Wednesday, May 27, 2009

A bunch of offers!

So after showing the house for a week I have:
$1000 over asking price, but cover $4000 of closing costs
$6000 over asking price, but cover $5000 of closing costs
At least 1 other incoming purchase offer
Or to rent it out for $1200/mth + utilities (+300 cashflow, plus or minus)

The first is less than I want, obviously. The second is very nice but I'm worried the house might not appraise that high. Renting it has all the concerns of my previous posts.

Ironically, while it is probably better to have lots of 'good' options like I do here, it seems like it's easier to deal with having no choice -- or even deciding among bad options!

Tuesday, May 19, 2009

The plot thickens

My house was on the market for less than 13 hours before I got my first offer (to buy)
The house is up 'for lease or sale' and, as I alluded to in my previous post, I'd really rather lease the place (I think). I'm in that strange situation of being stressed over what should be a good thing.

It is coming in at $8000 less than my list and asking for $5000 of closing costs to be paid by me. I'm definitely going to counter before I'd accept a hit like that and I've asked for a few days to mull it over and see if I get any more offers.

Still, 13 hours isn't bad in this market!

Saturday, May 16, 2009

Rental Property

In my last post I alluded to renting out my current home while I am away. Doing this would be interesting from the perspective of the fact I would be striking out into very new territory.
as I spoke about in my summary of my financial past, I owe most of my money habits to my wonderful family. I wasn't even 10 years old when they decided to teach me about the stock market by having me buy a handful of shares. I researched lots of companies that made things I liked, and eventually bought 10 shares of Disney. Shares I still own today, after a number of splits.

My family invested their money in stocks and mutual funds of stocks and bonds. They keep their money in checking, savings, and money markets. But no one in my family owns rental real estate. This is a field where it is probably possible to become very wealthy, but it is also a field where it is very easy to shoot yourself in the foot and go bankrupt. It is full of scam artists and hype, along with some very real advice.

When I started getting interested in rental real estate I started doing some research and found a number of sources - my favorite 'finance guru' had a book on the subject "Clark Smart Real Estate" which I have read cover to cover a number of times. I also picked up a few random books in Barnes and Noble and thumbed through them. Online I follow the adventures of "Meg" with her WealthIsGood blog. On the radio there are a number of programs in my area by a group calling themselves LifeStyles, whom I have decided have some good ideas and some I disagree with fairly strongly.

Still, I'm interested in gathering ideas and thoughts on rental real estate. Here is what I have gathered from my research:
  1. Credit and Criminal check every occupant over 18. A minor blemish need not disqualify them, but look for trends and obviously prefer things to be cleaner. Consider the nature - a credit collection on a card but a perfect rental history might suggest someone who pays their rent before their other bills, which would be a plus for you
  2. Make sure the security deposit is not exactly a month, otherwise the tenant might think it is the 'last months rent' and leave you short when repairs have to be done
  3. Get a home warranty and write a "tenant deductible" into the rental. This accomplishes two things, the first is that it means the tenant won't call you for extremely minor problems (change your own light bulb, thank you). The second is that it limits risk - you generally only have the difference - if any - between the warranty and tenant deductible if something does happen.
  4. Be tough early, nice late. Be extremely picky about picking out tenants, but if you have a good tenant who runs into trouble you can get a lot of loyalty by being understanding if something happens later. Of course, don't forget it is a business and you need to be paid.
  5. Don't hesitate. Start the eviction process as soon as you are able to if the tenant is late, because even in the best of circumstances this can take time to go through. Hesitating will only give bad tenants the impression they can get away with it and leave you without rent longer. If they pay up, you can drop the process.
  6. Keep rental houses on the cheaper side of the market. There are far more renters below $1000 than above, for example. If you get too expensive, you start requiring incomes that are more able to purchase a home which reduces your potential pool of tenants and could result in long vacancies.
  7. Don't leverage yourself to the hilt. While leverage can help increase profits you are taking some major risks - the more the leverage the less number of 'bad things' that have to happen in a short period to turn a cash flowing set of homes into a horrible story.
Does anyone else have any hints on how to run a successful rental property? I'd love to hear them! Anyone have horror stories? Also welcome!

In my own particular case what concerns me most is the distance -- I would be several states away from my old home if I turned it into a rental. There are a few ideas I've had -- hire a friend to check in on the place for a few bucks a month for example. Does this seem like 'fundamentally a bad idea' or does it seem workable? I'd hate to give this place up; I really love it because of all the work I did making it perfect, but I don't want to get myself in trouble with it either.

Friday, May 15, 2009

A brief history part 4

My next job took me to Texas. When I finished my interview I had a very strange impression of the company - as I described it to my family "It is like being an Italian Chef, and you just interviewed with a great restaurant. The food is wonderful, the owners willing to do anything to help you improve the place, but something feels wrong. Then you put your finger on it - the restaurant is owned by the mob."

Ironically, I was probably closer to the truth then I imagined. While I have no reason to believe there is a link to organized crime the company was run in a way where I have to wonder if it was trying to fail. Hit and run management came down and disrupted your work on a regular basis. Company owners overrode decisions by domain experts on a regular basis, and then when their decisions backfired they blamed everyone else for sabotaging their 'genius'. Morale was the lowest I have ever encountered anywhere. It was a depressing place to work to say the least.

In the time I worked there I actually felt my personality change. I became short tempered and caustic, slept too much, and stopped caring about the quality of my work.

Financially I also went through a number of changes. The biggest: I purchased my first home. I cute little foreclosure with ugly wallpaper, stained carpets, and dry wall holes on the interior. I bought it very cheaply and started making repairs.

I also had a major raise with the new job - officially over $20,000 - combined with moving to a lower cost of living area. Ironically, it probably didn't help that much as I turned to spending as a cheap thrill and dining out every day just to get out of the office. Lots of my best habits fell into disrepair, and it is something I hope to turn around soon.

...And then the house got destroyed. Hurricane Ike hit the gulf coast, ripped off my roof, and rained inside my house for hours. I was in tears as the storm finally passed, leaving me with a living room full of wet insulation.

Luckily we were among the first to get power back, and along with bags and a shovel we quickly removed the furniture, insulation, carpet, and all the other damage. A week off of work gave enough time to deal with it all, and lots of pictures for insurance. In the end, though, the hurricane may have been the best thing to happen to the house.

I had purchased the 'best' form of insurance in the form of replacement value. For an example of what this means if I have a $1000 roof that is supposed to last 15 years, and it is destroyed 10 years later, I would usually get $333 (a third of the value). With replacement insurance I get $1000.
The hurricane destroyed much of the house - but it destroyed the unrepaired dry wall and crummy carpet. Insurance paid to replace these in full - my fixer upper went from a deal to an even bigger one. It is a beautiful little blue collar starter home, and I absolutely love it.

And then work got to be too much. Having several interviews scheduled and being sick of being told I didn't know what I was doing in areas of programming I have been doing for years I called it quits. I was unemployed just as the 'global financial crisis' was getting into full swing. Probably not the best of ideas.

On the flip side my savings habits had left me with over $20,000 in savings and a tax return that would include a $7500 credit for buying a home in 2008. Without the daily lunches out my expenses went back down, and I found myself with enough to weather well over the classic 6 month emergency.

As things would have it, I wouldn't even need that much. 2 months later, I was entertaining a number of offers. A salary to match the job I had just left in Nevada, at a company that seemed equally happy to the depression of the company I had just left. Another was a telecommuting position where I could work from home every day, though for less than I was making before. And that brings us to this week.

Eventually I decided to take both of the options above. I wrote the telecommuting job and asked if it might be possible to work part time, which they accepted. So now I am packing up and preparing to move out west. Now I'll be working a lot more - 60 hours will be a normal week, 80 or 100 if things get hectic. It will be quite the challenge. On the other hand, my income will be extremely high and my savings might never be higher.

I also have a number of decisions - what do I do with the house back in Texas? As mentioned, I love the place and I would rather keep it. I am considering renting it out, with the intent to return after the Nevada job wraps up, but nothing is set in stone. In particular, I'm having trouble figuring out if 'intent to return' will allow me to keep the $7500 interest free loan on the house, which would be handy. I also have to decide if it is worth buying in Nevada - their market has been hit extremely hard and so a great deal could be found, but if I am going to head back to Texas will it be worth it? If I rent the house out I would probably need a manager, or at least a friend to check in on the place. Even as cheap as I got it, could I really get enough to cover the mortgage, maintenance, and make a positive cash flow on the property? It will be a challenge, and a hard choice.

Thursday, May 14, 2009

A brief history part 3

My second job came with an interesting change: living with my father. Ironically, after having done so well I technically became a 'boomerang child'.

My parents divorced long before I was ever in elementary school, and while my father had been caring, with weekend visits a regular occurrence, I had never lived with him. Still, he happily offered me a bedroom when I got the offer and I thought it might be a great chance to get to know him beyond watching movies together.

It was also the first encounter where I really realized what completely different worlds my families were from. On my mother's side were a set of financially savvy savers. All were college educated engineers who had done fairly well financially. On my father's side I was the first to graduate from college. Most lived in the country, and actually had no conception of the sort of math and science I dealt with on a daily basis.

My father thought me moving in was the perfect opportunity to try going into business for himself. I don't think it was a conscious decision but I think that in his heart he expected me to support him. The business didn't work out and every month had him beg me for more money to pay the rent. I felt horrible for doing so, but eventually I had my paystubs and tax information sent to my desk at work rather than risk him seeing them and thinking I had the money to do so and I started underplaying how much I made. I also was exposed to a number of financial habits that I have seen in other people who have trouble:
  1. No sense of the future. Having money in the bank on the 29th meant you could spend it, nevermind that the mortgage is due the next day - it never even occured to him.
  2. Using his house as an ATM. I had heard him proudly declare he had paid off all of his credit cards, but later realized he had done this by refinancing. After living in his house for over 10 years, my father still has no equity.
  3. Being optimistic about everything - no retirement savings because he doesn't plan to retire, nevermind if something forces him to like an injury. Credit cards being under control because the minimums can be paid, despite the fact that paying them that way will take years and cost a huge amount of interest.
Outside of family I had a few interesting discoveries at work. The new company was very much 'bonus oriented' - in a good year a bonus might be more than a year's salary. Because of this, base salaries were lower than other companies but in the end usually came out financially ahead. What was interesting is that the company had very solid financial habits because of this. Because bonuses could not be depended on it was quite common for the employees to have a seperate 'bonus withholding' for the 401k of a fairly high percentage. Everyone learned to 'live on' the lower base salary and so at bonus time it was very easy to save or splurge and know it was safe. I loved the work, but sadly after a year and change the company was reorganizing and the role I was fulfilling was being removed (I was playing an emergency responder type of role, so it was a good reorganization to remove the need for that) - I was offered a generous severence and so I took it; hoping to finally get my own place and feel like I wasn't tempting my father into dependence on me - especially since it was a dependence I didn't intend to support.

To this day I worry about what I should do should my father run into financial problems. On the one hand, this is his own fault for not saving, for being unable to look to the next day nevermind the next year. On the other hand he is my father and I cannot abandon him. I have, for the moment, pushed these worries back but it is still a subject I have not yet decided how to handle. At the very least I know now that this is a worry, something I never would've known had I not spent that year with him.

Wednesday, May 13, 2009

A brief history part 2

We pick up with my first full time job, taken midyear 2005. It was several states away from 'home' and, in a very real sense, I was on my own. On the plus side, I had developed solid money habits in college and my starting salary was very nice for a fresh graduate.

After taking an exploratory trip before graduation where I had picked out an apartment, one of the huge advantages was that it was not only fairly affordable ($710/mth) but it was within walking distance of work, a nice way to encourage some daily exercise as well as save money on gas. I got myself saving into the 401(k) before my second paycheck, and contributing to my Roth IRA at about the same time (previously established from summer jobs).

Quickly it became a game -- how cheaply could I live? I set the goal to max my IRA and when it became obvious I would easily accomplish that goal I set out to max out the 401(k). Now it is important to realize that I started this job half way through the year - maxing the 401(k) would mean saving over half my salary. Unfortunately, the saving money game ran into the wall of a company limit of 50% salary contributions. Still, I maxed it out in that regard and lived as tightly as I could manage.

At this point I realized a few things - home being so close meant that going home for lunch was an option on a daily basis - I could go home and cook a hot meal which was more appealing than a 'brown bag' but kept the same savings appeal. In my subsequent jobs this would be a sorely missed advantage to my weakness for burger joints and other fast food. I also took advantage of company provided meals at every opportunity. The AC/Heat was off when I was away and combined with being in the 'middle' of the apartment tic-tac-toe board I was able to keep my bills low by leeching from their apartment's climate control. I cut my bills ruthlessly - open access point from a neighbor? No internet. I cut pay TV, kept no magazine subscriptions, and otherwise kept the monthly repeating bills to a minimum.

By getting into the game so early I never really felt deprived. I was still effectively taking home more than the tiny allowance I had in college, and since I only had a few paychecks before half of them were being taken out I didn't feel like I was cutting back. It was interesting to see other new employees, who I happend to know made the exact same salary I did (starting salaries for fresh outs were non-negotiable with this company, though very good), struggle. One workmate came in regularly on the 29th or so of the month asking me how he could somehow come up with enough money for rent - he ended up pawning some prized possessions and otherwise making some really tough sacrifices, and yet his life style seemed no better than my own; for all the spending he was doing the end result was a few more DVDs, meals out, and knick knaks along with a lot more stress.

I then had an amusing experience: while making a salary above the national average, with an emergency account, and every other sign of being a good steward of my money, I was unable to get a credit card. Mastercard, Visa, Discover -- I couldn't get credit because I hadn't had credit. Eventually I took out my old student ID and got one of the student cards that were pushed so hard just off campus. Something I'm fairly sure I wasn't allowed to do, but it never bit me. I got a solid cash back card that I paid off every month and started building a credit record as best I could without ever paying a cent of interest.

Eventually I realized that 'big corporate' life didn't suit me and I got a recruiting call from my father's home town. I jumped on that opportunity and got myself a 15% pay raise in the process. Thus my first job ended almost exactly a year after I had taken it, with a net worth that had risen by nearly 85% of the salary I had earned in that time.

Tuesday, May 12, 2009

What is stock

One thing I've noticed time after time is that some people simply do not understand what stock really is. You hear pundits declaring that people who own stock "didn't do the real work", or are otherwise some form of deadweight, or unnecessary part of the economy.

While I won't argue Wall Street does some dumb things, I do think that the stock market plays a huge role in making a successful economy and is almost required to have the rising standard of living that exemplifies the modern world.

First, a simple English definition of what stock really is from a few perspectives.
  1. Stock is ownership of a company. When you buy newly issued stock you are contributing resources that were your own into the company's use. Without going into a detailed discussion of capital, this means that without stock (or, alternatively, debt) the company could not obtain the workers or equipment - there would be no money to pay employees or buy supplies. When you buy existing stock you are preventing the need to liquidate successful companies for owners that need the cash.
  2. Stock is a way to make ownership liquid. There are lots of small, one person businesses in the world. However, assume that I own Stolid's Auto Repair in full - it is a functioning, profitable mechanic's shop. But I have a child I wish to send to college and the costs are higher than I have funds for - without stock I would have to either take the burden of debt or sell my shop (something I might be loathe to do!) - however with stock I am able to sell portions of the company's profits to someone else. This doesn't carry the risk of debt (with debt, I have to pay it back whether the shop is successful or not, with stock I do not), and lets me keep control of the company if I keep most of the stock. It also means that the person who bought the stock from me can sell it to someone else when he needs his child to go to school.
  3. Stock is the way that a company's profits are distributed to those that allowed the profits to occur. This explanation has two parts. The first is that without the stock holders, the company would not have had the money to attempt to fulfill people's needs and wants - and if there is a profit then there are customers so the company must be making lives better. In exchange for helping others the company receives an economic boon in the form of profit. The company can then opt to return this boon to those who organized the resources in a way that had more benefits with less cost than the alternatives - which is to say, the stock owners. The term for this payout is 'dividend'.
  4. The company also has the choice to 'retain earnings' - this means keeping the profits instead of putting them in a dividend. Usually this is because the company feels, long term, it can grow larger in an efficient way. For example, if Stolid's Auto Repair wanted to open a second location on the other side of the city, it would usually retain earnings to do so
So what does this tell you?
  1. A stock's value consist of 2 things:
    1. The resources the company controls - if Stolid's Auto Repair owns a building, repair equipment, etc. then even in a worst case scenario these could be sold and the proceeds, after paying any debts, would be distributed to the stock holders.
    2. The value of the dividends the stock pays out, discounted by the 'time value of money', which is basically that money now is more valuable than money in the future. This is related to the economic idea of time preference.
  2. Stock holders bear several duties that are economically important.
    1. They provide the raw resources that will fund the company at their own deprivation (I could buy stock, or I could go buy that shiny new TV!)
    2. They also bear all the risks for their own decisions. When a loan is made there is some risk of not being repaid if things go badly, but they get 'first dibbs' on the resources a company controls if it fails. Stock holders are basically the last in line, and thus bear the most risk of failure. In return, they have the largest potential for gain. If they did not have this potential, why would anyone buy stock rather than loan money?
    3. Stock purchasers have the duty of evaluating how efficient a company is at using it's resources. Imagine if "Emotional Auto Repair" and "Stolid Auto Repair" have, essentially, the same resources - number of garages, tools, mechanics, and so forth - but for whatever reason Emotional's stock is trading lower than Stolid's. That is a sign that, in some way, Stolid's shop is either geared better to grow in the future or organized more efficiently which will lead to more profit later. Without this capability a company could only be evaluated in the past, but with the market you can get an idea of where a company is going (this is why the market is often called 'forward looking')

Monday, May 11, 2009

A brief history part 1

Anyone who looks at my networth chart on Networth IQ probably sees the big turning point in mid 2005. In the interest of sharing, I'm going to start a series of posts discussing my financial history. I'll try to work chronologically, but I'm going to skip my childhood years because I feel those stories are important enough to warrant more than a few line mentions in the history. The start of adulthood was really the start of my habits, even if the chart seems to suggest a major change, it was less a change in me and more a change in my status.

Thus we start with college, 2002. I enrolled in a respectable solid school, though I have to admit both at the time and retrospectively I wish I had focused on getting into a better one. On the plus side, with some very very good test scores the school wanted me pretty badly and between the scholarships and funding my family had put aside I was able to get through school without taking out any loans at all.

One of the advantages I had was a family that had multiple highly educated members several generations back. For most of my generation college has become all but a requirement; in my family, however, it was more so. The upside to this is that my college fund was started before I was even born and I was able to graduate with some left over.

The other financial boon was that I was, as I mentioned, disappointed at the school and determined to make a better go of it. I took some crazy semester loads through some finagling and ended up graduating in just over 2 years of school. This saved over a year's worth of housing costs at the college and put me into the work force earning a year earlier. It also looked great on the resume.

By the time I got to college I had a few good habits already under my belt:
  1. I knew better than to buy things on credit. Until I was about 15 or 16 I didn't even know you could carry a balance on a credit card (I thought the whole 'credit' was they trusted you to pay them back in full at the end of the month). Therefore, in addition to no student loans I had no credit card.
  2. I already tracked my finances. When I was a senior in high school I got a laptop as a combination graduation gift and college requirement. It came with MS Money, and I started using it to work towards savings goals
  3. My bank statements went 'back home'. This meant just about every purchase could be looked at by my family. Generally they trusted me, but every so often I'd get a call about spending $60 on a meal. This gave me a very real 'angel on my shoulder' when I spent my money.
There were also a few major financial developments while I was in college:
  1. My interest in economics went from 'passing' to major. Learning about things like how savings turns into capital was fascinating to me and improved my savings incentives.
  2. For the first time I was responsible for the majority of my spending. I was given an allotment (one big payout at the start of a semester for books and supplies, and smaller ones every month for living expenses like food) and expected to make due.
  3. I learned the lesson of not loaning friends money. While nothing major was lost two friends in particular were the 'on the edge' types financially. Luckily, I knew enough when I gave the loans to not depend on getting the money back but it did teach me that the type of person who takes loans from friends is the kind who constantly needs them.
When I graduated from college I had basically stable money habits: I knew what groceries I could afford, I knew not to loan friends money, I knew how to balance my checkbook. When I went on to my first job it helped immensely since the only new bill I had was rent -- a consistent amount every month. Suffice it to say I didn't go wild and raise my standard of living.

My networth during college may have been flat, but I see it as the time I really came into my own regarding money and it set up the attitudes that would lead to some incredibly amusing stories at my first real job.

The big lessons:
  1. Keep track of your money. I think this is one of the most important items and it deserves its own post. I only got 'paid' once a month in college and by design it just barely enough to live on. I had to make sure I knew what I was spending or that new DVD would mean living on water at the end of the month.
  2. Don't take debt as a first choice. I went to a high school where most of the students were from a significantly better financial standing than my family, so it completely shocked me when the school's guidance councilors told everyone to fill out the FAFSA forms. Later I figured out that despite making more, the other families had basically saved nothing - they were dependent on loans to put their children into college. Through a combination of merit scholarships and my family's savings I got through loan free.
  3. ESPECIALLY don't take debt on something that won't pay off. I found it mystifying how so many people taking on heavy debt loads had no idea what they wanted to major in. There were juniors who were undeclared, and some who had never lasted one semester in the same major. Overwhelmingly the people with those habits eventually dropped out which meant they had taken on a huge debt and had nothing to show for it. If you're completely undecided, go to community college - take the universal prereqs (english, math, etc.) and some cheap 'intro to' topics that you're considering.
  4. Leave cash at home. One of the easiest ways I had to blow money was to walk around with it. Living on campus meant 'emergency cash' needs were basically nil. I walked everywhere, kept a charged cell, so there was almost no chance of an emergency leaving me with a need for money that couldn't wait for a run home. To this day the easiest way I have to blow my budget is on 'cheap' dining out when I get hungry.

Sunday, May 10, 2009

New Job(s)

It has been quite the hiatus. I'll avoid whining, but the background is that I left a job I absolutely detested. Thus, the last few months have been busy and stressful - either from the job or from performing a job hunt during a recession.

The flipside/upshot is that now I have a new job; and I'm moving to Nevada!

Luckily this won't change some of my favorite things - like Texas, Nevada has no state income tax and is fairly cheap to live in. Unfortunately it means I'll have to deal with my home here in Texas (expect a forthcoming post), pack up, move, etc. Cleaning and packing will be quite the chore.

Luckily, the job hunt went well and I had a sizable emergency fund that made riding it out pretty easy. In the end, I actually may have two jobs; one that I spoke with was a 100% telecommuting job and after accepting the more traditional asked if they might consider part time (20 hrs a week) and they said they'd make a new offer for that on Monday. That will put me working 60-80 hrs a week, but it might also help me improve my work ethic (I have a serious case of work ADHD, when I'm doing well it's awesome but other times every conversation in the building or web comic is a distraction that will suck up most of my day).

I'm making a new goal in my planner of at least 1 post a week, preferably one every day or two.