The Waterfall Cascading into my Basement

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Here’s the story of how I blew my renovation budget.

It took a lot of time, some negotiating and patience that I didn’t know I had, but I was able to get a decent contractor that was willing to do some basic renovations to the house for an acceptable price.  By the time negotiations were done, I had brought the cost down from around $15,000 to around $10,500 including materials and machine rentals from home depot.  Because I couldn’t find the time to shop around for things such as cabinets in the damaged sections or Offerup, I had to buy them for their retail price which wasn’t great, but wasn’t terrible either since I wasn’t looking for anything fancy.  But everything was going too well. I knew something was gonna happen. It felt like the calm before the storm. It literally was…

The DC area has recently been experiencing an unusual amount of rain and this storm was one that was talked about all week. There were flash flood warnings on the news and predictions of flooding in my area but I thought I was safe. Not only was my basement equipped to handle flooding, the ground above it was concrete. What could go wrong? The storm came and with it, buckets of rain that lasted about an hour or so. That’s when I saw something I wouldn’t have believed if I didn’t see it in person. From a hole in the corner of one of the basement steps, there was water literally being propelled a few inches into the air and then cascading down to my basement entrance. It literally created a waterfall effect with brown flood water that was coming from the neighbor’s gutter into a hole in a patch of dirt next to the driveway and out on the side of one of the  basement steps. Unbelievable!

Needless to say, pouring concrete into the hole, and refinishing the driveway shot up to my list of priorities. And there went an additional $2,500 for material and labor. I have now completed my renovation and the total cost of buying this property as well as renovating it now stands at $25,980. Although I wish it was lower, I still consider this to be an acceptable amount of investment into the property. The renovations I did added value and attracted potential renters. I literally had couples stopping by asking when it will be on the market while the house was still being fixed up.  At the price point that I would rent it, the house would return my investment in less than a year. Also, I will be reimbursed by my insurance company for some of the things I’ve had to do. While I did come out on top, I just wanted to note that real estate is always full of risks and requires a certain level of tolerance for exploding budgets.

My side hustles of working as a realtor, translating documents, and hosting pop up shops has allowed me to pay most of my bills while my salary supports this effort. I’m making the last payment to the contractors today and will be able to turn my attention to paying off my student loans once I’ve rented the house and saved for incidentals. I predict this will take me another month or two. My current plan is to start paying my student loans by November 2017 at a rate of $4,000/month by transferring them to my credit card as part of a 0% balance transfer. Then, when I graduate in May, I will consolidate/refinance them and start paying towards them directly. If this plan works, I will be done with my loans (now totaling $158,556) will be paid off in 33-38 months. I plan to continue my side hustles but will also take certification courses and negotiate the market salary of my MBA which will hopefully increase my income and allow me to allocate more towards paying off my student loans.

Offer Accepted :) Next Steps After Securing the Property

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Buying property is very cash intensive. You literally bleed out money in the buying process and maybe even after that. There are costs that you can anticipate like paying for inspection, appraisal, transfer tax etc. But there are so many things that could come up that literally will take a huge bite out of your cash reserves. This is even more likely to happen in a seller’s market which is what the market in my area currently is. A seller’s market is when there’s less supply and more demand making the seller the ultimate shot caller in the negotiation. My last two purchases happened during a buyer’s market when the supply was high and demand relatively low so I was negotiating down the price of the property and  asking the seller for all kinds of help with paying for these expenses. Well, the shoe was on the other foot this time.

My offer was for a property in the working class neighborhood I grew up in. The property needs some work but was in good condition. I had seen it on the market a few months prior and did not put in an offer because I thought it was overpriced. It was. The seller ended up reducing the price by $20k. So this time I offered and yes my offer was grounded in reality. The price I was willing to pay was $15k less than what the property was listed for. This is my neighborhood. I knew there was no way property could sell for that amount in this condition. I got rejected promptly. Someone else was willing to pay above the price it was listed for. The realtor didn’t even want to speak to me for long on the phone. And the reason he gave me could be summed up as “you don’t have enough money” I was sad but I could not put myself in a strenuous financial situation just to get the property. I backed out.I came to terms with the reality that maybe, at this time, I’m just a little too poor to try purchasing property. And then something magical happened.

A week after my offer was resoundingly rejected, I got a call from the agent that tried to snub me. He said his seller had some conditions but was willing to accept my offer now. It turns out, the other buyer wanted upgrades and changes that would cost the seller both time and money she didn’t have. So here I am.

Here are the steps I plan to take after completing the closing process and getting the keys.

-Have a working bar-be-cue housewarming – Yes you read that right. I’m going to ask my friends to pitch in on work such as ripping out old carpets, staining cabinets and painting. As a thank you, I would have a barbecue.  The cost of hosting a cookout is nothing compared to what I would have to pay for labor.

-Find additional side hustles to cover unexpected costs- Because of the age of the home, I’m counting on some unexpected issue coming up and costing me a large sum of money. It is essentially inevitable in a home built in the 1940s. I plan on increasing my marketing to attract home buyers that are looking for a realtor. I will also increase my translation workload.

-Find a contractor I can trust- This is so much more easier said than done. But luckily for me, I know a few people I can ask for referrals. I plan on getting 3 quotes from the referrals and comparing their cost, time frame and workmanship. This is the most immediate task and possibly the most difficult.

 

I’m a bit overwhelmed since this will be my first renovation but also excited. This is one step in the direction of having income that will solely be dedicated to paying off my student loans. I’m hoping I’m right in picking real estate as a way to generate cash and will buy additional property if this proves to be worth it. Here goes nothing…

The Home Buying Process

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I’ve purchased property twice before. But this is the first one I’m actually negotiating on as a realtor. Yes, in addition to my day job, I’m also trying to work as a realtor part time both for the experience and the money. I want access to the multiple listing service so I can see what’s on the market and invest wisely. I also want to help other people buy and sell and make money that can pay off my student loans. My past purchases were condos and now I’m looking for a townhouse.  I haven’t been doing this for long but some things make themselves abundantly clear from the start. Here’s what I’ve learned so far:

  1. Don’t get pressured into buying property: Its not always the right thing to do. Don’t just do it because it looks like a good idea. Do your research. All real estate is local and depending on where you live, buying a house as opposed to renting might be the wrong thing to do. The reason I decided to buy property instead of renting an apartment is because the rent in my area for the type of home I wanted was literally double the amount I would pay as a mortgage. If I had rented a 2 bed 2 bath with the same amenities that my current home has, I would be paying $2400 in rent as opposed to the $1245 I pay now in mortgage and condo fees. But this might not be the same for you. Do what makes sense. Literally everyone in the home buying process is making money off of your purchase and might not always have your best interest at heart so make sure you do your research.
  2. Be honest with yourself: If you’ve worked yourself into a position where your credit can get you a high amount in loans and you’re tempted to buy that snazzy renovated house, just ask yourself if you need it. You probably don’t. You probably also don’t need the high monthly payments that come with buying a property just because you can afford it. That’s how you chip away at the quality of your life. Be honest and find something that will just fit your needs for now. If you’re young and have no children, there’s no need to go and buy a 4 bedroom 3.5 bath granite/hardwood everything house in the suburbs; unless you’re planning to rent it out.
  3. Adjust your DTI: Lenders look at a lot of things to see if you’re credit worthy and one of the things that tell them whether or not you will be able to pay your mortgage on time and in full is your Debt to Income ratio. This is calculated by dividing your monthly debt by your gross monthly pay.  What they consider debt for this calculation is things like credit card debt, student loans, mortgage/rent, car note. Your utility bills don’t factor in. The maximum it can be for them to consider you a trustworthy borrower is 43%. Anything above that is not considered. The lower it is under that threshold the more trustworthy you are. How do you do this? Simple, you pay down your debt and increase your savings.
  4. Preparation is Key: Going through the process of getting a mortgage is not the most fun experience. Its made that much more difficult if you are not the type to have your essential financial documents handy. To apply for a mortgage, the documents you would need are three years worth of tax returns and W2s, your last two pay stubs, your last three bank statements, and your driver’s license. These are all things you could get in advance and have ready to go. The more prepared you are, the less time/energy the process will cost you.
  5. Don’t go crazy with your money: Lenders are put off by random unpredictable expenses and random unpredictable sources of income. When they see an unexpected expense on your bank statement that’s not part of your regular spending, they worry that you’re undisciplined and likely to have cash flow problems.  When they see a random surge of cash in your bank account they worry that you’re either not telling them about all of your sources of income or that you’re borrowing from someone and thus have altered your DTI. Either one is not a good look. Your finances have to be super predictable and consistent for them to trust your ability to pay the mortgage.
  6. Documentation is everything: Sometimes, stuff happens. Your car breaks down and costs $1200 to fix or you have to go to a hospital and end up spending $900 on medical expenses etc. In order to avoid the effect unavoidable expenses such as this might have on your chances of getting a mortgage, keep records of the necessary expenses you had to cover. Receipts, emails and statements for everything you know is out of the ordinary.

Getting to Ground Level

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If you’re in debt, its hard to make long term plans for  wealth and retirement because they seem so far away. I’m in this position where I know all the right things to do to build wealth but I can’t actually act on them because I’m still deep in the hole and need to climb out. The pursuit of financial independence starts from zero. I’m way in the negatives feeling my way through a dark and at times depressing journey to net positive, the point where my debts are eliminated.  At this stage of indebtedness, making progress requires me to make more money and put it all towards my student loans until they are completely eliminated. So I find myself having to break the rules for achieving financial independence to first achieve freedom from debt.

My debts are prioritized as:

  1. Credit cards
  2. Student Loans
  3. All other debt including mortgage

In the next few months, I will eliminate my remaining credit card debt and be able to focus on the second and most challenging liability I have, my student loans.  Paying off over $150K in 3 years requires making payments of at least $5,000 a month for the next 24-36 months.  Coming up with this kind of money is going to require some bold moves on my part. I need to find streams of income that can produce that much after they cover my expenses. For now, the only such stream of income I can think of aside from my salary is real estate.  With real estate, I can create a positive cash flow that will allow me to tackle my student loans aggressively.  So I’ve decided to purchase another property and rent it out.  All the profits from the rental property, my salary as well as my side hustles will have to be able to generate at least $5,000 a month.  But real estate is cash intensive and requires a large upfront investment.  So unfortunately I’ve had to make a few sacrifices that I wouldn’t even have considered if I didn’t have student loans. But alas, since I don’t have wads of cash lying around, I took out my Roth IRA to use it as a down payment on my property purchase. My account is now a sad shell of what it used to be :(. My goal is to replenish it once I’ve tackled a few high interest installments.  I guess I’ll have to lose out on the compounding effect until that time.

Having to withdraw my Roth IRA to buy a property has me bummed. But I’ve made peace with it. After all, a rental property will help me eliminate my loans. And once my loans are gone, it will become a source of passive income. I’ll be looking for properties to purchase and hopefully making an offer in the near future.  Once I’ve purchased a property and done a quick live in renovation, I will rent it out and begin my debt repayment journey. Here’s the plan:

  1. 0-2 month: Purchase property and make cosmetic changes
  2. 2-4 months: Rent out property and start to tackle consumer debt
  3. 4-6 months: Implement student loan method 1, transfer the first student loan balance to my zero interest credit card and start paying it off.

That’s the plan. I’ll be doing my best to stick to it. Here we go…

 

 

Student Loan Payoff Method #2

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 Cash out Refinance: This is also another method people might consider risky. Why use the equity you’ve accumulated to pay off debt instead of reinvesting it? Why reverse the progress you’ve made on paying off your mortgage? Consider this:

The condo the mortgage is associated with a property that can appreciate in value while a student loan can only be a liability and digs me further into debt the longer its around.  While its not a guarantee that properties will increase in value, they do have the potential to do so. Debt, cannot appreciate in value or benefit you in any way by hanging around longer. Between 2015 and now the value of my home has increased by $20,000 creating a significant amount of equity. In the same amount of time, the loan I had taken out to pay the cost of tuition has accrued close to $10,000 in interest.  One is providing me with equity, the other is dragging me down into the abyss.  Even though I have no guarantee that the value of my home will continue to rise, I would rather take my chances with it than continue to sink faster and further into debt.

Mortgages have a longer term and a lower interest rate.  While student loans are generally given a 10 year period to be paid off, Mortgages come with 15 and 30 year terms meaning that you have more time to pay them off. In addition, on average, mortgage interest rates are lower than student loan interest rates. At least in my case, my mortgage has an interest rate of 4.125% for a 30 year term wile my student loan average is around 6.3%.  In addition, the interest on mortgages compound monthly while the interest rates on student loans compound daily. This means that the cost associated with the interest rate for mortgages increases monthly while the cost associated with the interest rate on my student loan increases daily.

Student loans are not forgivable essentially under any circumstances, even death while mortgages are. Mortgages are backed by the house as collateral.  This means that the house could be sold to pay back the mortgage and if there is any debt that remains, it will be forgiven. This option is not available for student loans. Even if you file bankruptcy, you cannot get rid of student loans and must find a way to pay them off.  By using this method to reduce my student loans, II would be reducing the amount of debt I would have remaining in the event of a bankruptcy and making it less likely that I would have any debt remaining.

I do believe in investing. Under any other circumstances I would opt to invest any equity I take out instead of paying my debt. But student loans are the type of debt you should tackle as soon as you can because they’re literally the worst kind to have.

Fortunately for me, there have also been changes in the refi laws that favor people who want to use this strategy.  Secondary mortgage buyers like Fannie Mae and Freddie Mac are willing to reduce/get rid of the fees associated with cash out refinancing provided that you’re taking the money out to pay off your student loans. They work with companies like SoFi to make these options available. You can also take out a larger percentage of your equity for this reason than you can for reasons like home improvement etc. I’m now quietly waiting for my equity to accumulate and in a couple of years, all else being equal; I will be able to use it for this purpose. My goal is to use this strategy to finish of the loans I will have remaining towards the end.

Student Loan Payoff Method #1

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In 2017, one of my goals is to start paying back my student loans. I plan on implementing my payoff strategy.  I would like to have paid at least one third of my student loans by the time I graduate so I can reduce the interest that’s been accumulating while I was in school.  Currently, my balance is hovering around $160,000. So the amount I would like to pay before graduating in May 2018 is around $54,000. Paying off my loans is going to be just like paying off my credit cards but on a much larger scale.

– Balance Transfer: If there ever was an upside to having a credit card balance repeatedly and being forced to pay it off, it’s the fact that it will help you build your credit and in turn give you a higher credit limit.  Obviously there’s a better way of building your credit and being able to have a high credit limit. But this is how I’ve gotten it. I’ve never not paid my credit card balances. My issue has been keeping them paid. So I currently have a high credit limit which I plan on using to pay off my student loans. This method is risky and unconventional but I think will actually work for me. Every time I’ve had a credit card balance, I’ve found the inner discipline to make sure I drive it down to zero. So far, I’ve gotten those balances by buying things I don’t need. Why not just load one student loan out of the 11 I have onto the card and tackle it aggressively? Here’s why I think this will work.

Many of my student loans have interest rates that are above 6%. They accrue interest daily and between September 2015 and today alone have added about $9,000 to my total balance. Student loan interest rates are compounded daily and adjust to be a percentage of the new balance. That means that the amount I owe is increasing by over 6% of the total amount (principal + interest) and not just the principal amount I borrowed. If I use the balance transfer option of my credit card, I will have the option of getting 0% interest for the next 12 months. That’s 12 months of not having the interest grow out of control! I will stop the hemorrhaging and be locked into a timeline that I have to abide by to pay off the amount I transfer. Also, for once, I’ll be doing something completely constructive with a credit card. I’ll be paying off a student loan and building my credit at the same time. I plan on tackling the loan with the most accrued interest first and working my way down.  There’s also the added fear of not letting my balance transfer offer expire before I pay off my loans and having to pay 21% interest on my loans to incentivize me. So I’m motivated by both fear and logic.

In addition to building credit and reducing my student loan debt, I would also be able to reduce my total debt to income ratio with this method. The debt to income ratio is the result of dividing your monthly recurring debt by your monthly gross income. The lower your debt to income ratio, the better because it means you’re not over leveraged.  This is important for me because I plan on investing in more properties and lenders take this ratio into consideration when they’re deciding how much loan they should approve you for. If I can reduce my DTI by a significant amount by using this method, then I can be able to qualify for a larger loan which will allow me to purchase more lucrative real estate  like multifamily properties.

Finally, the most morbid yet equally beneficial reason I’ve thought of to do this is the fact that a credit card balance is forgivable in the event of bankruptcy and death. Student loans are not. So if I have to file for bankruptcy, I know that whatever amount I have put on my credit card would be wiped out as a result. Additionally, my estate will not inherit my six figure debt in the event that I pass before paying off my student loans. Hopefully I won’t go bankrupt or die anytime soon. But I can’t discount this benefit just because its not fun to think about.

I’ll be posting about more methods I plan to implement for my payoff strategy.

 

What to do on Day 1 of the New Job

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Since I just went through this process, I figured I’d share what things to look out for when you’re settling into your salary and benefits package.

You passed the few rounds of interviews. impressed the employer enough to get a job offer. You countered the salary/benefits that were offered and settled on an agreeable arrangement. Now you’re at the office going through the on boarding process and getting bombarded by a barrage of forms! Health coverage, Dental, Vision, 401K, subsidies etc etc. It’s so easy to just focus on completing them just for the sake of doing it and not think about the implications of what you’re agreeing to. But how you set up your benefits package could literally be the difference between taking advantage of all the opportunities afforded to you and leaving money on the table.  Pay attention. Don’t play yourself.

For most things, there is no one size fits all approach. Everyone prioritizes things differently based on what their needs are. But there are a few basics.

  • Spend some time on HR’s website.  You need to see what type of benefits they offer you. Yes, things like 401Ks, healthcare and dental are provided but do they have transportation subsidies you can take advantage of? Are there businesses that provide you with an employee discount somewhere you’re already a customer, say your cell phone service provider or your wholesale grocery store? Does their employee assistance program also provide free legal advice or financial planning advice? Is there tuition reimbursement for school or certification programs? Most companies do some sort of orientation that gives you a brief overview. But they don’t get into the details of what might be important to you because their objective is only to inform you that these options are available and not necessarily that you know enough to use them well.
  • While you’re on HR’s website, you should also look for any information related to the pay scale your company utilizes.  This is an immediate feedback on your salary negotiation skills because it tells you how much more your company would have been willing to pay you than you settled for. If you negotiated closer to the top end of their willingness to pay, congratulations! If you didn’t, you probably will never forget the feeling of regret you have right now and will make sure you use this information when you renegotiate your salary.
  • For the love of God, at least contribute the amount your job matches to your 401K! Ideally, you should contribute the maximum allowable amount to your 401K of $18,000/ year. Doing this not only reduces your taxable income in the short term, but it also sets you up nicely for retirement. When you start early and max out your 401K, you make compound interest work for you. If the magic doubling penny could reach such a high amount within one month, imagine what 10% or more of your salary could go up to in a matter of years. Maybe you want to ease into this and start out with a smaller amount. In this case, at least contribute the same amount as your employer is willing to match. If the employer does a 3% match, then make that your minimum. If you do this, you will guarantee that your company is providing you with the most amount of money towards your 401K plan.
  • Don’t just pick the PPO. If you’re young and relatively healthy, chances are you’re giving up a lot of money for healthcare coverage you don’t really need. Last year, I blindly funded my PPO and ended up spending $1500 more than I needed to on healthcare coverage.  How about you make those dollars work for you instead? Don’t just give your money away. Consider getting the High Deductible Health Plan and matching HSA instead. The HSA is a bank account that is funded by your pre tax dollars and can be used to pay for healthcare related expenses like co pays. It can also be used to cover expenses that are indirectly related to your health like transportation to your doctors office, contact lenses/solution, pads, sunscreen etc. And you know what else, HSAs could also be used as an investment account! They’re really just magical! You reduce your taxable income, you eliminate health coverage waste, start an investment account and get the ability to purchase some things with pre-tax dollars! Effing magic!
  • Take advantage of any other pre-tax account your employer is willing to fund. Again, this saves you a lot of money on taxes. But it also gives you an opportunity to spend less on things you already spend money on.  If your employer will let you pay for parking or public transport with your pre-tax money, sign up for the maximum. Yes, your take home pay will look like it’s less but its actually more because you have reduced a big recurring expense that you no longer need to spend your after tax money on.

There are so many other things. I could probably write about this all day. But do yourself a favor and at least start with these basics.