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March 12, 2013

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Great to see a pastor featured on the reader profiles. Rental properties with six kids sounds like a handful! Hope it works out for you though.

Sounds like my situation minus a details and a bit younger ;) hope you dont mind me asking, but did you opt out of SS payments because of being a pastor, and is that why your church reimburses for half of what they would pay? Also, do you receive tax benefits for housing? We are looking into these things now on our own since our chirch is fairly young/unexperienced with these things. TIA

One reason I am not a landlord is because I would have a tough time telling someone down on their luck to pack up and move. The bottom line is that it's a business, and no matter who you're renting to, someone is paying the bills for that property. It's either you or the renter, there isn't anyone else. People I've spoken with who do well at rental properties tell me two things: prescreen candidates properly and thoroughly, and follow the rental agreement and laws. If, for example, the agreement says when they're five days late with a payment you start eviction proceedings, that's what you do regardless of whether you talk to them and try to otherwise help them out or come to a compasionate arrangement. In other words, you don't have to be mean, but you do need to follow the laws and the rental agreement as currently written. If you don't and you do run into issues later, the state will likely side with the tenant and you will potentially be out a much larger chunk of change.

I'm stressing this because you are a pastor and may have more trouble than most, both in properly screening a tenant and in eviction if necessary, primarily because there is a stronger possibility you will want to, or be pressured by others in your church to, "help" someone out who is a less than ideal rental candidate. Not saying you will ever encounter this or that this will even be a problem for you, but I am saying you have to be aware of the possibility and know yourself.

Also, whether you decide on rentals or Roth IRAs or some other vehicle you need to get cranking on the retirement savings plan for both you and the spouse. $45K (15 plus your 30 saved) at 37 is okay but still a long way to go. I see nothing in your above information indicating that you are saving additionally for retirement in that your $450 saving category is more about saving for near future needs not long term growth. Technically you've still got a fair amount of time, but practically it will fly by before you know it and you should have a consistent plan for building your nest egg, whatever form it takes, or you will find yourself at 50 wondering where the time and money went. You may want to consider a one time shot with a fee only planner or a community college adult education course in investing just to give you an idea of things you can do and options available.

Best of luck.

Sorry to be so negative, but your financial situation looks quite dismal to me, especially your retirement savings. Are you expecting a pension from your church? Do you have life insurance? $30,000 is not much savings for a large family where the wife has no paid career. I dont think you should risk trying real estate investment, which is a difficult thing and also a bit of a gamble, until you have much more financial room for error.

I think you should put that $30k in tia-cref or something similar low risk, and dont touch it, so you have an emergency fund. Then I think you should work on increasing your family's income and cash flow, starting from what you know best--your current occupation.

Perhaps your wife could open a daycare or church based preschool? Or run a summer camp? Could you travel and preach also at nearby small rural churches for a fee, where they cant afford to hire a full time pastor? If you speak Spanish (or start learning it) there are many Spanish speaking congregations where you might be welcome to minister part time. Can you make yourself more available to perform weddings or funerals, for example, in parks or other unusual locations? if you are OK marrying mixed denomination or even gay couples, you could likely make money that way. Do you have experience with counseling? Could you work oart time as a counselor at a local hospital? Could you advertise and build a side business doing marriage counseling for people not in your church? could you work with local police to counsel troubled teen offenders? Do you have other talents for example music or theater? I happen to know an Episcopal priest who does voice overs and voice characters (people with funny accents, etc) for advertisers on local radio stations. And many pastors play music in local coffeehouses and use it as an opportunity to talk to people and share their faith too. You said you have handyman and construction skills...why not set up a side business doing that?

Basically, I think you should be realistic about your financial situation and focus your efforts on where you really have the potential to make extra money. I am skeptical that someone with little money or experience can do well investing in real estate.

I'm with MC. Makes me pretty nervous to see few dollars and so many mouths to feed. I would reduce your tithing. Although it's obviously important to you, you give in other ways besides financial contributions. You should consider that as well.

I agree with MC as well... you should really be build up your savings, with such a large family and so many dependent on you.

Given how many people you are supporting, I would think that cutting back on tithing would be ok.

I have to echo getagrip's concern. My family has dabbled in real estate, and if you don't have the right personality or mindset for it, you could potentially lose out on a lot. The moment you deviate from what's written on the contract, is pretty much when that contract becomes null and void especially in court.

Remember that not all ideal or good tenants remain ideal or good tenants. The stuff that hurts the most is when a good tenant you've come to rely on becomes a liability (I won't use the word "bad"). Complications or unforeseen circumstances can arise that change that designation, whether it's from a medical emergency that just depletes all of their income, to sudden unemployment. It could even be the unexpected death of the family breadwinner. These things make us want to help people out (whether it's letting them pay rent late or even stay rent free awhile). But small things can easily slide into big things and the next thing you know, instead of providing a bit of extra income each month, your rental property will be sucking income from you.

Thanks for all the feedback so far everyone. I don't have a lot of time now, but I will comment more as I have time.

Kim - I did opt out of SS which is a pretty cool perk. I believe it's just a desire of our church to still pay 1/2 to me. I don't think they would have to do that. I also have a housing allowance of $25,000 that comes right off of my income, which drastically reduces my taxable income. I am not a tax guy, so I might not be wording all of that correctly, but I think I got it close :)

@getagrip and MD

" but you do need to follow the laws and the rental agreement as currently written. If you don't and you do run into issues later, the state will likely side with the tenant and you will potentially be out a much larger chunk of change. "

"The moment you deviate from what's written on the contract, is pretty much when that contract becomes null and void especially in court. "

These statements are not accurate.

If you violate the law, then yes, you are going down in court. If you flat out violate your contract then you are too.

But if your contract says you have a right to impose certain restrictions and you don't do so immediately that does not preclude you from doing so at some future point in time. If you are concerned about the court reading those clauses too literally then you put in the following clause which most good contracts and leases have:

WAIVER
The Landlord’s failure to enforce or insist on compliance with any provisions of this Agreement shall not be deemed a waiver nor a limitation of the Landlord's right to enforce or insist on compliance with the provisions of this Agreement.

You do not need to do things at the first moment you have the right to do them in order to follow through on them at a later point in time.

As to having a clause in the lease that states that after 5 days an eviction will be brought, I cannot think of any reason why you would want to put something so rigid in your lease. For instance, I have late fees that apply when rent is late, but at soon as it's late they are in violation of the lease. I do not have to evict but I can. And my Breach clause gives me multiple options but does not state that I must or will do any of them in any time certain. It looks like this and was taken directly from the lease produced by our Attorney General:

BREACH OF LEASE [RE-ENTRY CLAUSE]
If Tenant materially breaches this lease, Landlord may do any of these things.
A. Demand in writing that Tenant immediately give up possession of the Premises. If Tenant does not give up possession, Landlord may bring an eviction action. (unlawful detainer action).
B. Demand in writing that Tenant give up possession of the Premises to Landlord at a certain date in the future. If Tenant does not give up possession on that date, Landlord may bring an eviction action (unlawful detainer action). Landlord may accept rent for the period up to the date possession is to be transferred without giving up Landlord’s right to evict.
C. Bring an eviction action immediately (unlawful detainer action).

You need to follow your local laws but in MN at least, the landlord wins without much effort in court on any eviction case with a clear breach of the lease given that the clause that was breached is legal. Not paying rent is the easiest eviction of them all. The court case goes something like this:

Judge: Did you pay the rent?
Tenant: Well, you see I tried to get the money ....
Judge: Did you pay the rent that was due?
Tenant: No.
Judge: Do you have the money to pay the rent in full plus eviction fees here today?
Tenant: No.
Judge: You are hereby ordered to evacuate the premises within 7 days. Next case.

It really is that simple.

The statement getagrip made about prescreening tenants I do agree with strongly. It is one of the most important aspect to having a successful landlord experience. If you do a great job of that all these other issues about the lease become moot because it rarely gets to that point. I have been a landlord for over 4 years with 10 properties and have never once had to even have a dispute with a tenant about enforcing my lease. The two biggest factors for that I attribute to having properties that attract quality tenants and screening those tenants well to make sure that quality tenants is what I get.

I think it's great that you are managing that household on that budget. Unlike others who are advising to cut giving, I would suggest that you are doing as well as you are precisely because of the giving. It's not that the giving causes blessing, but the stewardship heart behind the giving shows your priorities are right.

I would also not suggest that your wife gain some hours and income. Her role stabilizing the home front can pay far greater dividends than any sum she might earn. You are making good investments in the home. Well done.

My hesitation with real estate investing for you would be the time component. My parents owned several rental properties over the years. While they did make money on them, they did so at a time when their kids were out of the house and their careers were at a settled point. Tenants would move, and they would need to clean up or fix up before showing the property again. Then another would open up and the process would start again. There were times of stability, but many times when one thing after another would hit.

(1) Your wife will need your availability for her sake. Every hour spent fixing up a rental property is an hour you can't be with her or can't watch the kids so that she can have time out.

(2) Your 7 kids will need your time. In a few years when they could help you work on a project, the situation might be different.

(3) The needs of your church may be limited time-wise, but the emotional burden of the people's needs can be taxing even in the off times. With your own family's needs, throwing a rental property on top could add more stress you don't need.

@DL,

As to others reservations about being a landlord, if you have good handyman skills I think that getting a good rental property is a great way for you to augment your income. I agree with others that your income looks pretty tight for the number of people you are supporting. Since you are a pastor I am certainly not going to suggest you change your tithe. I suspect that is highly important to you. Rental real estate would be a great way to expand the income side and it is a better time to start that now than it has been for a long time. I am not sure if you were following the Real Estate 101 series I did last fall but it might be worth a read if you are seriously considering getting into it.

The Summary with links to all the articles can be found here:

http://www.freemoneyfinance.com/2013/01/real-estate-101-summary.html

Given that you have opted out of Social Security (from your comments message) I think you should see the 15k in retirement accounts as being the area you need to focus on. Cut back wherever you can and make it your mission to build that retirement balance to at least 25 times your yearly expenses, or expect to opt out of retiring altogether.

"I did opt out of SS which is a pretty cool perk" - with a total of $15K in retirement, with all due respect this seems like more a disaster waiting to happen than a perk. (As much as people beat on ss, for the many I know with a paid for house but little savings it does a pretty darn good job keeping people past working age clothed, fed and fairly well entertained).

"Things are tight for us but I believe we live fairly frugally on a single income."

"The bulk of that extra savings is from the sale of our last home."

@ Apex

I do not think there is enough money for DL to even buy one property. Lending restrictions, especially for a non-residential loan, are still tight. Even if we remove the extra principal payments DL makes in addition to taking out whatever equity he has on his home it would still not be enough for a down payment. It would also not be prudent from the standpoint that DL is tight on cash even while living frugally. I would say the extra side income would best come elsewhere until his finances improve significantly from where they are now.

@Luis,

You may be right if he buys a full 4 bedroom home for 180K. However there are many different kinds of "homes" one can buy. I can still find some 2 bedroom newer townhomes in very good condition for 80K. With 20% down plus closing costs he is only in for 20K. With 30K in savings beyond his emergency fund, that gives him a 10K operating cash buffer. I would feel very comfortable doing that with that cash buffer.

Like others have said, the retirement savings is a HUGE concerns. You need to direct all your excess at this point to retirement savings.

I think you should not worry about 30K sitting around not earning much. You can't afford to risk that $ to get a higher return. Especially not with all those mouths to feed! I agree about cutting the tithing. Remember the airplane instructions. You have to put your own oxygen mask on first before you help someone else and if you hit even one small hiccup you'd need financial assistance. Your savings are not that much for the enormous responsibility you carry. I am single and would not feel comfortable with only $30K liquid!

And good for you for recognizing the need for a good amount of life insurance, both on you and your wife but especially you as she would not get survivor's benefits for the children from Social Security should something happen to you before they are all grown. You do also have a longterm disability policy, too, I hope. I understand your choosing to opt out of Social Security but you must understand that that choice means you have to provide yourself for things that others don't worry about as much. In my opinion, you should remember that whenever you are reading or listening to investment advice that is generally meant for those who are in the Social Security system. For you, AHEAD of everything else suggested to do with money (paying extra on mortgage, buying rental property, etc) should be making sure to have adequate life and disability insurance and putting a large amount into retirement savings. Remember that others who are saving 15% for retirement also are putting 15% into the Social Security system (even if unwillingly). You should consider 25% to retirement to be on the low side.

There's been a few comments regarding our giving:
-this is one area where we do feel very strongly about. All of that is not a tithe per se, but our heart is to be "hilarious" givers (as a friend of mine puts it). I would like to see that figure increase every year if at all possible

@Apex / @Luis
-you are both on the right track I think. I agree I could not afford a large investment. But, with the current market, a modest $60k-$80k home is very doable to me.

Retirement Issue
-many have commented on retirement... I would agree that if we have any holes, that is a big one. A couple things come to mind quickly. 1. I have often thought of a real estate investment as possible "retirement" money. 2. This is most likely related to no. 1, but it would be hard for me to take $20-$30k and invest it in the market. If that were the way I would go, I probably would look into a one-time or ongoing relationship with a financial planner

@DL,

Real estate investment if done right is not only a possible retirement plan it is a retirement plan. Not just a retirement plan but a superior retirement plan to anything considered traditional retirement planning. This all assumes you are up to the task and you should read my first column in the Real Estate 101 series to see what I mean by that. But assuming you are here is why it is superior using some example numbers that might fit your situation:

2013: spend 20K to purchase 80K property.
2016: spend another 20K to purchase another 80K property.
2019: spend 25K to purchase a 100K property.

Over the years make a few extra payments on the 2016 and 2019 properties.

During the next 24 years these properties provide an extra 6-10K of cash flow per year which continues to rise with inflation.

2043 (age 67): All three properties are 100% debt free and probably worth 700K - 1 million dollars total and are all throwing off around 50-80K per year of cash flow now because the rents have risen and the mortgages are now gone. If you want it turn key subtract 7-10K for costs of a management company. The appreciation and cash continue to rise as a hedge against inflation.

Show me a "retirement plan" that can do that with only 65K invested at an average age of 40.

Real estate is more work but the returns are better.

@DL,

I should clarify that the 50-80K cash flow estimate in 30 years is for all three properties combined. The way I stated it, one might think that is per property. Real estate returns can be good but not that good.

Seems typepad is eating my comments. :(

I'll make a short one and see if it stays...

Please tell us that you have a nice pension from your church.

If not then I would honestly recommend you consider opting back into social security. Given your income level and a non working spouse you should actually come out ahead pretty well with social security.

I would echo the sentiments of others that real estate can be good, but you have to have both the TIME and the temparament for it. I would think 7 kids would mean you really don't have time. And as others have noted, there would be a lot of pressure on you to turn your rental homes into a charitable endeavor; so I'd recommend against it for those 2 reasons.

If you don't have a 401k or 403b at church, open up an IRA and put it in a balanced mutual fund. As others have said, a 15% retirement savings rate is actually LOW if you've opted out of Social Security.

A husband and wife with 6 kids, one on the way, and no mention of Health Insurance in the budget puts you in a very precarious situation. Rectifying that should be a top priority and way more important than retirement planning.

My wife spent two weeks in the hospital in December for surgery to remove an intestinal blockage and even though we are medicare age the hospital bill was $181,879.78.

The bill for a nurse to come to the home after discharge, three/times per week for 5 weeks and 2 days, to change the dressing and maintain a hi-tech Wound Vacuum device that was needed for proper healing of the incision was another $6,285.

If something of that nature happened in your family it would seem that it could bankrupt you. Fortunately for us we are Medicare age and are still insured under my former employer's excellent group insurance plan. Our only financial responsibility for the whole episode was $1,000, a copay of $250/day for the first 4 days of hospitalization.

@Old Limey...I believe he did mention his health health insurance is covered by his pastor job.

@DL...One area where I disgree with most other posters is the tithing issue. I think you should keep paying it. After all, you can't ask your congregation to tithe when you're not. Nobody forces anyone to have 7 kids, so it's not like that was an extraordinary circumstance beyond your control.

Can a pastor who is leading a church also have a major money making side business that is not part of his overall ministry to either his particular church or the larger community? I would be curious whether they would allow that. The pastors I have known....none of them were landlords or businessmen unless they were volunteer preachers who were not paid at all by the church. I think he should get both his church's and denomination's OK on whatever he does before his planning gets too far along, or he might find himself out of a job.

I think it's great that your household functions with that many people on that budget! I admire your focus and discipline.

I think that rental properties could be a good fit for your carpentry skills and a nice side income for you, but not for a few years. I would focus primarily on beefing up your retirement savings as the main priority. Take $10.5k of that $30k and fund Roth IRA's for 2012 and 2013. Then I'd park the rest in a target date fund at Vanguard, Fidelity, or similar. Keep funding a Roth and adding to that target date fund for a few more years, then focus on real estate.

Can you take side jobs as a carpenter/handy man at all now? Maybe with a property manager? That might be a good way to learn more about the challenges and opportunities of rental properties while earning some money to save for your own purchase.

@Walden,

Real estate takes capital.

How does waiting 2-3 years and tie-ing up some of his capital in deferred retirement vehicles make him more ready for real estate. In my mind it makes him less ready.

Recall the 30K came about because of profit on a previous property. He does not have enough room in his budget to save tons of money per year to build up cash for real estate. There is not enough savings for him to fund a Roth at that level and still grow his capital. Funding retirement vehicles will reduce his available capital.

This is an either or proposition. He does not have enough income to both fund traditional retirement vehicles and do real estate. Perhaps real estate is not the right choice but funding retirement vehicles like Roth IRAs will mean there is no choice. He simply won't have the funds to do real estate ever if he puts 10.5K per year into IRAs.

It sounds like you are doing a great job! I was scared of rental properties too, but we just got our first one and it has been going well so far.

@ Apex
From reading your comments on the blog, you are infinitly more knowledgable about real estate and investing than I am, so I'm happy to defer to your judgment! I was just putting in my $.02.

The OP stated he didn't like his $30k sitting in cash, and I personally think his retirement (and by that I meant money specifically reserved for retirement - perhaps I am viewing it too narrowly) needs attention. I think it's definitely possible for real estate investing be a retirement plan on it's own, but I would think (though I don't know) it would involve a not insignificant investment of time and knowledge, and carry with it some serious risk. With so many people depending on the OP, a more traditional plan looks safer to me.

I guess I was thinking he could increase his income a bit by taking on some side work. In a few years his oldest will be close to college-age and his youngest will be entering school. Perhaps his wife might return to work, perhaps he will have been promoted - maybe then would be a better time to invest in a rental property.

But as I said, this is just my opinion. I'm sure you have the right of it.

It would be best for you to get into rental properties since you will need a bigger income for the upcoming expenses. Your current cash flow is not going to suffice you through all of the needs of your kids, and they are not cheap once they go beyond 10. You have a 12 year old so you sorta know, but peer pressure starts now.

Is your $4200 pre-tax or take home?

Also, your skills to fix houses will be well leveraged, and this way you will not have to take undue risk in the stock market which is your current option for investing the funds you have.

I have put myself through real estate and it is NOT bad at all. In fact, I cannot buy properties fast enough myself, get them fixed up (I don't do it), and then rent it out. Rental income for me (net of ALL expenses except my income tax on the rent income) gives me 15% to 28% in ROI. That is just phenomenal these days and not comparable to any other investment including gold/silver. And, it is peaceful income (relative to stocks or options), but it involves some work on my part to be the Property Manager.

Are you done having kids, is a key question you need to ask yourself also, since Brady Bunch sounds good, but this is not the era for having too many kids when college education per child averages out to $20K per child per year at a State University (I have two of them at a State Univ today, and the in-state tuition+dorm+books+fees is near $28K).

Finally, your retirement funds should be invested aggressively so that you can collect enough money for your own retirement, even if the church is going to give you a pension.

Good luck.......

@Walden,

There are reasons to debate whether real estate is the correct decision for the OP. I cannot answer that definitively. My point however was that you seemed to be suggesting waiting a few years and beefing up the traditional IRA funds and mutual funds in the mean time. But I don't see why that would make his situation better for getting into real estate a few years later. Yes he would have a small retirement fund started but it will likely hinder capital needed buy real estate not help it so why is he then ready to buy real estate in 2-3 years if not now? He doesn't have the cash flow to really beef anything up and especially not if he puts over 10K into IRA type funds which will be locked up for over 20 years.

His current budget has 5K per year for savings (some of which he tagged for his next car, and I suspect most of it eventually gets tagged for something else). That's why all of his 30K came from profits on another house because he is doing all he can with his current budget and isn't really able to put much away long term with it.

I am certainly not trying to pick on you Walden. I was using your comment to point out how I think many of us in the personal finance world think about, well, personal finance. We get conditioned to think about the traditional path as a series of check boxes.

1 Emergency fund, check
2 retirement fund, check
3 college fund, check
4 other less traditional investments ...

so when the suggestion is to jump from 1 to 4 we think wait a minute. You shouldn't do that. That's not safe. You need to get #2 taken care of first. But we think of that from the standpoint of funds re-allocated from x,y,z to beef up #2 and then keep moving on. He has no x,y, or z. There is nothing to allocate. Except the 30K which then precludes doing 4 without finding another source of income and if you need to do that I would argue just do #4 now. Managing a rental property on average is less work than a side job. If he doesn't have time to manage real estate he doesn't have time for a side job.

Personally, I am amazed by what DL does with the amount of money he brings in. He is doing great to make that work with 8 going on 9 mouths to feed, clothe, house, and entertain. However I suspect the demands of that growing household will be challenging to stay ahead of financially.

That's why I don't really see much hope for a traditional path here myself. Since he has opted out of social security he is actually able to cheat his budget in ways hardly anyone else could. That's only to say most everyone else has 15% of their check between themselves and their employer going towards future retirement. He gets to keep that money (all of it since his church gives him their half) and the budget is still tight. And it means he has zero going to retirement which will make having his own plan even more important. Yet when I look at the budget I don't see room for one in the traditional fund an IRA path that will get him anywhere near where he will need to be come 65. That's why I think if he mentions real estate as an option he thinks is a good fit for him, that is good enough reason to go that route.

Keep it simple and just start maxing out an IRA and Roth IRA. One can still fund a 2012 IRS until April 15. Perhaps getting on automatic monthly draft into an IRA might be a simple solution for future retirement funding?

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