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Refinancing Your Existing Loan to Purchase An Investment Property

Finance

Many people are looking at the housing market slump right now as an investment opportunity.  Here are a few of the things that you need to know before getting a new home loan or refinancing your existing loan in order to make that happen.

 Amount You Want to Borrow

 A lot of borrowers go shopping for real estate and have exactly no idea how much money they can borrow. One of the first questions that you need to ask before going real estate hunting is how much can I borrow. You can ask a bank, lender, or financial institution to give you a ballpark figure of the amount of loan that you would qualify for. This will make it easier for you to narrow down exactly what type of property you can afford and what areas you can concentrate on.

 Amount of Interest You Will Pay

 Too many people are overly concerned with the purchase price of the home that they are buying. They fail to find out how much interest they will have to pay back to the bank in order to make their home ownership dreams come true. This is where a home loan calculator can be really useful. You can find out exactly how much interest you will repay over a 10, 20, or 30 year loan time period. You can also change the interest rate and down payment amount on those calculators to see if you can secure a lower monthly payment.

 Credit Score Needed to Qualify

 It doesn’t matter if you are buying a home for the first time or refinancing an existing loan. Your credit score matters. You need to start doing some research now if you want to secure a loan with a really low interest rate. This involves taking the time to see what credit scores traditional lenders are looking for and doing the work necessary to qualify for this loan. Your credit score will make a big difference in determining if an investment property purchase is a profitable endeavor or one that winds up costing you money. It will depend heavily on what kind of loan your credit score allowed you to negotiate.

 Make the Choice

 Once you know how much you will need and exactly how much you will be paying out over the life of another mortgage, you can decide whether you want to refinance your current home loan to get another one.  Adding on another huge debt to an existing one is a big risk.  Make sure to think it through fully before jumping in.

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How We Handled The Windfall

Finance

Landlord
Landlord (Photo credit: FletchtheMonkey)

Three years ago, my mother-in-law died.  She didn’t have a will, but that’s a story for another day.

My wife, being an only child, inherited everything.  All of the assets, and all of the problems.

She inherited the house, which was completely paid off.  That was nice.

My mother-in-law was a hoarder who didn’t buy into the idea of maintaining your property.  That was not nice.

Between the life insurance policies and the ready cash, she inherited about $60,000.  Also nice.

It’s all gone.  Not so nice.

Now, I know you’re asking where it went.  Lucky for you, that’s what this post is about.

We paid off the last $10,000 of our credit card debt, and haven’t accumulated a balance since.  Now our cards are paid off in full every month.

We put $5,000 down on the Chevy Tahoe we bought in 2012 and paid off in full 9 months later.

Every last cent of the rest went into the house we inherited.

Huh?  45 fricking grand to get the house ready to rent?

Yep.

  • $3000 to clear out the brush and landscape the yard
  • A few hundred to have the hardwood floors sanded, stained, sealed, and buffed
  • An intense carpet-cleaning
  • Painting every single room
  • 3 large dumpsters to handle the garbage we pulled out of the house
  • New refrigerator
  • New washing machine
  • New boiler
  • New stove
  • New patio door
  • New locks for the doors and windows
  • Security lights
  • Food for all of our helpers whom we can never thank enough
  • Finishing the basement

All of that pretty, pretty money, gone in less than a year.

What did we get out of it?  A rentable asset that is bringing in $1200 every month, with minimal work.

We could have chosen to sell the place, but we would have had to do nearly all of that work, anyway, so it wouldn’t have saved anything.

I like having the new stream of income, even though it will take several years to turn a profit.  That house isn’t going anywhere, and since it’s only 3 miles from Minneapolis and 5 miles from downtown Minneapolis, it will always be an in-demand area for renters.

It was just a lot of work turning it into a useful property instead of a year-long drain on time, patience, and money.

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Twinkies: A Failure of Unionization

News

Box of Twinkies
Box of Twinkies (Photo credit: Wikipedia)

Twinkies may survive nuclear warfare, but the iconic sweet treat ultimately couldn’t withstand the might of the unionized workforce. Faced with mounting losses and overwhelming debt, due in no small part to the relentless demands of the various unions representing the nearly 19,000 employees, Hostess Brands filed bankruptcy for the second time in January 2012 and ultimately requested permission to liquidate it’s assets in November of last year when a buyer failed to materialize. While many factors played a part in the demise of the maker of such all-American snacks as Ding Dongs and Ring Dings, as well as childhood favorite Wonderbread, there is no denying the fact that costs imposed by union contracts were a major factor in the shuttering of this once-beloved company.

While there is certainly plenty of blame to go around, the simple fact is that nearly 97 percent of the company’s unsecured claims were from employee pension funds, according to the Chapter 11 filing. How did those claims arise? Simply put, the skyrocketing pension expenses were caused by the unions continuing to push for overly generous retirement rewards despite overwhelming evidence that the company could never sustain those costs. True, the unions did agree to considerable concessions prior to and even following the first bankruptcy filing in 2004. However, that was only after union officials had pushed wages and other benefits into the stratosphere, even though Hostess has been struggling for years to remain competitive.

Certainly America’s changing eating habits, increased competition from such companies as McKee Foods, makers of Little Debbie snack cakes, and rising commodity costs all contributed to the ultimate demise of Twinkies. There is no doubt, though, that union contracts inhibited the company’s ability to adapt and make the necessary changes to remain profitable. Not only were employee costs out of control, ridiculous union rules made it nearly impossible for the company to make money. These are just a few of the rules that hampered Hostess’ management:

  • Twinkies and Wonder Bread could not be delivered on the same truck.
  • Drivers could only deliver one product, even if they did not have a load and a load of another product was waiting to go out.
  • Drivers could only drive. They had to wait for loaders to fill their trucks.
  • Likewise, loaders could only handle one product. Their contract prohibited a Twinkie loader from helping out if the Wonder Bread loaders were shorthanded.

Yes, management agreed to these terms, but often they were forced to do so in order to prevent a costly strike. In fact, it was a labor strike that lead to the decision to liquidate.

Unions are meant to protect workers from dangerous working conditions, overbearing management and unfair labor practices. Ensuring a living wage and decent benefits is another of their responsibilities. However, it is evident that in this case, the unions became as much an enemy of the Hostess employees as of the company’s management. As a result of their unwillingness to compromise and make wage and benefit concessions, almost 20,000 people no longer have a job that needs to be protected. In the end, the unions drove not only the company but themselves out of business.

Not to fear, however. Two private equity firms acquired Hostess’ assets last fall and are beginning to turn the company around. Production of Twinkies began again in June, and the gooey sponge cakes returned to store shelves on July 15. The workforce has been dramatically reduced and will not be unionized. In the end, probably the only winner in this battle is America’s sweet tooth.

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Net Worth Update

Misc

The remodel of our inherited new house is about done.   The bills have basically been paid and the insurance checks have been cashed.

Now that it’s all (more or less) done, I’m finding my financial situation has changed a bit.   My credit card is paid off, except for our regular monthly expenses and a couple of remodeling expenses that will be paid off in the next week or so.   Our mortgage is within site of being paid off, and we have a rental property that is mortgage-free.

With all of the changes, I took the time to measure the difference.

 Net Worth

Let me tell you how nervous this post makes me.   My business partner is under the impression that I no don’t care about our business because I no longer have any worries.

That’s crap.

Yes, our net worth has gone up $329,000.   That’s not nothing, but it’s hardly enough to retire on.

$113,000 of it is in retirement accounts.  I mean, great, we’re a bit ahead of where we need to be, but it’s not like that money is putting food on the table for us this week.

$177,600 of it is in our rental property.   Which doesn’t start driving income until February.   Today, it’s a $25,000 money sink.  That’s money we would have had to spend to sell it, even if we didn’t want to keep it.

There’s a $10,000 car that we need to deal with, we’ve paid off our credit card debt, and we have an extra $10,000 in the bank.

So, yes, we are in a much better place financially.  That’s a comfort, long-term.   Day-to-day?   Our credit card payment has been pushed to our mortgage, so that’s not extra spending money.   We don’t know exactly how much of the $10,000 in the bank still needs to be spent on the house, and we don’t know how we’re going to reorganize our vehicle situation.

That’s a lot of uncertainty that, at most, involves $20,000.   Again, it’s not nothing, but it’s not a lot.   It won’t cover our barebones expenses for 6 months.    We pay $15,000 per year just in daycare, and we need to put braces on a kid next year.

We are in a much better place, but I can’t stop hustling.

 

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What D&D Taught Me About Finance

Finance

I admit it: I’m a geek. I’m not a hobby geek who only geeks on the weekends. I’m a full-fledged, licensed and certified geek. I am a geek about so many wondrous things that it’s hard to list them all. My wife knows, my kids know. It’s not much of a secret. One of my many geek qualifications is my sordid history of gaming. Role-playing, tabletop only. If that’s gibberish, it’s okay. Nobody needs to understand my geekitude but me.

I started playing Dungeons and Dragons more than 15 years ago. There were no live chickens or human sacrifice. Just a small group of geeks, proto-geeks, pseudo-geeks, and the occasional nerd playing DnD in a poorly lit room for several hours. We laughed, we cried, we fought evil, saved the world, and raised the stock price of an assortment of caffeinated beverage companies.

As the man said, I told you that, so I could tell you this:

DnD taught me many things.  It taught me THAC0 calculation, dice-identification, and the fact that no woman, anywhere, considers tabletop roleplaying to be an alpha-male trait.  “I’m a level 73 kinder warrior-mage-thief” is not a pickup line anywhere in the world, even Gen-Con.  Remember that.  Also remember, the singular of dice is die.  If your are talking about one, it’s a die.  Get it wrong and I will throw a bag full of dice at you and make you dig out the purple, sparkles-like-a-vampire, 27-sided die from among the hundreds of other dice.

DnD also taught me some surprising things about the world of personal finance, which is not a part of a planar campaign.

All the best toys cost too much. At the current exchange rate of 10 silver pieces(sp) to 1 gold piece(gp), potions of extra healing will drive you into debtor’s prison.  Just as a sword of extra-slaying +10 will cost you everything you earned raiding that castle for the last 6 Wednesday evenings, so will a big screen TV set you back a full month’s salary.  Don’t risk your life or sell your life’s energy for something fleeting, just because it’s “the best” or the newest gadget, geegaw, or artifact.

Pretty Lady

Never sell your soul for a castle or a horse. When the Baatezu come to offer you a “no money down, 0% for a year, all-expenses-paid, surrender-your-first-born” deal for a castle or the prettiest horse in the park, take a cue from the former First Lady.  Just say no.  Spending money today that you have to pay for tomorrow is almost always a bad idea.  Don’t spend your soul, spend your savings.  Don’t buy something until you can afford it.  A Lexus or an Arabian, a mansion or a rambler.  Are any of them worth auctioning your future?

Your armor isn’t stronger just because it’s shiny.  A suit of Full-Plate of Protection-From-the-Charms-of-Bar-Wenches +5 may look pretty, but it’s not going to help against the orcs, kobolds, or trolls unless, of course, they are wearing skirts and sitting on a bar-stool above a sawdust-covered floor.  Does the shiny new iPod really provide a benefit, or is it just a shiny gadget to woo the ladies?

A good sword is necessary to keep your stuff. This is a not a call to self-defense, or mugger, err, orc-slaying–though why that’s ever viewed as a negative is beyond me.   You need to be aggressive in defending your loot.  Call your credit card companies and demand they turn over the booty, err, lower your rates.  Tell your friends to step away from the Diamond Ray of Disappearance, err, expensive outings or you will chop off their heads, err…no wait, that one can stay.  I think my friends may be scared of me.

[ad name=”inlineleft”]The promised reward for completing an adventure isn’t the only way to make money. Sure, the local duke(your boss), may be willing to pay you a chest of gems(your salary) for defending the town from the ravages of the Tarrasque(your job), but that isn’t the only way to make money.  You could do your job, collect your pay, and go home at night, but why?  Don’t forget to pick up the loot along the way.  If you spot the shiny penny, grab it, whether it’s abandoned gold, a new idea for a niche-blog, or a chance to turn your leisure hobbies into money.  There are thousands of ways to make money outside of your day job.  Every one will help your bottom line.

It takes cunning to slay the dragon. When tackling your debt(dragon), wading in swinging your sword may be emotionally satisfying, in the short term, but long term, it’s just a painful method of reminding yourself that you are crunchy and taste good with ketchup.  Make plans.  Have a strategy.  Come out a winner.  Then, sit down for beer and dragon steak.   Goal-less, plan-less attacks fail in the long-term.

Update:  This post has been included in the Carnival of Personal Finance.