. Neighborhoods will fluctuate in unpredictable ways over the span of the next 40 years. By diversifying our buy-and-hold locations, we’ll defray the risk of holding a bunch of houses in an area that might experience a collapse. (Of course, if ALL of metropolitan Atlanta plummets, we’re screwed.)

C’mon, Get Talkin’ Numbers, Already

rental property - repairThis house went on the market in August 2011 with an asking price of $175,000. If that sounds like a lot of money for a home in disrepair — in a city where you can pick up houses for $21,000 — you can thank the location. This property sits on one acre of land, which is a rarity inside the Perimeter.

The asking price was a little high. The next-door neighbor’s house is currently on the market with an asking price of $155,000, and it doesn’t need repair.

So one month later, in September 2011, the owners dropped the asking price to $148,000. That’s in line with homes on that street that are in good condition, but this place needed a deeper discount to compensate for the work that needs to be put into it.

So in October 2011, the owners dropped the price again, down to $125,000, and that’s where the price remained when we stumbled upon the house in February 2012.

Negotiation Time

We toyed with our offer for a long time. We had a very strong sense that the owners would accept $115,000, and we were ready to pay that. But we wanted to make a smaller offer, so that we could “negotiate up.”
bathroom renovation
Will wanted to offer $105,000. I argued that we should offer $95,000. We volleyed the idea back and forth. We both worried that the “reverse sticker shock” of a less-than-six-figure-offer would cause the seller to dismiss us.

We consulted Mom and Dad. My dad, a tough negotiator, liked Will’s idea. My mom, an even tougher negotiator, agreed with mine.

Mom knows best: we submitted an offer of $95,000 and waited for the seller to retort with a counter-offer. To our amazement, the seller accepted it!

You know, real estate just blows my mind. You can “save” $10,000 just by asking for it. I don’t know any other area of life in which that’s possible, unless you’re running a major business.

We bought the house for $94,000, after getting another $1,000 concession when the inspector found mold in the basement. (It’ll cost $1,000 to treat the mold, so we’ll “break even.”)

The “REAL purchase price” is the purchase PLUS initial repairs. Our repairs are going to cost about $6,000, so the “actual cost” of the house is $100,000.

According to the One Percent Rule of Thumb, this house would be a good deal if we collect $1,000 per month in gross rent. ($100,000 x .01 = $1,000).

I estimate that this house can rent for $1,000 – $1,200 per month, thanks mostly to its zoning and its school district. The return on investment isn’t as hot as the $21,000 house, but the quality of tenant is likely to be much higher.

What’s Next?

rental house team sportThank goodness we’ve started delegating out the repair work: instead of sanding cabinets and hammering nails in House #2, we outsourced that work and used the extra time to search for House #3.

Plus, we forged great relationships with the contractors who worked on House #2, so we knew exactly who to call for quotes on House #3. This streamlined the process immensely, allowing us to coordinate the repairs much faster.

If there’s one lesson that Houses #2 and #3 have taught me, it’s that you’re only as strong as the team around you. Business is a team sport. My focus from this point forward is to build that team.

UPDATE, NOV. 2012: We rented out the house! Check out the final numbers.


Three Mantras for Small Biz Owners

Remember this when starting your business ...

I took part in a pretty dynamic, thought-provoking Twitter chat tonight in which a lot of small business owners shared ideas about how to take the leap to starting your own business.

I want to share 3 of the best quotes from that chat, and accompany them with a sentence or two about how you can apply that advice to your own small business (whether it’s an actual “business” that sells a product, or a side gig like tutoring, for which you still have to promote your service, manage your time, demand payment from clients, etc.).

These 3 brilliant snippets of wisdom were all said by @caroljsroth, author of The Entrepreneur Equation, carolroth.com:

If a few people aren’t laughing, you’re not dreaming big enough.

SO TRUE!!!! Now can I make a confession? I am embarrassed to call myself a blogger — because I don’t make a living from it yet. I feel like an imposter. (Who calls themselves an “aspiring blogger,” anyway?) I’m afraid that if someone asks what I do and I reply, “I write Afford-Anything.com,” they’ll laugh.

But you know what? My dream is for this blog to become big. HUGE. My dream is to start an entire Afford Anything movement. I want 1,000,000 readers to this blog. I want 200,000 email subscribers. I want this to spawn books, magazine articles, a television show. I want nothing short of a cultural phenomenon.

Are you laughing? Good. That means I’m daring to dream big. And so should you.

Be willing to take a couple steps backwards to make a huge leap forward.

Again, this is entirely true. The biggest barrier to risk-taking is comfort. If you’ve got a comfortable life, with a comfy job, comfy income, comfy home, comfy shoes, you’re at risk of not taking risks.

USA Today recently reported that the Great Recession and layoffs spawned record numbers of people to start businesses. Why? Because with 10 percent unemployment, and an even greater percent of underemployment and low wages, people stopped feeling comfortable. And that’s when the real fun began.

Your time is valuable — if you don’t think so, no one will.

Small business owners who sell a service — such as freelance writing — often charge extremely low rates, which they justify by telling themselves that they’re in a business with very little overhead. After all, a freelance writer just needs a laptop and an internet connection, right? And some incidental office supplies?

What that freelance writer isn’t considering is his or her time — hours of her life which she’ll never get back. Hours which could have been devoted to doing something else, whether it was pursuing more highly-paid work or relaxing and enjoying life.

Our lives are short and our time is valuable — so value it.