When John Young was downsized from his job last year, he didn’t throw a pity party. He seized the opportunity to pursue his passion, and it could very well lead to his prosperity. In May 2003, Young was let go from his position as assistant to the president of the American Medical Association, a job he had held for nearly a decade. Initially, the single 34-year-old, who has no children, didn’t even look for a job because, quite frankly, he was tired. Not only had Young been working his 9-to-5, but when he purchased an apartment building five years ago, he became a landlord. And, in his “spare time” he worked as a disc jockey at parties, weddings, and nightclubs. The layoff left him with a severance package worth two months of his $48,000 salary, and plenty of time to think.
“I took a minute to catch my breath,” says Young. He had the luxury of taking a break before beginning his job search, since his eight-unit Chicago apartment building was bringing in $4,000 in monthly rental income. He also began collecting unemployment, and his DJ business chipped in about $3,000 a year. The slower pace, and the peace and quiet, agreed with him. So he decided to pursue purchasing more rental properties as his primary source of income.
Young’s practical side has moved him to look, at least casually, for another full-time administrative position. But since the end of last year, most of his enthusiasm has been channeled into hunting for another building. “I’ll definitely have another building before the year is out,” Young says with optimism.
Such spirit shows that Young is determined and disciplined — and so does the way he manages his money. He has $40,000 in a savings account waiting to be used as a down payment on a new building. He also has $12,000 in a checking account; $40,000 in a 401(k) account from his previous employer; $21,000 in a mutual fund; $2,000 in an IRA; and $23,000 in an emergency fund, should something unexpected crop up with his property. In just five years’ time, he’s whittled down the amount he owes on a $150,000 loan, taken out to rehabilitate his first building, to $58,000. And he has no debt outside of his mortgage.
What’s his secret? “I don’t spend frivolously. I don’t buy the latest gadgets, or $500 suits, or go out to dinner five times a week,” says Young, who adds with a laugh, “I was born this way.” It helps too, he says, that he was too busy working his full-time job, handling much of the maintenance at his apartment building, and landing gigs to have the time to spend his money.
Peering some
five years into the future, Young sees himself married with children and the owner of five buildings. As for a full-time position in corporate America, says Young: “I’m not saying never, but if I do go back, I want it to be by choice rather than by necessity.”The Advice
To assess Young’s financial and real estate aspirations, Pierre Dunagan, president of The Dunagan Group, a financial advisory firm in Chicago, looked closely at Young’s situation. Simply put, Dunagan was impressed. “He’s the poster child for doing it right — for sacrificing for the short term to achieve long-term goals,” he says.
Continue acquiring real estate. Young’s one building covers his expenses, and each month he has about $1,000 left over that he can continue to pile into his acquisition fund. “By buying apartments, he’s buying streams of income,” says Dunagan. “He’s essentially buying a salary for himself.”
In time, Young would like to clear between $8,000 and $10,000 a month from real estate. To reach his goal, he’ll need to net an additional $4,000 to $6,000 per month in rental income. Dunagan says that by purchasing two or three small properties, netting at least $2,200 a month per building, Young would put himself in the ballpark. “That $6,000 would pretty much be gravy,” says Dunagan.
Dunagan advises Young to focus on buying properties with four
units or less, because he can purchase them with only a 10% down payment (20% is required for buildings with five or more units, because they’re considered commercial properties). “Putting 10% down will keep him from depleting his acquisition fund,” says Dunagan.Tackle the first mortgage. Dunagan says Young should concentrate on paying off the mortgage on his first building. “Paying off that mortgage will free up $1,200 a month in cash flow,” he says. Ideally, Young should quickly purchase two additional smaller properties, and then begin applying $1,200 a month from the rent money he collects to aggressively pay down the mortgage on his first building.
Purchase a primary residence. While the $400 rent Young pays for his apartment isn’t burdensome, he should set a goal of buying his own home within two to three years. With the cash flow from the apartment buildings and Young’s history of disciplined saving, Dunagan says obtaining a home shouldn’t be a problem.
Shore up retirement savings. Young is off to a healthy start for his retirement. Analysis of his 401(k), IRA, and mutual fund accounts, Dunagan says, reveals that Young has a diverse portfolio of small-, mid-, and large-cap stocks, as well as international assets. Dunagan recommends that Young set up a variable annuity with a mutual fund option so that he can take advantage of the tax deferment while maximizing growth. The $2,000 contest winnings could be used to start the account, to which Young could then contribute $500 a month.
Protect the investment. Bad tenants can create maintenance costs, and if they don’t pay the rent and have to be evicted, there are legal expenses and loss of income to deal with. That emergency fund of $23,000 is a safety net.
Invest in insurance. Young has been careful to buy property and casualty insurance to cover rebuilding costs and pay off his mortgage in the event of a fire. Dunagan says Young should purchase similar coverage on all future properties.
Create an estate plan. Dunagan says Young needs to look at estate planning to pass his assets onto the right family members in the event of his death. He won’t have to worry about estate taxes because his estate is just under half a million dollars. At some point, Young will also need to add life insurance as a part of his estate plan. However, it makes more sense for him to develop a living trust to hold and manage his property and assets. Dunagan notes that assets transferred in a trust are immediately available to his heirs, saving them the time and expense of probate court. Unlike a will, a trust cannot be contested.
Financial Snapshot: John Young
|
HOUSEHOLD INCOME |
|
| Gross Income | $51,000 |
|
ASSETS |
|
| Market Value of Apt. Bldg. | $350,000 |
| Savings | 40,000 |
| 401(k) Retirement Plan | 40,000 |
| Emergency Fund for Apt. Bldg. | 23,000 |
| Mutual Fund | 21,000 |
| Checking Account | 12,000 |
| IRA | 2,000 |
| Total | $488,000 |
|
LIABILITIES |
|
| Mortgage | $58,000 |
| NET WORTH | $430,000 |