appreciation

March Financial Update

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I realize that some of the items that I share each month will be repetitive, but I’m catering to new readers that may not have seen the previous month’s details. As always, feel free to reach out if you have any questions about this information.

SPECIFIC LARGE CHANGES FROM LAST MONTH’S UPDATE

Paid $8,000 towards an investment property mortgage. This property’s mortgage balance is just under $14k, and we expect to have it paid off in the next 6 months. It would be earlier, but we’re also paying off another mortgage at this time, so we’re putting money towards that one next.

Mr. ODA cashed a few savings bonds that were mature, so we brought in $622 that wasn’t planned.

MONTH’S EXPENSES

Every month, $1100 is automatically invested between each of our Roth IRAs and each child’s investment accounts.

We had all the tenants except two pay their rent on time, and the other two houses paid on the 12th (typically when a tenant is late, the balance is paid on the next Friday of the month – pay day). Our rental income is $12,353, and we pay our business partner about $2,100 (we collect the rent and then pay him to cover the mortgages he holds and his half of the ‘profit’ after the mortgages are deducted from rent). We made it through the month with no investment property costs! We did have a tenant power wash our house out of the kindness of their heart though.

  • We paid about $5,900 for our regular mortgage payments.
  • Our grocery shopping cost us $500. We did the trial period for Walmart+. Unfortunately, the first two weeks of that trial period were destroyed by back-to-back ice and snow storms, so we couldn’t ever get deliveries scheduled within a couple of days. Once life went back to normal, there were plenty of delivery times available, even same day. While it was convenient, it wasn’t worth the annual fee and tipping the driver each time, so we cancelled it.
  • We spent $57 on gas, and $83 eating take-out.
  • We made some purchases that aren’t typical: ski season pass for next year ($119), medical bill ($70), and some furniture and odds and ends for the house (~$1,500).  
  • $464 went towards utilities. This includes internet, cell phones, water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant. Last month I shared that our electric bill was very high. We learned through the course of 6 HVAC company visits that our unit was not running properly, and that meant our heat strips were essentially on since we moved in ($$$). We will seek financial compensation from the builder once our next electric bill comes in.

SUMMARY

Our net worth increased by $45k from last month’s update. This change is mostly due to the value of our houses increasing and our mortgage balances decreasing.

Two Years of Changes

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On the surface, a jump of $1.1 million in just over 2 years seems impossible, but here’s the break down of how things changed in our finances during our child-rearing hiatus.

The highlights:
– Mrs. ODA left her job;
– We purchased three new properties;
– We sold one property;
– We paid off two mortgages and significantly paid down two others;
– Our investments grew based on market fluctuation, as well as our continued investment; and
– The value of the properties we own appreciated.

401K

Since I met Mr. ODA, I maxed out my Thrift Savings Plan (TSP, the Federal government’s 401k) contributions each year. Before that, I had been putting money into the TSP, but hadn’t maxed it out. I left my career position in May 2019, at which point I stopped contributions to my TSP. However, we put in as much as we could for the year before I quit (if Mr. ODA has his way, we’d have maxed out my contributions); I contributed $13,070 over the first 4 months of 2019. My balance on June 30, 2019 (it’s a quarterly report) was $300k. I have gained $127k over 19.5 months based on my investment strategy for the account with no new contributions. Mr. ODA continues to max out his contributions of $19,500 per year. His account balance has increased due to annual contributions, a loan repayment, and market fluctuations.

IRA AND TAXABLE

A Roth IRA has maximum contribution limitations per year. For 2019, 2020, and 2021, that amount is $6000. We each put $500 per month into the Roth IRA to max out the contributions. We have maxed out the contribution limitation every year we’ve known each other (10 years), and Mr. ODA had done so before Mrs. ODA knew such a thing. We don’t time our contributions throughout the year because we don’t want to stress about when the perfect time is and then possibly end up throwing five grand in when December rolls around. We have taken the ‘set it and forget it’ (essentially dollar cost averaging) approach to the Roth IRA investment.

Dollar Cost Averaging – Since we know we want to put $6,000 in for the year, we break it down into $500 a month and contribute on the 30th of every month regardless of individual pricing. This eliminates the need to pay attention to, and the effect of, volatility in the market. Some may say that dollar cost averaging is not a prudent idea because the market always goes up over time (essentially you’re setting yourself to pay higher and higher per share as the year progresses, on average), but I just can’t handle the psychology of dropping $6k on January 1 and not having anxiety for the rest of the year that it was the right decision.

As for the taxable accounts, this includes accounts we have set up for our children – UTMAs (however, the growth of these funds are not taxable to us because they are taxed at the minor’s rate – 0% for us). An UTMA is the Uniform Transfers to Minors Act. It allows an account to be set up in the child’s name without the child carrying the tax burden of the money. The IRS allows an exclusion from the gift tax up to $15,000. We put $50 per month, per child, into the account. This is also ‘set it and forget it’ with automatic deductions from our checking account.

CASH

Our cash balance really has no meaning. We bring in income and we pay our bills. We don’t purposely keep a savings account balance (as I shared in the Leveraging Money post, we’re not interested in maintaining 3x our monthly income in a savings account at 0.01% interest rate). We don’t purposely project how much to put towards mortgage principal.

We currently have a larger-than-normal cash balance, which is left over from selling our primary residence in September. It hasn’t been dwindled lower yet because we have a fence install that needs cash and we were paying down the last of our large credit card. Now that most of these things have happened, we’ll put more of our cash balance towards the investment property mortgage we’re currently paying down.

PERSONAL MORTGAGE

In October 2018, we had been living in our previous house for just under 3 years. In January 2021, we had only made 1 mortgage payment on our new home. While our current home cost slightly less than our last home and we put 20% down for each house, we had more years of principal pay down in October 2018 than we currently have.

PERSONAL RESIDENCE AND VEHICLES

We sold our Virginia home for $400k in September 2020. The valuation of that home rose significantly over the 2019-2020 years due to lower inventory with high demand in the Central Virginia area (probably all over the country, but I don’t know those details).

Also in September 2020, I traded my vehicle in for a van (and I couldn’t be happier :)!). That increased our vehicle valuation since the van is 3 years newer and a higher cost than my previous vehicle.

Even though my vehicle value rose slightly, Mr. ODA’s vehicle’s value continued to decline, and we purchased a home in a lower cost of living area, therefore having a lower value.

INVESTMENT PROPERTY VALUES

Since October 2018, we’ve purchased 3 properties, increasing the total property value of our portfolio. Additionally, all of our properties continue to increase in value. The Virginia homes have increased significantly over the last two years. In the table below, I’ve provided each property’s change in value from January 2020 (oldest snapshot per property I have) to February 2021.

Note that this is a projection based on the internet’s valuation and not an exact science. The only house that we have a recent appraisal on is the one that we refinanced in January 2020. That house’s appraisal was $168,000; we paid $112,500 in July 2017.

INVESTMENT MORTGAGES

Of the three most recent purchases, one was purchased with a partner, split 50/50, and the other two were the last two KY houses purchased. These three added $215k of new debt. However, you see that our mortgages on investment properties have only increased by $27k, which doesn’t exactly say “we bought 3 new houses.” That’s because we’ve paid down (and sold) about $150k of mortgages in addition to 2+ years worth of mortgage payments going towards these loans.

In May 2020 and January 2021, we refinanced two properties. Quick tidbit – we signed the refinance papers in May under a tent in a parking lot, and we signed the January refinance at our kitchen table with a traveling notary. While the interest rate and monthly payment decreased, the loan balances increased because we rolled closing costs into the principal and took $2,000 cash out (the maximum allowed) in each case.

We sold one property that we had been paying down the mortgage on; in October 2018 it had a balance of $11,142, and we sold it in January 2019. We had been paying down the mortgage because it was our lowest balance. When we made that decision, selling the house wasn’t in the immediate future. An opportunity presented itself, and we sold it.

We’ve paid off two mortgages during this period. One was in January 2019 with a balance of about $44k, and another was in April 2020, which also had a balance of about $44k in the October 2018 calculation. Our intent to paying off mortgages was two-fold. It increases our monthly cash flow that helps Mrs. ODA stay home with the kids, and it gets Mr. ODA closer to being able to leave his job. Plus, due to Fannie/Freddie requirements of having no more than 10 conventional loans, it creates the opening for us to get a new mortgage if the opportunity arose. The downside is that it de-leverages the house’s financials and creates a smaller cash-on-cash return for the property.

We have also paid down 2 mortgages over the last two years that aren’t completely paid off.
– One of those properties is the one that we purchased after October 2018 with a partner. It has our highest mortgage rate. The affect on the numbers here just shows that the principal balance of that mortgage is smaller than it was originally, thereby not increasing the mortgage total ‘fully,’ if you will. The principal pay down on that mortgage has been $44k total, but we’re only responsible for half of that.
– On the other mortgage, we’ve paid almost $28k towards principal between October 2018 and now.

CREDIT CARDS

We open new credit cards with 0% interest for an introductory period when we have large purchases looming. Not only is the 0% interest beneficial to us for an introductory period of 12-15 months, but we strategically choose new cards that come with a welcome bonus (points or cash) when you reach a moderate spend level in the first several months. Given the strategic timing of a new card before a large purchase, this bonus is easy to achieve. When we have large balances on credit cards, it’s because we’re purposely carrying a balance month-to-month at 0% interest. We have never paid interest on a credit card balance.

LIFESTYLE

Despite Mrs. ODA leaving the workforce, our net worth increased for all the reasons listed above. The one unmentioned piece, because its not directly tied to any accounts, is lifestyle. While our net worth, rents, and investments have increased, our lifestyle has not creeped. We still make strategic decisions, spend money mainly on needs, look for wants that provide our happiness without breaking the bank, and generally keep our financial future at the forefront of our daily lives. We live like no one else does so eventually we can live like no one else can.

Living intentionally allows us to get to where we want to be.

February Financial Update

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I had so many things to share, and now it’s time for another net worth update, but I hadn’t gone into the details of our 2019-to-2021 changes! I promise, it’ll come.

SPECIFIC LARGE CHANGES FROM LAST MONTH’S UPDATE

We paid off $5,000 left on one of our credit cards. This credit card was opened for a large purchase, and the 0% introductory rate expires at the beginning of March, so I wanted to make sure it was fully paid off so we don’t pay any interest on the balance.

We put $2,000 towards an investment property’s mortgage, and we received $2,000 cash out from another investment property’s refinance.

MONTH’S EXPENSES

Every month, $1100 is automatically invested between each of our Roth IRAs and each child’s investment accounts.

Between our personal home and the investment properties, except for the one that we refinanced so we skip February’s payment, we paid about $5,500 in mortgages. To put this in perspective, we brought in over $8800 from those properties, which doesn’t count $900 worth of rent at this time that the tenant is late on. This doesn’t include the properties that we own with a partner through an LLC, which nets us $400 each month (although one of those properties hasn’t paid rent this month yet either).

  • Our grocery shopping cost us $409.
  • We spent $76 on gas, and $72 eating take-out. We typically visit family once a week (45 miles round trip), go to the grocery (10 miles round trip) once or twice a week, and get take out once a week (10 miles round trip).
  • I made two Amazon purchases for non-grocery items we needed (e.g., activities for our 2 year old, vitamins, items for our daughter’s 1st birthday, and – really important – potty training seat), which totaled $125.
  • We owed personal property taxes from last year’s time in Virginia, so I paid the $94 for that. I also paid the balance of our personal home’s HOA, which was $85 for the rest of the year.
  • As for the investment properties, we had to purchase a new washing machine, which was $528 (although that cost is split with our partner for this particular house). We also paid for the insurance on a property that isn’t escrowed, which was $203.

$430 went towards utilities. This includes internet, water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant. Our electric bill was insane this month. We moved into our new home in November and had previously been living with gas heat so didn’t know what to expect. Mr. ODA called the HVAC company to have them run a diagnostic check on our units, and we found that the downstairs condenser isn’t working. It isn’t resolved yet due to an ice storm here, but hopefully it’ll be fixed today, and we hope to see some sort of compensation for our high electric bills due to this not working properly.

SUMMARY

Our net worth increased by $102k from last month’s update. This change is due to fluctuations in the stock market and the value of the houses. Our 401k balances increased over $35k, our taxable investments rose over $10k, and home values increased over $42k all together. A difference of over $5k in our credit card balances also contributed to the change in net worth.

PMI – Private Mortgage Insurance

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Don’t pay it. Get creative for your down payment. Here’s a brief on how PMI works and how we avoided paying it.

What is PMI?

A lender typically requires PMI when the loan is greater than 80% of the loan-to-value (LTV) ratio because it’s higher risk for them. If a buyer has less of their own money as equity in the property, the bank views this as a higher probability the homeowner will default on their loan. With that, the PMI is required until the borrower reaches at least 80% for the LTV ratio and the loan is in good standing for at least 5 years. This typically means that a borrower needs 20% of the purchase price as a down payment. There are a few exceptions, but overall, if you don’t have a 20% down payment, you’ll be paying PMI.

PMI can be up to 2% of the loan balance. The lender uses your credit score/history, the down payment amount, and the loan term to evaluate your risk and set the PMI rate.

While there are requirements that the PMI must be removed when your loan hits 78% and 5 years in good standing, you can request the removal of PMI earlier if your house value has risen (e.g., market fluctuation, improvements you made). If you request the removal of PMI, you may be required to pay for the new appraisal, which is an added cost. You should weigh the cost of the appraisal against the remaining payments. In a broad example, if the appraisal costs $450, and your monthly PMI is $120, then as long as you have more than 3 months left before hitting the 78% LTV ratio, it’s worth paying the appraisal fee to have PMI removed. There is also a risk that the appraisal doesn’t come back with a high enough house value, so you should be confident in your home’s value before requesting said action.

How did we avoid paying PMI?

While we were more than qualified to purchase a home in the D.C. suburbs based on our debt-to-income ratio, we restricted ourselves to what we could afford as the down payment.

A bank qualifies you based on your debt-to-income ratio. If you have low recurring monthly bills, then you’re qualified for a larger loan. At the time, our only recurring monthly payment was on my vehicle, at about $350/month. The bank pre-qualified us for about $700,000. Sure, we could “afford” a monthly payment on a $700,000 mortgage, but then we couldn’t eat, sit on furniture, or do anything else. 😉 We’d also be paying PMI because we didn’t have 20%, or $140,000, to put down.

Also due to our low debt-to-income ratio, we couldn’t qualify for any programs that would allow anything less than a 20% down payment for a mortgage. We set our purchase limit at $350,000, which meant we would need $70,000 for the down payment, plus closing costs. Due to the limited inventory at that price in the DC suburbs and the knowledge that we were pre-qualified for double what we were searching for, our Realtor kept pushing us to raise our purchase price. However, we advocated for ourselves and kept our focus on what we could afford as our down payment so we wouldn’t pay PMI. After months of searching and seeing places that were literally missing floors and walls, we increased our search to $400,000, hoping that if we found something in the 350k-400k range, we could negotiate it to 350k.

Our move to the D.C. area was not in our original plans. Mr. ODA had been saving through high school and college, expecting to buy a house in a lower cost of living locality. When we moved to D.C., we knew that we would need to change our expectations and day-to-day actions. We rented an apartment in Fairfax, but we didn’t want to be putting over $1600 per month towards rent for long, and we’d prefer to be paying towards a mortgage and building equity in a home. Positives to owning a home: mortgage tax deduction, appreciation, and the equity building that you get back when you sell the home.

While we rented, we were conscious of our spending. We aimed to spend less than $10 per day on food between the two of us, and we limited how much we ate out. We did activities with Groupons or restaurant.com coupons.

We moved to DC in December, and over the summer, we put an offer on a flipped foreclosure. The listing was $384,900; our offer was $380,000 with $2,000 in closing costs. It was denied by the bank, as we were told we were the 2nd best offer of 3. The next day, we got a call that the bank countered our offer. Apparently, the first offer attempted to negotiate their offer further, and the bank moved on to us. They countered $380,000 with no closing costs; we accepted. We now had to scrounge up about $80k for closing. 

We looked into a Thrift Savings Plan (Federal government’s 401k) loan. Many warned us against the idea, but our research showed it wasn’t as much of a concern as others let on. The details of this loan option are on another blog post. We decided to each take a residential loan from our accounts. I took a $15,000 loan and Mr. ODA took a $25,000 loan. We also borrowed $5,000 from Mr. ODA’s parents and paid it back within a couple of months. We avoided PMI.

An argument heard about not owning a home is that it costs a lot to maintain a home. While owning the home for 3.5 years, we gutted the main floor bathroom ($4,000), replaced the AC ($3,600), replaced the hot water heater ($1,100), resolved termite issues with treatment and wall replacements ($2,000), laid carpet in the basement living area, improved the yard through grass maintenance and purchased a shed, and painted a few rooms. We sold the home for over $60,000 more than we purchased it for (tax free since it was our primary residence the whole time), far more than the minimal expenses we put into it.

Key takeaways from our experience:

  • The efforts we put in to avoid paying PMI meant we had another $100-200 in our pockets per month. Instead of padding the bank’s ‘pockets,’ we paid ourselves back with interest into our retirement account.
  • We lived below our means, saved, and kept focus on the big picture.
  • We pushed ourselves to our financial limits to begin building equity in a home, rather than paying rent to a landlord (or in our case, an apartment company). The efforts put in that year have paid off time and time again, starting with selling the home 3.5 years later for a profit that led to some of our first rental purchases.