Photo credit: pencilsoda

This last post in the current series signals the return of the 7 Millionaires … In Training ! to its ‘old’ home right here at the NEW, REVAMPED, BIGGER, BETTER, BRIGHTER, ALL-STAIN-REMOVAL:  http://7m7y.com.

Soon, we move on to the next phase of this ‘grand experiment’ and ask the 7MITs to really examine: “is this [their selected Growth Engine] an opportunity worth pursuing?”

With Mark’s “Craig’s List Ad”, it looks as though he has settled on Tax Lien Investing as his preferred vehicle to get him to his Number? Is it investing, or is it a business? Does it even matter? Stick around, and we’ll find out (if not in this post, then in Mark’s next ones) …

________________

I’ve been settling in the MM101 comfort zone for a while. Now it is time to move up to MM201. I do need momentum and I think I did not recharge enough from the previous exercises to move forward fast enough. I tried “forced” recharging via a business development deal with my accountant and encouragement from my peers but it is still not enough. The plan for me is to redo some of the exercises we did last year to plant enough fire for me to push through.

My number and my date haven’t changed. It is still $5million in 10 years. It is well explained in my previous posts. With my accountant, we have developed a business plan where I’ll spending the next few months preparing for tax lien auctions in South Carolina which will happen in the months of October, November and December. The goal for me is to review my training materials and to develop a written procedures for various targeted counties and also line up the necessary resources – property reviewers, real estate attorney and the bid history to get an idea of competitors and patterns. There is a lot of work but we spaced them out proportionately every month leading to October.

The first year will be focused on South Carolina. I’ll then repeat the process in other nearby states like Maryland, Georgia, Florida and Texas. All these states will fit in to a 5 year plan where there is a target tax lien acquisition, potential conversion, rough expenses, etc.

It looks like I have a lot of things going on. I know without a great push from within, it will not move very far. That’s why I’m going to go back and redo some of the exercises.

Wanted 1: Growing Tax Lien Holding Company

A growing tax lien holding company with operations in at least 5 states. Must have written procedures, templates and archived documents to operate in the various counties which have different proceedings. The written procedures must cover all stages of the tax lien process including due diligence, property review templates, redemption of tax liens, foreclosure processes, strategies to manage properties and established contacts with local resources  – property reviewers, real estate attorney, and investors.

Onward!

Photo credit: Maggie’s World

This is the last of our transition posts!

IMHO – where H = humble as well as honest – it starts to get VERY exciting / challenging – interspersed with long periods of boredom – from here …

…. so, let’s make this a last-but-best post: Mark knows his path (i.e. real-estate and small businesses). How do we help him on his way? C’mon, be creative!

___________________

Onward! That reminds me of my former co-worker. He is a happy go lucky guy who is very smart and he is currently in his 3rd or 4th retirement now.  How that works? Work really hard a few years, save some and spend carefully, hit a jackpot with a start up and retire temporarily. I might adopt some hybrid approach in the near future, hopefully. Too much of either one; work or retirement, is not healthy.

We have just concluded a bunch of MM101 exercises. Most of them are really helpful; I’m particularly fond of the 20% Rule and the 25% Income Rule. Maybe because I like numbers and I got an elephant stamp out of that exercise with my old home. I do need to rework it for my new home. Nevertheless, the other MM101 exercises are equally important.  It is MM101 principles that got me here at this point.

Like a few of the 7 millionaires in training, I started some MM201 activities like converting my old home into a rental property and making attempts to launch a mall business. The rental is not cash flowing a whole lot and I’ve made some significant improvements on the property. The way I look it is the experience that I’ll gain from this activity. It will help me in my future real estate acquisitions too.

Let’s review my original number and date here. It is $5 million in 10 years and the required compound growth rate is about 40%.  I should be looking at:

Real-Estate together with Stocks and Small Businesses

So far, I’ve started on a small rental. I’ll be launching a small business soon investing in Tax Liens and that will bring in more real estate exposure. I did hire an accountant to help me draft out a business development plan and I’m happy with the outcome. The next steps are flawless execution according to the plan. How do I do so far? I must say, I’m not moving forward enough! My current obstacles are my home, assembling furniture and furnishing the new home;  and a very busy social calendar – trips, concerts, parties. It is time to make a choice. I can still do it all but there will be some sacrifices.

Automated Budget?

Photo credit: urbanraven

Another great graphic! Thanks, Mark …

Unlike those whose MM101 issues are at the fore, Mark has a good income and low cost base so the ‘pressure’ to budget, etc. seems less … but, how important do you really think it is? Any advice for Mark on his spending / saving habits?

__________________________

I must admit I’m not a big fan of budgeting. I did attempt to follow the No Budget Budget, but I failed miserably, hence the broken pie chart above. I’m too used to letting Quicken download my financial data and perform monthly analysis on my spending. I usually have a 12-month average that I use as a benchmark. This is how I compare against my average spending. My average spending is actually here.

How do I compare with the average in April? It was a huge difference! I just moved in to a new home and I’ve spent about $5,800 fixing up the old townhouse for rental. That amount paid for a new heating and cooling system, painting, cleaning and fixes. I haven’t started paying the mortgage for the new home yet and I’m still paying for the old townhouse.  By comparing with the average, I can quickly identify anomalies:

A quick glance shows that I’m $5,472.01 out of my norm. This is mostly from Rental Expenses that incur in April. Another anomaly is Entertainment; I just bought 8 tickets to a U2 concert and I’m going to sell some of them. I might actually make a small profit later – I’ve done this before .  How do we record such activities in a budget?  I’ve also increased my charitable contributions and bought some ceiling fans and tools for my new house. The moving sale and a drop in gifts did offset some extra moving expenses.

I keep questioning about having the need to budget. I know I do spend less than what I’ve earned and my savings are automatic. Should I spend more time budgeting or spend more time earning more income?

I actually believe that savings from budgeting may not have a huge impact that I’m looking for.  Savings on big ticket items like a house, car or education should have a larger impact. Nevertheless, having good MM101 habits is very important.  We will see how I will do in May when we apply the 10-1-1-1-1 rule. Will it stop me from spending?

MM101 Summary

Photo credit: janet7r

I hope that Mark actually bought some of that ‘prime HK land’ at those bargain Monopoly-comparison prices … it’s kind’a like the McDonald’s Index except that select HK property has probably skyrocketed in value compared to US since Mark was 5?!

And, just look at the reason that Mark gives for not blindly putting your faith in Uncle Sam and his ‘retirement accounts’: “I … did not effectively apply [investment tools] to protect my portfolio. It could have prevented the sharp decline in my net worth the past year even though the tools are not available in my regular retirement accounts.“

Mark’s future looks to be in property investment (and some ‘business development activities that I, for one, am looking forward to hearing more about) … any suggestions?

______________________________

We have been looking at our MM101 activities ranging from our housing, to our choice of transportation, retirement accounts, debts, income statements and net worth statements. These MM101 building blocks are definitely important for us to check if we have the habits and foundation to graduate to MM201. Looking at the various MM101 activities, I think I’m ready to transition into MM201 although there are still room for improvements. I do intend to reexamine these M101 activities in the near future to make sure I still abide by its rules.

As for MM201, I’ve converted my former residence into a rental and also engaging an accountant to help with with some business development activities. My focus will be in real estate and hence the monopoly theme. I did not get to play the original monopoly until much later in life. I did play the Asian version called “Millionaire” when I was about 5. Instead of having British or American landmarks, it uses landmarks in Hong Kong and it cost a lot less ($0.50 vs $10-$15 or so after currency conversion). I did enjoy that game at a very young age and I hope I’m going to enjoy it in real life, sort of.

Now, back to Adrian’s questions:

1. What, if anything you will change in relation to your current financial situation?

Looking back, I wish I spend more time on my investment activities. I’ve learned some of the investment tools but did not effectively apply it to protect my portfolio. It could have prevented the sharp decline in my net worth the past year even though the tools are not available in my regular retirement accounts.

Anyway, looking at my current situation, I’m looking forward to kick off a few MM201 activities this year. I may not have immediate success but I hope to learn a lot from it.

2. How / when you intend to go about it?
3. What results you are hoping to achieve?

I’m going to use my former residence as a rental and acquire some property management skills. I did learn how to look for reasonably priced contractors, how to market the property, the need to abide by local laws,  have the relevant paperwork for this activity and proper tenant screening. This will aid me in future property acquisition and how to select a good property management company.

I’m also starting some business development activities with an accountant which I hope will result in a solid business plan in the area of my choosing and push me to execute it accordingly. I’ve learned that without the push, I’m not achieving much.

4. If you haven’t specifically addressed debt in your response/s to 1. – 3. (above), what (if anything) you intend to do about your current debt?

Since my debts are mostly mortgage related, I’ll be feeding the banks regularly on schedule.I don’t intend to pay off any mortgage but I do intend to sell my rental property in the near future and acquire another better performing property.

5. What questions that you may have (if any), in relation to how you are (or should be) handling:

MM201 activities will have a different set of rules and Adrian did throw in some examples in various posts including the analysis of the recent commercial property acquisition. I’m hoping to see more discussion on MM201 activities and try to understand what are the common problems and what strategies we can apply to address them.

Just Numbers

Mark discovers that living his “Life’s Purpose” too early can have a financial cost … do you see something a little ironic in this?

What advice can you give Mark?

__________________

I’ve been tracking my numbers using Quicken for a while. I remember using it a lot more a few years ago when I have the 2001 edition. It is more manual but at least I know I need to work on it to keep it updated. Unfortunately, I upgraded to the 2007 version. The conversion didn’t go quite well and I lost some of the reports I used to keep track of my income and expenses. 2007 includes automatic updates which makes me use it lesser and I do lose track on my expenses as we discover below.

How do we compare the usage of Quicken and NetworthIQ?

Although I prefer to use Quicken, it is harder to add notes to it or get involved with other like minded people. I haven’t been leveraging NetworthIQ that much although there are good information among the Questions and Tips.

Over the last year, I have been struggling in terms of aligning my goals towards achieving my number. I seem to do quite well following Money Making 101 and some of its rules, but I haven’t quite make it to Money Making 201 with much success yet. I did experiment with stocks and options trading, some real estate investments and a half-hearted effort to do something online. My main enemy has been time where I am unable concentrate on any one of the investment activities and unable to cope when my current work requires extra effort (working nights and weekends).

Some of them are my own doing where I choose to travel to various destinations and enjoying life. I may have put too much emphasis on  the “enjoy life” part of my life’s purpose.

Let’s go through our current exercise where we focus on our “Income Statement” and “Net Worth Statement”. The reference will be the numbers from my NetworthIQ profile.

Income Statement

My current monthly net income after taxes is about $6,425

I haven’t tracked my expenses in detail for a while even though I’ve been using Quicken and I’m surprised to see some areas where I can easily cut down.

Current Monthly Expenses (average for the last 12 months):

• Housing – $980
• Gifts (gifts for family and friends, mostly family) – $925
• Auto – $267
• Entertainment (been to many concerts, musicals, activities and events) – $266
• Utilities – $256
• Dinner and Lunch outside – $228
• Vacation (low number since I’ve used airline miles for 2 international trips) – $224
• Charity – $191
• Misc (Electronics, Clothes, Insurance, Cash) -  $406

The total is about $3,743.

This indicates a savings of $6,425 – $3,743 = $2682

The $2682 goes into the 401K ($891), ESPP ($1248), HSA ($162) and building cash reserves or fund investment activities ($381).

My income and expenses will definitely change in the near future since the above numbers does not include my new residence and potential rental income. These numbers are not available yet but the Net Worth Statement below did take my newly acquired primary residence into account.

Net Worth Statement

Using my NetworthIQ profile, you can see that my current assets are:

• Cash     $21,016
• Stocks     $22,387
• Retirement     $78,781
• Home     $209,900
• Other Real Estate     $141,300
• Cars     $8,500
• Business accounts (savings, checking, investments) $4,500

The total is $486,384.

However, the liabilities are:

• Home Mortgage(s)     $183,420
• Other Mortgage(s)     $108,966

Total liabilities: $292,386.

Current Net Worth: $486,384 – $292,386 = $193,998

Good Debt?

Photo credit: revdancatt

Sounds like Mark has embraced the concept of ‘good debt’ pretty quickly; I wonder where he intends to live when he converts his current home to a rental? I am also wondering why he is planning to ‘flip’ it in 2 -3 years for another?

________________________

I must admit, I came from a culture where debt is frowned upon. This apply to mortgages as well.  I’ve never hear of the concept of a good debt until recently. What kind of debt do I have?

For starters, I don’t carry a credit card balance so I don’t have any credit card debt. The only time I did carry a balance is when it was 0% many years ago right after college. I was a poor student!

I had brief moments where I have an auto loan. The first one only lasted 9 months and the latest auto loan is paid off using a HELOC I obtained from my home which is a much lower rate and it is tax deductible.

Here is my current debt situation:

1) Primary mortgage on my current residence. The balance is about $92K @ 4.75%. It is an ARM that will reset next year but I’m only planning to keep this property for 2-3 years. The cost of refinancing is not too attractive for that time frame. Alternatively, since this is an ING Orange Mortgage product, I can just pay $750 to get the current rate for another 5 years. Currently it is at 4.5%. The ARM is tied to the 1 Year Constant Maturity Treasury Rate + a margin of 2.5%. It is currently at 0.62%. If it resets today, it will be lower than 4.75%. That’s why I’m not too keen on refinancing.

2) HELOC on my current residence. I took out a $25K credit line from my local credit union. I used about $10K to pay off the auto loan and about $7K for investments. The rate that they are charging is Prime Rate -1% which is currently at 2.25%. This is definitely a steal and I’m repaying this slowly.

3) Future primary mortgage. I’ll be taking up more “good debt” end of this month. I just identified a property from a builder and completed the purchase agreement and obtained financing for it. The mortgage amount will be at $183K @ 4.999% fixed for 30 years.  There is actually an interesting story behind this deal which deserves its own post. I will get to it, I promise.

I planned to convert my current residence into a rental very soon. There is some up front cost like minor repairs and replacing the 15 year old heating / cooling system. I will just rent it out for 2-3 years and will plan to sell it during that time frame to avoid some tax liability. That will  eliminate debt (1) and (2) but I will be purchasing another property at that time, hopefully.

201K

Photo credit: krodinjw

Mark’s experience (50% losses in his 401k; 75% losses in his Roth IRA) prove that it’s not the 401k or the Roth IRA that is the problem, it’s what you put IN them that counts … in Mark’s case, he’s prepared to wait 20 to 30 years to cash them out … presumably, these are ‘backstops’ for him in case his plans to reach his Number don’t pan out?

As Mark asks: what can we learn from all this?

_________________________

As an employee, the 401K program is definitely one of the easiest “savings” vehicle.  It is automatic, you don’t see the money when you get the paycheck and the employer matches too.  However, it is tightly tied to the stock market;  it goes up and down over the years; depending on your investment choices.

Currently, I’ve 2 retirement accounts, 401K and Roth IRA.  I’ve been contributing to the 401K account for the last 8 years at 10% of my salary. It was bad during the first couple of years where we experience the dot com bust, good to very good the next 5 years and an almost disaster the past 1 year. It is amazing that in 1 year, you go loose so much on paper.

As of writing, the 401K is valued at $64, 600. It is down probably around 50%, just like the Dow Jones Industrial. It has a good mix of large cap, mid cap, small cap, and international mutual funds. Am I concerned about the return? Yes definitely. Am I underwater? Yes, on paper. But am I breaking sweat about it? Not really.  I don’t need the money now and it still got 20-30 years to recover before I can start withdrawing. Will it recover or produce decent returns by then? Probably. I’ll just continue what I’m doing right now since it is automatic and it is getting an employer’s match at 6% up to $750 per quarter. That is a maximum of $3,000 that I get every year.

The Roth IRA was a pet project of mine. I enrolled in an advisory service to auto trade calendar options. It was doing well for 2-3 years until the sharp reversal the past year. It is valued only at $4,200 right now, mostly in cash. There are huge losing positions in there. The losses in this account is about 75%.   Lesson learned for sure and I did learn a few things; a rather expensive education for me

What can we learn from all this?

Ultimate Driving Machine

Photo credit: wadan

I agree with Mark, it appears that 7m7y is the new hangout for BMWphiles (and, the occasional pickup truck owner). My wife thinks like Mark: she went for the ‘green experience’ with a hybrid Lexus SUV …

________________________________

It is apparent that we have a bunch of BMW fans here! Looks like BMW did its job on producing great products and a strong branding effort. They did create the entry level luxury car market.

About my particular ride, it is a 2002 BMW 325i. This car was purchased back in 2005 – I did not buy brand new. In fact, I haven’t bought a brand new car yet. This was actually an interesting purchase. I was about to graduate with a Masters degree after toiling for 3 years on a part time basis. I just feel that I need to reward myself with something nice

The trouble was that I don’t have much time to go look at vehicles and I want to get the car right after I graduate. During that time eBay started eBay motors and I decided to browse around and found that cars are actually cheaper compared to local used car dealers! And yes, I bought my car on eBay, back in 2005.  The process is quite simple, I don’t have a chance to kick the tires but did hire an independent inspector – he definitely did a better job than I would have.  The savings from buying on eBay covers the cost of transporting the car and also a 4-year warranty ( haven’t got to use it yet).

The car was purchased at $16,500 back in 2002 where it already clocked about 75,000 miles. It is now almost 4 years later and accordingly to Edmunds , it has 3 values:

Trade in: $7,500

Private Party: $8,800

Dealer: $10,200

I’m using the Private Party value in my net worth calculation.

At that time, I did finance the whole cost, including transportation and the warranty. It was a $18,000 5-year loan at 6.75% but I did pay it off  early last year in 2008 using a HELOC which lowers my cash flow requirement and also at a lower interest rate.

I’ve no immediate plans for my next vehicle but it is hard to step down. Maybe a “green” vehicle can offset the driving experience.

Housing Situation

Photo credit: patchworkpottery

It’s only three posts in, and we have already covered a lot of ground on the subject of houses and housing … you should also be able to see that this blog is unusual; it’s like an iceberg: only 10% can be seen ‘above the ground’ (i.e. in the post, itself) … 90% of the value is ‘hidden’ in the comments below the water line. So, do yourself a favor, go back and read the posts over the last few days and scroll down to the comments …

When you’re done reading, add one of your own!

Now, our intrepid hounds have tracked Mark down to one of his secret global locations (Mark: will you let us in on the secret … and, send the requisite photos??!), to find that he is the poster-child for the 20% Equity and 25% Income rules … both now, and planned.

What do you think? Does Mark get an elephant stamp?

________________________________

The real estate market has been on the news a lot; be it housing starts, mortgage rates, foreclosure rates, refinancing activity and so forth. While at the macro level it seems like it is affecting everyone, we should zoom in on our own situation to assess where we are at in the current situation. Using some numbers from networthiq.

Basic numbers:

Current home value (according to zillow): $140,000 (Range: $133,000 – $152,000)

Current mortgage: $109,600 ($92,600 first mortgage and $17,000 HELOC).

Current mortgage payment: $515.39 (first mortgage) + $216 (HELOC) + $100 (Taxes) + $146 (HOA dues) = $977.39 (I’m including taxes and HOA dues).

% of after tax income per month: 15.6% (($977.39 / $6241) x 100)  using 70% of gross income.

20% Rule

Now let’s look at the details for the 20% rule:

The current equity for the home is $140,000 – $92,600 – $17,000 = $30,400

This approximately (($30,400 / $181,900) x 100) = 16.7%

20% Rule – check.

25% Income Rule

Based on the 25% Income Rule:

I’m currently spending about 15.6% of my net income on mortgage, taxes, and HOA dues.

25% Income Rule – check.

But wait, the 20% Rule and 25% Income Rule is a general rule of thumb. What if the number is significantly below the threshold? Are we not investing enough in our primary residence? Are we missing out on tax breaks on the mortgage interest?

Some of these questions got me thinking and I’m currently in the market to upgrade my current residence and convert my existing home to a rental. It is definitely a great time to buy, if you can afford it. Mortgage rates are at multi-year low and housing prices are declining. It is a buyer’s market.

As for my current residence, I don’t foresee it being a good rental because it does not cash flow with the high HOA dues and the HELOC payments. I dont’ think I will get rid of the HELOC since it is at 2.25%.  The main reason for me to keep it as a rental is to ride out of the current market and sell it later when the housing market picks up again.

Let’s run some numbers for the upgrade:

Home value according to zillow: $210,000 ($190,000 – $220,000). I believe I can get a $210,000 market value home at $200,000 given the current market. Not a lot of discount but I’m not looking at foreclosures or HUD homes since I want to live in it for about 3-5 years and upgrade again.

Current home value: $210,000 (purchase value at $200,000)

Current mortgage: $180,000 (after $20,000 down payment)

Current mortgage: $1,216.82 (PITI)

% of after tax income per month: 19.5% (($1,216.82 / $6241) x 100)

Great! This is still within the 25% Income Rule. How about the 20% Rule?

The current equity for the home is $210,000 – $180,000 = $30,000

This approximately (($30,000 / $186,900) x 100) = 16.1% (Assuming equity gain at $10,000 – $5,000 closing cost). The rental is now an income producing asset (if we consider taxes and depreciation).

Nice. Let’s hope I find a good one.

Mark is traveling again – where?

Connecting the dots

Photo credit: turtlemom4bacon

Aside from finding the quality of graphics on this site is definitely on the improve Mark has provided a great summary of the steps (and the reasons why) of this ‘grand experiment’ for new readers, even before we get to his table. Thanks, Mark!

It looks like Mark has no shortage of areas to dig into … how to turn this into his growth engine: any ideas? 

_____________________________ 

All seven of us came a long way back in 2008 in this grand experiment. Now in 2009, it is time to look at what we have done before and plan ahead for this journey. For this post, we are aligning the previous exercises with this current one to find our growth engine.

We started off with the lengthy but necessary Life Purpose exercise. For this particular exercise, I found out that money has little to do with my life’s purpose but it does affect my ability to realize it.

We then attempted to quantify our life’s purpose by creating a spreadsheet and filling up our Lee’s List. This helps revise our Number and date and determine our Required Annual Compound Growth Rate.  At 40%, I’ll need to invest in real estate, stocks and small businesses.

Although we now have a destination, time and areas that we should be looking into, the scope is still fairly large. Let’s see how the latest exercise can help us.

Here is my table for this exercise:

Items in 4 columns

The common recurring theme in this exercise for me is that traveling or planning vacations and attending or organizing events or parties appear in all 4 columns.

I must admit, I love to travel but I’m limited by vacation time and ability to finance my travels. Right now, it is definitely heavy on the SPEND, ABILITY and DO column. How can I turned this into a future EARN item?

There are a lot of ideas – writing travel guides (books, blogs, etc); be a travel agent; be a tour guide; travel photographer; be a commercial pilot; etc. The closest thing I’ve done that is related to travel industry is being a trainee maintenance  aircraft engineer for a commercial airline. That did not work out for me. I think it has to be combined with other items like e-commerce or teaching for it to be more profitable. Let’s brainstorm for ideas.

Another 4-column item has to do with events or parties. I’m quite social and have organized events and parties  for myself and a few non-profit organizations. I haven’t done it for profit yet or organized any large scale event like a week long conference. I did attend a few good conferences and it is quite a logistic feat to pull everything together. Can I learn to be an event organizer? It does allow the ability to travel too since conferences are held in various cities.

Items in 3 columns

Let’s not overlook items that appear in 3 columns.  This includes investing, problem solving, and learning/teaching.

Again, this leads to a lot of ideas. I’m particularly fond of finding investing ideas be it in stocks, real estate or potential businesses. Problem solving is very general and could be applied to the various activities that we discussed. I enjoy learning new things a lot and sometimes find myself explaining new ideas that I’ve read about. I did think about being an academic and one point but since both my parents were teachers, I thought I should try something different. Something that I did not attempt hard enough is to combine investing with planning, organizing, and problem solving. This is the area I want to focus the most. I should be planning and organizing more investment related activities instead of vacation and events.

I think we got what we wanted out of this exercise for me.  It does give me focus on what needs to be done to align myself with my required growth engine, achieving my number and hopefully fulfiling my Life’s Purpose.