Real Estate Done Simply

Whenever possible, simple is better. I try to keep things in my life as simple as possible. I include my life at home, my job and my work at our fire department.

With fewer moving parts there is less that can go wrong.

This can be applied to real estate. I know various people that have different levels of involvement with real estate. Some of these folks are stretched very thin by the work that is needed to maintain a real estate portfolio. They may own a lot real estate by other people's standards or not, that is subjective but if managing your real estate is a full time job and you don't want it to be, you probably have too much.

The idea coming in this post is not mine nor is it unique but that does not diminish the extent to which it is a good idea. Also keep in mind the primary theme is simplicity, it would be easy for someone knowledgeable in real estate to find better ways to skin this cat.

In the next couple of years my wife and I plan to buy a duplex ( but a three-unit building is not out of the question nor does it increase the hassle factor by much). I'm not sure exactly where we will buy but it will be somewhere where we could enjoy living, as we do now in Walker, maybe Juneau.

The basic idea behind a duplex is you have two renters, which reduces vacancy risk. This is probably not new to anyone. The way we plan to integrate it into our financial plan might be a little different, though.

I will probably be 42 when we buy. Our plan is to pay down the mortgage very quickly with rent and by making extra payments from our income. I think we can have it paid off when I am 52.

Here are some numbers to help explain the thought process. Rents where we live are kind of low. If we owned a duplex in Prescott, we could probably charge $650 per unit per month, $1300 total. $1300 free and clear, in today's dollars, covers about half of our total expenses, we live quite modestly. Even if that was only 20% of your monthly expenses it would still be compelling.

If your monthly expenses are high (this calls for introspection), then a duplex could be 20-25% of your retirement income, a stock portfolio could be 25-30% of your income and the rest could be split from some sort of part time work mentioned in previous posts and social security. Four different streams of income is not a bad way to go.

Where I think my thoughts might start to go off the beaten path have to do with people that don't do a good job saving money but can do a good job paying the mortgage.

Someone in this position could sell their home upon retirement (this idea assumes the house is paid off) for $250,000 (in today's dollars), close to the average home price today, and move into one side of the duplex (which, presumably has also been paid off). The proceeds could then be put into a diversified portfolio to comfortably generate $1000 per month.

In this scenario, $650 rent is coming from the other unit, there is no mortgage to pay, $1000 in portfolio income plus the part time job and social security. Also note that I have made the assumption that this person did not save anything during their working lives.

The numbers may seem small but the person that saved nothing is going to have to deal with a very modest lifestyle in retirement. Things look much better with a modest bit of savings accumulated, say $200,000 in an IRA.

There are a couple of logistical issues with any type of rental property. My own preference would be to hire a management company, for my money they are worth their 10-15%. You need to maintain some sort of slush fund to pay for various little fix-its that come up and more importantly to cover any vacancies.

The other issue is negative cash flow on the property when you first buy. Rent usually goes up at the rate of inflation. A small negative cash flow in the first few years is not a big deal to me but this is very subjective and there is no wrong answer. I would add that $1500 in rent versus a $3000 mortgage would be a turnoff for me.

The primary purpose of this post is to start thinking about real estate in a simple manner. One piece of investment property is not an unreasonable burden and regardless of the end game, moving in or selling, some exposure makes sense. A real estate bubble, if there is one, will not hurt investors that are not overleveraged.

Alaska

A few months ago I wrote a piece for my Big Picture blog about retiring in Alaska which you can read below. A part of the idea was that, in the interest of finding ways to supplement income, a retiree could live in Alaska to take advantage of the Permanent Fund dividend paid to residents out of the energy royalties the state takes in.

Today there is news of a new pipeline that will bring natural gas from Alaska to the lower 48. There are still a couple of obstacles, still a few years until it could be in operation and there was no mention in the WSJ piece about whether the pipeline will contribute to the Permanent Fund.

After a few years of decline in the dividend due in large part to poor stock market management, the dividend has a chance iof increasing substantially due to higher energy prices, this new pipeline and hopefully an improvement in portfolio management up to mediocre.

When I first ran the post, it was linked to in several places with some valid criticisms. One was the weather. To qualify for the dividend you only need to live there for six month out of the year. Although I may not have been clear, I was referring to the Juneau area. In December, January and February the average temperatures are 27.1 degrees, 24.2 degrees and 28.4 degrees respectively, according to CityRating.com. My original article posited that you only live there eight months a year, skipping those three months and either November or March which both average 32 degrees.

The other criticism made was about the cost of living. According to CityRating's cost of living calculator it would be 42% more expensive than in Arizona (where I live). A couple of things mitigate this, there is no state income tax and retirees get property tax breaks.

Intuitively, it is hard for me to imagine that Alaska is really 40% more expensive. If it really is that expensive, there are probably ways to reduce that spread, with a little ingenuity, some but perhaps not enough to make it worthwhile.

The more important thing to take from the following is the exploration of a new idea. Exploration like this can lead to other ideas that you can use, even if the Alaska idea does not make sense.

I have some wild ideas now and then and I write about them every so often because they amuse me.

This latest one I hatched is about way to retire for people that have not been lucky enough to accumulate a large enough nest egg for an ideal retirement. Several assumptions are made with this idea and I realize this.

Last summer my wife and I went to Juneau, Alaska. We loved the scenery, the hiking and the food. Alaska has a social program that I believe is unique. In 1982 the state of Alaska began to pay a dividend to residents out of something called the Permanent Fund. You can click here for details but the basics are the fund is funded with oil money which is then managed in the capital markets. The amount of the dividend can fluctuate. This year's dividend was payable in October and was $845 for qualified residents. The dividend has gone down for the last five years. The all time high payout was $1963 back in 2000. $845 is the lowest dividend since 1988. The reduced dividends of late were attributed to stock market losses.

I think this dividend could be incorporated into retirement planning in the right circumstance. Over the last ten years the average dividend has been $1396 per person. Relative to our fixed monthly expenses (no mortgage or car payments), $1396 in today's dollars is a lot of money. For a retired couple that only has to pay for insurance bills, utilities and groceries it is possible that $1396 could cover the month. Two people, two months covered. Two months out of twelve is significant. Clearly this is only for a modest lifestyle.

I should note that there is no state income tax in Alaska and the first $150,000 of assessed value is exempt from property tax for people 65 and older.

What about the winter someone might ask? Southeast Alaska (the area near Juneau) does not have as much snow or as much darkness (but there is still plenty of both) as the rest of the state. However, as I read the requirements you can be out of state up to 180 days per year. So three or four months in the desert or Florida or somewhere else and you avoid winter's bite.

Here is how some numbers might play out. A quick reminder is that is an idea, as I intended it, for people of modest means who don't spend a lot. Real estate in Alaska is cheaper than most parts of the country. I think it would be realistic to sell a home for $350,000 in many parts of the country, buy a modest house or condo in Alaska for $185,000- $200,000 and a condo in some parts of Florida or the desert with the balance. So maybe eight months in Alaska and four months in some place warmer. There are alternatives to buying a winter condo. For example, in Arizona, there are seasonal jobs in the tourism industry where accommodations are provided. I'm sure there are other similar opportunities too.

I think it might be reasonable to think that the type of person I have in mind for this, long career, decent income, diligent saver, might have $300,000 in a 401k account and maybe $50,000 liquid in a taxable account. These numbers are not run of the mill but they are not impossible either. Invested properly a 5% income need should not deplete an account. So $350,000 might generate $17,500. Of course, not buying a winter condo could leave a portfolio of $500,000 which could generate $25,000 a year.

There is more and more consensus that being retired no longer means not working at all. More and more retirees will work one way or another. There are numerous health and emotional benefits to working part time after traditional retirement. This could involve consulting, writing, eBay (or other internet venture) or just something you love (my wife's uncle was offered a job with the Los Angeles Angels of Anaheim working at the stadium for about $10 an hour which he almost took). It would not take much effort or time to make $500-1000 per month working 10-15 hours per week. If both partners in the couple do this, there is another $10,000-$20,000 per year.

So lets see where this couple stands now in relation to their expenses;
$2792 Permanent fund dividend
$17500 Portfolio Income
$15000 Income from part time work
$35392 Total

One other element might be social security. I don't think it makes sense to rely on social security as we now know it. I do not think it will ever disappear either, more likely might be a reduced benefit. Instead of each spouse getting $1000 per month perhaps it makes sense to think about $500 per month per spouse. That adds another $12000 annually which takes the income up to $47392. While the $1400 in monthly expense seems silly to me, $2500 (in today's dollars) plus a little money for traveling may not be. $30,000 in expenses compared to $47000 income seems comfortable to me.

In this example the Permanent Fund contribute close to 10% of a reasonable income need. It makes sense to me that the dividend could increase in the future because of higher oil prices and less volatility in the stock market.

There are some flaws here to be sure. The permanent fund could pay out more or less at any time. The fund could theoretically go bust. You'd have to love the great outdoors of Alaska which is not for most people. While we love it up there a friend recently visited Alaska and while he and his family had fun it was not the be all end all destination.

The point here is not that everyone should move to Alaska. The big picture here is that many of us may need to use some ingenuity to have a financially stable retirement. If stock market returns are below normal and social security is compromised and health costs go way up there will be less people able retire to the country club.

I do not think people can rely on planners or other professionals to think outside the lines on this sort of thing. This ties into one of the themes of this blog which is do-it-yourselfers being more empowered to make better decisions about investing and planning thanks to new investment products and access to different types of information thanks to the internet.

While you may or may not think this idea is insane, as the title to this post implies, it is outside the lines to be sure. If you have a unique idea along these lines I'd love to hear about it.

Multiple Assets

A few days ago I was visiting with a neighbor and we were talking about investing. He mentioned, something I already knew, that he and his wife have zero exposure to stocks and bonds. They have their money in real estate.

I am a big fan of real estate for reasons I will get into in subsequent posts. I am also a big fan, no surprise, of the capital markets. No matter how much you think something is a great type of asset, having all your eggs in that one asset class is a bad idea.

This philosophy is more of a you never know what might happen way of looking at things. Real estate has never gone down a lot and stayed down on a national scale. Some sort of unprecedented decline is always possible. Hey I don't expect that either but anything is possible and if something completely unexpected happens at precisely the wrong time for you, you could be in real trouble, trouble that could have been prevented.

If you are so fortunate as to have a large enough net worth to accommodate stocks, real estate, bonds, commodities, cash and maybe a couple of other things I may be forgetting, you should take advantage of the potential diversification.

Creating one income stream from real estate is great but have other streams of income not tied to real estate could matter at some point in your lifetime.

How Not To Structure Your Portfolio

While I try not to alienate anyone that reads my content I run the risk of doing that to a recent emailer.

He told me that he is 48 years old, has 18% of his portfolio in Berkshire Hathaway and he wanted to know what I thought about that weighting and that stock.

For purposes of this article all I'll say about the stock is that I have never had any interest in buying it.

Hopefully one source of income for you in retirement will come from a portfolio invested in some combination of stocks and bonds.

Managing this portfolio can be as simple or as complex as you want to make it. A do-it-yourselfer that, presumably, does not want to work full time on their portfolio is better off favoring simple.

Simple probably means some combo of ETFs and OEFs for the vast majority of your equity portfolio. I am saying most not all of your portfolio. A few individual stocks here and there is not really an unreasonable burden.

Simple also pertains to risk taken. Staying reasonably close to the market should get diligent savers to where they need to be. Taking outsized risk that is unnecessary makes no sense. This takes the conversation back to 18% in Berkshire. The strategy may or may not work, the emailer may never have to face the consequence of the risk he is taking but that does not mean the risk doesn't exist. The very fact that he emailed me at all reveals that he already knows the answer.

We have learned that any stock can go to zero. Very few do but there is no way to know that a company is lying. Lies equal a deathblow.

If you have 18% in a company that happens to go to zero it will take several years to get back to where you were. If you have 3% in a stock that goes to zero you might make a quarter of that back just in dividends in a couple of weeks.

The emailer's position creates another problem. Only 82% of the portfolio is left to invest. He will very likely miss out on something else that might do well at some point. For example, China and gold, as investment themes, have provided tremendous returns in the last few months. I have had exposure to both for several years. Before the last run up for both they had been kind of dead money for a while. Then out of the blue they both went up a lot which helped the overall portfolio.

The idea was that at some point they would have a good run. Just being patient was the skill deployed, not stock selection. If I did not have room for these two themes, the portfolio would have been impacted. Next quarter, leadership will probably come from somewhere else. If you are properly diversified, you will not have to figure out what will lead.

But you need to have room.

Monetize A Hobby Part II

I wanted to give a couple of other examples to what I talked about in the last post. Last time I wrote about the potential to monetize my firefighting hobby.

My in-laws are collectors. They don't collect anything in particular, but they just buy whatever they can find. They really enjoy going from garage sale to garage sale trying to fund stuff on the cheap. They have accumulated two houses full of stuff. A lot of it has some value, more than they paid for it. They do a good job of finding things that cost very little money.

Just recently they started to rent a booth in a consignment shop in Phoenix. They have to pay $175 per month in rent and can work the rent off in the store at $7 an hour if they want to. The other day they were dropping off a hutch they had just bought that morning for $50. A shopper at the store bought it from them in the parking lot for $175. They do this all the time.

They have invested a lot of their time in this because they love buying stuff which is why they can have success. Fortunately, my wife does not share this passion but chances are that one day she will need to help with reducing the inventory.

Their hobby easily covers a big portion of their expsenses.

A neighbor of ours is a retired policeman in his 70s. I'm sure he gets a pension but I do not know any of those details. A long time ago he bought a backhoe to help with the site prep for building his house and because he thought it would be fun to have. He is now on his second backhoe after upgrading to a Cat a few years ago. He charges $60 an hour and can have as much work as he wants. How much would just ten hours a week at $60 an hour, playing on a toy, supplement your income?

Both examples require some capital and some time but both activities are fun for these people. There are more ideas like this out there. Hopefully these posts will get you to think along these lines.

If you buy into your retirement paycheck coming from several different sources then this type of fun income should be considered. One last point is that having a job, of sorts, in retirement, whether it pays or not, makes for healthier aging physically and mentally.

Monetize A Hobby?

There will be plenty of time to talk about investing in capital markets but I wanted to take a diversion with this post so that not every thing I write here is the same as the other site.

Long time readers will know about my involvement with the local fire department. We moved to our cabin full time in 2002. The area has a danger of wildfires and so my wife and I, knowing nothing at all about it, wanted to join in order to help out. We both found it very interesting, fun and completely different from anything else we had ever done.

It quickly grew into something I absolutely love doing because it is a physical challenge, a mental challenge, it keeps me involved, it helps the community and something I can stay involved with for many years. Some of the guys are in their 60's and one is 74 and is perhaps the fittest of us all.

In a very short time I have already become co-assistant fire chief. There is visibility that I will be chief or co-chief for many years.

A little over a year ago I became aware of an interesting little tidbit about our involvement as fire fighters. We are eligible for small pensions for our service. The number for me is small, and would be a little less for my wife because she is not as involved as I am. This might work out to $250 per month in today's dollars, based on what I've learned.

The number is not as small as it seems. $250 is about 15% of our fixed monthly expenses (no mortgage or car payments). This creates a little more wiggle room for whatever my portfolio might become in the future. Realistically I am hoping that this means I will have less of an income need from my portfolio.

Reducing an income need from 5% down to 4% could be huge over a 30-year time period. It would allow for riding out poor return environments with less stress.

In addition to the pension, there is a potential income to be made volunteering as a fire fighter. During bad fire seasons we participate in inter-agency patrols for which we get paid as a department for our truck and our personnel. The season for this can be two to three months long and can be several days a week of work. We have guys doing this that are retired. The income potential is small, $86-$114 per day, depending on your pay grade. It would be easy to make a few hundred dollars per month during the summer which could help pay some bills for a portion of the year.

If we actually have a fire, I have fought about 14 fires in my time, we get paid for that as well. Earning one months's worth of fixed expenses doing a hobby can provide a little more relief to the work you portfolio needs to do.

No one is too old to start this type of volunteerism. We have had guys start in the 50's and 60's. Based on some good genetics and what I see other people doing, this is an activity that I will be able to do for a long time. I would be doing what I am doing even if there was no monetary benefit, I enjoy it immensely. That I could finance that much of our future income need from this is just a bonus.

The point here is not that you should be a firefighter. The point is I found an activity that I love doing and it turns out it can be monetized. I have to think that there are other activities along these lines that can also be monetized.

If you have some sort of extracurricular activity in your life, you may be able to monetize it. In this post I detailed something I know a little about, firefighting. I would urge you to explore if this could apply to something you do now or something you would like to get involved with.

Bigger picture, I think this is an important concept. We may see below average stock market returns and social security might be compromised one way or another at some point. Supplementing the traditional sources of income with ideas like this an easy way to relieve potential portfolio stress.

I have more ideas along these lines that I will share in future posts. I hope readers will share their ideas along these lines like maybe writing, tutoring, grant writing, antiquing and so on.