Primarily About the Primary

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Primarily About the Primary

Scott and I ‘worked’ on this house very early on in the piece, so I kind of feel ‘at home’ just reading this post πŸ™‚

If you haven’t already done so, you should check out the photos, as Scott suggests, over at our Community Site


In the next exercise, it’s time for all the MIT’s to evaluate our current primary residence, our mortgage situation with this residence and how this relates to the 25% and 20% rules!

As you may have seen in my Networthiq profile, the mortgage on my primary residence is currently at around 322k. This mortgage is fixed on a 30 year, 6.25% interest mortgage. My payment(including taxes and insurance) comes to $2,438.00 per month. My net, take-home household income seems to be averaging around 11k per month at this moment, however this is down from normal due to my wife recently losing her job. In the current economy, my wife has lost 2 different jobs in the past 6 months.

The first job she lost paid her 65k per year, so naturally that gave us a much bigger financial tool to use, when coupled with my income. The interesting thing is, when she was making this money before she lost her job, I was averaging around 120k per year (so approximately 180k together). Right around the time I acquired 50% ownership of my practice from the original owner(which naturally raised my income), almost immediately, my wife lost her job, so income stayed about the same or perhaps dropped a little, lol. Go figure! Anyway, she was unemployed for about a month, then found a job with another company, which paid her 40k(big step back for her), but that job only lasted around 4 months, unfortunately.

So when she is working, we have about 14k per month or so in net monthly income and when she isn’t working, it’s around 11k per month. You can see that in either one of those scenarios, we set up our primary residence situation to make sure that we didn’t violate the 25% rule, meaning that our primary mortgage, including taxes and insurance do not exceed 25% of our monthly net income. With her not working, it’s hovering around 20% actually and when she is working, it’s a mere 17% or so. So, good to go on that rule!

Now, as far as the 20% rule goes, our primary residence was last estimated to be worth around 380k(now this could have dropped a little in recent months. Zillow has not yet reported any values for this home for some reason, so it’s hard to tell without paying a professional to come out and give us an estimate).Β  With the mortgage balance of 322k, that gives us around 15% equity in this house against the mortgage, or roughly $58,000.00. As you can see, this 58k is approximately 38% of our 150k net worth. A big no- no, according to the 20% rule!Β  The trouble is, at only 15% equity, we cannot tap this equity yet and use it toward investments, so I think we are a little stuck in the mud in our violation at the moment, that it is, until our savings and investments otherwise build our networth up to the point where this is no longer the case mathematically.

We love our home and really have no intentions to purchase another, even in the near future(although circumstances and people certainly do change!). This home is a 101 year-old, historic farmhouse and our only plans for it are to finish renovations and cosmetic work to bring it back to it’s original ‘charm and glory.’

(see pics of it on!)

We have currently budgeted $1000.00 per month of our net income to use as a “home improvement” budget for this work. We figured that way, the improvements come slower and more manageable over time, we don’t have to concern ourselves with going out and borrowing any additional money and naturally, this work will help to slowly increase the value of the property as work is slowly completed.

I believe that this is money well spent for several reasons, because it’s not the same as taking $1,000.00 per month and putting it towards spending money, toys, a Porsche Cayman S lease, or anything like that. It is rounding out the home that we plan on living in the rest of our lives, so we won’t have to worry about eventually spending 1 or 2 million dollars on a home with our valuable number, just to be satisfied with our primary residence. And as the value of our home increases because of this work, we can simply tap into this equity in the near future when available and apply this equity toward investments, so that we maximize the speed of growth toward our number by our date.

Let me know what you think!

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Reader Comments

Scott – I agree with your philosophy regarding the $1K/month rehab budget. If it were me, I’d consider it just like any other dollar cost averaging investment that I have.

Looks like you have ample room relative to the 25% Income Rule to comply with the 20% equity rule when the time comes.

Good Luck, Jeff

Hey Scott, if 38% equity isn’t enough to tap, then what is the amount of equity you need to have built up in order to allow you to take advantage of it?

@ Josh, I only have 15% equity in my home. The 38% is the percentage of my overall networth that the equity in my home represents. I think you just read the percentages backwards πŸ˜‰

@ Scott – ‘Normal’ is what the current circumstances provide, so I would tend to the lower income in my ‘conservative’ planning … if you happen to make a short-term decision that breaks the rules, in the (hopefully, reasonable) expectation that income levels will go up, so be it … but NOT so for long-term decisions (houses included).

Fortunately, you meet the 25% Income Rule regardless πŸ™‚

No,w I am looking strictly at wealth building for the purposes of your ultimate lifestyle goal: your Life’s Purpose:

This means that if you currently break the 20% Equity Rule, but beat the 25% Income Rule, then you need to look to either:

a) Reduce the home to ‘fit’ in both rules, or

b) Increase your Networth.

Obviously, b) is better all around …

Fortunately, you can do that a number of ways:

1. Since your wife is not currently working and you have income to burn, I recommend that you allocate all/any income she does earn to investments IN ADDITION to meeting all the Making Money 101 ‘rules’ for your own income … at a min. – for losers only πŸ˜‰ – would be to treat he income as ‘found money’ and put at least 50% of it aside.

This may seem unnecessarily conservative, given your high income and living standard desires … but, I am laying the groundwork for your future SUSTAINABLE success here.

2. I would normally suggest that you set aside your $1,000 ‘home improvement’ fund for investment purposes, as well … HOWEVER, it is possible that making such improvements MAY improve the value of your house, so your Net Worth goes up and you magically MEET THE 20% RULE.

But – a big but – you need to get an appraiser’s opinion of (a) the current value of your home and (b) the likely improved value of your home – if this is too expensive to consider, then AT THE VERY LEAST send your wife out to look at all the homes for sale in your area and ‘value’ the before / after for you (if she can be trusted … hehe); you will need to invest a weekend doing the same. Sorry, no way around this …

IF what the $1k/mth produces helps you meet the ‘rules’ sooner rather than later (and, you will need to compare the cost/benefit to any other reasonable investment choice available to you), then by all means, go for it.

BTW: Presumably, your Number already includes your valuable home, either purchased now or later.

@ Adrian – Good news is my wife is interviewing for a job tomorrow that pays 75k/year, so I’ve got my fingers crossed! If she does get that job, every penny that she takes home after taxes is pure savings and investment money on top of what we are already able to save from my income, which currently averages to be about 3,500.00/month(at least until we get the rental re-financed and get positively geared on it).

We are not even interested in raising our lifestyle any right now until we reach our number, so her income would double our monthly savings to over 7k per month. That should wind up being about an average of 84k per year of cash saved to be invested. And if our modality of real estate, with stocks and small businesses does produce the compound growth rate that Masterson suggests, we’ll be on our way.

As far as our home is concerned, I’ll probably just pay an appraiser to check it out soon and see what it’s worth for sure.

Our real estate agent sold this house to a couple in 2004 and told us that it appraised at 380k back then. He said that most comparable farms in our area that were updated or rather ‘finished’ started in the 500’s and some that had the exact same size, land and amenities, but were only ‘newer’ constructions were going for 700k, so I think we got a steal of a bargain on it at 325k.

Now it’s just time for a little elbow grease! πŸ˜‰

@Scott – I think you are doing great. Keep us updated on your situation. I believe after refinancing, you will free up more cash for investments. I hope your wife get the job, both of you will go below the 38% of Net Worth very soon.

[…] Scott talks about both his current home (he has kept his previous home as a rental) and compares his current dual income to the 25% Income Rule – although, there is a question about his wife’s income to be answered. […]

I agree with Adrian that you need an appraisal, but for another reason. You may have more equity in your home than you think. If you do, then your current interest rate is about 1.5% too high, no matter what part of the county you live. You could save a lot with a lower rate.