• He would pay about $750 bi-weekly instead of $1,500 every month.  That sounds the same, but it really means that he’s paying every 28 days instead of every month, which adds up to paying an extra month’s payment each year (there are thirteen four-week periods in a year, instead of twelve months).  This pays down the mortgage faster (with his own money), so he ends up saving a lot on interest in the long run.
• To run this for him, they charge $295 + $5.42 monthly.  This doesn’t sound like much, but it adds up to $2000 over the life of the program!

Is this a good deal?  It’s certainly good to spend $2,000 to save $40,000!  However, there are two things to be aware of:

• First, he’s paying $1500 extra each year towards his mortgage.  This is money that could be spent on other things.  If he has extra money, it’s not a bad idea to put it towards paying down a mortgage, since paying down the principal early saves a LOT on interest in the long run, but maybe he needs the money for other things (for example, it’s certainly not worth paying down a mortgage at 5% interest when you have credit card debt at 18%).
• Second, he’s spending $2,000 for a service that he could easily set up for FREE.  All he has to do is set up bank account to make online payments every 4 weeks instead of every month, or just set it up to make one extra payment each year.

So, while this is a good way to pay down your mortgage early and save a lot of money in interest (and yes, it really works), you’re doing it with your own money, and it’s expensive to pay $2,000 for a service that’s easy to set up for free.

Things that matter less than you think:

• Youth
• Money (over $40k / year, or $100k / year in California)
• Education
• Intelligence
• Religion
• Beauty

Things that matter more than you think:

• Free time (the perception that you have control over your time)
• Humor
• Volunteering (doing things for others)
• Dancing
• Self esteem
• Social skills

There were a couple surprises for me on that list.  First, that many of the things on the first list are what we strive for, yet they don’t make us truly happy.  They give an example that if you seek education, you get your college degree, and you’re happy for 3 days.  Then you want a graduate degree, so you get that.  And you’re happy for three days…  Then you want a PhD, and then a good job, …

That makes sense; these are things which can always want more of.  I know so many people with beautiful bodies, who have low self esteem and go to the gym 5x a week, and will never be happy with themselves.  Or those who chase the dream of perpetual youth (and spend tons of money on unproven beauty products), while each day we get a little bit older.  I’m certainly guilty of this at times.

The second list also has some surprises.  I’ve heard that volunteering leads to success before, but was surprised that free time took the top of the list.  Again, when I think about it, that makes sense.  Nobody likes to be controlled (in a recent conversation with my new boss, I listed “freedom at work” — the flexibility to work remotely and on my own schedule — as one of my top values at work).  I’m also surprised that dancing made the list — I guess I need to get out and do that more!

Any surprises for you?

• Does your employer match your retirement savings?
• Do you have any debt other than your mortgage?
• Do you think you could get a better return on investment in other things?
• Do you have an emergency fund?
• Do you currently owe more than it’s worth?
• Does the amount of mortgage bother you?

The first three emphasize that if there are better investments (with a higher ROI) than your mortgage interest, you should invest in those instead. The fourth emphasizes that it’s good to have an emergency fund (they recommend 24 months, which is quite conservative). These all make good financial sense to me.

The last two seem entirely personal.  I don’t see any advantage, except psychological, to pay it off if it’s underwater. After all (and I’m not advocating this), you lose the option of doing a short sale if you do decide to move, and if you have the extra cash you can always pay it down when you do decide to move.

In my case, I see my three rental properties as businesses, and mortgage is a business expense that’s paid for by the rental income. By leveraging these investments, I was able to buy three houses instead of just one, and with interest rates this low I’d rather have the cash to invest in other things with a higher than 5% ROI (like more houses!). That said, I might start to pay down my mortgages when house prices go up and it no longer makes sense to buy rental properties.

So, in my case it’s a business decision to leverage as much as possible, but I can certainly see the emotional argument to pay it off and be debt-free (especially for a personal residence, and when I get closer to retirement).

1. Cash Flow – Money earned each month after mortgage, taxes, insurance, maintenance, and other expenses.
2. Appreciation – Money earned by selling the property for a higher price than you paid.
3. Loan Amortization – Money paid each month by your tenants towards the principal on the loan (not the interest).
4. Tax Shelter – Money saved from various deductions including mortgage interest, maintenance, and depreciation.

I expect to go into each of these in more detail in future posts, but it’s important to understand these basics, and it’s interesting to evaluate a given property along all four dimensions.  I might also add a fifth dimension, which is hedge against inflation — if you have a fixed-rate mortgage and the price of EVERYTHING goes up, then you’re getting even more money in rent/appreciation, but paying relatively less in mortgage.

Different investment strategies might emphasize different dimensions: for instance, a fix-and-flip strategy would focus on appreciation.  I’ve been focusing on single family residence rentals, and here’s an evaluation of my properties along these dimensions:

1. Cash Flow – I’m getting some cash flow each month, though much of it gets eaten up by periodic repairs.  This will grow over time, as rents go up but my mortgage payments stay the same.  I would never want a property with negative cash flow; it would become a burden to pay every month and I wouldn’t enjoy it.
2. Appreciation – I don’t expect any appreciation any time soon in the current economy, but I’m not planning to sell any time soon either.  This could be a major plus when the economy turns around.
3. Loan Amortization – My loans are new, which means that most of the payment is going to interest rather than principal, so I’m not getting much value in amortization yet, but this will change over time.
4. Tax Shelter – The flip side of my mortgage payments being mostly interest is that I can deduct all that interest. I can also deduct things like insurance and repairs, and I also depreciate the value of the house and any improvements.  In my first year, I didn’t end up paying any taxes on the income earned from my tenants due to these deductions.

After a few panic calls to my dad and a friend for advice, I decide to call the only plumber I know of from their well-marked vans that I’ve seen driving around on the highway – Roto-Rooter.  They come out the next day, and after a couple slow hours, they’re able to clear it enough that it will drain somewhat but warn me that they haven’t really fixed the problem.  I’m out $600 for a service call that was less than 3 hours, and didn’t involve any materials.

A few months later it happens again, but this time I know better.  I ask around for recommendations, and also look in Yelp to get contractor ratings.  I choose a contractor who is both recommended by another landlord and who has good ratings online.  They come out that night at 7, try to snake the problem and determine that the pipe is broken somewhere under my yard. They can’t fix it that night, but are out the next day for the whole day (with an assistant), dig a small hole in my yard, replace the broken pipe, and the problem is permanently fixed (they even replaced the sod over the hole they dug). This time I’m out $700 (including materials), but the problem is fixed, not just patched.

Repairs are a cost of doing business, and I try to get them done promptly to keep the tenants happy. But there are a few lessons learned from this scenario:

1. Don’t blindly trust the name brand corporations.
2. Ask around for good recommendations.
3. Use rating services such as Yelp to find quality contractors.

What do you think?  Any other advice for good repairs?

1. Know your options. There are different strategies depending on whether you want to be a landlord, or restore and resell properties. In my case, I chose to focus on rental properties.
2. Partner with experience. Work with an agent who has the right experience, or partner with an experienced investor. I did both — worked with a friend who also started investing in this market, and found a real estate agent who also does the same. We regularly share ideas and advice, which sped up the learning curve greatly.
3. Look for the right location. For rentals, they suggest to stick to high population areas, houses with multiple bedrooms and baths, and near amenities like shopping areas and public transportation. I chose to focus on single family houses in a working-class neighborhood, and found that 4-5 bedrooms seem to bring the most profit due to the type of renters that I am targeting.
4. Have capital lined up. Perhaps easier said than done in this economy, but you should expect there will be months when the property isn’t rented or sold, and you’ll have to pay the mortgage. They suggest keeping six months of mortgage payments saved, in case you need it for an emergency. You don’t want to stretch yourself too thin, and become another victim of  buying more than you can afford that caused the housing bubble to burst in the first place.
5. Build a supporting cast. You need to have good, fast, and affordable contractors available for renovations and repairs. I’ve worked with my “partners” (my agent and my friend) to find good contractors, and used services like Yelp to get others when an emergency arose. They also recommend that you might need an attorney or accountant, but I haven’t needed them yet.

What do you think?  Have any other good tips for new investors?