Portfolio Update: New Subtraction (CMI, APD, EXC, and EMR; January 17, 2013)

by FI Fighter on January 17, 2013

in Stock Portfolio Updates

dome

As I mentioned in an earlier post this morning, I am now under contract for my second rental property. Once the good news was confirmed by my agent, I knew that I didn’t have much time to celebrate. Simply because there is no time to waste (my last deal went down to the wire, and we barely closed on time). Although I am thrilled with the win, when it comes to real estate investing, time is of the essence. I have 40 days to secure a loan and deposit the downpayment to escrow.

Details

Property: 2/2 Townhouse
Purchase Price: $290,000
Downpayment: 25% ($72,500)

The initial winning bid was $285,000, but I was forced to increase my offer by $5000 to $290,000 after the short-sale lender had the property appraised. The difference isn’t too great, so I didn’t bother to fight the lender’s addendum. I just wanted to win, plain and simple.

In a rising market, I know that this property could easily sell for over $320,000 today. The $290,000 price represents fair market value as of November 2012. I wasn’t going to squabble over $5000 and risk losing the property altogether.

Here are the main reasons I am so insistent on securing this win:

  • Rental Property #2 is located in a prime location. It’s very close to freeways, schools, downtown area, and most importantly, a plethora of jobs. So, it should be very easy to rent out. I don’t anticipate having much trouble at all locating a tenant.
  • If you are in high-tech, this is most definitely the place to be. It’s only a few minutes drive away from: Intel, NVIDIA, Cisco, Fairchild Semiconductor, Broadcom, Brocade, Qualcomm, Texas Instruments, etc. Since it’s surrounded by high-tech, I should be able to charge more for rent. People (like me) will pay more for convenience.
  • From the front doorstep, you can even see the new football stadium being built for a certain team that’s on the verge of making it to the Superbowl. From the house to the stadium is literally within walking distance. In real estate, it’s all about location. If you can secure property in a highly coveted area, you have to do it. Once the stadium is built, the local economy should pick up with all the influx of wealth pouring in. I’m anticipating strong capital appreciation and rent appreciation as a result.
  • It’s cash flow positive. Using the previous $285,000 purchase price, the CAP Rate is 8.84%, and Effective CAP Rate is 5.94%. Total Cash Return Rate is 13.27%. Quite frankly, I’d hate to miss out on this golden opportunity to secure an investment that will return over 13% yield in a year. The return for this property trumps what I am currently getting for Rental Property #1, which I still feel is doing quite well.

Making It Possible

So, all the above sounds great, but here’s the tricky part. How am I supposed to come up with over $70,000 by the end of February? Well, Martin is suggesting I rob a bank, and he’s willing to play the role of driver… so there’s an idea. 😉

Another option for me (which may be more realistic) would be to liquidate some stocks. I started that process today, as I exited out of the following positions:

17 shares of Cummins Inc (CMI) for $112.92/share
20 shares of Air Products and Chemicals (APD) for $88.16/share
153 shares of Exelon Corporation (EXC) for $29.97/share
45 shares of Emerson Electric (EMR) for $55.09/share

Selling the following stocks nets me $10,727.21.

The timing of the short-sale approval coincides well with current stock market conditions. The market is approaching 5 year highs, so now would be as good a time as any to sell and book some profits. In fact, I was able to make some money from each of the above transactions, minus Exelon.

I’m taking a pretty sizable hit by selling Exelon at this time, but it is what it is. EXC has been a laggard in the portfolio, there are fears of a potential dividend cut, and ultimately, the share price may deteriorate even further before all is said and done. I can always add more shares later, though, if it in fact takes a further plunge, but right now I really need the cash. My preference is to keep as many Core Holdings as I can, and since EXC was one of my larger holdings, it made sense to me to cash out now.

Work to Be Done

I am trying to think of some clever ways to come up with the rest of the downpayment. I’ll update as more details emerge. No, nothing illegal, I promise! (Sorry, Martin)

I anticipate needing to liquidate another $15,000 or so worth of stocks to make the downpayment.

Readers, what holdings would you suggest I sell?

As of right now, I’m strongly considering exiting out of Chevron (CVX), or Procter and Gamble (PG). I may even elect to sell 1/2 of my stake in Norfolk Southern (NSC). CVX and PG are supposed to be Core Holdings of mine, and I will no doubt add more shares to these wonderful companies in the future. Right now, they look ripe for selling, seeing as how their share prices are sitting near their respective 52 week highs.

Selling dividend stocks, especially Core Holdings, is never fun, nor easy to do. In fact, I’m having a rather difficult time with this because I hate the idea of having to saw off branches from my dividend tree! But ultimately, I feel my best long-term strategy is to stay invested in both real estate property and stocks. It has been in my gameplan all along to acquire multiple properties. And right now, the real estate opportunity is just too attractive to ignore. Once I get through this deal, you can be sure I will redouble my efforts towards building back up the dividend portfolio.

Final Portfolio Look

Here is what the portfolio would have looked like at the conclusion of today’s trading session:

1_17_13

 

{ 8 comments… read them below or add one }

1 Compounding IncomeNo Gravatar January 18, 2013 at 11:03 am

15,000? Hmm

PSX (huge runup, small position)
ABT (concerns over spinoff)
ABBV (concerns over Humira)
WMT (probably can find better price in the future)
BP (probably can find better price in the future)
COP (probably can find better price in the future)
CVX (probably can find better price in the future)
NSC (I would sell whatever is needed to get up to 15,000 with NSC)

Maybe substitute LNCO for CVX, but that is what I’d do. Now does not strike me as a good time to sell AAPL, VOD, SO, or INTC.

A lot of stocks seem to be pretty pricey at the moment, we make look back at this in 6 months and realize this was perfect timing!

Good luck!

-CI

Reply

2 FI FighterNo Gravatar January 20, 2013 at 7:26 pm

CI,

Thanks for the great suggestions. I ended up cashing out of CVX and ABBV on Friday. I agree, now is not an ideal time to be selling AAPL, VOD, SO, or INTC. I won’t resort to selling these unless I absolutely have to (more details to follow). The other stocks have all had a nice run up, minus NSC, but even it has bounced back quite a bit.

Take care!

Reply

3 JC @ Passive-Income-PursuitNo Gravatar January 18, 2013 at 3:14 pm

Hate to see you have to liquidate some of your DG portfolio but if the house gives a you a much better cash flow now then you have to do it.

CAT and CMI have had pretty big price swings since the new year
PSX has had a huge runup so that might be something to consider, plus it’s a relatively small position
APD
COP just because they’ve been having to sell assets since the spinoff, could be able to get back in cheaper later
NSC to maybe bring it’s weighting back in line with the rest of the portfolio

Hope everything works out, maybe we can get another little boost to the markets to add to your sale prices.

Reply

4 FI FighterNo Gravatar January 20, 2013 at 7:29 pm

JC,

Thanks for the recommendations. The industrials CAT and CMI have had a nice run since bottoming out in October. I sold CMI, and will most likely look to sell CAT next week. My position is very small in PSX, so I may elect to just hold on this one. The amount is so small, it’s probably not worth the transaction fee.

NSC is a bit overweight in my portfolio, but it’s still pretty cheap right now. I’d prefer not to sell, but b/c it’s such a large position, may need to indeed sell off 1/2 to meet the down payment.

Yes, I usually don’t like market run-ups, but this time around, I really do hope stock prices keep on rising 😉

Cheers!

Reply

5 Dividend Growth MachineNo Gravatar January 18, 2013 at 3:45 pm

I’ll suggest selling ABT (low yielder after spinning off ABBV), some or all of PG (fully valued), PSX (small position and it’s had a big run-up), and about half of NSC (to bring its weight more in line with CSX and the rest of your portfolio).

Regardless of what you decide to sell, I hope everything goes well with raising the cash.

Reply

6 FI FighterNo Gravatar January 20, 2013 at 7:31 pm

DGM,

Thanks for your opinion. I will most likely sell all of ABT and PG next week. PG is a large cap blue chip that most dividend investors like to own, but I agree that it looks fully valued at this point in time. I don’t really see it having a large run-up anytime soon, and a more attractive re-entry point is very likely to emerge again in the future.

Best wishes!

Reply

7 Dividend MantraNo Gravatar January 20, 2013 at 11:05 am

FI Fighter,

Best of luck with all of this. I hope everything with the transaction works out. It sucks to see you cut out such a large swath of your portfolio, but it sounds like it’s for the best long-term. I’m with DGM on this one. I’d get rid of ABBT, ABV, PSX, PG as whole lots and sell half of NSC. That should net you just over $13k. To get the other $2k or so I would trim one your energy holdings, probably LNCO or KMI…maybe even half of CVX.

Obviously real estate is priced based on locale. Here, a pretty nice 2/2 condo can be had for about $120k, and an entry level 2/2 condo can be had for well under $100k. Of course, I don’t live in Silicon Valley! 🙂

Best wishes.

Reply

8 FI FighterNo Gravatar January 20, 2013 at 7:41 pm

DM,

Thanks for your thoughts on this. I agree, it really does suck to have to part ways with some (or many) holdings. But, I gotta do what I gotta do.

By the end of next week, I will most likely exit out of PG, some NSC, and maybe some LNCO or KMI. I’ll probably keep PSX since my allocation there is so small.

$120k for a nice 2/2 sounds like an awesome deal! Yeah, prices out here are pretty pricey, that’s kind of expected. Not only for real estate, but for general cost of living. A $100k salary really doesn’t take you very far here. Too many people have gotten rich from stock options, as well, so it’s very difficult to win rental properties. There’s also a ton of foreign investors gobbling up inventory with all cash offers. That’s just another reason why I want to secure what I can now. Real estate can be extremely frustrating, which is why I want to “get it over with” now. After this, I won’t plan on buying another property for at least two years. So, I’ll be able to just concentrate on my dividend portfolio again!

Take care!

Reply

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