All posts by vclynn

Personal Finance

Buy This, Not That

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Sticking to a budget, getting out of debt, and saving up for an emergency fund can be overwhelming tasks. And depending on how aggressively you are working on these goals, you may have eliminated many luxuries from your life. But with a little bit of creativity, you can bring back some of the luxuries into your daily lifestyle. Instead of buying the luxury itself, we present some budget friendly alternatives.

 

  1. Instead of buying beer, consider taking up craft brewing as a hobby.

Cost for a 12 pack of craft beer: $17.99

Cost to make a 12 pack of craft beer: $14.00

Annual Savings: $207.48

 

For most singles, and those without children, a big part of the entertainment budget is devoted to social drinking. Here, we already assume you’ve cut out visits to the bar, and just want to kick back a couple of days during the week and have a beer or two with your neighbors or friends. Taking up a hobby like craft brewing gives you more advantages than just saving money. It becomes a conversational topic when you are visiting with friends and neighbors, and it gives you a hobby with results that can be quickly enjoyed.

 

  1. Instead of visiting the Redbox, check out your local library’s vast DVD library.

Cost to rent 3 movies per week for 2 nights: $7.20

Cost to check out 3 movies per week from the library: $0.00

Annual Savings: $312.00

 

Another great way to offset a family entertainment budget is to do a lot more entertaining in. And as long as the movie is the same, why not get it from a free source like the public library? Most libraries have extensive DVD collections, and even allow patrons to reserve a DVD title online, and receive notifications when it is their turn to view a title. As long as you can return movies on time, you will have a supply of free entertainment as big as your local library can hold.

 

  1. Instead of buying face scrubs and skin moisturizers, make your own from

in-season ingredients.

Cost of a facial scrub cleanser: $8.39

Cost to make facial scrub from raw ingredients: $2.00

Annual Savings: $76.68

 

For women, an added balancing point when creating a budget is trying to figure out which personal care items should be kept and which items can be pared down. Some items, however, do not need to be eliminated entirely. Those facial scrubs that you favored because they contained natural ingredients, can be made at home (naturally). Next time you’re in the kitchen, consider making an exfoliating facial scrub from brown sugar, pureed blueberries and lemon juice. If your hands are feeling dry, try making an exfoliating and moisturizing salt scrub from coconut oil and table salt.

 

  1. Instead of paying for a gym membership, use the free gym around you

Cost of a gym membership: $30 per month

Cost to work out in your natural surroundings: Free

Annual Savings: $360

 

Instead of paying for the latest gym craze like Crossfit, find ways to achieve your fitness goals outside of the gym. Instead of lifting huge tires like those in Crossfit, you can surely find something of increasing size in your neighborhood that you can lift for free. Take a walk or run through your local park, and if it gets dark too early in your part of the world, you can always look up aerobic exercises that can be done in the comfort of your home.

 

  1. Instead of going out to dinner or a bar with friends, consider having a game night at home.

Cost of one outing a month with friends: $40

Cost to host a game night at home: Free

Annual Savings: $400

 

Have your guests over for a “bring your own game” night. Besides changing it up from the usual bar scene, you will be able to converse with friends in a much more quiet atmosphere. If you don’t have any games to play, you can look up some low cost and free games here: http://www.moneycrashers.com/family-game-night-ideas-board-games/

Just don’t spend too much money on games or refreshments. The idea is to save some money.

 

  1. Begin a clothing exchange with your similarly sized friends.

Cost of one outfit every 3 months: $60

Cost to exchange one outfit: free

 

Take a stroll through your closet in the near future, and take inventory of your clothes. You probably have something, or maybe even a few somethings that are in reasonable shape, you just don’t wear anymore because it’s not your style. Next time you do this, set these clothes aside, and see if you have a similar sized friend you can do a clothing exchange with. It can be a fun and interesting way to refresh your wardrobe, and maybe even try a style that you’ve never considered.

 

These tips will help you rethink your discretional spending. By taking on some of life’s simple luxuries yourself instead of buying them, not only will you save money, but you will be able to unleash your creative talents

Equity Analysis

Using the RSI to time your next market entry or exit

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Great news! Because you carefully researched a stock, you are enjoying its appreciation in value. This of course leads to the more difficult news of how do you know when to exit, and take the gains you have rightfully earned. The relative strength index (RSI) may be a great tool for you in this case.

The RSI is a momentum indicator which looks at the shift in price over a recent time period to determine if the security is overbought or oversold. The formula looks like this:

RSI = 100 – (100 / (1+ RS))

Where RS = (average number of days’ up close)/ (average number of days’ down close)

How many days should you use? Like anything else, it depends, but on average most investment tools use 14 days worth of data to compute this number.

Anything with a RSI value over 70 indicates the security may be overbought, and anything with a RSI value under 30 indicates the security may be oversold.

The reasons for a high or low RSI value can be diverse. For example, if a stock has a RSI of 75, the market may be efficiently responding to a condition where the stock was undervalued, and stock prices are ticking up daily in response. Just as likely, however, there can be a lot of positive buzz surrounding a particular stock, and the behavioral part of finance can be at play, rewarding a stock for being successful with more success. If you suspect your stock was already fairly valued, and suddenly you are seeing a substantial increase in portfolio performance, you may want to look at the RSI, and create an exit strategy. Possibly a re-entry strategy as well, once the stock price is back on sale.

If you are not the type to perform fundamental analysis on a particular company, you can try day trading options using this RSI indicator. In a future post, I will do a case study of the RSI Indicator on a heavily punished (oversold) ETF, buy an option on it, and let you know where I stand.

Income Properties

Why Your Investment Property Needs an Operating Budget

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When managing your own property, it can be easy to become a passive investor. The practice of collecting rents, paying the mortgage, and fixing property issues as they come up, all seem pretty straightforward. But, if you aren’t keeping score on your investment, you are setting yourself up for failure. Say for instance you would like to measure the return on your investment? Or perhaps you’d like to be able to articulate to a buyer of your property what type of return they may expect to receive when buying your property as an investment. This is when an operating budget becomes valuable.

 

What is an Operating Budget?

 

Much like the name suggests, it is a projection of the income and expense for the operation of a property. If your projections hold true, it can help you to anticipate how much profit you will earn in the course of a year. If you have managed a property for some time, it may be simple to estimate rents, mortgage payments and property maintenance costs based on past experience. If this is a new property, then some estimates will have to be made, but these are the basic components of an operating budget.

 

Rents: How much rent can you charge per month? If you are unsure, look on craigslist.org in your area for comparable properties. Depending on your market, this will help narrow down a range. If you still have a fairly wide range, drive to the properties, inspect the properties and rank them objectively against your property. On the operating budget, rents will always be annualized, so multiply the monthly rent amount by 12.

 

Mortgage Payments: If you are using leverage to finance your asset, include any monthly mortgage payments. You can choose to include taxes and insurance on this line, or you can itemize taxes and insurance separately. The benefit of itemizing the taxes and insurance separately, is that it provides further granularity on what impact taxes and insurance have on your profitability. Again, these are annual figures, so multiply monthly mortgage payments by 12.

 

Homeowners’ Association Fees: Provide an annualized figure for HOA fees, if you have any. Be sure to include any special assessments that you may have in the coming year.

 

Planned Maintenance: This is your opportunity to keep a schedule of items you would like to maintain. It also is an opportunity to ask some questions of your renters. Would you like for them to help you with caring for the yard? If not, you will have to either do your own landscaping, or hire someone to do so. Some people use this number as a plug for their operating budget, i.e. will only devote an acceptable amount of leftover funds to this line item. That can be short sighted for a long-term investment. Commit to budgeting 3.0% of the home’s value per year to planned maintenance if you have a single-family home, or 1.5% to a townhouse or condominium if a homeowner’s association is handling planned maintenance items on the home’s exterior. This has generally worked well for me, although, I would offer the caveat that each home is unique, and older homes seem to need more than these numbers, and newer homes seem to require less.

 

Unplanned Maintenance: How do you budget for something that by definition cannot be planned? If you are fortunate to have past records, you can estimate based on previous years. If you are not that fortunate, you will have to take an honest assessment of your home and ask, what items will likely break in the next year. A home inspection may be your best tool in this instance. There are a lot of variables to this estimate: Townhomes and Condominiums typically have fewer large ticket unplanned maintenance items, since the most expensive things, roof and sewage are typically covered by the HOA. Older properties will have more unplanned items just due to the overall number of outdated or outmoded features of the property. For a new home, townhouse or condominium 1.5% of the property value may make sense. For older properties, you can go as high as 3.0% of a property value in a given year.

 

Property Vacancy: This is an insurance item I put in any annual operating budget as renters by definition are temporary occupants. You may have a renter who has been faithfully paying rent for years decide to up and move. Then what will you do? Even in the best-case scenario, you will need a month to clean up, inspect and repair the property, not to mention secure a new renter. Also, your ability to secure a new renter is a product of the rental market you are dealing in. I usually put in one month because I can diligently prepare (or secure the resources to prepare) a property for rental within that time. I also operate property in a very hot rental market. You will have to do an honest assessment of your own market to see if this is feasible.

 

Your final operating budget might look something like this:

Operating Budget Sample 

 

 

Show me the results: Once you’ve put together your operating budget for the year, you should hopefully be showing an anticipated profit. But in either case, you want to measure where you stand to determine if real estate investing was lucrative for you this year. To determine your capitalization rate, you will divide the net operating profit by the estimated property value. Since you have already based your budget items on an annual basis, this will be an annual rate.

Cap Rate

 

Not quite the results you were hoping for?: Sometimes after looking at the initial operating budget, your return can look a little disappointing. If it does, you can take two approaches to this: If you are a short term investor, or risk averse, this investment may not be suitable for you. Real estate is not only illiquid, but subject to sweeping market fluctuations, and requires a lot of interaction. If you are fine with this property being a long term investment, keep in mind historically property values have increased over time, as have rents. Furthermore, assuming you are using leverage that amortizes normally, your debt service payments will remain constant. That can lead to slow and steady increases in performance over time.

Income Properties

Make a second home a reality

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This article references my home, Colorado, though you could apply the same ideas to any dream locale, whether it is the Mountains, the Beach, or the Lake.  I love Colorado for its natural beauty and its active lifestyle. Even driving home from work, I will sometimes look up at the foothills and be in amazement of the beautiful place I call home.

On the weekends however, is when I really wish I could call the mountains home. Imagine, being surrounded by tall lodgepole pines and aspen groves. Smelling the crisp mountain air as you ride your bicycle to town. Even better, knowing you can stay the night in this paradise without having to battle the Sunday afternoon traffic down I-70 to Denver.

What if I told you there are some ways to make your dream a reality? Depending on your goals, you may even be able to leverage your second home into a revenue stream. Below are some key items to consider when searching for that second home.

 

Buy Where You Would Want to Play

This probably seems obvious to some, but it is worth discussing. Do you want to be away from it all? Near a lake or stream so you can enjoy fishing on the weekends? Or do you prefer the feel of small town mountain communities where you can enjoy a local café, followed by a bicycle ride on a county road? Are you a ski bum, and have dreams of ski weeks for life? Whatever you want, there is a town that offers it up. Don’t just get online and find properties that fit in your price range. Colorado is so large and diverse that a wide array of mountain properties will fit into your lifestyle and budget. Narrow your wish list down to a couple of locations, and set up property alerts so you know when something interesting becomes available.

 

Visualize Your Dream Property

Again, it comes back to the idea that Colorado is such a large state filled with diverse beauty that your dream property could come in many flavors. Do you want to have something low maintenance that throws you directly into a resort town? If so, there are many multi-family units in Summit and Eagle counties that may fit that lifestyle. Do you enjoy hunting, fishing, and camping? There are plenty of properties that are off the beaten path and may consist of a dwelling, or no dwelling at all. Perhaps you just enjoy the small town feel of having a home up a rural road that you can escape to when you need peace and solitude. There are many mountain towns that are not ski towns, but still host many locals with a country heart and spirit.

 

Paying for Your Property

Obviously, the more free cash you have laying around, the easier paying for your property becomes. Even if you end up taking out a mortgage, most lenders will require a 20% down payment for a conventional loan on a second property. Furthermore, you won’t be allowed to let debt exceed more than 36% of your total income. But just because you aren’t sitting with a big fat bankroll doesn’t mean you should give up. For example, you could leverage your retirement account to purchase the property as an investment property.

 

There are many organizations that offer services to structure your IRA so that it can invest in real estate. If you do go this route, there will be some additional items you will have to consider, such as the trade-off between investing in the stock market and investing in real estate. That can really be where those first two bullet points I discussed can come into play. Four out of five mountain homes in Colorado typically are vacant on any given day. If you are offering a Vacation Rental by Owner, understand your competition is intense. So whatever property you purchase has to hold a unique appeal. Even at best most hotels, which would arguably be able to get the most favorable vacancy rates, will have an average occupancy rate of 75%. Which means anywhere from 25-80% of the time your rental will be vacant. So do figure this into any decision you make when choosing to buy a second home as an investment.

 

If Nothing Else, Keep the Dream Alive

After looking at your finances, you may decide that now is not the right time to buy that second home in the mountains. That doesn’t mean the right time won’t come. Just as residential real estate experiences peaks and valleys, so do the markets in small towns and vacation communities. The peaks and valleys can become even more so pronounced, since people are much more willing to walk away from a second home than a first. So keep exploring the towns you’d like to live in, save up your cash, and an opportunity will present itself eventually.