Posted by Steve McLain, the main author of Generational Wealth Tycoon--a man dedicated to the enjoyment of a life well lived.
I've been married since 2002 to the love of my life, Maggie. She and I started out with a small inheritance, money in the savings account that we had stored up, and a wedding paid for by her parents. All that is to say that when we were first married,
we started out with several thousand dollars as a safety net and no credit card debt.
My first home away from my parents was with my wife, in a one bedroom apartment for something like $650 per month. I was making under $13 an hour, but with a fair amount of overtime, employed by the City. She was attending school full time and had just gotten a job as a teacher at a nearby private school that paid $18k per year. We were nineteen. This was the beginning for us.
We bought two couches, a coffee table, and two end tables for five hundred dollars, a dining room table for a couple hundred, and the rest was all hand-me-downs. Maggie drove the Acura Integra that she'd been given by her parents and I drove a little Mazda pickup truck that I'd bought for $1,500 several months before.
Water was paid for, air conditioning a little 700 square foot apartment was nothing, and we enjoyed our dial-up internet through the use of a free Juno account.
Life was good. We had everything we needed. It was enough to think about--even overwhelming at times--when I took in our finances. Keeping track of our expenses quickly proved tedious as we both would make purchases and find it difficult to balance a check book between two people. Neither of us really spent that much, so we just relied on the transaction history online as a means of tracking expenses.
During our first year, my dad urged me to buy a house. Granted, it would have been difficult to do because we had no credit history. As it was, when we finally bought our house a year after getting married, we had to take out an FHA loan and suffer a slightly higher interest rate because of a lack of depth. My dad's urging was based on his knowledge of the benefit of owning instead of renting. The market was low; it was more of a buyer's market.
We waited to buy a house because we just wanted to get into a better financial situation, build our credit history, and give ourselves a better feeling of security.
The deciding factor was the lease renewal. The monthly rent was going up to $750 per month and it seemed ridiculous to pay that much when we could easily own a house for not much more. Having just changed jobs and gone up to nearly $15 an hour, we took the plunge and began searching for a house.
After realizing that our first real estate agent was not meeting our needs, we went with a close friend who helped us find a nice place. It was a 3 bedroom, 2 bath, 1,440 square foot house built in 1972, but it was beautiful. It was just above what we were pre-qualified for. We went back to the loan broker and he said that we could do it, so we committed to filling out more paperwork than a human being should ever have to fill out.
In May of 2003, we had our first house. I was suddenly introduced to the joys of home ownership, in which fixing broken things is a common occurrence, mowing the lawn was now
my responsibility, and whatever was wrong was now my problem--not the landlord's.
We replaced plumbing, we replaced our furnace which had not been sized properly for the house, we fixed the ceiling where leaks had ravaged it, and we found and fixed lots more as we found it or it found us.
After several years in the house, the property value had gone up ridiculously high. Following the advice of a good friend, I opened a home equity line of credit to the tune of almost twice my mortgage balance. We used some of that to pay for improvements on the house--like tile in the kitchen and new siding on the outside of the house. However, that same friend had convinced me that the true path to success was to buy a second house and to begin renting the old one.
I'll take a moment to describe my friend. He was what could be considered a high-rolling, on-fire investor. He and his nephew had made several property investments in the San Francisco area and were regularly dealing with huge sums of money. The monthly costs to maintenance their loans were over $10,000. Both of these guys seemed like gods to me. I marveled at them and admired them. Maggie and I went up to San Francisco and saw the kind of work they were doing--buying ancient buildings, renovating them, and then selling them for huge profits. They'd had some success, but immediately dumped it all back in to generate more wealth. They had everything leveraged so that they could maximize their gains on the house's dime. It seemed ludicrous at the time, but brilliant anyway.
I was young, mesmerized, and excited. I needed to get in on this.
Around the same time, I was reading a book entitled
The Millionaire Real Estate Investor by Gary Keller. I still recommend this book after having learned the lessons I have. His method is right on and he doesn't hide the ugly truths about this particular path to wealth. Even after reading the wisdom of this book, though, I was still caught up in the dream that my friend and his nephew were living.
We eventually found a house that we liked and decided to buy it. The plan was to use our HELOC for the down payment and then to move out of our old house, rent it, and move into the new one. Everything was moving along at a quick pace, the inspection had gone well, and Escrow was underway.
I had a bad feeling though. For one thing, the Realtor we'd been dealing with had applied too much pressure and I couldn't shake the feeling that I was caving to his urging more than making a smart decision. He'd come to us based on a recommendation from a big investor, so I didn't know what I was getting into. I also had an inkling that the overinflated market wasn't right. To top it all off, there was a high
Mello-Rroose Tax that sent me over the edge. Forsaking the money we'd used for the inspection and opening of Escrow, we backed out of the deal. I had a difficult conversation with my Realtor in which he tried very hard to bully me back into the deal, but I nervously stood my ground and won the fight.
Literally a month later we started seeing the housing boom implode. The market crashed and the house we'd been looking at was suddenly worth a fraction of what we would have paid. We had signed an exclusivity contract with the stupid Realtor, so we waited until it had expired and then went with a friend to capitalize on the now falling market.
It was during this time that my friend and his nephew sold off one of their properties. They immediately rolled over most of their money but had tens of thousands of dollars left over that needed a shelter before capital gains taxes hit. We talked about it and decided that we'd all go into a one-third-each partnership on a house. We'd put renters into it instead of having one of us live in it since it was a three-way financial arrangement.
We quickly found a property we liked and made the deal. We bought a 2,400 square foot, 3 bedroom, 3 bath house that had dropped in value by about 30%. Before Escrow closed, we had a renter lined up. When Escrow closed, we cleaned, fixed a few things, and let the renters come in.
Unfortunately, the payment, without taxes and insurance impounded, was high and the rent we were getting only covered about 90% of it.
I'd violated a basic tenet of The Millionaire Real Estate Investor rulebook. I had done a deal that resulted in the math being wrong. I had not determined what rent we would be able to get for the house and so we were left with negative cash flow.
Split into thirds, the payment wasn't that bad and to have a long term investment being
mostly paid for by renters was cool. It was the property taxes and insurance, though, that hit us hard. It also didn't help that the hot investments my friends had in San Francisco had started to cool--the stuff they had for sale wasn't moving. This led to their continued requirement to pay massive maintenance fees on their interest-only loans. I started to see the wisdom of putting twenty percent down and of buying into something that you can reasonably maintain on your own. These guys had purchased ticking time bombs and time was running out.
The market continued to drop after this and the value on the house finally bottomed out to around $100,000 less than what we paid for it. That's terrible, but it doesn't bother me too much. As long as renters are paying the lion's share of it, I'm not overly concerned. What did concern me was when our renters left. This began the period of several months without somebody else to bear the burden of the payment.
Luckily, we had savings--as is always the case--and we were able to pay for the costs. My friends too eventually paid their share, though it hurt them immensely to do so.
Finally, we had gone around three months without renters, but we had made our fixes to the house, cleaned it up, and put a rent sign in the yard. It wasn't more than a couple of weeks before I showed the house to a family that loved it. They were renting the following month and have been for the past year and a half or two. Still, the rent is the same as before, but that was about all I could get.
Until very recently, that was the only thing I could look at as an investment for my family. It wasn't a very good investment, but it was something. I'd learned lessons, I will eventually pay it off, and I will eventually recover from the mistakes I made. I was wrong, though, about that house being the only investment I had made. We'd also bought our house. That was an investment too, and it's value hadn't dropped too dramatically below what we owed. We were happy in our home and even added a new member to the family on October 5, 2009. My son Caleb was born and we had medical bills up the wazoo, but he was worth it. We brought him home to our first house where we had so many memories and so much love.
Tragedy hit our family the day after Christmas of 2009. My wife's parents were hit head on by a driver trying to pass recklessly on a two lane highway while on their way to church. My father-in-law was killed and my mother-in-law was hospitalized and almost died as well. We spent the next several weeks nearly living at the hospital. After a long time, my mother-in-law regained consciousness, moved on to a rehabilitation facility, and was finally released to go home.
In April, my mother-in-law had finally begun walking again and was released to start driving again. Her first time back on the same highway, on her way to our house, she and my niece were t-boned by a negligent driver in a big truck. My niece was okay, but my mother-in-law was again air lifted to the nearest trauma center.
After this accident, we all jointly made the decision that we would purchase a new house with the life insurance money she had received from my father-in-law's policy. The house title would have her name, Maggie's name, and my name on it. We would then enter into an agreement with my mother-in-law to pay her back a loan in the amount of two-thirds of the price of the home.
In August, we bought our new home for a steal. It was a short sale and it is now worth slightly more than we paid for it according to
Zillow.com. We moved to a nice, convenient area that is about fifteen minutes closer to my work. That helps a little with gas.
This left us with the other investment I just mentioned: our first house. It was sad to leave it behind. There were great memories there and we definitely weren't ready to leave it behind, but life changes and necessity pushes you into new adventures. So, we were left with a vacant house.
The payment on that house, with impounded taxes and insurance and PMI, is still pretty cheap. We rented it for about $70 a month more than what we pay.
This is positive cash flow! A positive cash flow of $70 monthly isn't much, but it's significantly more than we've ever gotten before. Now we're in a position that I can look at with some pride. I am upholding the rules I wanted to abide by in the first place and I'm not losing anything. The best thing about it? We are the only ones entitled to the equity in that house. We don't have partners there!
Our income has gone way up and come way down (Maggie now works half time as a public school teacher teaching second grade). That income, though, is much higher than it was way back when we first started our life together in that little apartment. Higher income leads to more options and freedom to carry out financial goals, so I can't say I'm displeased at all. I can, however, look back at when I felt overwhelmed by my simple financial situation during those first days and have a little laugh at what I would have thought about my current finances. If I thought things were confusing then, I wouldn't have believed what I have to deal with now!
That is some about me.
I didn't handle my investments perfectly, but I made them and I'm seeing them through. I plan to someday tip the scales and make our net worth go positive. Each successive house we buy is another chance to get the math right and to build our wealth. With luck, we'll eventually break into multi-unit properties and diversify a little. The goal is to get to the point where we've paid our properties off and we have monthly, residual income that is consistent and reliable. That income level needs to be significant. We need to hit something in the million dollar a year range for residual income to be able to pass on generational wealth that matters.
As I continue with this blog, I'll post more about how to get to these goals. I'll share strategies that others have shared with me, concepts that I've applied, and any other specific elements that can contribute to success in wealth building that I come by. Stay tuned for more.
Thanks for reading my financial thoughts.
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