No Debt Plan

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Last year my wife and I were sitting in our apartment cooking dinner and waiting on a friend to come over and join us. We were making some awesome lasagna and just enjoying being newlyweds. We kept hearing some loud noises outside and for those of us that have lived in apartment complexes that was nothing new. These noises were persistent, so we finally went out on the patio to see what was going on. Much to our surprise, our entire complex entrance had been blocked off by firetrucks and police cars.

Let me tell you, that gets your heart rate going for a minute or two.

It turns out two apartment buildings down from us was smoking from the top of a chimney and no one had a fire in their fireplace. The complex had neglected to get the chimneys cleaned annually and leftover stuff somewhere in the chimney was now on fire.

We went outside and got to see the entire action. Firefighters on the roof chainsawed off the top of the chimney and then sprayed water down through the hole. They had cleared the building (and scared some of the unknowing inhabitants) before doing this. Imagine you live in the bottom apartment, you have to evacuate your apartment because their might be a fire in your building. Now imagine they dumb gallons and gallons of water down the chimney and it runs down to your place. I’m guessing every apartment got some water damage, but you would think the people at the bottom would get the worst of it.

Thankfully, no one was injured and no serious damage occurred to the apartments. But it could have been different. The entire building could have been gutted by smoke and fire damage — those folks could have lost everything.

What would you do?

If you came home one night and your house was just… gone, nothing but ashes, what would you do? Hopefully you would have insurance, but there are some extra steps you can take to truly protect yourself. This post is going to show you how to do a complete home inventory for insurance documentation purposes.

Why do I need a home inventory?

When your house is destroyed and all of the contents within it are unrecognizable, the insurance company may not give you full value for your belongings. You say you just bought a 46″ plasma TV. You lost the receipt, the TV, and the box in the fire. Hmmm… could be kind of hard to prove. The insurance company may think you’re trying to scam them (and I’m sure people have in the past). Having proper documentation can help you prove you owned what you really say you owned, and get that insurance check faster.

Five Easy Steps to a Complete Home Inventory

1. Have insurance

It almost goes without saying, but you would be surprised how many people live in apartments without renter’s insurance. As a home owner, you can’t get a mortgage without insurance. The banks simply won’t do it. But there is no stipulation for renters. If your downstairs neighbor leaves the space heater on and burns down all of the apartments in your area and you don’t have renter’s insurance, you’re pretty much up a creek without a paddle.

The beautiful thing about renter’s insurance is how ridiculously cheap it is. When I was in college and living in a duplex with two other guys I got renter’s insurance through the same company that held my automobile policy. The absolute cheapest insurance I could buy was $12/month for almost $24,000 in coverage. I could not only have replaced everything I owned with that money, but probably everything my roommates owned as well.

If you don’t have insurance, call your agent today and get it setup.

2. Know what is important to document

You don’t need to document the notes you took in science class in the 10th grade. You don’t need to document the peanut butter in your pantry. You do need to document your couch, tv, and furniture.

Don’t waste time documenting things that are worthless in the eyes of an insurance company.

3. Grab a camera/video camera and go

The easiest way to document your belongings is to grab a camera and start taking photos or video. Digital cameras are so inexpensive these days that even if you don’t have one, you probably know 20 people who do have one.

You’ll want to take pictures of all the major items in your house. Here’s a short list: furniture, electronics (iPod, computer, laptop, TV, DVD player, stereo), clothing (especially high quality, expensive suits and the like), and even your appliances. For electronics it would be wise to document the serial and model numbers off of the back to prove that you did have this brand DVD player and that brand expensive gizmo.

4. Create extra documentation

The pictures are a great start and you’re already ahead by doing that. But you’ll also want to convert those photographed items into some sort of easy to digest list. I would put the items into an Excel worksheet and document room by room. Something like this: In the living room, we had the TV, the couch, the DVD player, and the stereo system. Those items are worth $X each. Now in the office we had…

Having a list that you can hand over to your insurance company (along with photos) can go a long way in helping you out.

5. Store your documentation in a safe place

All of this work is essentially worthless if you don’t store your documentation in a safe place. What’s a safe place? Somewhere outside of your current home (and not with your neighbor). Try a safe deposit box, or a box at your parents’ house.

Imagine you do all of the above steps, but leave the Excel worksheet and photos on your computer. Your house burns down or is destroyed by a tornado. The computer is gone, and along with it your documentation.

I also recommend storing it at least a state away. Look at Katrina. If you have your documentation in a safe deposit box at the bank down the street and the bank is also wiped out by the natural disaster, you’re still up a creek without a paddle. We store ours with our parents who live 6 hours from here and are unlikely to be affected by any natural disaster that affects us.

What about you? Do you have your belongings documented? Where do you store them? How did you go about it? Leave a comment so others can learn from you.

At the risk of sounding heartless, I’ve got to vent about this article at CNN titled “Mom forced to live in car with dogs“.

An excerpt (emphasis mine):

A former loan processor, the 67-year-old mother of three grown children said she never thought she’d spend her golden years sleeping in her car in a parking lot.

“This is my bed, my dogs,” she said. “This is my life in this car right now.”

Harvey was forced into homelessness earlier this year after being laid off. She said that three-quarters of her income went to paying rent in Santa Barbara, where the median house in the scenic, oceanfront city costs more than $1 million. She lost her condo two months ago and had little savings as backup.

“It went to hell in a handbasket,” she said. “I didn’t think this would happen to me. It’s just something that I don’t think that people think is going to happen to them is what it amounts to. It happens very quickly, too.”

Okay. This housing bust has definitely been rough. I agree. It’s even hit the middle class that has been overextending itself (hooray negative savings rate).

But this story is purely devoted to pulling on your heartstrings for a woman who doesn’t really deserve it. That may be a bit harsh, I’ll admit that. I don’t know all of her circumstances and I do feel bad for her.

Again, she said 75% of her income went to paying rent. What? Seriously? That is more than 100% greater than what is recommended as the maximum (generally 30-36% is considered the maximum % of income to go to housing).

The story goes on to tell that she had no savings to help her when she lost her job. Well, duh! If 75% of your income is going to rent, how could you even afford gas, car insurance, or food?

CNN Money has been doing a lot of articles about the recession, slumping economy, and credit/housing crisis and how it is affecting average Americans. A lot of them are extremely overextended and used home equity to buy big toys or send their kids to college. The chickens have come home to roost.

Everyone out there should take the lessons being learned by these poor folks to heart. Don’t buy a home with 105% financing. Don’t pay for your kids’ education with a home equity loan. Don’t buy a house as an investment — buy it as a place to live. Spend less than you earn… don’t spend 75% of your income on housing. The list could go on and on.

I’m not trying to be harsh, but when you sign that 3-in-1 ARM that resets to 9% at the end of your loan, you can blame no one but yourself. You should understand what you are signing when you sign your life away.

(Photo by terren in Virginia)

Yesterday I told you not to buy depreciating assets on credit. Today I’ll share my thoughts on buying appreciating assets on credit.

For starters, let’s get some definitions hammered out.

What is an appreciating asset, and what do you mean by credit?

An appreciating asset is anything that increases with value over time after you buy it. If you bought a Picaso painting for $2 million and three years later it is worth $4 million, the asset has appreciated (gone up) in value. The picture above is a sculpture in Chicago. I’m guessing it might go up in value over time, making it an appreciating asset.

For this post I’m not going to focus on just credit cards when I say credit. Why? Well, usually you aren’t going to be buying appreciating assets on a credit card because credit limits are not very high compared to most appreciating asset costs. There are exceptions to every rule, of course. You might be able to buy some antique glassware on a credit card that ends up appreciating. However, for the most part an appreciating asset is going to be something big like a house or classic car.

Additionally credit card rates are generally too high to overcome to earn a significant return. If you’re being charged 15-30% interest, the asset would have to appreciate extremely quickly (and very high) for it to be worth using a credit card.

Why Buying a House on Credit is a Good Thing

The most obvious reason credit for large items like a house is overall very positive is the simple fact that very few people could afford to purchase homes up front with cash only. Home owners tend to be more stable and feel more control over their lives than when living in an apartment complex.

Getting people into homes is great and all, but isn’t the main benefit of using credit (a mortgage) to purchase a residence. Up until the recent housing frenzy and bust, homes generally have appreciated over time. And with mortgage rates being extremely low (5.5-6.5% for a 30 year fixed rate)… and the government giving a tax break on mortgage interest… then it makes a lot of sense to own a home.

Now I will say I am not a fan of “investing” in your house. You buy a home to live in it, not to profit from it. I don’t want to tie up my retirement plan in my home. As we have seen with the recent housing bust, that can make your wealth disappear overnight.

But watching the house appreciate over time is a nice bonus, especially since the money you received is very cheap. Today’s mortgage payment of $1,000 will over time become cheaper and cheaper to the home owner because of inflation. With a payment that costs you less in real dollars over time, plus the added bonus of even slight appreciation, home ownership is a good deal.

The Bottom Line

If you can be absolutely certain that the asset you are buying is going to increase in value by a specific amount, you can easily run the math to see if borrowing money to purchase today is a good idea. For example if I can be guaranteed that an asset I buy today for $10,000 will be worth $20,000 in one month’s time, I can afford a very high interest rate if I were to borrow the full $10,000.

If you cannot be certain or guaranteed the value will increase, you can still consider buying on credit. A home is a good example. Home prices in our area may not go up meaningfully in the next few years. We may not see a solid return on our money “invested” in the house. But over time, I can be fairly certain our house will be worth more than it is today.

The main problem people run into is they purchase assets on credit that are virtually guaranteed to go down in value. Buying a new car with 100% financing is an easy way to make sure you will lose money on the deal… every time. So not only should you try to change your behavior and only buy appreciating assets on credit, you need to avoid buying assets that are guaranteed to depreciate when you buy them.

(Photo by natebeaty)

I’m not a huge fan of homeowners associations.

Correction, I’m not a huge fan of overly restrictive homeowners associations.

The concept makes sense. You come up with some set guidelines to make sure that no one in the neighborhood paints their house glow-in-the-dark green or keeps a flock of flamingos in the backyard. You make noise rules so that no one throws a jazz festival or runs a dog farm in the backyard. I like that, thumbs up there.

What I don’t like is that any changes you want to make to your house has to be approved. If we wanted to add a second tree to our front yard, technically, we have to wait for approval. When we got DirecTV, the guy told us it had to be mounted in a certain place on the house. When I called the association for permission, they said it had to go as far back as possible. I looked around the other houses that had been done the exact same way — close to the front, but on the side — and said okay.

I also don’t like that the association meetings are typical gossip sessions. I haven’t been to ours, but I think it’s a fairly common phenomena.

However! I will say that our homeowners association actually was worth something this week. We pay $440 per year to the association currently. A neighbor down the street let their yard just go to hell and back. They moved out, there is no “For Sale” sign out front. I would bet good money on it that the owners had a 0% down adjustable rate mortgage that they now cannot pay. Instead of trying to get rid of the house, they are just walking away. They left a huge pile of trash in the driveway — not bagged, not canned — and as I mentioned let the yard just go. The backyard in some spots was close to waist high. Seriously. I’d get lost in there.

Needless to say, it was an eye sore.

I had been meaning to call the association simply because the trash people won’t pick up trash that isn’t in a can. Even if it is laying all over someones driveway and obviously is trash. But someone beat me to the punch. Wednesday night I came home from work and there were two trucks, a trailer, and a group of five guys mowing, edging, and cleaning up the house.

So for this week, I say hooray Homeowners Association. Now if it were only free…

The weeHouse by Alchemy Architects is by far one of my favorite prefab green homes on the market. The weeHouse can be built in several forms ranging from a 341 sq. ft. studio to a 1,230 sq. ft. two story “tower”. Everything is built within the factory and placed on a truck to be taken to your site. The truck arrives, offloads the house onto your foundation, and you hook up utilities. Bam, you’ve got a house.

Pretty impressive. The photo above doesn’t do the house or the website justice. Some very nice photos of actual installed homes (again, people are actually buying these) are shown.

Info from Fab Prefab:

• Complete factory-built dwellings that arrive on trucks ready to live in.
• Available as studios, one- and two-bedroom, kitchen/living, sleeping, and stair models.
• Can be customized or combined to fit any need: House, Cabin, Office, Addition, Rooftops etc.
• On-site work includes the foundation, utility hookups (sewer, water or electrical supply), and simple fitting of the modules.

Pricing for Your weeHouse

Costs vary from market to market and on size of your weeHouse. Some examples below.

• Studio: $70k
• Small: $80k

The website is unique, not very proper “architect” which I guess you might expect from a group called Alchemy Architects. The only hiccup I had was some of the links did not work in Firefox. An example is the very nice brochure. Clicking in my version of Firefox gave me nothing, clicking in IE gave me the brochure.

I’d love to drop one of these off out in the middle of some vast land if I could get a complete off-grid setup going. And buy off-grid I mean internet, cell phone access, solar/wind power, clean water source, etc. And for the price you really could do that.

I’ve told you about the experience my wife and I have had learning how to tend to our lawn and plants at our new home. We’ll continue to share stories of our rookie mistakes like how we bought weed killer on clearance as our lives progress.

I’ll get to the plants that pay dividends in a minute, but a brief background on our landscaping and gardening abilities:

We did some more landscaping a few weeks ago. It seems every time our parents come to visit, we put them to work in the yard. They seem to enjoy it though — they have green thumbs. We have brown. They are doing everything they can to get a hint of green in our thumbs.

Our parents tend to love saying “Oh, with this plant you just can’t kill it.”

A few weeks later and all we have left is brown, crispy, crunchy, ruined plant. It never fails. Brown thumb strikes again.

Seriously, buy plants that pay dividends

Honestly… in general, I like plants. Green, yellow, red… they’re all fine to me. You might go as far to say I find them aesthetically pleasing (just don’t tell me group of guy friends). Take the plant to the right here, Dianthus deltoides. We have some form of dianthus that my Mom brought from home planted in the back. Apparently it should spread over the years and take over the area it’s in. We’ll see — we’re just trying not to kill it.

Now if I could only buy plants that money would grow on, I’d be set!

Until I am able to breed that plant in my laboratory (what, I haven’t told you about my laboratory?), I’ll stick with other plants that pay dividends.

We’re not talking about public corporations that make plants. Or plants that earn you 3% cash dividends. No, I’m talking about perennials.

For those like me (the uneducated gardner): There are two types of flowering plants: annuals and perennials. Annuals are plants that you have to plant annually. You plant them once, they bloom then seed themselves, and die. I used to think it was the type of plant that came back (without needing to replant) annually. “Annuals come back annually, right?” Not so.

Instead, perennials are flowers that you plant once and they reappear every year* with minimal effort. Of course minimal depends on your definition of the word. Plants need water, proper soil, and maybe a bit of fertilizer so it isn’t necessarily a no-work required deal. But it’s a lot better than replanting annuals every year.

* = Perennials can apparently be short lived as well, but usually live up to two years. Some can last eons.

It’s a bit of a stretch to make this comparison, but what the heck: buying perennials is kin to investing in a stock that pays a consistent dividend payment.

1. Buy once.
2. Plant once.
3. Enjoy multiple years of flowers.
4. If you’re lucky and have a green thumb, your plants might even spread and grow extra plants. This is equivalent to reinvesting your dividends in a DRIP plan. Your plant DRIP plan will work better if you use water. Ha-ha.

What do you think? Are you a fan of annuals-only, perennials-only, or a mix? And stick around, tomorrow I intend to have an article up about a modern pre-fab green home that I’d move into today if I had the chance.

I received a comment recently on the article where I asked How Much House Do You Buy Each Month? Nuggie asked,

How does escrow fit in, and does it ever make sense to prepay escrow?

Here’s a brief overview of escrow in relation to a home mortgage. (You can also get the general idea from Lending Tree’s information on escrow. The following is just my opinion.)

A quick explanation of escrow

Escrow is an account that the mortgage company opens up for you to hold onto different monies. Your homeowners insurance and property taxes are the most common uses for escrow. Part of your monthly payment includes your escrow monies. That means the mortgage company is holding onto your money to insure that you pay your property taxes and homeowners insurance. In fact, they pay them for you.

Why does the bank hold onto escrow for me?

The bank has a vested interest in the house. They require you to have insurance so that if it burns down, you can pay back the money they lent you. They require you to pay your property taxes so that your state/local government can’t take the house from you. That makes sense from a business perspective. I’m not going to lend a few hundred thousand dollars out to someone if I can’t be reasonably sure I will either get the money back or get the asset into my ownership.

Should I ever prepay escrow?

There are not many situations I can dream up where you would want to prepay your escrow. I do know that our mortgage holder, Suntrust Mortgage, gives us the option to apply any additional payment to escrow. As we discussed, escrow payments are based off of your insurance and property tax costs. This should stay fairly consistent year to year. However, a new tax assessment or perhaps upping the coverage on your house could increase either of the underlying costs behind escrow payments.

Your bank may also only make adjustments once per year. Our taxes should be lower than what we are paying into escrow because we were able to homestead our home here in Alabama. But Suntrust told us they only adjust the escrow payment for taxes once per year. If you were going the opposite direction — higher costs — then you might want to start paying extra each month so you don’t end up owing a large amount to your escrow account at the end of the year.

(Photo: Mill Street by Paul Keleher)

Have a question? Don’t be afraid to ask! I love to help clear up concepts or issues for readers. Or feel free to bash me. Whatever feels right. Drop me a line, or leave a comment on a post.

Sometime in the past two weeks I was working on No Debt Plan with the TV on in the background. We happened to have the channel on HGTV, and the show “My First Place” was on. I also happened to have it two nights ago when I was writing this article.

As you might imagine, the show is based on the premise if helping first time home buyers find that perfect first home. It also is a great opportunity to show off some really, really bad decisions. After watching the show, I can see exactly why we have a foreclosure problem in the US right now. (Photo: Four letter word by Justin Shearer).

The first episode included a married couple that lived and worked in Seattle. Combined, the couple earned $100,000 per year. As the show unfolded, I started to sigh to myself. Apparently, this is going to be frustrating to watch. They visited several properties ranging from single detached homes to condos. Their original budget was, if I remember correctly, $230,000 to $250,000.

They didn’t like the condo because it felt like they were living in an apartment. I don’t blame them — we didn’t like condos/townhouses we visited either. Of course, they saw a few options that they always found something wrong with. Either the commute was too long, or the grass wasn’t just right, or (name your excuse here). So they started to look at houses that were more expensive than their budget.

The couple did a whole slew of things wrong that really disappointed me in the show. You’d think instead of just taping a disaster-to-be that the show would offer some advice. Apparently not. They ended up with a $262,000 house, a 6.75% interest-only mortgage. Unbelievable.

Some mistakes I picked up on:

• They were not pre-approved for a mortgage, so they were shopping prices that they did not know they could get a mortgage for. A pre-approval process would help them figure out what they could afford on a 30 year (or 15 year) mortgage.
• They had no savings. None. If you are making $100,000 per year and have nothing to show for it, something is seriously amiss.
• The mortgage they chose was terrible. The broker or lender they chose should be ashamed of themselves. They even laid out the numbers on what a fixed mortgage would be, but going to interest-only would save them $200 per month. Of course, they will never own their house, but they said they would pay extra in principle after they were settled. Coming from people without savings, I highly doubt it.
• They spent above their target budget. They ended up in a $262,000 house and the target price was $230,000 to 250,000. Of course their initial expectations may have been unrealistic. I think that is fair to say with most first time home buyers. But they still spent above what they targeted on the high end by $12,000. That’s no small amount of money.

The second episode was fairly similar. It featured a single woman in Atlanta that was trying to get out of her apartment. She worked as a personal assistant and was starting an event planning company on the side. She connected with one of her sorority sisters that was in real estate. Her target price was $250,000 to $260,000.

The realtor took her from house to house, and of course there were things she didn’t like about the houses that were in her range. She settled on a $265,000 house and offered $262,000 with the seller paying closing costs. As she signed the offer sheet, she became very nervous about being able to afford the payments. She was hoping she could be approved for it. Again, no pre-approval letter showing what she could afford.

A house inspector came and found a few small things wrong with the home. They were fixed by the seller. The week before she was to close on the house, she was laid off from her position. She had until the following week to find employment so that she could close. Unable to do that, she ended up losing the house. (I do wonder if she lost any money in the process, like deposits, etc.)

She was lucky because she lost her job before she got the house. Imagine moving into your house the day you lose your job. This isn’t entirely her fault, but there were still several mistakes she made along the way.

Overall, I am disappointed that the show doesn’t offer any advice to the first time home buyers. Instead, they seem to just document what is happening.

If it were my show, this is the advice I would give first time home buyers:

1. Get pre-approved for a 30 year fixed mortgage. Don’t consider any other options except a 15 year fixed mortgage. None of that interest-only or ARM junk.
2. Save for a down payment. The market will probably require a 10% down payment for most areas these days. We only put 5% down, but we are rapidly paying down the principle on the mortgage to get to 20% as fast as possible (currently at 7-8% in 6 months — not bad). Putting down just 5% may have been a mistake for us as well. I’m not saying we’re perfect.
3. Based off of your pre-approval, find out how much house you can afford. If your range is $230,000-250,000, don’t buy a $259,000 house. It is out of your range. You may even be approved for more house than you need. Don’t make that mistake either. (Just because the bank says you can afford $300,000 doesn’t mean you need that much house.)
4. Consider all of the costs involved. The mortgage and realtor fees is just a starting point. Don’t forget the cost of moving, closing costs, and furnishing the house. If you live in a one bedroom apartment and buy a three bedroom house, you now have two extra rooms to furnish. Throw in lawn, garden, and patio furnishings and it really begins to add up.