I need to have a conversation with Fake Bob. I’d like to work out the details of Plan B, and I get the feeling that only he can help me.
Me: Hi Bob.
Fake Bob: How did you get into my house?
Me: So I went for PP4 #7 but I couldn’t get it through regular banks due to the amount of reserves I needed. And I tried going through the savings banks that don’t sell to Fannie or Freddie, but they still give me crap about my missed payments from 5 years ago. So I lost out on PP4 #7.
Fake Bob: Okay.
Me: It wasn’t until I took a step back that I realized the reason for my dilemma. I was looking for a loan for a RESIDENTIAL property, which require reserves and more rules and regulations. Loans for commercial properties, like the one I got for Property 3 in 2013, are much easier to get because they focus more on the prospective property’s ability to generate income instead of me and my properties.
Fake Bob: Right.
Me: So, I decided to go with Plan B, which is to save at least $60,000 by mid-2016 to keep my options open. But what I need is a more detailed plan, you know? Something for me to look forward to, heading into 2016.
Fake Bob: Okay. Show me the combined proposed numbers for PP4 #5 and #7. Look them up here.
Me: This is what I got…
Purchase Price: $123,500
Total Rents: $32,400
Taxes: $6,691
Insurance: $2,400
Maintenance: $6,000
Fake Bob: Okay. And you said you can handle 4 more units?
Me: Four to six more units, but that’s it.
Fake Bob: The most important number is the “Total Rents”, which is $32,400. Your next purchase has to bring in that number. For a 4 unit, you’ll need a place where you can charge at least $675 per apartment. For 5 units it’s $540, and $450 for 6 units. Now your taxes for Property 4 will definitely not be $6,691 and the repairs should also be lower, but we’ll keep the number as is to maximize your profits. Expecting the worst is always best. These numbers don’t take into account the mortgage, but you said you plan to pay everything off, right?
Me: Yes.
Fake Bob: Okay, so then that’s what you’re looking for. As far as purchase price goes, you’ll want to stay under $150,000. You’ll need about two years to pay off this property, so you’ll want to have a principal balance of under $100,000. After 7 years, I’m guessing you know Smalltown pretty well by now. Is it feasible to find a property in a good area for under $150,000 that can yield those rents?
Me: Yes. I can find a 4-unit for $120,000 in a good area, going up to a 6-unit for $150,000.
Fake Bob: Okay, now what about your jobs?
Me: I want to pay off Property 3 first, and then take Fridays off of the shipping depot job. Then I’ll only be working one job every day: bank job on the weekdays and shipping depot on the weekends.
Fake Bob: Good. So after you buy Property 4, you should be able to pay Property 3’s remaining principal balance of $40,000 before the end of 2016. You’ll be able to take off Fridays afterwards.
Me: Wait, I have a question. If I pay my car off, I’ll be saving $339 a month... $4,068 annually. Paying off Property 3 yields an extra $3,724 once paid off. So would it be better to pay off the $20,000 car loan first rather than the $40,000 mortgage? After all, paying off the car loan would give me an extra $344 to pay off properties.
Fake Bob: You can do that if you want, but I would suggest against it. The main goal is paying off the properties, not the car loan. You’ve already factored the car payments into your personal expenses when you retire, so I’d leave it alone. Once you retire, you won’t have too many car payments remaining and can pay it off within months. While you have the jobs helping you, focus on the bigger expense… the properties.
Me: Awesome! And I’ll still be able to retire by 2018, yes?
Fake Bob: The end of 2018 most likely, but it may leak into 2019. By the end of 2018 you should only have one property left to pay off. You can decide that you’ve had enough and quit the jobs anyway, paying the last property off over time. The choice would be up to you. So your financial timeline, or what you want to call Plan B, will look something like this...
2016
Save up $60,000
Buy Property 4
Pay off Property 3
No Longer work Fridays at Shipping Depot
End the year with $10,000
2017
Pay Property 2 off
End the year with $20,000
2018
Pay Property 4 off
Fake Bob: As each property gets paid off, your annual income will be higher. That will allow you to pay the next mortgage off faster. And remember that $60,000 is not a definite number. Whatever number gets you Property 4 is the right number. The faster you get Property 4, the faster you’ll have help in paying Property 3 off.
Me: Cool. Now I have one last question. I’ve been trading stocks since the beginning of this year, and I want to know how that can factor in to paying off the mortgages.
Fake Bob: How are you doing so far in the market?
Me: Hmm. I’m down about $3,200.
Fake Bob: You’re down $3,200 in six months, and you want me to tell you what you should do? Isn’t it obvious?
Me: Not really, no. I’ve always learned this way. Like when I started in real estate I was making mistakes at almost every turn. It took time before I learned what I was doing wrong and how to fix it do become successful in property management. Losing seems to be how I learn, and I’ve learned a lot about my trading strategy since then.
Fake Bob: Can you not invest less of your money and learn the same lessons? Or you can do simulation trading until you pay off Property 3, and then get back into the market that way.
Me: I don’t learn that way. When I bought my first property, I invested everything that I had. I have to invest a good portion of my money, as the pressure makes me a better investor. I learn faster and am at my best when my back is against the wall.
Fake Bob: Look, if you want me to tell you to keep on trading the way you’re doing it, forget it. When you started real estate investing and made mistakes, didn’t you ever stop to take a break and see what you were doing wrong?
Me: Of course.
Fake Bob: So then do that now. You’ve already lost $3,200. You say you’ve learned lessons. Take a step back, apply those lessons in simulation trading. If they work out, then you can re-renter the market, but I would suggest waiting until AFTER you buy Property 4 next year.
Me: Hmm.
Fake Bob: There are battles and there are wars. You can lose battles and still win the war. The key is to know when you’ve lost the battle and retreat with what you have to fight another day. Concede defeat now with your remaining $6,800, having that much more to fight with in the next battle. You'll be smarter and hae more experience. An experienced investor with $6,800 is stronger than an inexperienced investor with $10,000. But if you lose everything, what will you have to fight the next battle with? Get it?
Me: Yeah I guess so.
Fake Bob: Okay good. We done here?
Me: Yeah. Thanks Bob.
Alright! Fake Bob is really helping me out, and now I have a much more detailed Plan B. Save $60,000 by mid-2016. Buy a commercial property that can both yield $32,400 and a mortgage that can be paid off within two years. Pay off Property 3 by November. End the year with $10,000 in the bank, ready for 2017’s Property 2 payoff. Thanks Fake Bob. You're the best!
Me: Hi Bob.
Fake Bob: How did you get into my house?
Me: So I went for PP4 #7 but I couldn’t get it through regular banks due to the amount of reserves I needed. And I tried going through the savings banks that don’t sell to Fannie or Freddie, but they still give me crap about my missed payments from 5 years ago. So I lost out on PP4 #7.
Fake Bob: Okay.
Me: It wasn’t until I took a step back that I realized the reason for my dilemma. I was looking for a loan for a RESIDENTIAL property, which require reserves and more rules and regulations. Loans for commercial properties, like the one I got for Property 3 in 2013, are much easier to get because they focus more on the prospective property’s ability to generate income instead of me and my properties.
Fake Bob: Right.
Me: So, I decided to go with Plan B, which is to save at least $60,000 by mid-2016 to keep my options open. But what I need is a more detailed plan, you know? Something for me to look forward to, heading into 2016.
Fake Bob: Okay. Show me the combined proposed numbers for PP4 #5 and #7. Look them up here.
Me: This is what I got…
Purchase Price: $123,500
Total Rents: $32,400
Taxes: $6,691
Insurance: $2,400
Maintenance: $6,000
Fake Bob: Okay. And you said you can handle 4 more units?
Me: Four to six more units, but that’s it.
Fake Bob: The most important number is the “Total Rents”, which is $32,400. Your next purchase has to bring in that number. For a 4 unit, you’ll need a place where you can charge at least $675 per apartment. For 5 units it’s $540, and $450 for 6 units. Now your taxes for Property 4 will definitely not be $6,691 and the repairs should also be lower, but we’ll keep the number as is to maximize your profits. Expecting the worst is always best. These numbers don’t take into account the mortgage, but you said you plan to pay everything off, right?
Me: Yes.
Fake Bob: Okay, so then that’s what you’re looking for. As far as purchase price goes, you’ll want to stay under $150,000. You’ll need about two years to pay off this property, so you’ll want to have a principal balance of under $100,000. After 7 years, I’m guessing you know Smalltown pretty well by now. Is it feasible to find a property in a good area for under $150,000 that can yield those rents?
Me: Yes. I can find a 4-unit for $120,000 in a good area, going up to a 6-unit for $150,000.
Fake Bob: Okay, now what about your jobs?
Me: I want to pay off Property 3 first, and then take Fridays off of the shipping depot job. Then I’ll only be working one job every day: bank job on the weekdays and shipping depot on the weekends.
Fake Bob: Good. So after you buy Property 4, you should be able to pay Property 3’s remaining principal balance of $40,000 before the end of 2016. You’ll be able to take off Fridays afterwards.
Me: Wait, I have a question. If I pay my car off, I’ll be saving $339 a month... $4,068 annually. Paying off Property 3 yields an extra $3,724 once paid off. So would it be better to pay off the $20,000 car loan first rather than the $40,000 mortgage? After all, paying off the car loan would give me an extra $344 to pay off properties.
Fake Bob: You can do that if you want, but I would suggest against it. The main goal is paying off the properties, not the car loan. You’ve already factored the car payments into your personal expenses when you retire, so I’d leave it alone. Once you retire, you won’t have too many car payments remaining and can pay it off within months. While you have the jobs helping you, focus on the bigger expense… the properties.
Me: Awesome! And I’ll still be able to retire by 2018, yes?
Fake Bob: The end of 2018 most likely, but it may leak into 2019. By the end of 2018 you should only have one property left to pay off. You can decide that you’ve had enough and quit the jobs anyway, paying the last property off over time. The choice would be up to you. So your financial timeline, or what you want to call Plan B, will look something like this...
2016
Save up $60,000
Buy Property 4
Pay off Property 3
No Longer work Fridays at Shipping Depot
End the year with $10,000
2017
Pay Property 2 off
End the year with $20,000
2018
Pay Property 4 off
Fake Bob: As each property gets paid off, your annual income will be higher. That will allow you to pay the next mortgage off faster. And remember that $60,000 is not a definite number. Whatever number gets you Property 4 is the right number. The faster you get Property 4, the faster you’ll have help in paying Property 3 off.
Me: Cool. Now I have one last question. I’ve been trading stocks since the beginning of this year, and I want to know how that can factor in to paying off the mortgages.
Fake Bob: How are you doing so far in the market?
Me: Hmm. I’m down about $3,200.
Fake Bob: You’re down $3,200 in six months, and you want me to tell you what you should do? Isn’t it obvious?
Me: Not really, no. I’ve always learned this way. Like when I started in real estate I was making mistakes at almost every turn. It took time before I learned what I was doing wrong and how to fix it do become successful in property management. Losing seems to be how I learn, and I’ve learned a lot about my trading strategy since then.
Fake Bob: Can you not invest less of your money and learn the same lessons? Or you can do simulation trading until you pay off Property 3, and then get back into the market that way.
Me: I don’t learn that way. When I bought my first property, I invested everything that I had. I have to invest a good portion of my money, as the pressure makes me a better investor. I learn faster and am at my best when my back is against the wall.
Fake Bob: Look, if you want me to tell you to keep on trading the way you’re doing it, forget it. When you started real estate investing and made mistakes, didn’t you ever stop to take a break and see what you were doing wrong?
Me: Of course.
Fake Bob: So then do that now. You’ve already lost $3,200. You say you’ve learned lessons. Take a step back, apply those lessons in simulation trading. If they work out, then you can re-renter the market, but I would suggest waiting until AFTER you buy Property 4 next year.
Me: Hmm.
Fake Bob: There are battles and there are wars. You can lose battles and still win the war. The key is to know when you’ve lost the battle and retreat with what you have to fight another day. Concede defeat now with your remaining $6,800, having that much more to fight with in the next battle. You'll be smarter and hae more experience. An experienced investor with $6,800 is stronger than an inexperienced investor with $10,000. But if you lose everything, what will you have to fight the next battle with? Get it?
Me: Yeah I guess so.
Fake Bob: Okay good. We done here?
Me: Yeah. Thanks Bob.
Alright! Fake Bob is really helping me out, and now I have a much more detailed Plan B. Save $60,000 by mid-2016. Buy a commercial property that can both yield $32,400 and a mortgage that can be paid off within two years. Pay off Property 3 by November. End the year with $10,000 in the bank, ready for 2017’s Property 2 payoff. Thanks Fake Bob. You're the best!
It took me a few days to read this because I was worried it was going to be like when Dark Angel jumped the shark with the Boo episode. However, it was a good read. You successfully reasoned why you should take a break from the stock market. I can be stubborn like you, yet I have difficulty being the "other person" who talks sense into myself. The fact that you can is impressive. :)
ReplyDeleteNot sure of the Dark Angel reference, but I liken Fake Bob more to Felicity Porter talking into her tape recorder. I have this belief that everything we need to know is already in our heads. I'm trying to prove to myself that I have all the tools and information I need, but sometimes my mind gets cluttered and need a guy like Bob (fake or real) to clear things up. And, to be honest, if I'm gonna turn out to be a psychotic mumbling mess who talks to himself in public, I might as well get something out of it while I can...
DeleteI'm definitely going to take a break from the stock market thanks to this post. July will be my last month for the year and I'll stick to simulations until next year. This is easy to write, but not so easy to do. Fake Bob might have shown me the way, but following that advice will be tough... especially if the patterns I've been tracking map out the way I'm expecting.
P.S.: I'd be surprised if this blog could actually jump the shark. I focus more on whether I can connect with what I'm writing. If I can, then it's all good...