How To Be Needed

Working within Corporate America, I see many folks who are enamored with the idea that they are needed.  Their employees should not make decisions without consulting them.  Need to take a business trip? Get an approval.  Need to be reimbursed for said business trip?  Get an approval.  Have an idea for a better way of doing your work? Get an approval.  Want to start your next project?  Get an approval.

It sounds annoying but still innocuous, right?

Wrong.

All these approvals are “No” gates.  They’re just speed bumps on the way to someone at some level saying, “no”.  Just try taking action without approval though.  The entire system is set up to slow down and stop any action or change.

One of the reasons I’m so intrigued by real estate is the potential for passive income.  However, I’m not on the right path yet.  I’ve started setting up a system where I’m needed for everything.  And, it’s hard for me to change, even though I know I’m the only one in my way.

Let me explain.  I suffer from several personality flaws:

  1. I’m cheap
  2. I’m too curious about how things work
  3. I’m slow to trust
  4. Did I mention that I’m cheap?

To illustrate: we bought our condo, knowing that the interior needed to be completely refreshed.  My wife and I (and one of our good friends) spent almost 500 hours in 2 months tearing up carpeting, sanding, painting, installing flooring, cleaning, painting, installing trim, changing electrical outlets, painting, and managing 3 sets of contractors.  And that was on top of our day jobs.  We used contractors for the HVAC replacement, countertop installation, and appliance haul away and replacement.  Otherwise, it was all us.  I schlepped 800 sqft of flooring up 3 flights of stairs… hardly passive income.  That’s personality flaws 1 and 4 coming through.  We stretched our means to buy the property.  We knew going into the project that we needed to stick to our renovation budget, and that meant doing a lot of work ourselves.

Tim Ferriss’s Four Hour Work Week, Robert Kiosaki’s Rich Dad Poor Dad,  Paula at Afford Anything, Sam at Financial Samurai inspired us to act (affiliate links).  And I know they all started small, but I learned a new appreciation for the word hustle during this project.  Here’s the thing: they’ve all made it.  We’re just starting.  So, we don’t yet have systems in place to do the work for us.
When it came time to look for a tenant, we were hesitant to hire that out too.  We were curious to know who would be enjoying our new place.  (Yes, we thought of it in terms of “our”).  And that’s an unfortunate byproduct of personality defect number 2.  As much as we followed our newly established process for screening tenants, there was still some emotion associated with our selection.  In the end, things seem to have worked out OK.  And, we’re again faced with a new round of tenant screening.

We know every inch of our condo, having spent so much time renovating the place.  In our area, the renting process can be contracted out for roughly one month’s rent.  Each property can be managed (as a contract) for roughly 10% of the gross monthly rent.  Add both of those together, and our unit becomes significantly less profitable.  There’s the added uncertainty around a property manager: will they care about our property as much as we do? Will they present as good of a customer(tenant) interface as we will?  See personality defect#3 at work (Probably # 4 too)?  So, as much as we would like to have a better system in place, here’s what we we’re doing:

1. A pre-screening phone call.  We ask 7 questions of each person interested in seeing our unit.  The questions are:

  • Why are you moving?
  • When do you want to move in?
  • Are you OK with us conducting a background check as part of the application process?
  • Do you have residential and occupational references we can contact as part of the background check?
  • Is your income greater than 3x the monthly rent?
  • How many people/pets will be in the unit?
  • Have you ever been evicted?

2. Once we believe folks are good prospective tenants, we set up a time to show them the unit.  Note: I would love to transition this to an open house type of showing.

3. If they’re still interested, they fill out an application form and we proceed with background/reference/income checks.  To protect everyone involved, we’re using  TransUnion’s MySmartMove. We really like that our tenant’s personal information is protected: we don’t have to handle their data or worry about processing their application fees.  We get to see a quick summary of their current financial obligations, payment history, and a prospective tenant score.

 

    TransUnion’s Resident Score Range.

4. From there, we conduct rental history, employment, and income verification checks.  If everything checks out,

5. We review and sign the lease.  At last.

Whew!  What a process!  This being our first time screening tenants since the unit was finished, we had to invest a bit more effort to obtain interior photos, put up a detailed website, and prepare our listing on Zillow’s Rental Manager site.  We’ve spent 13.5 hours getting that all set up.  Hopefully, we’ll be able to re-use this for years to come.  In terms of screening tenants and showing the unit, we’ve spent 3.5 hours and showed the condo to 3 prospective tenants.  The third family submitted an application, and we’re processing it currently.  Keep your fingers crossed!

In a future post, I would like to revisit more of the non-recurring effort/ongoing maintenance effort and costs that we’ve experienced thus far.  From my homework in preparing to purchase this condo, I really struggled to find good data on these topics.

So, any ideas how we can systematize our rental property further and make it more of a passive income generating machine?

How to Prepare for a Layoff

With the Great Recession officially ending in June 2009, the US economy is almost 7 years into its recovery as of May 2016. Based on recent history, that’s a long run of good times a rollin’. How far in? It’s tough to tell.  The Bureau of Economic Research keeps track of US economic cycles.  Because their announcements tend to lag a peak or a trough (by up to 21 months!), let’s take a quick look at recent historical cycles to get a crude sense of where we might be in this cycle.  If you’re an optimist, you can make a case that the US economy may still be peaking:

GoodTimesYetToCome

If you’re a pessimist, you can argue that the economy is already in decline and we’re heading for the bottom of our next economic cycle:

GoodTimesBehind

Regardless of whether you think the economic punch bowl is half empty or half full, if you work for an employer, you have some risk of a layoff to contend with. So, what is a well-intentioned employee to do!?

Let’s set aside brown-nosing, jumping ship, and prayer as possible strategies to prepare for a layoff or other disruption to one’s primary income stream (This is a financial blog after all).

As I see it, there are two basic approaches: defense and offense.

Defense:
Cash

Cold, hard cash (or in a savings account). There is no substitute for a well-stocked emergency fund.  Conventional wisdom says that when looking for a new job, plan for about 1 month for each $10,000 of compensation.  If you want a $100k/yr job, be prepared to spent ~10 months to find it.  …so, how big is your emergency fund?

HELOC

As I understand it, a Home Equity Line Of Credit is like an open credit card against the equity you’ve built up in your home. Why would anyone be interested in such a critter?

  1. It provides a leveraged way to boost your emergency fund
  2. The interest costs are type far lower than a credit card.  On the order of 3 to 6 percent these days.

Unfortunately, there are also some downsides:

  1. You could lose your house as the HELOC collateral is your home.
  2. you need to demonstrate financial stability now. It’s tough to get a bank to approve a HELOC after you’ve suffered a financial perturbation already
  3. You will be charged interest on your outstanding balance until you pay it back
  4. There is an upper limit to how much of a line of credit you can obtain. How much equity you’ve built up in your home vs. market value is an influential factor.
  5. The interest rates are adjustable ~monthly, introducing volatility

Other Loans (e.g., Personal or Student)

There’s a couple of other loan options.  Personal loans are just that: loans for any personal use.  The lending office will be looking for verification of your income, so if you want to pursue this option (e.g., HELOC not available), get started while you still can show steady income.  Interest rates can vary but be between 6 and 9 percent currently (it’s good to be the bank, isn’t it!?).   If you are currently even a part-time student, you have a pretty cool option available to you: interest deferred student loans.  You’ll have to fill out a Free Application for Federal Student Aid (FAFSA).  Rates vary between 4 and 6 percent these days.

Credit cards

This is definitely a fall back option. I think an extra credit card that is largely unused, possibly with a single bill that auto pays each month, is a great idea. It can help boost your FICO credit score by lowering your percent of revolving debt. The minute you have a revolving balance at 10, 15, or 20% interest, you’re in trouble.  But, for a short term disruption, it might enable you to pay for essentials.

 

Cut Costs

If there is a pending disruption to your earned income stream, now is a great time to review your current expenses and trim what you can.  Cable, gym memberships, other monthly entertainment subscriptions (Netflix, Hulu, Spotify, Kindle Unlimited, gaming, etc.) are all candidates.  They may not be major drivers of your budget, but they’re easy targets, and they’re pretty quick to cut.  Reduce/negotiate your wireless data plan (we’ve cut ours from almost $130/mo to $85/mo!) Bigger targets of opportunity are certainly out there: housing, transportation, etc.  But, I’ll assume they’re roughly fixed for most folks in the short run.

Offense

Diverse Income Streams

Of course, this is one of my favorites (and a prime theme of this blog).  If 95% of your income derives from your day job’s paycheck, losing that income stream is highly disruptive.  If 20% of your income comes from your day job, it’s not such a big deal.  When you have enough income from other sources, you reach the F.U. Point ℠ (that’s “Freedom Uttained”).  Hustle.  Start a business.  Start a website.  Start now.

Unearned Income

Use a portion of your current net worth to generate unearned income.  We’ll revisit this topic in much more detail in future posts.  But, here’s a quick breakdown:

  1. No risk: Set up a CD ladder to earn a bit of FDIC insured interest income on a regular basis.  These days, this amounts to a pittance, but if you shop around, you can find rates a bit better than a high-interest savings account.
  2. Minimal risk: set up a bond ladder or buy into a bond fund (with quality bonds) directing interest payments to your checking account.
  3. Higher risk: buy & hold dividend stocks directing dividends to your checking account.
  4. Crazy risk: Peer to Peer lending where you become the bank to other folks (given that the context for this post is planning for a perturbation in your earned income, this may be folly).

Jump Ship

I said I was going to exclude this from the list, but I’m bringing it back anyways.  If you’re in the fortunate spot where you are finding out about a layoff before it hits, start looking for a new gig now.  Get that resume updated and tap your internal and external networks.

Yes, I said internal…

Not all parts of a company experience a cull in the same way.  You might be able to transfer or rotate much more quickly than finding a new opportunity externally.  In parallel, leverage your external network to see who can use your awesome skills.

A special shout-out to my friend, Dan for providing the inspiration and framework for this post.