Thursday, April 27, 2017

5 Unexpected Benefits Of Living In A Good Neighborhood

Welcome readers from TheSavvyCouple!

If you've been reading for a while, you may recall that we have moved around the country a bit and are currently living in our third house. Each time we've moved, we've learned a little bit more about the home buying process. Some of the latest lessons learned in real estate are not things that I was expecting to learn.

When we bought our last house, we really were focused on the house itself and the cost. We thought the location was 'good enough', but we really didn't know the area. During the time we lived there we had our house broken into, learned that the public schools were unaccredited, and even heard gunshots from a nearby area that we didn't realize we lived so close to. Location, location, location. Got it.

As we searched for our current house, we focused on having the things our previous neighborhood lacked. We now live in a great neighborhood that was built about 20 years ago. Although the houses are starting to get a little bit older, the architecture is very traditional and the homes and yards are all very well maintained. Curb appeal. Got it.

We were attracted to this neighborhood because of the large lot sizes, the awesome school district, low crime, and overall privacy. Each time we've moved, we have learned a little bit more about what is important to us in a house and neighborhood. In our current house I've realized that there are actually some really great benefits of living in a nice area that you may not be thinking of.

An Established Neighborhood Is Better Than A New Neighborhood


Our last house we built brand new in a new subdivision. The house we live in now is 20 years old. When all the houses in a neighborhood are new, it's expected that the everything will look great. But until they are all maybe 5-10 years old, you really don't know how well people are going to maintain them. This can impact your property value and have an impact on how quickly you can sell when that time comes.

One other interesting observation is that where we live, your typical first-time home buyers are priced out of our area. I have a theory that neighborhoods are better maintained by people who have previously owned homes. First time home buyers might bite off more than they can chew financially, which can limit the ability to perform maintenance. They might also underestimate the time commitment needed and grow complacent with neglecting proper maintenance.

That's not to say that no one in our neighborhood is living beyond their means, but people are established enough so that they know what is needed to maintain their homes physically and financially. One piece of evidence I can point at to support this theory is that the foreclosure and short sale rates seem to be inversely correlated to home price in our area.

An HOA Can Add Value


Contrary to popular belief, HOAs can actually add value. But that isn't always the case. Our last neighborhood had an HOA where we paid around $350/year and I really don't get anything for it. We had an embarassingly large percentage of homeowners who never paid their dues, and the HOA didn't have the power (or money) to enforce collections. If people didn't mow their lawn or adhere to other covenants, the HOA really had no enforcing ability. It was useless and a waste of money.

Contrast that with our current neighborhood and it is night and day different. Here we pay $700/yr, but have access to incredible neighborhood amenities (pool, tennis, etc.). Our HOA sponsors tons of social events and has newsletters and communication that really help build a great community. 95% of homeowners pay their dues on time and the HOA finances are managed very well. The HOA has almost $200k in cash reserves for major repairs so the odds of a surprise assessment are virtually zero.

Schools Matter


In The Millionaire Mind, Thomas Stanley surveyed households with net worths exceeding $10M to observe differences and similarities to households with net worth between $1M and $5M. One thing that stood out to me was that people in that demographic tended to buy homes in established areas with great schools so they didn't have to pay for private schools.

I think I always knew that schools mattered, but now that I have a child in school I have been very impressed with the experience we are having. This is especially true when compared to stories I hear from friends with kids in the neighboring counties schools.

Informal Mentoring


One thing I really didn't expect when I moved into a nicer area was the career benefits. When I go to the neighborhood pool, church, or the grocery store, I often run into people I recognize from work. I've had that happen before, but being in a nice neighborhood surrounded by even nicer neighborhoods, pretty much all the people from work who live near me are higher in the org chart than me (our CFO even used to live not far from us).

Because of my proximity to company leadership, I have had a lot more personal interactions with people who can be intimidating at the workplace because they might have several thousand people under them. I've done things like campouts, Sunday dinner, and carpool with people I consider friends, who just happen to be officers of a Fortune 100 company. Even those who don't work at the same company are often in very senior positions in their companies.

I don't ever want to abuse my relationships to advance my career but have found these friendships provide a lot of opportunities for me to be mentored, especially on navigating my career.

Free Stuff!


We get offered so much free stuff from our neighbors, we have to say no. We're talking about really nice stuff too. One friend gave us $1,000 worth of Thomas the Train toys his son had outgrown. He also gave us a 55" TV that he didn't want anymore (which ended our 6 year stretch of having no TV). The same friend offered us almost new furniture that wasn't big enough when they moved to a new (very large) house.

We've received clothes, toys, playsets, you name it. Not only do our neighbors tend to buy nice stuff, but they also don't have very many children. This means that things don't get too beat up before we have our four kids do their handiwork.

In our area, we have donation centers for Goodwill/Salvation Army, etc, but none of the corresponding Goodwill/Salvation Army stores to actually buy things. I've found many people would rather give things to people they know than a faceless organization for a tax writeoff they'll probably forget to take.

Every time we move, I'm sure I'll learn more about what is important to me in a house. Recently I've learned that living in a nice neighborhood has benefits I hadn't considered. An established neighborhood has had time to mature and you can know what to expect. HOA's can add value when done right. Paying extra to live in a good school district may actually save you money over time. People buy and give away a lot of stuff. Being on the receiving end in a nice area you can get a lot of great stuff for free. The most unexpected thing I've learned is that living in a nicer area can create opportunities for informal mentoring.

Thursday, April 13, 2017

Overreaction leads to Underperformace

Have you ever heard of the Dalbar study? This company does an annual study that looks at the impact of investor behavior on returns. What they've found is that over time not only do mutual fund investors underperform the market, but they also underperform the underperforming mutual funds. Wow...that's a lot of underperforming.

This underperformance is attributed to picking the wrong mutual funds and getting in and out of the market at the wrong times. Since it is impossible to time the market, I would argue that it is always the wrong time to be getting out of the market.

Here's an example of a chart Vanguard put together using data from the Dalbar study:


source: Vanguard

What do YOU do when the market gets scary?

The answer to this question should be "nothing" or "buy more". Sadly, research shows that many people do exactly the opposite. Selling everything when things are scary can feel good and provide a sense of safety in the short term. These same people will buy back in 'when the coast is clear', which typically means prices are much higher than when they sold in the first place.

For your long-term investment strategy, sitting out of the market is the one big mistake that you can't afford to make. With craziness looming in North Korea and other parts of the world, it would be easy to self-justify getting out of the market right now. But when do you get back in?

Do you remember how Greece's economy was going to destroy global markets? How about the fiscal cliff and government shutdown? Oh, and let's not forget about the debt ceiling or the flash crash. For eight years the market has continued to rise, quickly recovering from any number of fear-inducing events. Over longer periods of time, short-term declines aren't even noticeable.

It can best be summed up by a chart I have framed on my desk at work from Behavior Gap.


The Value of a Financial Advisor

I am a Do-It-Yourself investor. I think most anyone can successfully manage their investments without a financial advisor. Financial advisors will point to the chart above and argue that you need to have your accounts professionally managed to protect you from yourself. While there may be some truth to that, I think all you need is someone who can talk you off the ledge.

Even though I am a DIY investor, I have a financial advisor. He is someone I used to work with and trust his judgment and integrity. He doesn't manage my accounts, but I get free dedicated access to him because of the size of my accounts. We talk a few times a year and he helps validate that I'm still on track to reach my goals.

If I ever were considering selling everything, he would (hopefully) be able to talk some sense into me and prevent me from making that huge mistake. The real value of a financial advisor is when they can remind you of your long-term goals in times of short-term uncertainty.

Sunday, April 2, 2017

March 2017 Net Worth Update

Wow, is it really April already? Hopefully, you avoided getting pranked too badly on April Fools’ day. Here in the DIY house, we don’t really like playing jokes on each other. We spent the day doing some spring cleaning of the garage and playing with the kids. As we enter a new month, it’s also time for another net worth update. In March, our net worth increased to $651,050. 

NET WORTH DETAILS



CASH


Our cash went down a bit this month, but it’s mainly because we did some large charitable giving. The largest chunk of this was our monthly tithe paid in March for February, which was a big income month. Additionally, we made our annual donation to our alma mater. With all that, I’m actually surprised that it only went down as much as it did.

We are working on growing our cash cushion but do have some decent size house project expenses coming up that will slow that down. These projects include a backyard fence and small kitchen remodel. Whenever we do projects we plan to do them without taking money out of our savings account .

INVESTMENTS


The market was essentially flat for the month of March, so our investments didn’t really change other than monthly contributions.

We still haven’t made the final payment for our hospital visit, which will come from our HSA included in this total. The only reason we haven’t paid it yet is that there has been some confusion on who we owe what since it depends on the timing of when claims are submitted whether we pay 100% as part of our deductible or 20% after our insurance kicks in. I think we’ve figured it out, but we had to get refunds from doctors who we paid in full but then didn’t need to since they took their sweet time submitting the claim and ended up getting paid mostly from our insurance.

What a mess. I really hate dealing with doctors’ offices. Thankfully they are used to this confusion and aren’t in a hurry to get paid by us and they won’t send the repo man looking for our baby if it takes another couple of weeks.

CARS


I crossed over 200,000 miles in my Corolla this month! It was a bit anti-climactic but does feel like a pretty big accomplishment in delayed gratification and proper maintenance. We’ve been prepping/planning for a replacement vehicle for a little while now, and I had been thinking that something like a used Lexus was in my future. When I did a little bit of shopping, though, I found that I can actually get a brand new Corolla for cheaper than a 5-year-old Lexus. We aren’t pulling the trigger anytime soon, but I’m now leaning towards a newer, less luxurious car when that day comes. Either one would be a huge upgrade from my current vehicle.



I walked through this logic the other day while carpooling with a co-worker who suggested I get an even more expensive car brand new (they don’t make ‘em like they used to, right?). Rather than give him a sermon on FIRE (Financial Independence, Retire Early), I just nodded and said: “hmm, something to think about”. I’m not going to change his mind and he’s not going to change mine. We can still be friends, but we are at different stages in life/career and don’t have the same early retirement goals. He earns ~4x as much as me, drives a $100,000 car, and is already at the age that I plan to be when I have the option to retire.

HOUSE


Nothing too exciting here other than continuing to pay a little extra on the house each month. We plan to kick this into overdrive once our cash balance gets a bit higher, but we are only paying $600/mo extra until then. A house down the street is for sale and they are asking $490k, so $450k doesn’t seem unrealistic. In the years since moving here, I’ve learned that many of the same features that attracted us to our neighborhood are qualities that continue to attract buyers (proximity to great schools, large lot size, neighborhood amenities, traditional architecture, etc.), which helps houses to sell quickly.

529s


We first started funding our 529s about a year ago and I haven’t included them in our net worth figures. I still don’t plan to even though it is all technically still ours, but I will track it here. It is worth including to show what we have been saving and how that amount continues to grow.

We add $200/mo and have it allocated 100% towards equities. I know this won’t be enough to fully cover college, but we are torn on how much support to provide. I had limited financial support for the first half of college but was on my own entirely for my MBA. My wife was completely on her own for her entire degree. She finished with no debt and I had some debt for undergrad, but we planned and saved aggressively to finish my MBA with no debt.

I know all about the rising costs of education, so hold the hate mail. I also believe that there will always be a way to get the education you need without debt. We’re savings towards our kids’ college, but don’t want to have it all in a 529 so we preserve flexibility on how much support we provide.



So that’s it. Another good month of building our net worth, and we’re still on track to hit our 2017 goal of $700,000. Given the strong 1Q gains, we should get there if our return for the rest of the year is >3%.