Recent Home Buying Experience

Finding a nice home where you can cash flow positive is a tough business. The main reason being we will be occupying one of the units so that we can finally get out of the ghetto. I am going to share with everyone my last experience with trying to buy a home. Let's take a look at what the home looks like and then we can talk numbers:

 Now let's take a look at comparables in the same area. 

The home is at a list price for $159,900 and is currently only a 1 bedroom on each floor. This was the first problem because the listing states that it is a 3 bedroom which is very misleading.The first floor unit was in mint condition and did not need any work. The tenets are already paying $800/month with heat included which is below market average for this neighborhood.  The cheapest rent I found for this town for a 1 bedroom was $900/month and this did not include any utilities. The second floor is paying $650 in rent without any utilities. The apartment is very messy and would need some renovations to get market rent of $850/month. The second floor unit needs a substantial amount of work that includes:

1. Egress Ladder
2. Toilet
3. Tub
4. Bathroom Tile floor
5. Bathroom sink and vanity
6. Bedroom carpet
7. Paint whole apartment
8. Refinish stairs
9. Dome light fixtures
10. Door knobs
11. Refinish cabinets and knobs 

 At this point we are looking at about $6,500 in renovations just to get this apartment ready for some quality tenets. Keep in mind that this is just an estimate and could be more. Now we have to figure in all the costs of purchasing the home and moving costs.

Description	Cost
5% Down Payment (Offer Price $152,000)	$7,600
Renovations	$6,500
Moving Costs	$925
Total	$15,025.00

My first offer to the seller was $150,000 + Closing Costs with a deposit of $1,000. The seller would net $146,000. He refused the first offer as I expected and said that he was looking for a price closer to list price and a deposit of $4,000. I was very taken back my the seller demanding such a high deposit. After further investigation I took a closer look at the numbers. I decided that I should offer him $156,000 + Closing costs and would give him the $4,000 deposit. This means the seller would net $152,000 after closing costs. My mortgage would be estimated at $1,065/month and this includes taxes, insurance, and PMI. Even if we were to get the second floor at $850/month in rent we would still be cash flow negative because we would be occupying the first floor unit. So the negative cash flow would be -$215/month at best. 

      However I took at look at the value of the home if we were not occupying the home. Let's assume I was to get $900/month for first floor unit and $850 for second floor unit. Now were are looking at $21,000/year in income. The expenses would be about $16,080 and this also assumes the following:

Annual Expenses	Cost
Mortgage	$12,780
Water	$350
Sewer	$250
Gas	$2,700
Total	$16,080.00

Net Operating	Cost
Income	$21,000
Expense	$16,080
Net	$4,920

First Year ROI	Cost
Net Profit	$4,920
Investment Cost	$15,025
ROI	32.74%

Based on all this information I offered the seller $156,000 + Closing costs + $4,000 deposit. He would net $152,000. This is $7,000 lower than the listing price. He again counter offered and wanted an extra $4,000 on top of my offer. I finally gave up and said the hell with it. It's unfortunate we were only $4,000 off but at this point he was getting greedy. The house has been on the market for almost a year and I feel like it's not going anywhere at this point. I felt like my offer was very fair considering the amount of work I would need to put in it. And the deposit of $4,000 was already a huge risk for me in the first place. Oh well better luck next time.

What do you think of my recent home buying experience? Do you have any similar experiences? 

My Recent 401K Options

This week I had the opportunity to pick the funds for my 401K and was overwhelmed with all of the options. I ended picking the following two funds:

Vanguard Growth Index Fund  (VIGAX)

	Top Holdings (as of 12-31-14)
	Apple Inc	7.9%
	Coca-Cola Co	2.0%
	Google Inc Class A	1.7%
	Gilead Sciences Inc	1.7%
	Google Inc Class C	1.7%
	Facebook Inc Class A	1.7%
	Oracle Corporation	1.6%
	Walt Disney Co	1.6%
	Philip Morris International Inc	1.5%
	Home Depot Inc	1.5%
	Totals 22.9% of assets

Vanguard Value Index Fund (VVIAX)

	Top Holdings (as of 12-31-14)
	Exxon Mobil Corporation	3.7%
	Microsoft Corp	3.4%
	Johnson & Johnson	2.9%
	Wells Fargo & Co	2.7%
	Berkshire Hathaway Inc Class B	2.6%
	General Electric Co	2.5%
	Procter & Gamble Co	2.3%
	JPMorgan Chase & Co	2.2%
	Chevron Corp	2.0%
	Verizon Communications Inc	2.0%
	Totals 26.3% of assets

Expense Ratio for each of these funds is currently 0.94

Cost per $1,000 = $9.40

My concern is that I don't have current exposure to international funds at this time. Vanguard has the lowest expense ratios which is why I went with two of their funds. I also don't know a lot about funds, but I would like to eventually get into a foreign fund as well. I am content with what I have picked to start off with but I am unsure if I should add to this. 

What do you think? Should I add a foreign fund or any other type of fund? What are some great funds that have worked out well for you?

 

Net Worth Tracker

Net worth is something I have been tracking since August 2014. There are plenty of great apps that can help someone keep track of all their finances such as Mint and Personal Capital. Keeping track of my net worth has helped me stay accountable for every purchase that I have made. I have made a chart that illustrates what my Net worth has been for every month since August 2014.

Every month has been a steady increase of my net worth except for January 2015. If I recall the markets weren't so hot, and part of the reason was because I cashed out an old 401K account. When I received that cash, I ended up putting some of it into individual stocks back in February. This is why February was such a great month for my net worth. I may revisit this chart every quarter in order to continue keeping myself accountable.
    One of my goals for the year was to establish a 50K net worth by the end of the year. I focus on sub goals within this goal. So I want to try turning 20K into 30K which is almost accomplished. Once I get to 30K, I need to focus on turning that into 40K. Then I can achieve my end result of 50K. I find it very helpful for me to focus on the sub goals and figure out quicker ways to increase my net worth 10K at a time. I should be at 30K by the end of March but I am already thinking of how I can speed my way up to 40K.

• Should I invest in higher growth companies such as Nike and Starbucks?
• Buy a multi-family home and rent out the extra apartments for cash flow.
• Invest aggressively in my company's 401K. (I'll finally be able to do this in March and they match 100%!!!!)
• Sell aggressively on Ebay for extra income.

These are all things that could potentially help grow my net worth over time. Sometimes it's tough to always make the right call. One of the things I will definitely be doing is investing into the 401K with a 100% company match by the end of March. I had to wait a full 3 months for the opportunity to do so. I am thinking that 15% of my income should go into this account and I am excited to see which funds are available to invest.

What do you think of my net worth strategy?

FHA loan vs. 10% Down Payment Conventional Loan vs. 20% Down Payment Conventional Loan

I would like to start getting into investment property in the future but for now I am absorbing as much information through reading books. I just finished reading the “ABCs of Real Estate Investing” and I am waiting for “Buy It, Rent It, Profit!” to come in the mail. The cost of buying an investment property varies depending on many factors. I am an absolute beginner to real estate investing but I recently developed 3 tables for what the expenses could look like for a $125,000 home in my area, assuming a 4% interest rate.  Here are the examples of the mortgage programs available to me.

FHA Loan
Expenses	Estimated Cost
Down Payment (3.5%)	$4,375
Closing Costs (3%)	$3,750
Emergency Fund (6 months of Expenses)	$8,100
Property Tax (Based on a home I looked at)	$2,578
Maintenance (2%)	$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)	$1,750
6 Months of Mortgage (In case of emergency)	$4,236
Home Inspection (Estimate)	$200
Home Appraisal (Estimate)	$375
Attorney (Estimate)	$600
Total	$28,464
Mortgage	$706

 FHA (Federal Housing Administration)

The FHA is one of the more popular choices among first time homebuyers. It has been a great choice for those who do not have a ton of money saved since you don’t have to have a large down payment.

Advantages

• You only need a credit score of 580 in order to qualify

• You can qualify with a low down payment of 3.5% of the home price

• The interest rates compare to those of a conventional loan

• The down payment can be gifted from a family member or friend

• You may also borrow against your 401k for a down payment

• No prepayment penalties

Disadvantages

• You have to pay Private Mortgage Insurance on your home

• Private Mortgage Insurance is harder to cancel

• PMI fee is usually higher than compared to a conventional loan

• Some properties aren’t approved for FHA loan financing

• Little to no instant equity

• Higher monthly mortgage payments

 

• Less positive cash flow or ROI (Return on Investment)

10% Down Payment Conventional Loan
Expenses	Estimated Cost
Down Payment (10%)	$12,500
Closing Costs (3%)	$3,750
Emergency Fund (6 months of Expenses)	$7,860
Property Tax (Based on a home I looked at)	$2,578
Maintenance (2%)	$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)	$1,750
6 Months of Mortgage (In case of emergency)	$4,002
Home Inspection (Estimate)	$200
Home Appraisal (Estimate)	$375
Attorney (Estimate)	$600
Total	$36,115
Mortgage	$667

 

Conventional Loan with 10% Down Payment

This conventional loan is great for a homebuyer who has some cash on hand but doesn’t want to empty his savings account. A conventional loan adheres to the guidelines set by Freddie Mac and Fannie Mae. The federal government does not insure these types of loans.

Advantages

• You will receive a competitive fixed interest Rate

• The Private Mortgage Insurance fee is much less

• Closing costs on your home our lower when compared to an FHA loan

• You can cancel PMI once your Loan to Value reaches 80%

• This type of loan can be used on all property

• You can hold numerous conventional loans at a time

• Nearly every bank offers Conventional loans so your options are open

• Higher equity unless your house is worth less than you paid for it

Disadvantages

• You are forced to pay Private Mortgage Insurance

• You need a credit score of 680 or higher to qualify

• More difficult to qualify than the FHA Mortgage program

• There could be a prepayment penalty

• Higher down payment

20% Down Payment Conventional Loan
Expenses	Estimated Cost
Down Payment (20%)	$25,000
Closing Costs (3%)	$3,750
Emergency Fund (6 months of Expenses)	$7,500
Property Tax (Based on a home I looked at)	$2,578
Maintenance (2%)	$2,500
Appliances/Furnishings (Dish Washer, Oven, Microwave, Couches, etc.)	$1,750
6 Months of Mortgage (In case of emergency)	$3,642
Home Inspection (Estimate)	$200
Home Appraisal (Estimate)	$375
Attorney (Estimate)	$600
Total	$45,395
Mortgage	$607

 Conventional Loan with 20% Down Payment

This program is very similar to the 10% Down Payment mortgage. This used to be the required down payment a long time ago, but these days a 20% down payment is avoidable. The same pros I mentioned for the 10% down payment type of loan also apply to this type of mortgage program. You also get a whole new list of advantages.

Advantages

• You immediately start with a good amount of equity with 20% down

• The closing costs are much lower and may be waived by seller

• You are no longer require to pay a Private Mortgage Insurance

• Lower monthly mortgage payments

• You will receive the best-fixed interest rate

• Smaller mortgage makes it possible to get a 15-year mortgage with lower interest rate

• You get a better return rate and positive cash flow on your investment property

Disadvantages

A large down payment is hard to come up with

 

How do you feel about these mortgage programs? Would you add any advantages or disadvantages to any one of these loans?