MoneyNing - Part 398

Whether I Should Buy an Investment Property in The Current Housing Slump

by David@MoneyNing.com · 68 comments

With the housing market in one of the biggest slump in decades, I’m contemplating the possibility of buying an investment property. Those who know me will probably think that I’m nuts because I don’t even own a primary residence but let me explain the reasons why I haven’t bought a house in more detail.

Current Living Environment
I just got married in February and moved into a gorgeous apartment. There are lots of free amenities and activities for residences that we truly enjoy. The rent is not cheap but at least it is still affordable and we decided when we moved that it was worth the extra cost. In fact, the apartment turned out better than we originally thought. After we moved here, we were both happier and found ourselves enjoying life much more.

It is impossible for Emma and me to afford buying a house with all these amenities in our current financial situation, so if we buy a property, we will in effect downgrade our quality of life.

The Unused Space
We currently live in a one-bedroom apartment and although you can argue that we can use a second bedroom, the space we have is plenty for the two of us. If we buy a place, we will at least get a 2-bedroom, if not a 3-bedroom condo/house because we don’t plan to move when we have kids.

This means that we will just be paying extra property tax for the unused space until we can grow into the house.

Renting Part of the House
Many homeowners in California rent out unused rooms to help pay the monthly mortgage. I thought about buying a home and doing this too but since I work on my blog so many hours of the day, I don’t want to run the risk of my tenants causing distractions when they are in the house.

Why an Investment Property Seems to Make Sense

Since I convinced myself that buying a house might not suit my circumstances, I thought about buying a smaller piece of property and renting it out. The reasons below seem to make this a sound choice.

We are in a Housing Slump
Most people are much happier buying a house when the market is going up but all we end up doing is overpaying for the properties. I remember hearing stories of bidding wars in California where people were putting in bids of 15-20% over asking price in hopes that they will get the property.

The story is completely different these days. Realtors are begging potential home buyers to look at houses and buyers who are interested are putting in bids as low as 40% below asking price. It is in these markets where a first time home buyer like me can take my time and pick a good location.

Practice Makes Perfect
This investment property will be a smaller and less expensive place than my primary residence down the road. If I can use this time to learn what I like and dislike about houses and sharpen my skills in the home buying process, it will only benefit me down the road.

Long Term Investments
Unlike my primary home where the emphasis will be on livability, the emphasis of an investment property is return on investment. As long as the rent is generating a positive cash flow after expenses, I can ride the highs and lows of the market and still come out ahead.

Alternative Investments

There are so many other options out there for my money like stocks, bonds, CDs, and even investing in businesses. Why am I thinking about real estate?

Real Estate versus Stocks
I currently own some stocks, but it is almost a part time job keeping up with them. I want to get into a more passive approach and something that will generate an income for me. If I buy any individual stock, I run the risk of it never recovering. If I buy the index fund, I don’t get the income.

Another major benefit is that I won’t check my property performance like I would my stocks. This will keep me from being emotional when the market tanks so I can focus on my other day-to-day operations (like writing on my blog).

Real Estate versus Bonds or CDs
Since this is a long term investment, I need something that gives me a higher rate of return. Bonds and CDs are great for safety but the return on investment when my time horizon is taken into account is unsatisfactory.

Real Estate versus Investing in Businesses
This is an interesting alternative but I will definitely want to be involved with the business if I ever invest in one. This is the total opposite of passive.

Real Estate versus All
It is a nice feeling to own a piece of real estate since it is an asset that you can actually see. Furthermore, there are amazing tax incentives in the United States for owning real estate. I believe the specific rule is tax free capital gain for the first $500,000 as long as you have been living in it for 2 out of the last 5 years. So if we are lucky enough to pocket some gains on this property, all we have to do is move there for 2 years and then sell it.

What Do You Think?

Even though in theory this all make sense, it does not mean that it’s necessarily practical. Does anyone agree with what I’ve said or can anyone think of something that I’m not seeing? As a next step, I will start looking at the closing and renting prices of various properties to see if I can generate a positive cash flow. I will keep you updated and I look forward to hearing your thoughts.

Saying Yes to Up-Sell is Saying No to Being Frugal

by David@MoneyNing.com · 43 comments

Emma and I went to a pretty fancy restaurant to celebrate my wife’s birthday. After we sat down, our waitress pleasantly asked us “Would you like some wine tonight?” We just experienced a form of up-sell.

What is Up-Sell
Up-sell is the act of suggesting a higher priced product or service to a customer who is about to purchase. What we experienced at the restaurant is no different than the cashier at Starbucks asking us to buy a grande sized mocha instead of tall or at McDonald’s when the cashier asked whether we wanted a combo rather than just the sandwich.

What It Means for the Company
These forms of up-sell are very popular because it works. While at the restaurant, almost everyone that she asked ordered wine. If she didn’t ask on the other hand, I bet half of those people will forget to do so.

What It Mean for Customers Like Us
On many levels, up-selling is actually good for customers like us. We are given a choice which helps us realize that there are better options for our purchase. When we are at McDonald’s, we are reminded that we can get that extra drink and fries at half price by buying the combo.

There is however one negative side effect of up-selling because agreeing to buying the more expensive product is not a frugal practice. We all know that we are not too disciplined when it comes to spending. When we are given a choice to buy the better product, chances are we will. At the restaurant, everyone that ordered wine ended up paying more. They ordered it because they wanted it, not necessarily because they can afford it.

When someone gives us a choice for a better product, we might not instantly realize how it affects us long term. Sure we had a great time drinking wine, but what about the mortgage payment due next month?

What We Should Do
Now that we understand what up-selling is, we made a very good first step in keeping our wallets intact.

We routinely make purchasing decisions and if you are like me, sometimes that decision happens on the spot. We wait until we are at the register to figure out which combo we want, we ask for pricing on a product without doing research, and we really only decide what to buy until we see it at the store.

On the other hand, if we already know what we want before we have to decide, it would be much easier to assess the effects of the extra choice when it’s presented to us. Just to illustrate, if we knew that we wanted two sandwiches with water before we go into McDonald’s, we won’t end up with a combo and end up paying more. Who really needed all the extra sweets and oil?

Motivation Monday – Find Your Passion

by David@MoneyNing.com · 8 comments

feel passionate and motivation will show up

Often, we lack motivation and resort to looking for excuses why something is unnecessary, why the task should be done by someone else and why we can wait till tomorrow to do it. In the meantime, we search for tips and tricks all over the place to help boost our motivation. Most of the suggestions seem useless and even if one of them worked, it would be short lived.

If this is happening, you are lacking passion. At work, we talked about this subject thoroughly. My boss no doubt wanted us to have it for the business our company was in. He told us

If you are passionate, then you wouldn’t think about the time you spend doing it. It wouldn’t matter if you were working on it in the day time, night time or even on the weekend. All you think about is how to accomplish the task and not how not to do it today. Things become fun, because you are thinking about the result and not the time spen.t

When I heard this, I thought to myself how wonderful the feeling would be but I didn’t quite understand it. I didn’t know how to gain this “passion” and I didn’t know what I could do to achieve it.

After a couple of months, I finally realized something – We are either passionate about something or we are not. It is very difficult to develop passion for something if you don’t feel passionate about it already. Sure, the feeling is possible to develop, but it’s a long process and we cannot force yourself along the way.

Another realization was that even if we aren’t passionate about a particular subject, it just means we haven’t found the right subject. For example, we can be passionate about cooking but not golfing, or we can be passionate about politics but not stocks. So unless you really want to develop the passion for a particular subject, it is much easier to just find the one that you love.

If motivation is lacking, then find something you are passionate about. Once the passion is there, it is very easy to get things done.

Like my boss says, “time is never a problem, you are just having fun”.

Weekend Roundup and MoneyNing Quoted in the New York Times

by David@MoneyNing.com · 10 comments

One of my readers congratulated me on being quoted on the New York Times recently. With more and more people starting to look at blogging as a source of insightful information, there is no doubt that blogging is becoming main stream.

As a reader of this blog, you can take pride in knowing that you were one of the early adopters of this medium and that you were part of the transformation of blogging from being a hobby to a profession. While some of you are occasional readers that stumble onto this site, others have enjoyed articles by being subscribers of the blog. If you’d like to continue to enjoy personal finance articles, the third option is to get automatic email updates by subscribing through email in the form below.

It’s always enjoyable to read great personal finance articles and this week offered plenty. Here are a few that I’d like to hightlight.

The Simple Dollar shares with us how he and his wife got on the same page financially.
My Two Dollars asks a question on a decision we make constantly – How Do You Decide to Tip or Not?
Canadian Capitalist teaches us how we should choose a financial adviser, great advice whether we are Canadian or American.
With the interest rate so low, The Digerati Life helped me find a good savings option: The WaMu online savings account with 3.3% yield.
Squawkfox has a huge list of reasons why we should use reusable shopping bags.
Blunt Money’s grandmother was always prepared with extras and now Blunt Money is emulating her. What a great feeling to know that you won’t run out of things.
Four Pillars lets us in on his secret to getting anything he wants.
Unlike last week’s tip to get a free book, you can definitely still get in on this one. Clever Dude is giving away a free book and all you have to do is leave a comment.
Blueprint discusses four reasons to shop at the farmer’s market. Support the locals.

Learn From Watching Two Families Go Through Their Housing Problems on Larry King Live

by David@MoneyNing.com · 18 comments

Larry King Live on CNN interviewed two families in trouble because of the recent housing crisis last night. The first family was starting to get behind on their payment, while the other already lost her home and is now living in her car.

Overview of the Two Situations
Family Hope
The first family (which we will referred to as Family Hope) lived in what they believed a $300,000 house. They are starting to get behind in payments but they haven’t received their default notice yet. They want to save their house but here are a few signs of why I think they haven’t really been doing something about it.

Larry asked them how many months they are behind and they did not really know.
When asked what their monthly mortgage is, they “think” it is around $2,100 – $2,200 instead of knowing
They seem to have 2 jobs, but they believe it is impossible to come up with $2,200 to pay the mortgage.
They are hoping that they won’t lose their house, but they aren’t making any effort to pay the mortgage payments and they’re not trying anything else to solve their situation.

Family Optimistic
The second family (referred to as Family Optimistic) is actually a female living with 2 dogs. She is a notary who was helping mortgage companies approve loan documents. Once the credit market and housing crisis started, no one could get loans and she was out of a job. She knew she was getting into trouble at the beginning of the year and now she’s lost her 2-bedroom condo and just living in her car. Even though her circumstances seem much worst, here’s what I observed.

She didn’t try to delay the inevitable of losing her home. Once she knew she was in trouble, she got rid of the house.
She is out of a job and living in her car, but she found a part time job which gets her $500 a month.
She is extremely optimistic, and truly believe that she will live through this crisis and find a job and get her house back.
She is still genuinely thankful for everyone who donated money to her.

Thoughts on the Two Situations
Family Hope
It’s very difficult to understand why this family would think they could save their home when they aren’t even making payments. To make it worst, they don’t really seem to know how many months they are behind on payments and what exactly the monthly mortgage payment is.

Larry asked them about the payment and after some mumbling (and probably guessing), they came up with a figure of $2,200. If that was true, why do they not think it was possible to come up with the payment with two incomes? This family doesn’t even seem to be trying.

Family Optimistic
This lady on the other hand sounds more likely to bounce back from losing her home. Despite the fact that she has to sleep in her car every night, she is still extremely strong and optimistic about finding a job and one day living in a house again. She doesn’t know how she will do all that yet but she believes she will, she truly believes. I’m sure she will find a way, because she will keep trying.

What Can We Learn From This?
There are many things we can do to avoid situations like these.

It is absolutely necessary to have an emergency fund. We should setup an expense every month and pay the emergency fund account where we put money in and never take money out. If it was never needed, it means you were one of the few fortunate ones. There are many articles talking about having an emergency fund of 3 months of expenses but I think 6 months of your previous salary is much safer. With this fund, it is much better to be safe than sorry later. Having an emergency fund would’ve helped Family Optimistic while she was trying to look for another job.
When times are good, you don’t spend the money but instead save as much as you can. During times when money seems easy to come by, it is the best time to save. I know first hand that it is very easy to spend more when large amounts of money are flowing our way, but life has its ups and downs and being prepared for the unexpected is always good. If we don’t save when times are good, we may not have a chance when the tide shifts.
We need to be sensitive to our own financial situations. Family Optimistic knew she was in trouble and moved on from her mistakes in a timely manner even though it meant her sleeping in a car. In Family Hope’s situation, they still have a $300,000 house that they could sell and start over. This way, they can start saving up immediately for the down payment to another house in the future. As it stands now, they are just furthering themselves into debt and delaying (or even eliminating) their chances to ever get a new house.
We absolutely need to cut our spending. Family Optimistic is living off $500 a month while Family Hope cannot come up with $2,200 per month on two income. As I mentioned yesterday, there are always ways to save more money. Live frugally and be happy.
We need to act promptly with a sense of urgency. Both of these families don’t seem to have the “I got to fix it now” attitude. Family Hope should be cutting back on everything they are spending immediately and Family Optimistic should be out looking for another job instead of doing an interview with CNN. The most responsible and sensitive person to our needs is ourselves. Act immediately.
Believe that there is a solution. Although Family Optimistic is in a much worst situation than Family Hope, she brings a feeling of optimism into her attitude which will propel her to find a solution to her problem. I wouldn’t be surprised if she is back on her feet and sleeping on a comfortable bed in 6 months while Family Hope is sleeping in their cars by year end.

Final Words
Many situations can be avoided if we do some preventive actions. In order to be trouble free, we need to be proactive instead of reactive. If you don’t have one yet, setting up a family emergency fund for example would be a great first step.

Believing that a solution is achievable in any situation is also very important. Never give up on yourself, even in a foreclosure situation. It’s not the end of the world if you lose your home. It just means you can start working towards your dream home again.

Cut the Budget – My Own Example

by David@MoneyNing.com · 9 comments

My parents taught me so much of what I know today. The importance of living below our means, the understanding of money matters and the appreciation of compound interest are all values that were ingrained into me at a very young age. I remember my mom used to tell me “there are always ways to save more money so keep looking”.

So mom, I am practicing this today. I will keep looking for ways to cut my spending. To help me do this, I listed out my average expenses for the last 3 months.

Expenses for the Past 3 Months (April to June 2008):

Category	Average	Low	High
Rent	$1230.00	$1230.00	$1230.00
Food	$159.63	$66.02	$223.21
Gas	$135.37	$92.62	$182.18
Goods	$77.65	$0.00	$152.99
Entertainment	$150.08	$19.24	$241.00
Misc	$122.45	$9.26	$347.85
Total	$1875.18	$1417.14	$2377.23

There seems to be major differences with just 3 months alone. The total for “low” represents me being ultra frugal while the total for “high” represents me as a major spender. Just this quick look has already established a dream goal of just spending $1417.14 per month. Now let’s break down the spending in each category to see whether this goal is achievable.

Food

Average	Low	High
$159.63	$66.02	$223.21

This one is easy to cut back. All I need to do is eat out less and order less expensive food when I go out. Out of the $223.21 monthly high, 4 meals make up $180 of it so my goal here is to shoot for the low, $66.02.

Gas

Average	Low	High
$135.37	$92.62	$182.18

Spending less money on gas is harder than cutting back on food but some ways include:

Drive less by grouping trips with similar purposes
Be more patient on the road and drive with less emphasis on strong acceleration and hard braking
Think about the route that I will take before getting on the road to avoid driving unnecessarily

With these tips, I’m aiming for the average, $135.37 a month.

Goods

Average	Low	High
$77.65	$0.00	$152.99

This is one where cutting is easier said than done. It’s very easy for me to just say that I will not buy anything each month, but it is very difficult to accomplish. Therefore, I’m going to try not buying anything in the next 3 months instead of saying I will never buy anything ever again.

Entertainment

Average	Low	High
$150.08	$19.24	$241.00

I know doing this wouldn’t make it the ultimate guide to cutting my budget but I’m going to keep the entertainment expense at $150. As you can see, I can be totally frugal and just keep the entertainment expense to only $19.24 but I need to be sensible and make this goal practical and achievable. Therefore, I’m keeping some “fun” money in my new budget, making it $150 a month.

Misc

Average	Low	High
$122.45	$9.26	$347.85

This one is easier than it seems. The $347.85 is actually a car maintenance expense last month. Since I don’t foresee anymore unexpected expenses, my goal is $20 a month for miscellaneous expenses.

Average Spending of the Last 3 Months: $1875.18
New Budget Goal: $1601.39
Savings: $273.79

I feel good already knowing there are more ways to save. Follow me and do the same analysis with your budget today. Then come back and tell us how much you will be saving.

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