House 2

I closed on house number two a few weeks ago and have been working at fixing it up. Before and after pictures to come upon completion.

Once this place is rented out my gross rental income will be right around $2k/month. Taxes, the water bills, and insurance eat up about $250/month (though I pay all these annually up front). Which means I’m netting about $1,750/month. I figure on shuffling about $500/month into a reserve account for future maintenance on the properties. Which leaves me with about $1,250/month net. With education related expenses coming to an end in a few months, that means the $1,250 ought to cover my personal expenses. Which means, I suppose, that I’ll officially be financially independent (FI).

FI is a funny thing to calculate and think about. In fact, the capital I used to purchase these properties has been in my possession since the summer of 2009. And I hadn’t worked from October 2009 all the way up until just about a month ago. So does that mean I’ve been FI since the summer of ’09? The money was in securities and the returns weren’t enough to completely cover my living expenses, but now that I’ve changed my investment into real estate, that same amount of capital is enough to cover my living expenses.

You might be inclined to say ‘no’, I wasn’t FI, because my returns weren’t covering my expenses. Which sounds reasonable. Except that someone could well be FI, living off of securities for years, but then have one or two years with low returns that aren’t enough to completely cover living expenses, then rebound back. Would you say that person is no longer FI during the 2-year bear market? Probably not, you would probably say they were FI the entire time. So maybe I have been FI since 2009.

Whatever, it really isn’t of any consequence other than bragging rights anyway. Not so much of being FI, but of how quickly I did it, in 2009 I was 25 years old.

So now the insured value of my properties is just over $400k (the replacement value, the minimum coverage the insurance company will issue a policy for for my houses). The combined assessed value for tax purposes is $270k. Realistically, if I wanted to sell the houses quickly, I could probably get around $160k for the pair. Which shows you just how nuts the real estate market is right now. I saw a listing the other day for an old farm house on 10 acres where the asking price was $130k. Six years ago it had an asking price of $1.5M.

So I’ve already got my eyes open for a third house. Which I could probably swing on my own, but things would start to get a little tight. Which is why I made an arrangement to go 50/50 with another investor for a short-term partnership where we will purchase a place with cash, fix it up, and put it back on the market, splitting all costs and proceeds. Which will leave me in a comfortable position to be able to purchase a few more rentals on my own.

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7 Comments

  1. Jeff M.
    Posted February 9, 2012 at 12:45 pm | Permalink

    You haven’t been FI, and still are not, because the return won’t be there until you finish fixing up House 2. Right now, you’re building your nest egg through your manual labor, and are very, very close to your nest egg being large enough. But until you complete House 2, it isn’t.

    But that’s all BS semantics. Congratulations on your progress and your recently-achieved-or-soon-to-achieve FI milestone.

  2. Posted February 10, 2012 at 7:03 pm | Permalink

    to an extent, FI is a state of mind as much as anything.

    expenses can be adjusted to resources far more dramatically and easily than most are willing to consider.

    The bum on the street is there and I’ve got a pal who made $800,000 last year. When we had lunch he complained bitterly about how you just can’t make ends meet on only $800,000 a year.

    given his expense structure, he was absolutely right.

  3. Posted February 10, 2012 at 10:14 pm | Permalink

    Jeff has a good point that my investments require manual labor in order to improve my returns.

    On the same token I’ve wondered if a landlord, even one who contracts out all the maintenance work, can really call himself ‘retired’. But on the other hand, having been a landlord for almost a year now, I’m confident that I put in fewer hours per month than most active securities investors I know. Particularly the ones who deal in commodities, options and currency trading. Those guys put in as many hours in a day actively trading and researching as I do in a month of landlording.

  4. Susan N.
    Posted February 12, 2012 at 12:09 pm | Permalink

    Hi…as for house # 3…go to Mr. Money Moustache and read his recent post on his biggest mistake. After reading that … well, you decide. Good Luck!

  5. Posted February 12, 2012 at 8:01 pm | Permalink

    @susan Thanks!

    I go over and catch up on MMM now and then and I read the post you’re referring to. There’s big differences though between the one-off short-term agreement I plan on doing and MMM’s starting a long-term construction business with a partner who draws a salary from the investment capital.

  6. Jeff H
    Posted February 20, 2012 at 12:48 pm | Permalink

    Mind sharing your strategy for finding these houses? Or may be a blog post on your process that outlines how you search for a house?

    I tend to look around a bit on line at various R.E. websites, but haven’t really figured out to find foreclosure deals.

    Thanks, and good luck with the new one!

  7. Dmitry
    Posted March 9, 2012 at 11:10 am | Permalink

    Way to go, Mike, and congratulations.
    I used to be landlord at one point – not because I carefully planned all the figures and set up a nice positive cashflow. In other words, not by choice, rather, due to circumstances. Everything was wrong: condo bought at the top of the bubble, I was living in a different state (that’s why I had to rent it out – I had to move for job reasons). As a result, it was a nightmare costing me thousands (eventually) and a lot of mental anguish.
    I only wish I was as smart as you are when I was 25 (or, even better, at an earlier age). However, I rebounded from this goddamn ordeal, which ended in Dec 2009 via shortsale, and may even be ready for another, better, run at landlording :). Though I am not actively seeking this at the moment – partly because I don’t know if I really want to stay here in Texas. It’s reached its expiration date for me, been here for 9 years…

    Anyway, sorry for rambling. Congratulations again!