Chris Butler’s vision for his life is clear: to become a homeowner and landlord. Now, the 27-year-old is taking steps to turn this dream into a reality. He recently put in a bid for a duplex, which will provide him with a home and rental income. The Columbus, Ohio, property is selling for $207,000; Butler offered $189,000. “I was going to settle for the asking price, but I want to fight for a good deal,” he says.
The duplex, built in 1980, is in good condition. Butler expects a mortgage of about $1,200 a month. He’s anticipating getting a loan from the Federal Housing Administration and putting down 3% as a down payment. Whether this particular deal goes through, Butler is confident he will own property by the end of the year.
As a systems engineer/developer for Ohio State University, Butler earns $62,000 a year. He has taken some solid first steps by accumulating $23,000 in a pension, $2,200 in a 403(b), $3,000 in savings, and roughly $500 in individual stocks. As for debt, Butler has a balance of $2,500 on one credit card. His biggest burden is $42,000 in student loans.
Butler also has a problem with undisciplined spending. “I’m trying to figure out where my money is going,” he says. With a monthly take-home pay of about $3,400 and bills averaging $2,000, Butler has $1,400 in discretionary income. Just over $800 is deposited directly into a savings account; the rest, says Butler, vanishes. “I pretty much eat out for all my meals, so I bet that’s where a lot of my money is going,” he says.
The young techie wants to start a family and sees himself semiretired by the time he’s 40. What’s going to get him there? Let him tell it: “real estate and creating my own software company.”
THE ADVICE
BLACK ENTERPRISE recruited Larry Folmar of Folmar Financial Group in Southfield, Michigan, to take a look at Butler’s situation. “Chris has some right ideas about what is required to achieve financial success,” he says. “He just needs structure.”
The following are Folmar’s recommendations:
Eliminate credit card debt. While $2,500 isn’t a large sum of credit card
Increase emergency fund. The $3,000 Butler has in savings is a good start, but Butler needs to save up an emergency fund equal to nine months of living expenses. “I’ve moved beyond recommending the traditional six months living expenses to compensate for the length of time it takes someone to be re-employed after job displacement,” says Folmar. Butler should put the $2,000 contest winnings in the ING account to contribute to his emergency fund.
Pursue real estate. Folmar says choosing a
duplex is a wise decision. If the current offer is accepted, or when another deal comes before him, Butler should consider creative financing such as an 80/20 loan, two mortgages that will allow him to finance the down payment (20%) and the purchase price (80%). This type of mortgage is ideal for people like Butler who have limited funds for a down payment. It also eliminates the extra burden of paying private mortgage insurance, which is typically required when purchasers put less than 20% down.A duplex is also appealing because it is an appreciating asset that will bring in supplementary income. Interest costs are 100% deductible and, as Folmar explains, “Chris can change his payroll withholding allowances to get the tax savings into his paycheck. Renting out the duplex will further increase his monthly cash flow.” Butler also needs to attend homeownership classes to learn how to maintain and manage his property.
Assess asset allocation. Butler invests $75 a month in stocks. Folmar recommends increasing his monthly contribution and investing in mutual funds. According to Folmar’s review, about 60% of
Butler’s 403(b) is invested in one asset class. “While this may work in the short term, in the long term, it could have unfavorable consequences.” Butler should determine his risk tolerance and then reallocate his 403(b) using at least four to five asset classes.Take advantage of tax credits. Butler has a student loan of $42,000, with a 3.5% interest rate. Were he to pay $300 a month, it would take him 15 years to pay off the loan; he’d also pay $804 in interest annually. Currently, the government allows a maximum student loan tax credit of $2,500 for those whose adjusted gross income (AGI) is $65,000 or less. Butler qualifies and can lower his AGI by increasing his 403(b) contribution, says Folmar. “Chris is on the right track,” says Folmar, although his goal of retiring at 40 is a lot to ask. “He knows the building blocks for a sound financial future. He’ll get that duplex today, an apartment or office building tomorrow. As he further defines his plans, he’ll end up where he wants to be.”
|
HOUSEHOLD INCOME |
|
| Gross Income | $62,000 |
| ASSETS | Â |
| Savings | $3,000 |
| Pension | 23,000 |
| Stocks | 500 |
| 403(b) | 2,200 |
| Two Bonds | 50 |
| IRA Account | 25 |
| Total | $28,775 |
|
LIABILITIES |
|
| Student Loans | $42,000 |
| Credit Card Debt | 2,500 |
| Total | $44,500 |
| NET WORTH | $-15,725 |