Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for September, 2008

My Worst Nightmare

Creative Commons License photo figure credit: tinyfroglet

In Part I one this story, I told the story of how we came to own our current home, how we financed it, and how we found ourselves upside-down on our mortgage.

The original loan on our house had a clause that said that we could not refinance or pay off the loan for at least 6 months.  Recognizing that we got a rather lousy interest rate because of our lack of documentation, as well as the fact that we would have to refinance anyway, we went ahead and refinanced as soon as we could.  Just about 6 months and a day after we signed our original home loans, we signed two more loans — one for 80% of the value, our first mortgage, and one for 10% of the value, our 2nd mortgage.  Because it was only 6 months into the original mortgage, the appraised value of the house did not change.  Both of these mortgages are 30 year fixed loans with decent interest rates.

In the time since we refinanced, rates came down considerably, and we tried to refinance again into a lower rate.  The appraisal that we got in the process was the first strong clue for us that trouble was brewing: the appraised value was about 10% lower than what we paid, despite the fact that we had undertaken substantial exterior cosmetic improvements (curb appeal).  We were unable to finance into the very low rates that we available a little over a year ago since we now owe more than the property is worth.

Having unknowingly saved ourselves from the current mortgage crisis, we also did the smart thing and consolidated the 3 credit cards that I talked about in Part I into one card.  Every few months or so, I get a set of checks from my Chase Platinum card with offers for 0% interest for a year, 3.99% for 2 years, or 4.99% for the life of the balance.  We opted for the 4.99% deal.  Since half of the improvements made with the money on this card are for a legitimate business expense, we can deduct half of the interest payments on our taxes, which further reduces the effective interest rate.  In the time since we completed this balance transfer, we have paid down 3/4 of the original balance.  Because the interest rate is so low at this point, and half tax deductible, we have slowed our aggressive pay down of this account in favor of building up some savings.

So while we are not in any trouble with respect to continuing to make our mortgage payments or servicing the debt or our improvements, we are still in a pickle.  We are looking down the road at the needs we have for housing, especially in light of our growing family, and are not all that pleased with the options we have available:

  • We can sell our house, but we would have to come up with between $30,000 and $40,000 to cover the difference between what we owe and what the house is worth.  This would wipe out our savings, and we would be just about starting over financially.  We would have to find a place to rent as well while we save money towards the down payment on a new house.
  • We can buy a single family house now, and keep our two family, renting both units.  The trouble with this option is that it would also wipe out our savings, putting us in a precarious situation if any emergencies come up.  Another problem with this plan is that the market rents for our two units is less than the combined mortgage, insurance, and utility rates we would have to pay out each month.  This is what makes the property an Alligator.  Each month we will have to feed it hundreds of dollars to keep it afloat.  This could actually be seen as a really great investment, a forced savings plan of sorts, since we will eventually get this money back when we sell the house.
  • The default option here is to keep doing what we’re doing.  That’s fine for now, but we live in a 2 bedroom apartment, and depending on the gender of our next child, may only work out for a short period of time.  The real downside to this plan is that we may miss out on some great real estate deals as the market bottoms out.  Under this plan, we can save for a new house over the next several years.  However, there is still the issue of the 2nd option above.  With any luck, rents will rise over the next several years to offset the continuous payments we will have to make into the house, but we can’t bank on that.

We made two major mistakes along the way with the purchase of this house. We bought an over-valued asset at the height of a market bubble. We failed to adequately assess the income versus expenses for a rental property. In our defense, we bought the house for the reason stated in Part I: to be able to afford to live in the area we wanted, close to other family and in a decent neighborhood. But in retrospect it was an investment that will not provide the returns that we could have achieved using other investment vehicles.

What would you do?  Do you see options that I haven’t seen?  Are you feeding an alligator? Let me know what you think in the Comments section below, or click here if you’re reading via an RSS reader or by email.

Coupons

Creative Commons License photo figure credit: ninjapoodles

Hardcore couponers would probably accuse me of blasphemy for saying that couponing may be a waste of time but even Crystal of Biblical Womanhood and Money Saving Mom thinks it’s ok to take a break every once in awhile, see her post on it here.   As for me, I wasn’t raised by a hardcore couponer and have only recently discovered the benefits. Living with my mother-in-law for a year also helped spark my frugal side. I do feel there are a couple of problems that I have encountered over the past year or so with using coupons.

First off, MITBeta and I do not buy the newspaper. We have in the past, but found it piled up and was only good for starting the charcoal grill and filling our recycle bins. Nowadays we get all of our news online or through our local NPR affiliate WBUR.  Most of the time we are lucky enough to have our parents save the fliers from their papers, but when things get busy we may not see them for a week and then we both forget. Because of this I may end up missing a few of the sales that correspond to the current sales fliers. Another option is to stop at a coffee shop or the library on a Sunday evening and pick up a newspaper that may still have the sale fliers, but I usually don’t have time to do this, let alone remember that I can.  On occasion I have bought the paper, only to find that the filers were not included. That made me very mad, so I probably will not actually buy the paper again!

We also don’t tend to buy a lot of processed food, which makes up the bulk of the coupons in the sales fliers. I do like to take advantage of CVS’ing (see this post if you are unfamiliar with the term) and that usually does require the coupons. The nice thing is that if we do get fliers from our parents and they come a few weeks late it is usually ok for CVS since the CVS deals hardly ever line up with the current sales fliers. Also a lot of products that tend to go on sale at CVS may have coupons available to print online.

Since I started using coupons and making more frugal shopping choices in general, I feel that I do have a handle on the costs of items and try to save where I can with or without the coupons. This may mean buying in bulk if that is feasible, buying generic or waiting for the good sales.  It always means checking the unit costs in order to buy the cost effective size.  I also try to buy only seasonal produce and by menu planning I’m able to more fully utilize all the food I purchase without having food go to waste.

I’m not exactly sure how we are doing with our grocery budget, but I try to be cognizant of the total at the checkout, while at the same time choosing healthy options whenever possible. I have stopped by the local farmer’s market a few times this summer as well to pick up local produce.  I typically don’t spend over $100/week on groceries for our family of 2 + a toddler and in the past we have tried to have a $75/wk budget.  How about you? Are you a hard-core couponer or do you just try to shop wisely? What is your weekly grocery budget?

Jacksonville Skyline at Night

Creative Commons License photo figure credit: minds-eye

We’re currently on vacation in Jacksonville, Florida. Since I’m writing this before we leave, I’m hoping that we’re having a good time and that it’s nice and sunny there. We were worried last week that Hurricane Ike would ruin our plans, but instead it looks to be ruining someone else’s.

This is our first, and probably only, vacation for the year.  We have taken a couple of long weekend road trips, but this is the first “real” vacation as a family.  We’re doing a number of things to keep costs to a minimum, and I thought I’d share some of these tips:

  • We used Farecast.com to figure out when the best time to buy tickets is to get the lowest fare.  Once we decided that we were going to go, we watched the “farecast”, which told us to wait, wait, wait, buy.  By waiting for fares to dip, we were able to save several hundred dollars, and ended up getting 3 tickets for just under $200 each.
  • We are staying with friends.  While this can be a recipe for disaster, we are not going to be freeloading guests.  We’ll buy food and cook, keep the place clean, do the laundy, etc. (Want us to come stay at your house?) This will save us at least $500.
  • We booked a rental car through Hotwire. Compared to any other online car rental service, this was the cheapest by over $100. We had a number of coupons and deals for rental cars, but these discounts all paled in comparison. Hotwire’s trick, apparently, is that it gets to choose which car company you end up with. While I’m sure there’s a difference between rental agencies, I don’t have much of an opinion about them (except I won’t rent from Payless in Toronto again). We ended up with a car from Alamo.
  • We’re bringing our own child seat and GPS unit for the car. This way we won’t have to rent these items from Alamo. This saves us $20+ per day.
  • We’re going to shop for food and cook and eat “at home” as much as possible.  This will save a couple of hundred dollars on dining, though we still expect to eat some meals out.
  • We are traveling simply to visit friends and family.  If we end up doing nothing else, we’ll have had a good time.
  • We are going to Disney World for one day.  We used Trip Advisor to find a condo in Orlando that has a pool that looks like it will be lot’s of fun for our toddler and her cousin.  (Thanks to fivecentnickel for that tip!).  We’re sharing a two room suite with my cousin and his family.  The per couple cost savings is at least $50.
  • At Disney, we’re using passes that we bought two and a half years ago, when we saved money by buying multi-day passes that are good forever.  This probably saved us each $10.

I do hope to have a chance to get in an update while we’re away, but if I can’t you’ll know why!

Have you cut back on your vacationing this year because of the economy and high gas prices?  What have you done to cut costs on the trip(s) you did take?  Let us know in the Comments section below, or click here if you’re reading via an RSS reader or by email.

If you liked this article, you may be interested in seeing some related articles:


09.07.2008
Cardinals

Creative Commons License photo figure credit: linda_yvonne

It’s been a few weeks since I’ve had a chance to highlight some of my favorite articles in the rest of the blogosphere, so here’s what’s been going on:

Gather Little by Little tells us what the dumbest thing on which he ever spent money is.  He asks what others’ dumbest purchases are.  The first thing that comes to mind for me is a Bowflex machine.  It really did seem like a good “investment” in our health at the time, but like many things, it was too good to be true, and in retrospect way overpriced for what you get (a lot like a certain speaker company’s products that rhyme with “nose”).  A close second is a pair of those Ionic Breeze air cleaners.  At least we bought them on Ebay and saved a lot of money off of the MSRP.

GLBL also has a great guest write up on how to start an envelope budget system.  This is not the system that we use, but the best system for you is the one that works, so if you’re still looking, give this a read.

FrugalBabe writes about missing a home owners’ association payment and getting hit with a late payment as a consequence.  Her excuse is that they don’t actually bill her.  I’m a big fan of making things automatic, and I suggested setting up an automatic bill payment with her bank.  Few people realize that they can set up a billpay payment for things other than utility, credit card, mortgage, and other “typical bills”.  Heck, you can often send your friend a payment for the dinner you split last week.

J.D. at Get Rich Slowly puts it to his readers for suggestions on how to cope with a spending addition.  I don’t think the young woman in this case has an addiction as much as a bad habit.  My advice here again would be: Make it automatic.  Set up a Debt Snowball and then set up automatic payments that take effect the day after she can be sure that her paycheck gets deposited.  Of course she has to cut up her credit cards as well for now, but once she does this, if she doesn’t have the money in her bank account, she won’t be able to spend it.

J.D. also wrote another great post on “The Idea of Having.”  I hear him on this one.  Having “stuff” is a constant struggle for us.  We’re always going through closets and bookshelves and can usually bring ourselves to part with some stuff, but not other stuff that we don’t ever use but that we can’t bring ourselves to throw or give away either.  Sometimes I wish we had to live in just one room so that it would force us to pair things down to that which is truly important.

Pinyo wrote an analysis of when to start taking social security benefits.  He argues that while the starting benefit goes up as you age, you might not live long enough to recoup the difference.  However he missed the fact that a given person’s lifespan also increases with age.  A person born today in the US can be expected to live to 75 on average.  But a person who is already 62 can be expected to live into her 80s.  A person who is already 70 is likely to live into his late 80s.  This has to be factored into a full analysis on when to begin social security benefits.

Lastly, filed under the “just for fun” category, Freakonomics published an article detailing the correlation between states that have high occurrences of Bigfoot sightings and those with high occurrences of UFO sightings.  The best explanation given for this was in the comments section:

It strongly suggests to me that the aliens are Wookies.

— Posted by Doug

PS: I have a deeply discounted Bowflex machine for sale. Seriously.

09.04.2008
Bill Payment Box

Creative Commons License photo figure credit: brendaj

I have written before about our experiment with credit card arbitrage.  This is where you borrow money at a very low rate (preferably 0%) and stash it in a high interest savings account.  Since we have come to the end of the 1 year period on our Chase Freedom card, I got set up to make a large payment to pay off the card — $44,061.30 to be exact.

I know that the payment is due on September 17, so I decided to play it safe and get all my ducks in a row in plenty of time.  Last Friday, August 29th, I logged into my money market fund account at Vanguard to make the transfer to my checking and billpay account at Everbank.  I got the Sell order all set up only to find that “electronic transfer” to my checking account was not one of the options for cashing out our money.  The next day, I called Vanguard to find out why.  It turns out that since this is a joint account, Vanguard needs to have a signature card on file for ScrapperMom before it can let me transfer money from a joint account.  It didn’t matter that the checking account is also a joint account.

The only option available to me was a check.  I started doing the math in my head — the market doesn’t reopen until Tuesday, September 2, they can’t sell the money market funds on my behalf until the end of trading, the earliest they could cut a check would be the 3rd.  First class mail would likely get the check to me by September 7, then I have to turn that around and mail it to Everbank, which is another 3-5 days until it hits our account.  Now we’re up to Sept. 12.  A payment sent on that day should arrive at Chase on time.

After explaining the situation to Vanguard, and not wanting to cut it too close, they offered to overnight the check to us.  This will incur some fee, of course, and I don’t know what that is yet.  I’m assuming that it will be in the $20 to $30 range, but the representative could not tell me when I set up the order.

Fast forward to last night: I logged into Everbank to set up the bill payment.  I entered the full amount in the payment box, set the payment date for Sept. 10, and clicked PAY.  The bank came back with an error saying that I could only pay $15,000 in a single payment.  Okay, I thought, I’ll just set up 3 payments to take care of it — no problem.  So I reduced payment number one to $15,000.  Then I set up payment 2.  The bank thought it was smarter than me, and decided that this was a mistake — a duplicate of a payment that I already set up.  So I tried $14,999 instead.  Then the bank told me that the daily limit on bill payments in total is $15,000.

This was starting to get frustrating!  Eventually I ended up setting up 2nd and 3rd payments for the total amount due on the 11th and 12th.  According to the bank, a payment made on the 12th will arrive by the 16th.  How’s that for calling it close?  Usually the payment gets sent on the 10th, and usually gets credited to my account on the 13th.  So this should still work out.

Today I received the check from Vanguard and we immediately turned it around and mailed it off to Everbank.  There is the off chance that the check will arrive at Everbank and be credited to our account earlier than the 10th.  That will give us a little more breathing room if true.  Another option we now have through the billpay service with Everbank is to expedite a payment by sending it electronically or by overnight check.  As you might expect, these options are not without cost: $4.95 for the expedited payment, and $14.95 for the overnight check.

What are the consequences of a late payment?  I’m not really sure, but my expectation is that since the interest rate for purchases is 14.99%, the interest for one month at that balance would likely be about $500.  So it certainly behooves us to do everything possible to make sure the payment gets made on time.  It’s not as bad as it seems, since I estimate that we made over $700 on the arbitrage over the last year.

Lessons learned:  If you have to move large sums of money from one bank to another, make sure you know in advance what the limitations of the system are.  It’s also a good idea to understand what the limits of your bank’s billpay system is also.  We’re not sure yet what this means for future credit card arbitrage… but we’ll be sure to let you know soon how the whole thing turns out!

Have you ever experienced a close call with a payment or a problem moving money from bank to bank?