Year 3: The Conservator (2014)

by FI Fighter on February 6, 2014

in Progress, Thoughts

hawaii-33

Year 1: Inception (2012) was followed by Year 2: The Grind (2013). For 2014, initially, I wanted this year to be known as Year 3: The Accelerator (2014). I had high hopes of continuing my aggressive plan to purchase three more rental properties and snowball the cash flow further. After careful thought and consideration, I’ve decided to scrap that plan altogether and go with something entirely different.

Conservation. That’s the name of the game for 2014. Once Rental Property #5 closes escrow, I will ease my foot off of the gas pedal and proceed to cruise at a much safer speed. You see, sharp turns could arise at any moment on this journey, so I need to do the smart thing and make sure I don’t drive my car into a ditch… or worse.

Boring is Good

2013 ended on a high note. I had four properties under my belt and the forward looking net cash flow was over $1500/month. Granted, I didn’t have any major expenses pop up in 2013, so that forward looking number can be a bit misleading. At this point, I know I have a lot to lose, so I’m realizing that the prudent thing to do is to build up my cash reserves. For 2014, I want to play it safe. More specifically:

  • Rebuild cash reserves to $40,000 by the end of 2014.
  • Pre-pay loans (principal and interest payments) in advance for each rental to create some more breathing room.
  • If the market corrects enough, invest back into some dividend growth stocks.

It’s going to be rather dull year, no question. I simply want to hoard cash and save money. I think 2013 was already exciting enough, and I’m still running off the high that it created. I was able to purchase three rental properties in 2013, which has put my cash flow numbers in a pretty decent place.

There might be a little excitement, though. For 2014, I would also like to do the following:

  • Acquire a sixth rental property.
  • Start researching into Texas rental properties.
  • Work on growing this blog.
  • Network with other bloggers, readers, and investors.

Thought Process

The sixth rental property probably won’t happen (close escrow) until after my August trip. However, starting in March, or April, I would like to make a trip out to Dallas or Houston (or both) to start seriously researching into the Texas market. Currently, I have investments in the Bay Area, Chicago, and Indianapolis. I’m not sure what will ultimately become of those Bay Area rentals, but in addition to Chicago and Indianapolis, I would like to find a third source/vendor for out-of-state rentals.

I work in the semiconductor industry, and my company is a major supplier of IC’s to many different customers. For some businesses, we are a first source supplier. For others, we are a second source, or even third source. In the high-tech world, almost every major manufacture (Apple, Cisco, Huawei, etc.) has multiple sources. It’s extremely risky to rely on just one primary source! If a major supplier has a lines down situation, manufacturing stops, and catastrophe ensues. It’s extremely risky business to not have backup vendors.

I believe the same model should apply in real estate investing. I will soon own two properties in Chicago. I have one home in Indianapolis, and two more in the Bay Area. The Bay Area stuff, I’m most comfortable with since they’re located in my own backyard. I’m the property manager and I oversee everything. However, for the out-of-state stuff, I am completely reliant on others to take care of my properties for me. I am currently using two turnkey vendors… and I’m not at all comfortable with that idea, long-term. It’s been in the plans all along to diversify into a third (and maybe even fourth) out-of-state market. This year, I will dive in and do my research. I’ll go out there, meet the teams, tour the properties, and get a better understanding of how the Texas rental market works. If I like what I see, chances are high that my sixth rental will be located in Texas.

Outside of saving cash and purchasing a sixth rental, my only other big plans this year would be my round-the-world trip in August. I’m really looking forward to that and it should easily be the highlight of the year for me.

In addition to all that, I’ve also been having a blast networking with more bloggers and readers. I love hearing from all of you. Thanks again to everyone for all the support and encouragement! I’m humbled to be able to share this journey to early FI with you all. I’m looking forward to another awesome year in 2014!

Summary

2013 ended on a positive note and the cash flow numbers have made huge strides over the past two years. Early FI is looking more and more attainable each day. However, we’re not out of the woods yet, and proper precaution must be taken to insure we get to our final destination safely, and in one piece. Instead of trying to accelerate even faster (my original plan), we’re going to take the tortoise approach this year. Let’s ease back, rebuild the safety net, and proceed with extra caution. It would be absolutely wonderful to be able to retire at 30, but let’s try and do so while minimizing risks. Pitfalls (maintenance, vacancies, etc.) may be just around the corner, so it’s better to be safe than sorry. For 2014, we’re going the conservative route… That’s quite alright, because I know we’ll still get to the final destination. All good things come to those who wait.

{ 22 comments… read them below or add one }

1 writing2reality February 6, 2014 at 7:17 am

I like the plan FI! No need to kill yourself, plus the slower pace will allow you some additional time to focus on your long-term goals and possibly make revisions in your plan should you see reason to do so. Sometimes it is hard to see the big picture when we are wrapped up heavily in the details.

Looking forward to your Texas updates… I have an interest in possibly pursuing a property or two down there as well over the next couple of years.

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2 FI Fighter February 6, 2014 at 7:57 pm

writing2reality,

Yes, I’m definitely trying to slow down the pace this year. Initially, I might have been a bit overeager to keep on buying, but I took a step back and realized that faster is not always better.

I’ll keep everyone posted on Texas! You can be sure I’ll do a post about my experience and hopefully I’ll post some pictures as well.

Cheeres!

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3 Done by Forty February 6, 2014 at 8:47 am

Safe can be seen as boring, but it can make you look really smart, too. We’re keen on Texas, too, as a rental investment option. It seems like that state has the great combination of population growth, job growth, and cheap property. Let me know how that goes! Maybe we’ll follow in your footsteps and buy a property there as well.

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4 FI Fighter February 6, 2014 at 7:58 pm

Done by Forty,

I hope so! Part of the haste was I wanted to lock in more loans at low interest rates… that, and I wanted to secure as many loans as possible before exiting out of my W-2… But I think it’s better to play it safe and be a little bit more patient.

Will keep you updated!

All the best!

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5 Craig Moody February 6, 2014 at 9:12 am

Fi,

Not a solicitation, but I’m a part time broker in the Southeast part of Houston. (Clearlake) I’m not real active in the other parts of the city, but I am a member of the board of realtors, and I’d be glad to answer any of your questions about the area.

Crgmdy@yahoo.com

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6 FI Fighter February 6, 2014 at 8:03 pm

Craig,

Thanks for reaching out. Hopefully you can answer some questions on an open forum. I’m sure it’ll help other readers out as well:

-What’s the average/median purchase price of a typical 3/2 SFH?
-What type of rents for said home?
-Property tax percentage? HOA dues? MUD?
-Typical CAP rates, cash-on-cash returns investors should realistically aim for?
-Typical tenant profile in the area?

Thanks much!

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7 Craig Moody February 8, 2014 at 8:50 am

Formatting is a little off posting from Excel. Appologies.

In my opinion, Texas A&M University’s Real Estate Center is the best place to go for housing and demographic data. They publish a magazine called Tierra Grande, but information is also on the website. http://recenter.tamu.edu/#
This is the address for Harris county tax assessor http://www.hctax.net/Property/PropertyTax (Houston spills into several counties, but is concentrated in Harris.)
This data is from their website, I added the average for the year.
Date Sales Dollar Average Median Total Months
Volume Price Price Listings Inventory
2013-Jan 4,273 $ 852,045,057.00 $ 199,400.00 $ 149,500.00 21,364 3.7
Feb 4,884 $ 1,060,774,238.00 $ 217,200.00 $ 161,900.00 21,293 3.6
Mar 6,382 $ 1,478,847,537.00 $ 231,700.00 $ 172,300.00 20,909 3.5
Apr 7,115 $ 1,770,487,621.00 $ 248,800.00 $ 182,400.00 20,607 3.4
May 8,432 $ 2,120,463,418.00 $ 251,500.00 $ 186,200.00 20,526 3.3
Jun 7,930 $ 2,073,115,844.00 $ 261,400.00 $ 191,700.00 21,008 3.3
Jul 8,465 $ 2,169,661,834.00 $ 256,300.00 $ 187,800.00 21,497 3.4
Aug 8,153 $ 2,082,430,068.00 $ 255,400.00 $ 186,700.00 21,366 3.3
Sep 6,690 $ 1,626,718,991.00 $ 243,200.00 $ 180,000.00 21,207 3.2
Oct 6,522 $ 1,534,820,480.00 $ 235,300.00 $ 175,800.00 20,508 3.1
Nov 5,548 $ 1,354,722,078.00 $ 244,200.00 $ 181,000.00 19,331 2.9
Dec 6,432 $ 1,681,552,853.00 $ 261,400.00 $ 187,600.00 17,857 2.7

2013 Averages 6,736 $ 1,650,470,001.58 $ 242,150.00 $ 178,575.00 20,623 3

If you would like, I can email more detailed list, but can’t post information directly off of the MLS due to board regulations.
This is for 250 properties sold in the Clear Lake area last year:
Average contract closing price for Average sqft of 1799 is $139,710.
Median of same is sqft of 1790 for $139,900.
For 197 properties leased:
Average contract rent price for average sqft of 1764 is $1,441.
Median of same is sqft of 1737.5 for $1400.

Texas does not have a state income tax, so property taxes are relatively higher than most of the country. They range from 2.7% to as much as 3.2% for newer construction with MUD or PUD taxes and depending on what taxing authorities the home falls into. For the homes that would work best for rentals 2.9% is a good ball park. HOA dues are typically $400-$700 per year.

The Clear Lake area is home to NASA’s Johnson Space Center, so much of the employers (Boeing, Lockheed, Space X) in the immediate area are related to the aerospace industry. The Petrochemical industry is also a major employer many sites that range from 6-20 miles from Clear Lake City.

This area was first developed along with NASA. Homes range from the 1960’s to 1997. It is basically fully developed, however a new ~700 acre development is planned around the end of 2014. Trendsetter Homes will be developingthe site, and a grocery store and light commercial will be built alongside homes ranging from the low $300,000’s to +1,000,000. Demand for homes is high currently and supply is short. The summer selling season should see increased inventory. The addition of new homes will also free up some inventory. Houses are currently under contract in less than 45 days.

I don’t really want to post info about cap rates or returns as this could potentially be problematic from the standpoint of people expecting a guaranteed return.

Disclosure: This information is purely educational, and should not be taken as a guarantee or an offer to provide services. Anyone looking to purchase homes in the Houston area should seek a qualified advisor as well as support from an attorney.

crgmdy@yahoo.com

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8 FI Fighter February 8, 2014 at 8:56 am

Awesome, thanks very much for the reply Craig! Sure, feel free to shoot me a PM with more details.

Very helpful information for anyone else considering Houston.

All the best!

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9 JC @ Passive-Income-Pursuit February 6, 2014 at 10:58 am

I think it’s a good idea to build up some cash reserves. You had a lot of big moves in 2013 and a few ill-timed issues with some of the houses could really put a hurt on the cash flow. Let me know if/when you make it down here. If I’m home (Houston) or you happen to be in the San Antonio area maybe we can meet up. Looks like 2014 will be a slower year but that trip is going to be amazing!

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10 FI Fighter February 6, 2014 at 8:06 pm

JC,

Yeah, definitely a few big ticket items would set me back pretty good… Owning 4, or 5 rentals still puts you in a vulnerable spot b/c a single vacancy is still a huge blow to the cash flow.

That’s part of the reason why the plan is to get to 10. The extra hedge against vacancy will help.

Sure, I’ll let you know as the date gets closer. If timing work outs, perhaps we can meet in Houston or SA. Maybe you can show me around your new rental(s)? 😉

Cheers!

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11 Liam G February 6, 2014 at 10:58 am

FI, I like your plan for 2014. I initially had a similar set of goals for 2014 as you had. I was going to purchase another 2-4 rental properties, do some massive pay downs on loans, etc. I was almost under contract on my first purchase for 2014 using some unique financing (10% down, owner to carry the balance amortized over 30 years, due in 1). I had the 10% down, just needed some additional closing costs. A few inconsistencies popped up while going through due diligence.

Ultimately I decided to let that property go by the wayside. One day after I did that, I got a notice from my insurance company that there is/was an issue with my flood insurance that needed to be dealt with ($1,000), then four days after that, I got a call about a frozen pipe that burst ($500).

I would have been able to pay for those items somehow, but it’s nice to have some cash reserves. I’ve decided that this year, rather than invest all of my time/money in purchasing additional rental properties, I’m going to deleverage myself. In addition, I plan to partner with some friends of mine who are house flippers. They’ll put up the cash and I’ll put up the labor/management, we’ll split the profits. That cash will augment my regular income and add to my cash reserves.

Good luck this year.

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12 FI Fighter February 6, 2014 at 8:10 pm

Liam,

Thanks for sharing your story. Glad you did your due diligence and decided not to take risks on something that didn’t feel quite right.

Sorry to hear about the unfortunate events due to insurance and frozen pipes. Those type of things are exactly what I worry about and why I feel so strongly the need to build up more cash reserves this year.

Investing can be addicting, and the drive to keep acquiring more can lead you to make some hasty decisions. It took me awhile to see that myself, but I’m glad I’m taking a step back this year. I think it will be for the best.

Best of luck on the journey and I hope the flipping goes well for you!

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13 Charles@gettingarichlife February 6, 2014 at 11:22 am

Safe is a good theme. I’m buying more boring stocks this year as my growth portfolio is very aggressive. I do want a property but may wait to 2015. Thanks for the tips as I’m eyeing out in Dallas.

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14 FI Fighter February 6, 2014 at 8:12 pm

Charles,

Boring stocks are my favorite kind of stocks! Give me some KO, PG, and some JNJ and I’ll be able to sleep easy at night.

I do hope there is a massive market correction this year. I would love to pickup some dividend stocks on the cheap.

I’ll try and keep you posted on Dallas! Will let you know how everything goes!

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15 Dave @ The New York Budget February 6, 2014 at 1:53 pm

Great adjustment. It’s so easy to get wrapped up in the idea of “more” that it is nice to see that you are taking 2014 to pull back and realize that you are close to having enough!

Very excited to hear about Dallas, Houston, AND the around the world trip!

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16 FI Fighter February 6, 2014 at 8:13 pm

Dave,

Yeah, I picked up 3 homes in 2013, and am about to close on another in early 2014. It’s time to slow down and rebuild the cash buffer now.

Thanks! I can’t wait until the round-the-world trip happens! Six more months 🙂

Take care!

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17 Eric February 6, 2014 at 8:19 pm

You should slow down. $40K in reserves is peanuts. Make sure you have enough to pay all mortgages, including your own, for at least 6 months. And have enough to live on. You should have that before you bought the last one.

You do not want to get cash flow at the expanse of not maintaining properties. Do not trade your building for cash flow. A well maintained building attracts solid tenants and higher rents. Higher rents means a higher building value.

Works towards 4 plexes or larger. A 4-plex gives you a Fannie/Freddie 30 year fixed loan. 5+ unit buildings give you a 5-year adjustable rate mortgage (not as good…). Multiple tenant units are more difficult to manage, but they are also more stable and cash flow MUCH better. Higher turnover, but more cash.

The easiest building to manage is the one you can walk to. Keep them close. Watch them closer.

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18 FI Fighter February 8, 2014 at 10:54 am

Eric,

Yeah, I’m sure $40,000 isn’t much for some people, unfortunately that’s not true for me. It’s gonna take me some time to save up…

Cheers.

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19 Matt February 7, 2014 at 4:26 am

I like the plan! I find myself somewhere in the inception/grind stage – honestly, I’ll probably be here for more than a couple of years but that’s ok!
It’s always a good move to build up the cash reserves, especially when you’re levered at a decent rate and may need to lay out capital in a hurry. Good luck!

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20 FI Fighter February 8, 2014 at 10:56 am

Matt,

Thanks! Yeah, there shouldn’t be a rush as to when to start/finish each stage. Just go at a pace that makes sense and is comfortable for you.

More cash would help me a lot. I’m already using quite a bit of leverage, so I think it’ll be good for me to slow down on the acquisition side.

Take care!

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21 theFIREstarter February 7, 2014 at 8:19 am

Sounds like a shrewd move. I’m really just entering Year One: The Inception, so I am off to read that post now to see how you went about it!

(I’m writing last year off as I was mainly learning about FI, getting everything in order, and didn’t save so much due to getting married and the associated expenses with all that)

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22 FI Fighter February 8, 2014 at 10:59 am

theFIREstarter,

Year 1 is a most exciting time! I still remember when I started in 2012, totally enthused with this new path. Every paycheck I was trying to hoard so that I could buy more stocks.

All the best on the journey!

Reply

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