Stop Milking Me! - Cow’s Journey To Financial Freedom

Have you ever wanted to tell your younger self about the tings you know now, with insights you wished you had when you were younger?

Laura Rowley, author of Money & Happiness wrote a letter to her younger self about what she wished she had known when she bought her first primary residence. Here are a few tips that I find quite insightful:

1. No need to feel bad to drag your agent to show you 100 houses for 3 months. It’s his/her job. And ask for Comp Data – what are the selling prices of the comparable homes in your area in the last 18 months.
2. Look at the bone structure of the place, rather the depressing decors or the faded wallpaper, because the wall color can be changed easily, but not the guts and bones of the house. Well, unless you are in the fixing and flipping business
3. Live in a home for at least one year before doing major renovations. You need to have a better idea of how the space is utilized to better understand what are the critical changes will be.
4. Convince your spouse or partner to use professional services to get the paining and the flooring job done all at once, rather than targeting room by room for the next 10 years.
5. Save every receipt from your renovation. When you sell, the IRS will allow you to include these renovation costs in calculating what you paid for your home.
6. Try your best to take a 15-year mortgage rather than 30. The amount of interest you will save is phenomenal. Use a calculator like the one on bankrates.com to see an amortized table. You will be amazed by the 6 digit saving.
7. Don’t be so quick to tear out the former owner’s quirky additions. That weird foam padding on the back of the attic door might have some practical use you don’t know about until you settle in for a while.
8. Do a little more research on the schools before you buy. You may not have or want kids, but it doesn’t mean your future homebuyers won’t either.

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No, you don’t have to spend hundreds of thousands of dollars to renovate your house in exchange of above-market value. Other than knocking down a wall, adding another roof, there are 10 small things you can do to drastically boost your home’s value:

1. Make your kitchen really cook. The kitchen is still considered the heart of the home. Potential home buyers make a beeline for this room when they first view a home for sale, so make sure your kitchen looks clean and reasonably updated.
   For a few hundred dollars, you can replace the kitchen faucet set, add new cabinet door handles and update old lighting fixtures with brighter, more energy-efficient ones.
   If you’ve got a slightly larger budget, you can give the cabinets themselves a makeover. “Rather than spring for a whole new cabinet system, which can be expensive, look into hiring a refacing company,” says serial remodeler Gwen Moran, co-author of “Build Your Own Home on a Shoestring.”
   “Many companies can remove cabinet doors and drawers, refinish the cabinet boxes, then add brand-new doors and drawers. With a fresh coat of paint over the whole set, your cabinets will look like new.”
   If you’re handy, you can order your own replacement cabinet doors and door fronts from retailers like Lowe’s Home Improvement or The Home Depot and install them yourself.
2. Give appliances a facelift. If your kitchen appliances don’t match, order new doors or face panels for them. When Nicole Persley, a Realtor with Real Estate of Florida, in Boca Raton, was sprucing up her own home to sell, her mix-and-match kitchen bothered her. The room had a white dishwasher, microwave and wall oven mixed with other pieces that were stainless steel with black trim.
   When Persley called the dishwasher manufacturer to see about ordering a new, black face panel, the customer service representative clued her in on a big secret: Many dishwasher panels are white on one side and black on the other.
   “All I had to do was unscrew two screws, slide out the panel and flip it around. Sure enough — it was black on the other side!”
   Persley, who has remodeled numerous homes for resale, says that a more cohesive-looking kitchen makes a big difference in the buyer’s mind — and in the home’s resale price.

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If you missed yesterday’s Tip 1 – Give Seller higher price, please click here.

Tip 2: Finding Growth

Just like the previous “saving money vs making money” discussion, I think Jonathan from MyMoneyBlog hit the bulls-eye: “Why not doing both?? “

Same principle applies to the real estate purchase : while cutting down the cost, why not finding a house that has potential to grow? I am not talking about sitting on the property waiting for the market to appreciate (although that’d be nice). There are ways to significantly boost your home value without major renovations.

1. Look for a room to add:
   The home I am negotiating now has only 2 bedrooms. Although it does have another den/sitting room on the main level, it doesn’t have a door so it is not qualified as a 3 bedroom house. There is actually a clause on the MLS remark for this house: 3rd bedroom to be confirmed. To qualify as a bedroom, I think there must be a closet, a window and door(s). I don’t think adding a door can be that difficult and all the sudden, I have a legitimate 3 bedroom home.
2. Try to add some more finished sqft.
   For an area that has lots of small older homes, every square footage counts. If you look at MLS provided by the realtor, there is a sqft number and a finished sqft number (usually including finished basement). If your neighborhood is sqft hungry like mine, the finished sqft number also matters a lot. So finding a home that has full basement with the potential to be finished can add a lot of value. Adding a sunroom may not be a bad idea either so look for a yard that is suitable for that type of home improvement. Not only you can add sqft to your home, a nicely finished basement and a bright relaxing sunroom also add lifestyle, uniqueness and excitement to the house. This kind of lifestyle “add-on” is usually the key factor to have the buyers to “Fall In Love” with the house.
3. Try to look beyond the cheesy décor and disgusting wall paint.
   A lot of home owners don’t stage their homes before selling so their own lifestyles and tastes turn away a lot of buyers. The home I am negotiating right now is painted in dark grey with horrible dark grey carpet. The bathroom got some very unpleasant black and white tile. With the owner’s ancient furniture and stone-age décor, the house seems quite depressing and we figured that was probably why it has been sitting on the market for so long. But, it is a very solid home comparing with majority of the homes we saw. It is very well maintained, and has a very nice floor plan. I can picture how charming this home will be after I give it a face lift and change its color and style. So, yes, definitely try to look beyond the wall color and the furniture and focus on the house itself. You can find diamond in the rough that other people can’t really see.

So I think the house I am buying has a lot of potential to be priced in a much higher category once I add a room and possibility some sqft, and insert some energy into it by adding lifestyle to the house. According to my market analysis, a 3 bed 2 baths with 1700 sqft can be sold for $425K - $500K depending on the condition. So, yes, I definitely think this home has some potential to grow. And such growth is able to help me to offset the market downturn if that happens.

I think I am buying a house at the worst time right now. Mortgage rate climbed 6 consecutive weeks and hit the highest level since June 2004. After a 5 year red hot housing booming fueled by the low mortgage rates, the market finally started to cool down. However, the sellers don’t realize that and still listed their homes at the “red-hot” prices. It will take a while for the market to adjust to the “cooling down” price. But for now, it only means tough negotiation since the sellers are still stubbornly believe that their homes will go up 10% a year.

So how am I going to protect my hard earned money from this uncertain market? Here are three tricks I am trying right now and hopefully I can ride through the downturn of the housing market.

Tip 1: Give Seller A Higher Home Price
You might flip: What are you talking about?! Seriously, if you are buying a fairly expensive home, this strategy might make sense.

Here is how it works: instead of bargaining your ass off on the house price, ask for the seller to pay for the closing cost.

I am currently negotiating a deal with the seller. So let’s use my potential home as an example as how much I can save by asking for the closing cost vs. bargaining down the home price.

The numbers:
Home Price: $365,000
Total loan amount (5% downpay): $346,750
Average interest rate: 6.25%

Let’s say that I am trying to cut down the home price by $5000, an average 6.25% mortgage rate translates to
$29 a month savings
$348 total payment savings a year.
$1724 savings on interest over 5 years
$3034 savings on interest over 10 years.
Plus $250 (5% of $5000) down payment saving.

Let’s say instead of slashing $5000 off the entire home price, ask seller to pay for the closing cost not exceeding $5000, which is the same thing for the seller. I can then use that money to buy a much cheaper loan. The following clip shows the differences between high fee loans with low interest rate vs. low fee loans with higher interest (from www.interest.com).

Let’s say I take the 5.75% loan with $6090 fee, I am looking at:

1. $111 savings per month
2. $1338 savings per year
3. $10.415 savings on interest over 5 years
4. $18958 savings on interest over 10 years.

Although I do realize that this method works great if you are borrowing a large sum of money. I guess for a $150K home, it’d be nice to cut down $5000 on the home price then saving it on a loan application.

I will talk about the other two tips in the next couple of days.

I have been doing house hunting like crazy these days. After seeing a few dozen homes, I came across this very unique 2 bed/2baths Penthouse:
Living room:

Fireplace in Master Bedroom

360 degree Deck view of the Colorado mountains

If you are wooing and wowing, that was the exact reaction I had when I saw this place. I have always planned on buying a 3 bedroom single family house with a yard because this is the type of property that holds most of the values. Plus, with basement and yard, you have a lot more livable spaces and it is much easier to turn around and sell it to a family. Just to give you an idea what you can buy with the same amount of money in the same neighborhood, here are a few pictures of a 3bed/2baths place nearby:

But this Penthouse is really one of the kind! So, here is the dilemma: Should I pour my money into a unique property that is a lot smaller and less practice or stick with my original buying principle to get a regular single family home assuming the same price and same neighbourhood? What do ya say?

Spring is here and it seems that everybody is on the market selling and buying homes these days. Since my schedule unfortunately syncs up with the real estate season (I need to move out of my current apartment in Sept), I have to join the crowd and start looking now.

Location
Like I wrote earlier, I am a strong believer in location. My criteria are actually very simple but rigid:

1. A well known and popular neighborhood that most people would like to live in.
   When I bought my last Chicago area home, I purposely chose Naperville, the town which was rated as number 1 in the nation to raise a family because of its kids friendly environment and extraordinary school system. I sure made money when I sold it. So, this time, there is no exception either. It must be an ideal place that is desirable by a lot of people. The winner? Washington Park, Denver. It is minutes away to Downtown and Cherry Creek shopping; it has a history and this fantastic recreation heaven shown in the above picture. Best of all, you can actually take an easy walk to the park, mom-pop coffee shop or the nearby Gaylord stripe to party till 2am. And school system is fantastic! You can’t go wrong with this place.
2. Location in the neighborhood.
   Even within a neighborhood, there are differences in terms of location. I am staying away from the busy streets or crowded lots. I looked at one of the homes last week. From the backyard, I can see everybody’s back windows and what they were doing. I turned around and ran. I am looking for a cute home situated on one of those quieter streets, not too far from the park, has a private yard and have at least a few feet room from the neighboring houses.
3. School System matters.
   Although most of the residents in this neighborhoods don’t have school children, I am a strong believer that no matter what, the schools in the area can’t suck too bad. There is another neighborhood on my screening list called Highlands. It is a trendy and a fast growing community, but the schools are beyond terrible. I checked the scores on greatschool.net and only a quarter of the 5th graders can read and do math. Unless there are strong evidences to convince me the place has great growth potential, I may not feel comfortable to buy in an area where majority of the kids can’t receive proper education.

Potential to Flip
Given the special circumstances of the communities I am looking at, I may not want a home that needs major repair since most of the homes are built before 1920’s. I read enough books about “knocking down the wall to make the open space” type of theory. I suspect knocking down a wall in a 1980’s home might be fine, but knocking down a wall in a home built in 1895 may sink the entire house. So I am looking for a home that has larger rooms and space and need the following updates:

• upgraded kitchen
• upgraded baths
• need new paint
• Full basement with the potential to finish up
• Need new floor
• An extended sunroom may be added
• Landscape needs to be updated

Since I am a newbie, I don’t want to touch the guts of the home. And for now, I will stay away from my “knocking down the wall” theory until I talk to the professionals.

10 homes were looked at last week. One was perfect but was gone even before we had a chance to make an offer. There are 11 to go this week. We’ll see if there is any sweet deal… Stay tuned…

I just had an interesting conversation with a friend of mine about purchasing a vacation home as an investment property. She is a young single 100% traveling consultant just like what I used to be. She makes great income and pretty much lives in hotels and on company’s dime with no other significant expenses. With all the extra cash she has saved up, she’s been toying with the idea to buy a 500K – 600K beach house in the East Coast where she vacations a couple of times a year.

On the paper, it all looked great: It’s a wonderful vacation spot! She can use it for her own benefits or invite family and friends over. She can then rent it out the rest of the year. But for some reasons, my guts feeling tells me NO.

I have always had a principle to “Start Small and Start Simple”. Real Estate investment is a tricky long haul business that involves in a lot of money, energy and time. If you are using it as your primary residence, then it is a different story. Because in worst case scenario, you have bought a piece of roof on the top of your head. But if the property is purely for investment purpose, you will have to crunch the number to see whether it suits your current situation or not.

Using my friend as an example, the reasons I think it is not a good idea to sink in $100,000 cash right now are:

1. After crunching the number, she has to spend about $15000 a year to keep up with the cost. That is, after factoring in the rental income (which is a hugely optimistic assumption), the tax benefits and other regular maintenance expenses. It’s more than $1200 a month expense! Unless she lives in it, it doesn’t make sense to throw so much money in it.
2. She is still young and hasn’t started a family yet. There will be a lot of good usages for that 100K cash. By putting so much money on one property, that’s one giant egg in one giant basket. I just don’t think it is a good idea.
3. Vacation rental home is a tricky business simply because A) You are not local B) You have to rely on management company. C) You change tenants every week or so. Without any previous landlord experiences, it could be a bit overwhelming at first

So my suggestion to her is to start small and start local. Find a cheaper rental property near where her parents live and ask them to help out to manage it. Then, after a few years, refinance it or take out the equity and buy another (or more) rental(s). Repeat the process until she is comfortable with the whole thing. Then she can buy something big and fabulous.

A few years? Doesn’t that take way tooooo long? You may ask. After all of these years investing in rental properties, I have to say that real estate business is a long haul type of thing. There is really no fast money especially in rental business. Well.. flipping business might be a different story. I will soon find out.

OK, I know I haven’t started my “Flipping Project” yet. But here is a great tip I saw that I don’t want to forget:

You want to write down your very first impression about the house you see and focus on the bad stuff, because these items WILL be on your “Home Improvement” list. If you are annoyed by some features of the home, say a cracked drive way, or the disgusting landscape, your potential buyers would not appreciate these features either.

Then, write down the good stuff about the house. Although you don’t have to worry about these good stuff this time. It might be something you want to add to your next flipping project.

In time, you will have a comprehensive “First Impressive” list that documents all the appealing little features with those not so appealing ones that you want to work on.

After all, buying a home is an emotional process for most of the buyers. They want to “feel” the home is right for them and the first impression and guts instinct play a major part in their decisions. The statistic reports show that the buyers usually decided whether they like the homes or not in the first few minutes. So capture these little things that matter a lot in the first few minutes.

Based on my past experiences as a part time real estate investor and home owner, location matters the most when it comes down to a piece of real estate. I usually would spend months trying to research a location before I put any money in it. In my definition, “Location, Location, Location” really means three different things:

1. Location – the city/county you will be buying. In LA, you are screwed cuz there ain’t any cheap affordable homes left. In Denver where I live, I can still find something
2. Location – neighborhood. I think this is the most important part of the location. The neighborhood must be desirable, safe and has great schools. I spent a great deal of my time researching the local school system when I was buying my home in Naperville, IL. Although I don’t have any kids, I know the first thing the family will worry about is “where will my kids go to school?”. Call me superficial, but the demographical information is also important. How many renters in the area comparing with home owners? What is the average age and how big is the average household? What is the medium income? What is the crime rate? etc.. Bottom line, you don’t want to live in somewhere that murder happens once a month.
3. Location: The home location. Whenever I look at a listing, I first looked up the address on Mapquest to make sure it is not facing a busy street, rail road or cemetery. My ideal home location would be facing a park, open area or a small street. I don’t even check the home if it is not situated desirably.

After spending a full month doing research (I wasn’t working at that time), I purchased a home in Naperville that is backing the most famous golf club community in the area with superb school system. The house has been going up by double digits each year! Too bad that I sold it after 20 months. If I would still own it today, I would make $30,000 just in 2005! It’s unreal.

Now, the whole game is starting all over again, but in a different location – Denver. I was using Chicago Tribune’s online tool to conduct research on schools and census data. After signing up with a realtor, I had full access to MLS listing. So now, I need the same kind of tools to cover the ground work and I have found three great sources:

1. www.schoolmatters.com – It shows you the public school reports at your finger tip.
2. Google’s housing report – It combines Google map and Census data so you know what people live in this area
3. www.zillow.com – It combines Google map and Real Estate transaction data to show you the history of sales and how much it is worth right now.

Combine with my usual tools like Census site, Realtor.com and finally the Realtor’s service, I have quite enough information to look around.

Soon, I will be going to Open Houses in the area I want to buy and start screening Realtors that fit my needs.

I am in Boston these days taking a technical class. I noticed a guy sitting in the corner never really paid much attention to the class. Ironically, I was assigned to work on the labs with him. I noticed that he was constantly working on a house floor plan and I ended up doing the lab alone. That just irritated the hell out of me. I had to ask,”David, what are you working on?” “Oh, a house remodeling plan.” He just blurted it out. A few minutes later, we started chatting about remolding home, flipping a house and selling for a profit. After I told him my plan to save up all the money to pay for the remodeling cost, he flat out told me it doesn’t make sense to put my own money into the project.

“Say, you want to spend $35000 on remodeling and $25000 on down payment, and your final profit is .. say $30000. You got a 50% return on your investement. But what if you put down only $25000 towards down payment, get an interest only first mortgage, borrow a construction loan or second loan and use that money to remodel. If you make $30000, your return is about 100%. The worst case scenario is that you can’t sell it 6 months later for a nice profit. Then you can convert two loans into one by refinancing the house with interest only loan and hold it for two years. Although you are stuck with the home, you won’t pay capital gain after 2 years. The bottom line, don’t spend your own money. Cash is king. The less you spend on your business, the better. Just treat the interest as part of the business expenses… “

Turns out, this guy has been investing in raw land and real estate for a long time and ready to walk out of the job at anytime. He and his fiancé just remodeled a half million home and sold it for 1.25 million in North East. Now, they moved to Kentucky and are working on a log home by the river.

That was definitely one valuable lesson I learned since I got here. No wonder he didn’t care for the class. He’s got a much more exciting gig going on on the side which offers him not only wealth but also freedom.

I think I am very convinced about borrowing interest only loan to minimize the out-of-pocket cost. Interest only loan usually carries much lowest rate. Although I won’t have any principle built in, it is perfectly acceptable since I am really aiming at profits. I just have to factor in the loan interest into the total cost. After all, even though I am buying a home, it is a business and should be treated as a business. If my partner approves, it would mean a drastic decrease of the required 2006 project budget. However, I am still going to keep the figure at $46000. You never know what’s gonna happen.