Preparing for Marriage: Asset Allocation & General Advice

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Preparing for Marriage: Asset Allocation & General Advice

Postby Meg77 » Thu Feb 07, 2013 7:07 pm

Hi Bogleheads! I have been voraciously reading other posts, and I decided to post my own situation to get some help improving my portfolio. I just recently crossed the $250,000 mark with investible assets, and I'm thrilled! I've been maxing out retirement accounts for years now, and I can feel the momentum starting to pick up. I know that at this level asset allocation and fees can make a huge difference in overall return (though of course continuing to invest is a priority too), so I'd love to hear your advice on rebalancing my portfolio.

Questions: I'm going to start with these so you have my background/concerns in mind as you review my situation. Please feel free to share any thoughts and/or advice though! It's so easy to get tunnel vision as I analyze my own finances, so I really appreciate any outside insights.

1. I am planning to buy a house with my fiancé this year, and we plan to marry in early 2014 (we’ll each use our bonuses this year for the down payment and furnishings so my reserves and asset allocation won’t be impacted). We each have incomes in the low 6 figures and good savings habits so joining forces will be a great financial step forward for both of us (he also has investible assets/total assets in the low 6 figures). We have budgeted 40% of our joint gross income for investing and accelerated debt repayment (his student loan will come first and take a 2-3 years to knock out). I want to make sure I have my financial house in order in preparation for joining finances with him. My main concerns are keeping separate property separate and having a more efficient portfolio that’s easy to rebalance (i.e. feel free to recommend different/fewer funds than those I've got). Once we marry we’ll each keep our separate accounts, but we’ll open new joint ones and going forward we’ll save/invest together – so we’ll have lots of accounts to balance/rebalance each year (his IRA, my IRAs, his 401k, my 401k, his brokerage, my brokerage, & our brokerage at a minimum).

2. I’m not sure exactly what my (our) target asset allocation should be in light of all the real estate. After reading some other threads I assume I should have a lower stock (risk) target in general. Which works out since currently I’m at 58 (s) / 42 (b+c). However I have a fairly aggressive risk tolerance; I tend to buy stocks whenever the market dips (even in 2008), and I have a decades long time horizon. I’m pouring 100% of 401k contributions into stocks, which will hopefully catch me up soon to more of a 70/30 allocation. But with my big “bond” at 8% maybe not…I guess this is also a question for my fiancé, but I’d love your input.

Emergency funds: I have 6 months reserved for both my personal and my rental properties’ fixed expenses

Debt:
$18K car loan at 2.74% (5 year amortization) with 3 years remaining
$112K home mortgage at 3.25% (15 year amortization) with 14 years remaining
$811K in rental mortgages at a weighted average 4.30% (30 year amortizations) with 24-29 years remaining

Tax Filing Status: Single (plan to marry in 2014 though)
Tax Rate: 25% Federal bracket for 2012 (effective tax rate 18%); 28% bracket for 2013 (effective rate projected 23%); no state income taxes
State of Residence: TX
Age: 29
Desired Asset allocation: 70% stocks / 30% bonds (I’m open to suggestions here – I like it a bit more conservative because I don’t have to take as much risk to reach my goals if I stay on track and because of the large mortgages I hold.)
Desired International allocation: 35% of stocks (again, open to suggestions)

Total Assets - $1,493K Total Investible Assets (not including reserves or real estate) - $253K

Current Investible assets

Roth IRA at Vanguard - $119K
4.4% VG Inflation Protected Securities Fund Investor (VIPSX) (0.20%)
3.6% VG Precious Metals and Mining Fund (VGPMX) (0.29%)
2.0% Vanguard REIT Index Inv (VGSIX) (0.24%)
4.0% Vanguard Total Bond Market Index Admiral Shares (VBTLX) (0.10%)
11.9% Vanguard Total Int’l Stock Index Admiral Shares (VTIAX) (0.18%)
21.3% Vanguard Total Stock Market Idx Admiral Shares (VTSAX) (0.06%)

401k - $20K
7.9% Vanguard 500 Index Inv (VFIMX) (0.17%) Company match 50% up to 6% ($3K / yr)

Rollover IRA at Vanguard - $12K
4.7% VG FTSE All-World ex-US Index Fund Admiral Shares (VFWAX) (0.18%)

Taxable – Brokerage - $18K
1.2% Chipotle (CMG)
1.2% Diago (DEO)
0.79% Bank of America (BAC)
0.79% MDC Holdings (MDC)
0.79% British Petroleum (BP)
0.79% Lowe’s (LOW)
0.79% AT&T (T)
0.79% Wells Fargo (WFC)

Taxable – Trust account - $84K
3.2% Cash
30.0% Note Receivable at 8.3% for 5 years (30 year amortization, secured by real estate, pending closing this month)

New annual Contributions
$17,500 to 401k (plus $3K employer matching)
$10K available for extra debt repayment, cash savings, other investments in 2013
$8K interest and dividends being generated (mostly by the proposed loan within the trust) and available for reinvestment

Available funds My other 401k funds aren’t cheap or great so I’d prefer to keep all contributions going into VFIMX and rebalance/diversify through my IRAs. My Scottrade account I’ve had since I was 13 and use as “play money” to buy (and usually hold) good stocks when they tank due to marketing issues (BP, Toyota a few years back) or when I get a recommendation from a trusted source (DIA, BAC, LOW) or whatever. All holdings have significant gains except MDC (20% loss) and most throw off good dividends.
Last edited by Meg77 on Fri Feb 08, 2013 12:03 pm, edited 1 time in total.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby zebrafish » Thu Feb 07, 2013 7:59 pm

Total Assets - $1,493K Total Investible Assets (not including reserves or real estate) - $253K

How much actual equity do you have on these rental properties for which you have nearly 1 million dollars in mortgage debt? Also, what kind of cash flow are these properties generating?

Answers to these questions kind of alters the approach to your finances and investing. If you have almost no equity on these properties, you are carrying an enormous amount of leveraged risk if one of you loses a job, becomes disabled, etc. I would keep a huge cash reserve to buffer this risk.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Grt2bOutdoors » Thu Feb 07, 2013 10:42 pm

Meg77 wrote:Hi Bogleheads! I have been voraciously reading other posts, and I decided to post my own situation to get some help improving my portfolio. I just recently crossed the $250,000 mark with investible assets, and I'm thrilled! I've been maxing out retirement accounts for years now, and I can feel the momentum starting to pick up. I know that at this level asset allocation and fees can make a huge difference in overall return (though of course continuing to invest is a priority too), so I'd love to hear your advice on rebalancing my portfolio.

Questions: I'm going to start with these so you have my background/concerns in mind as you review my situation. Please feel free to share any thoughts and/or advice though! It's so easy to get tunnel vision as I analyze my own finances, so I really appreciate any outside insights.

1. I am planning to buy a house with my fiancé this year, and we plan to marry in early 2014 (we’ll each use our bonuses this year for the down payment and furnishings so my reserves and asset allocation won’t be impacted). We each have incomes in the low 6 figures and good savings habits so joining forces will be a great financial step forward for both of us (he also has investible assets/total assets in the low 6 figures). We have budgeted 40% of our joint gross income for investing and accelerated debt repayment (his student loan will come first and take a 2-3 years to knock out). I want to make sure I have my financial house in order in preparation for joining finances with him. My main concerns are keeping separate property separate and having a more efficient portfolio that’s easy to rebalance (i.e. feel free to recommend different/fewer funds than those I've got). Once we marry we’ll each keep our separate accounts, but we’ll open new joint ones and going forward we’ll save/invest together – so we’ll have lots of accounts to balance/rebalance each year (his IRA, my IRAs, his 401k, my 401k, his brokerage, my brokerage, & our brokerage at a minimum).

If you don't already have one, would suggest using a separate checking account specific for property management - mortgage, bills, etc. in your name only. Don't pay any property related bills from your joint accounts - it only takes once to have someone say you've commingled assets. Leave the deeds as they are currently registered. You may want to consider drawing up a financial POA if you become temporarily disabled, unless you have a property management company overlooking your real estate affairs.

2. I’m not sure exactly what my (our) target asset allocation should be in light of all the real estate. After reading some other threads I assume I should have a lower stock (risk) target in general. Which works out since currently I’m at 58 (s) / 42 (b+c). However I have a fairly aggressive risk tolerance; I tend to buy stocks whenever the market dips (even in 2008), and I have a decades long time horizon. I’m pouring 100% of 401k contributions into stocks, which will hopefully catch me up soon to more of a 70/30 allocation. But with my big “bond” at 8% maybe not…I guess this is also a question for my fiancé, but I’d love your input.

Emergency funds: I have 6 months reserved for both my personal and my rental properties’ fixed expenses

Debt:
$18K car loan at 2.74% (5 year amortization) with 3 years remaining
$112K home mortgage at 3.25% (15 year amortization) with 14 years remaining
$923K in rental mortgages at a weighted average 4.30% (30 year amortizations) with 24-29 years remaining

Tax Filing Status: Single (plan to marry in 2014 though)
Tax Rate: 25% Federal bracket for 2012 (effective tax rate 18%); 28% bracket for 2013 (effective rate projected 23%); no state income taxes
State of Residence: TX
Age: 29
Desired Asset allocation: 70% stocks / 30% bonds (I’m open to suggestions here – I like it a bit more conservative because I don’t have to take as much risk to reach my goals if I stay on track and because of the large mortgages I hold.)
Desired International allocation: 35% of stocks (again, open to suggestions)

Total Assets - $1,493K Total Investible Assets (not including reserves or real estate) - $253K
I count $440K in equity, $253K as you say Investible Assets, $187K in real estate equity and reserves. Seems like you are heavily leveraged, likely have somewhere between 10 and 15% equity, rest is debt financed. I figure your cash reserves are somewhere between $40K and $50K.
Current Investible assets

Roth IRA at Vanguard - $119K
4.4% VG Inflation Protected Securities Fund Investor (VIPSX) (0.20%)
3.6% VG Precious Metals and Mining Fund (VGPMX) (0.29%)
2.0% Vanguard REIT Index Inv (VGSIX) (0.24%)
4.0% Vanguard Total Bond Market Index Admiral Shares (VBTLX) (0.10%)
11.9% Vanguard Total Int’l Stock Index Admiral Shares (VTIAX) (0.18%)
21.3% Vanguard Total Stock Market Idx Admiral Shares (VTSAX) (0.06%)

401k - $20K
7.9% Vanguard 500 Index Inv (VFIMX) (0.17%) Company match 50% up to 6% ($3K / yr)

Rollover IRA at Vanguard - $12K
4.7% VG FTSE All-World ex-US Index Fund Admiral Shares (VFWAX) (0.18%)

Taxable – Brokerage - $18K
1.2% Chipotle (CMG)
1.2% Diago (DEO)
0.79% Bank of America (BAC)
0.79% MDC Holdings (MDC)
0.79% British Petroleum (BP)
0.79% Lowe’s (LOW)
0.79% AT&T (T)
0.79% Wells Fargo (WFC)

Taxable – Trust account - $84K
3.2% Cash
30.0% Note Receivable at 8.3% for 5 years (30 year amortization, secured by real estate, pending closing this month)
Given the rate 8.3% for 5 years, this has to be a "high-risk" "not available to the general public" kind of deal. Here's my question, what happens after Year 5, what does the rate reset to? It has a 30 year amortization, so what happens from years 6 to 30? If the note is for 30% of 84K, what is the rest of the trust invested in?

New annual Contributions
$17,500 to 401k (plus $3K employer matching)
$10K available for extra debt repayment, cash savings, other investments in 2013
$8K interest and dividends being generated (mostly by the proposed loan within the trust) and available for reinvestment
Build up cash with your $10K --> $50K in reserves is on the low side for the amount of leverage you are carrying. How accessible are those trust assets, if you get into a pinch?


Available funds My other 401k funds aren’t cheap or great so I’d prefer to keep all contributions going into VFIMX and rebalance/diversify through my IRAs. My Scottrade account I’ve had since I was 13 and use as “play money” to buy (and usually hold) good stocks when they tank due to marketing issues (BP, Toyota a few years back) or when I get a recommendation from a trusted source (DIA, BAC, LOW) or whatever. All holdings have significant gains except MDC (20% loss) and most throw off good dividends.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby BolderBoy » Thu Feb 07, 2013 10:58 pm

I got lost in all the data you provided. What is your "net worth"? What is his "net worth"? The more detail you can provide in arriving at those numbers, the better.

You'll want both of those numbers calculated for the day before your wedding day...and saved in a very safe place.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby freebeer » Fri Feb 08, 2013 12:37 am

If you are concerned with "keeping separate property separate" then a prenuptial agreement would be a great idea. I know it doesn't sound romantic but you can keep separate accounts and still find that down the road it's all all mingled (Texas being a community property state). There are various fine points - appreciation on separate property in Texas remains separate property but dividends and other income are community property. Which means a typical default of re-investing dividends in an investment account would quickly lead to commingling which could cause the whole account to be deemed community property. A pre-nuptial can clarify if it's instead desired for all returns from separate property to stay separate, etc.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby letsgobobby » Fri Feb 08, 2013 10:30 am

I'm not a real estate expert but from what I read you should get each rental in its own LLC. Like, now.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Meg77 » Fri Feb 08, 2013 11:50 am

zebrafish wrote:Total Assets - $1,493K Total Investible Assets (not including reserves or real estate) - $253K

How much actual equity do you have on these rental properties for which you have nearly 1 million dollars in mortgage debt? Also, what kind of cash flow are these properties generating?

Answers to these questions kind of alters the approach to your finances and investing. If you have almost no equity on these properties, you are carrying an enormous amount of leveraged risk if one of you loses a job, becomes disabled, etc. I would keep a huge cash reserve to buffer this risk.


Here is more detail on the real estate (I'm including homestead equity/debt because it'll become a rental when I move in to a new home later this year):
Total value (at cost) - $1,112K
Total debt - $923K
Equity - $189K
# of properties - 6
# of loans - 7

Cash flow varies greatly from year to year, partially because I have bought an average of one property per year for the last 6 years and have refinanced several of the mortgages once as well. In the worst year I had a negative cash flow of just over $30K and was able to get by without tapping much in savings by cutting personal expenses and supplementing rental income with my wages. I have a lot of cushion in my personal income even in years without any bonus. Also 3 of the mortgage loans are private loans from a family member at market rates/terms. In a pinch I can suspend payments on these notes easily. This gives me flexibility in years with negative cash flow. Going forward now that I'm not planning to accumulate or refinance any more rentals, I expect a positive annual cash flow (possibly very positive, but I will count on simply breaking even).

Also I do have a property management company handling these for me.

With regard to an LLC, I can't move them into that because most of the properties have a conforming mortgage and the lender wouldn't allow the deed transfer. Also the costs to maintain and establish an LLC (or 6) would outweigh the benefit. Instead I have a $1MM liability policy on each rental. I've consulted attorneys and other landlords and this is the most common method used by them (that or having a large umbrella insurance policy).
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Meg77 » Fri Feb 08, 2013 12:02 pm

BolderBoy wrote:I got lost in all the data you provided. What is your "net worth"? What is his "net worth"? The more detail you can provide in arriving at those numbers, the better.

You'll want both of those numbers calculated for the day before your wedding day...and saved in a very safe place.


My net worth is currently $551K.
$189K real estate equity
$150K retirement
$84K trust (all cash currently but I have the $76K private loan pending); I don't have control of this till I'm 35 but am allowed to access it pretty much at will and the trustee is willing to invest it as desire at this point.
$79K LLC interest I manage and share with family members (17% cash, 83% private loans earning 8%)
$21K cash
$18K brokerage
$10K car equity

His net worth is appx $65K ($20K cash, $25K brokerage, $98K retirement, $78K student loan).

My total cash is currently $104K but it'll drop to around $30K briefly when the trust loan closes. Shortly thereafter I'll be receiving a bonus of $35K (net after taxes). In addition I just paid all my property taxes so Jan/Feb is a low point in liquidity for me. The rental cash increases substantially throughout the year even in bad cash flow years.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Meg77 » Fri Feb 08, 2013 12:19 pm

Grt2bOutdoors wrote:If you don't already have one, would suggest using a separate checking account specific for property management - mortgage, bills, etc. in your name only. Don't pay any property related bills from your joint accounts - it only takes once to have someone say you've commingled assets. Leave the deeds as they are currently registered. You may want to consider drawing up a financial POA if you become temporarily disabled, unless you have a property management company overlooking your real estate affairs.

Yes I have a separate account for the rentals which I plan to pad considerably prior to the marriage so that any future cash injection requirements don't have to come from joint assets. If I do need to supplement the cash flow I'll do so from other separate property such as the trust or my personal brokerage. I also do have a management company, but a POA is a great idea.

Total Assets - $1,493K Total Investible Assets (not including reserves or real estate) - $253K
I count $440K in equity, $253K as you say Investible Assets, $187K in real estate equity and reserves. Seems like you are heavily leveraged, likely have somewhere between 10 and 15% equity, rest is debt financed. I figure your cash reserves are somewhere between $40K and $50K.

Actually I double counted my homestead mortgage, so total current rental debt is actually $811K (I corrected the error in my original post). Total RE equity is about $189K and current cash totals $104K (that'll temporarily drop to $28K when the trust loan goes out but then almost immediately bounce up to $63K when I get my bonus next month). Also I don't escrow most of my taxes and just paid them, so cash is at a yearly low in Jan/Feb.

30.0% Note Receivable at 8.3% for 5 years (30 year amortization, secured by real estate, pending closing this month)
Given the rate 8.3% for 5 years, this has to be a "high-risk" "not available to the general public" kind of deal. Here's my question, what happens after Year 5, what does the rate reset to? It has a 30 year amortization, so what happens from years 6 to 30? If the note is for 30% of 84K, what is the rest of the trust invested in?

After the inital term of 5 years the investor can likely qualify for bank financing, can pay the loan off, or can find another private financing source if we don't wish to extend the loan. Initially he borrows 100% privately to buy distressed properties (often foreclosures) which generally require quick cash closings. He fixes them up and leases them out in 90 days and generally holds them long term as rentals. However if at the initial loan maturity the private lender does not wish to extend financing, he can usually qualify for bank financing since the property is then stable and has some equity. If not, and if he can't find another financing source, he sells. He's done this for 15 years with dozens of properties and has never defaulted even through the RE crisis years. He's fairly conservative for a RE investor. Worst case I foreclose and get another rental for my portfolio.

New annual Contributions
$17,500 to 401k (plus $3K employer matching)
$10K available for extra debt repayment, cash savings, other investments in 2013
$8K interest and dividends being generated (mostly by the proposed loan within the trust) and available for reinvestment
Build up cash with your $10K --> $50K in reserves is on the low side for the amount of leverage you are carrying. How accessible are those trust assets, if you get into a pinch?

I can access the trust if I want/need to. It will dissolve in just a few years anyway, so the trustee pretty much acts like I already control the funds.
[/quote]
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby nimo956 » Fri Feb 08, 2013 12:31 pm

Why would you invest in properties with negative cash flow? Are you counting on appreciation in the value of the property? You can't always count on that, as we saw with 2008-9. What is the cap rate for each of the properties (gross rents less non-financing expenses divided by the purchase price including closing costs)? I think you should check out this post by Lumpr:

viewtopic.php?f=2&t=68979

Lumpr wrote:Here are some quick thoughts from my experience:

1 - You cannot count on any appreciation (in real terms) in the value of income property beyond what you can do to increase rents in excess of inflation. Income property is valued based on rental income, thus any appreciation must come from either (a) actions you take to increase rents or (b) unpredictable market dynamics (e.g. new factory in town, gentrification, etc.). You cannot count on dumb luck.

2 - You need a robust model (they are not that difficult to conceive or build). Your model must account for (a) management expense regardless of whether you hire a property manager (your time is money too), (b) vacancy, (c) maintenance, which must including deferred maintenance items not just day-to-day repairs, lawn care, snow removal etc. (you’ll need to replace the roof, water heater, carpet some day), (d) property taxes, (e) insurance, (f) professional fees (tax prep, evections, etc.), (g) advertising, (h) utilities if landlord is responsible for them and (i) cash reserve. If you really want to get fancy you can layer on the income tax effects on top of that, but I’d suggest you view this as gravy.

As a generally rule of thumb, when I’m eyeballing properties (i.e. pre due-diligence), I estimate expenses (not including any financing) to be 45%. This is generally fairly accurate, but at the end of the day you must perform your diligence before you are fully committed.

3 - I generally look for Cap Rates north of 10% (I’ve gone as low as an 8% Cap Rates, but that is the exception not the rule). In my area, most rental property is listed at a price that results in a 5-6% Cap Rate and most realtors will chuckle when you tell them you are looking for a 10% cap rate and tell you it doesn’t exist. They are full of nonsense (and that is putting it nicely). Now during some market conditions it is difficult to find a 10% cap rate and in others, like now, it isn’t (at least in my area). FYI, compute a cap rate by dividing (a) gross rents less non-financing expenses by (b) the purchase price (including closing costs).

The important thing to keep in mind is that real estate is a very illiquid with high transaction costs, so chasing marginal opportunities is not worth it. If you buy at an insufficient cap rate, you’ve pretty much ensured that you’ve made a bad investment absent dumb luck.

4 - Be wary when someone is trying to sell you on cash-on-cash return (COCR) or ROE (sometimes they’ll call it ROI, but that is a mischaracterization). Now these metrics are important (but not as important as the cap rate). Why are they not as important? Because the COCR and ROE metrics are all about how you finance the property and not the actual value of the property, additionally focusing on them makes it difficult to evaluate a potential investment to other asset classes. FWIW - I don’t go into an investment property with the intent to mortgage it, unless I’m 90% confident that, with at least a 20% down payment, I can get a 17+% COCR (and really I’d want this to be north of 20%).

5 - Given recent history this should be obvious, but leverage magnifies risk in real estate just like in other asset classes. I cannot tell you the number of times I’ve seen someone convenience themselves that a marginal property was somehow a good investment because they could mortgage it. Leverage is a financing technique, it doesn’t change the fundamental value of the property.

One of the first things I do when I start investigating a property is look it up on the assessor’s website and figuring out what the current and prior owners paid for it. At lot of the things I’ve look at in the two years were purchased in the 2002-2006 period. It is not uncommon that these people paid 3x the current asking price. I can almost assure that these people didn’t understand what a cap rate was and why it is important when they bought these things.

6 - Based on my experience and research, I’ve concluded, that the market for small rental properties is not very efficient. There are opportunities that can be exploited, but it takes effort.

7 - Economists will tell us something to the effect that “you are not rewarded for taking a diversifiable risk.” This may be (and probably is mostly) true in broad, deep, liquid financial markets. I’m not convinced that this is true in small investment property market.

When you invest in rental property you are exposed to at least two risks that are otherwise diversifiable (a) you’re investing in a single asset within the asset class and (b) you are investing in a particular geographic location. If the yield on the REIT index is 6% and you buy a property at a 6% cap rate, well you’ve just gifted your time and capital to your tenants and the seller. So you have to make sure up front that you are buying a particular property at a price that you reasonably expect to compensate you for this risk (i.e. your expected return has to include a premium for these risks).

I will be the first to admit that I have no rigorous empirical study to back up my thoughts about this diversification issue (i.e. I cannot be sure that my expected return reflects an appropriate premium for the idiosyncratic risks of investing in rental property). That being said, I am almost certain my expected return does include a premium for these risks based on comparisons to other asset classes using common valuations models. Using the same methodology, I’m fairly confident that the premium is also of a sufficient size.

The other thing I’d point out is this highlights something fundamental about investing in rental properties. On a spectrum with (a) operating a retail business on one side and (b) portfolio management on the other; investing in rental properties is at best in the middle and most likely titled towards the operating business side.

8 - Have a plan (how will you advertise, how can you increase rents, what do you do if someone doesn’t pay the rent, what do you do if there is a clogged toilet and it’s midnight, how will you screen tenants, etc.). Even if you hire a property manager you need to understand how these things will work.

9 - If you hire a property manager you need to recognize there is an agency problem. They have no incentive to keep maintenance costs low (in fact most of them slap a surcharge on the bill, so if anything they have an incentive to increase maintenance costs).

10 - The tax advantages are overhyped. Now 1031 exchanges are great and the timing advantages you get from depreciation is nice (but remember they allow you to depreciate for a reason, some day you will pay the piper). But all this other stuff about writing off business expenses is nonsense. You simply don’t get ahead by spending a $1 to save $.30 on taxes. If you would have otherwise spent that $1 in your ordinary course of life, chances are that trying to make it a deduction is a best a grey area and at worst fraudulent.

11 - In my experience the best areas are middle to lower class blue collar type neighborhoods. Avoid the truly rough parts of town unless you really know what you are doing. I’ve seen very few properties in upper middle class neighborhoods that made sense as an investment from my perspective (I have seen them, but they seem to be extremely rare).

12- Most guru’s ignore the risk associated with leverage, ignore the need to have a cash reserve (this is an opportunity cost), mischaracterize the benefit of tax depreciation, place too much faith in market appreciation and myopically conclude that real estate is the best asset class in all seasons. If an “expert” is making one of these mistakes, how much reliance can you put in the rest of what they are saying? None - in my opinion.

13 - If you are not comfortable with negotiation, confrontation and dealing with people in general, investing in rental properties is almost certainly not for you. You’d have to place too much reliance on a management company.

14 - Go slow, don’t put all your eggs in one basket and don’t put yourself in a position that could conceivably (even in the remotest of circumstances) cause you to go broke.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Meg77 » Fri Feb 08, 2013 1:17 pm

nimo956 wrote:Why would you invest in properties with negative cash flow? Are you counting on appreciation in the value of the property? You can't always count on that, as we saw with 2008-9. What is the cap rate for each of the properties (gross rents less non-financing expenses divided by the purchase price including closing costs)? I think you should check out this post by Lumpr:

viewtopic.php?f=2&t=68979


Thanks those are all very interesting and good points! The properties aren't always negatively cash flowing - that year was just a particularly bad one (two thirds of the loss was related to one home which suffered a delinquent tenant I had to fight to evict and some serious vandalism that they did on the way out which took months to fix - which also compounded the vacancy costs that year). Over the 5 years I've owned rentals I have averaged a $4200 per year negative cash flow overall. However this year - a year with no new aquisitions or refinances planned - I exect to net $10K - $15K in positive cash flow.

My original goal was to hold all the real estate long term for an alternate source of income in retirement. I don't really care about appreciation from that perspective, and my vision was that if I can at least break even on cash flow until the mortgages are paid off then I'll have a nice income stream from all the real estate on the off chance the stock market crashes and burns when/before I retire. That goal seems achievable, especially given the very low interest rates I've got fixed, however I've begun to realize the importance of cash flow and that there may be better uses for my time/money as well. So I plan to watch all the properties closely now that I've reached a stability point and then begin to sell any that aren't cash flowing well after 5 years.

By the way my cap rates vary from 6.5% to 9% with a weighted average of 7.5%.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby michaelsieg » Fri Feb 08, 2013 3:03 pm

Meg77
Thanks for your interesting post and it seems like you are doing everything well in terms of your finances. I see two main future risks of your finances - the first one is the Texas real estate, which I don't know much about, but I am sure you have a firm grip on it and the key here is not to get over-leveraged and to have enough of a cash cushion should you loose your income stream temporarily. The second one, and possibly the greater one, is your future spouse. It is really important that you two talk about finances before you get married. It is important that you have similar spending habits and that you agree how you want to handle your finances while you are married. Books like "smart couples finish rich" or "all your worth" or "the two income trap" might be a good read before you get married. If you both bring about the same amount of assets into the marriage, then a prenup is not crucial. But if there is a significant difference, you should really consider talking about one. If that is not possible - and it is not easy to bring this up in the middle of wedding preparations (who I am to speak, I never brought these issues up when my wife was my fiancee), then please take the above advice and strictly separate accounts. If you commingle assets and things in your relationship don't work out the way you hope, then your future husband could claim half of these assets. So it would be advisable that you have the cash for a major repair of your rental properties set aside before you get married and also put all the income from the rent into a separate account, so you will never have to tap into commonly earned money to maintain the property you brought into the marriage.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby tibbitts » Fri Feb 08, 2013 11:45 pm

Honestly with two (or even one) six-figure income(s) at age 29, I don't see either the need or the appeal of owning six rental properties, unless you enjoy the hands-on aspects of the business. I'm making some assumptions (income likely to be fairly stable going forward, for example), but except for simplifying (which doesn't seem to be a priority for you), it seems unlikely you'd benefit much from further tweaking your mix of investments.

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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby zebrafish » Sat Feb 09, 2013 8:59 pm

I think the giant elephants in the room are:

1. You are carrying an enormous amount of leveraged risk with all these investment properties, which don't seem to be particularly profitable. I see people in their 30s and 40s all the time who have major health problems. Not a single one expects to get sick. What if one of you loses a job or needs to go on disability for 6 months? Then what happens if you have a problem tenant? Or the roof goes out on one of your properties? How many hits like this can you take and still stay afloat? What happens if you have a child and don't want to work any more? What if you have a child with a health problem and you cannot work full time? What if you need to go on pregnancy bed rest for 3 months? How many rental properties can you cover the mortgage payment if unoccupied and for how long? Etc. etc. etc. In your current situation, if everything goes perfectly for the next 20 years, you're fine. If you run into some bumps on the road, all that leverage could sink you very quickly.

2. Is it wise to buy a house with your fiance now, if you are not marrying until 2014?

3. Is your husband going to be comfortable with this investment strategy (extreme focus on real estate in your portfolio; very leveraged approach)? Is he comfortable with all this risk?

4. Are you comfortable and is he comfortable borrowing money from your family member?

These are all things I would think about. Personally, I could not sleep at night with all that debt and the risk sitting there. Obviously, it's ok with you (and that's fine). However, is your spouse comfortable with this? Just some things that you might consider discussing.
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby icefr » Mon Feb 11, 2013 3:02 pm

I have a question about keeping separate property separate. With brokerage accounts, you can just open a new one. Do you plan to keep your pre-marriage savings accounts separate and open new ones to be joint? How will you deal with that with your IRAs and 401(k)s?
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Re: Preparing for Marriage: Asset Allocation & General Advic

Postby Grt2bOutdoors » Mon Feb 11, 2013 3:21 pm

icefr wrote:I have a question about keeping separate property separate. With brokerage accounts, you can just open a new one. Do you plan to keep your pre-marriage savings accounts separate and open new ones to be joint? How will you deal with that with your IRAs and 401(k)s?


IRA - Individual Retirement Account = hands off!!! The word is "individual". Just open a new IRA to represent the married years, if there is a problem down the road, you know which assets are up for discussion. 401k - keep your statements, problem solved.
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