Total net worth or passive income: which metric to chase?

I have been thinking a lot on which metric shall I use to measure how close I am to financial independence. Both total net worth and passive income have as a basis my expected yearly expenses but whereas total net worth generally assumes a 4% net return rate, the passive income assumes that the amounts I am earning now can be replicated in the future. Both have flaws but both can be used as a guide.

In my specific case, I have invested mostly in real estate (on my way to buy property #2) and my investments yield more than 4%. Therefore, if I consider both properties and the passive income generated by them, 40-45% of my yearly expenses are already covered by these properties (potentially even more, because I can still decrease the amount of taxes I pay for both properties if I decide to create a company and deduct expenses and VAT, which I am planning to). On the other hand, if I use the total net worth metric, I am only 30% financial independent.

It is more conservative to target total net worth, which, in our case, is 870k EUR (my husband disagrees and think this is too low) but I will still celebrate when we reach 100% of expenses covered by passive income!

What about you? How do you keep up the motivation towards your goal?

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30% Financial Independent

I am currently taking a sick leave from work the whole week and I have to admit that I am actually enjoying staying at home. I have a 1-year old baby and it’s been over 1 year I am not home alone! So, despite the pain in my body and throat pain, I am actually enjoying this “time-off” from work. It got me even more motivated and more into financial independence because it allowed me to have time to do things I really enjoy:

  • I read 2 books I have been wanting to read for a long time (Misbehaving and When, totally recommend both!)
  • I have been reading more blogs on financial independence, running and updating my numbers and learning new concepts, in particular the difference between Full FI and Lean FI. I have realized I am a bit over 30% Full FI, which sounds great, because the following 30% will be much faster to reach than the first.
  • I have been doing yoga by myself and realised I need to learn more/do more, even though it is very challenging to find the time when you work full time + have a baby. I will definitely do a yoga teacher training once I decide to “retire”.
  • I have also been thinking on how to combine my two passions which are personal finance + girls empowerment. I am not specifically talking about the new movement current out there, I would like to focus more on how to help poor girls get through, empower them and help them to make sound financial decisions. Again, very difficult to do it in the country where I am currently living – Germany – not only because of the lack of time but also because I do not speak German fluently (not even close!), so maybe I have to delay this till when I go back to my home country. Meanwhile, I have to think what could I do online related to these topics. Any suggestion?
  • I have convinced my husband to finally start saving first, i.e., every month both of us will put in a separate account 2.5k each so that we manage to save 5k a month. Let’s see if we manage to do it! We start this month!

Even though there are many things I love about my work, to name a few being an international environment, my manager is an amazing coacher, my organization is very flexible in terms of working hours, the high salary, etc., working is definitely killing my creativity and separating myself from my true passions. I feel I would be of so much more use to the society if I could focus my time on helping others to achieve their own freedom and to thrive, either through personal finance or yoga/meditation practices. However, on the other hand, I feel I still do not know enough of personal finance or meditation to be able to teach. And because I work full time I cannot find the time to get better, or at least not as much as I would like to. I guess I still need to wait a couple of years and meanwhile I will try as hard as I can do improve my skills on the topics I passionate about, without being hard on myself for not being able to do it full time.

Financial Statement – February

February was a very bad month in terms of savings because my husband took unpaid parental leave and we have decided to go on holidays before he started a new job. However, personally it was very rewarding 🙂

Still, our net worth has increase by 2.5k when compared to January due to the increase in my pension amount and plus a bit of cash we managed to save. We have a lot of cash not invested because we will soon need it to pay Property #2 (and we will still need to ask for a loan because we will not have enough available). We will officially buy it once it is built, which should be in the following 2 months, hopefully! I am so looking forward to start cashing in!

Cash 45,700
Peer to Peer 854
Pensions 73,480
Security deposit for current house 4,000
Rental Property #1 100,000
Rental Property #2 133,000
Debt (Rental Property #2) -94,000
Total networth 263,034

Savings rate = 21%. My husband took parental leave the whole month so we were living on one income. Next month hopefully this value will skyrocket to at least 50%!

Rental property #1

As I have told you before, at the end of 2016, I have invested 100k in my first real estate property in the beautiful city center of Porto, Portugal. I bought it before it was built, so we were finally able to start cashing-in in the beginning of September 2017. We have decided to hire a property manager specialized in short-term rentals and until now it has been going great. Check out my property in Airbnb!

Here is a quick summary of the current situation, with actual values until January 2018 and estimated values for the future months:

net profit

I will have around 6400 Euros net per year which represents a yield of 5.9% on my initial investment (my initial investment includes not only the cost of the apartment, but also taxes, furniture, etc. anything I had to pay before the apartment was ready). It sounds like a pretty good investment to me! However, I can still improve it, as I do not have the most efficient situation in terms of taxes and I can maybe still negotiate the cost of the property manager.

This experience has been very exciting! At first, we were concerned and a bit annoyed because there were some delays in furnishing the apartment, so could not start cashing-in in August 2017 which is a pretty good month for tourism. But, once everything was settled, there is not much you have to do, apart from seeing the money coming in into our account every month! With so much free time, we have decided to do a quick analysis on the strengths and risks/weaknesses of our investment.

 

Strengths:

  • New apartment in the city center (my opinion is that the city center hardly ever devaluates, in particular in Portugal where prices are still low and the reconstruction of the city centers in big cities started very recently)
  • Perfect for tourism but also can be rented long-term (we were contacted by an agency with an offer for our furnished apartment which would yield us 5500 Euros net per year)
  • Tourism is growing at very high rates in Portugal and this growth is expected to continue in the future

 

Risks/weaknesses:

  • Legal changes in short-term rental laws in Portugal (tourism has been the main driver of growth so I think this risk is small but it should be considered)
  • Small apartment with no parking space

 

We have weighted the pros and cons and we have decided that it is a really good investment and a niche that we would like to focus on: small apartments in premium areas in cities we are familiar with. This is why,  a few days ago, we have decided to buy property #2, a very similar apartment to property #1, for the same purposes: short-term rental. We were a bit unlucky this time (or lucky in the first time) as the prices are quickly increasing, therefore the price of this property is 35k higher than the first one (auch!). But, whereas in the rental property #1 we had to wait 1 year until we started cashing in because the apartment was not built when we bought it, rental property #2 is almost built and we hope to start cashing-in before July. All the same, instead of a 5.9% annual return, we are expecting around 4.5%.

Our following steps are to check with a tax adviser if we can/should create a commercial company for our real estate investments so we can deduct the costs of the investment for tax purposes. Currently, we are paying a significant amount of taxes because we cannot deduct the costs that we have on the investment. At the same time, with 2 apartments, we hope to be able to negotiate the cost of the property manager.

I am so excited about this project! Not only it is profitable but also I am learning so much about real state, Portuguese laws and about taxation. I fell I am an expert by now, so feel free to ask me any questions related to these topics!

Financial Statement – January

I have just realized that my last post was written on September 2017, almost 5 months ago!!! Lack of time I could say? But let’s face it, we never really have lack of time, just time management issues or different priorities. I have been a bit busy with managing working full-time + having a baby + my first real estate investment. And, although I feel having a blog is useful as it makes me fell accountable for how I manage my money, I couldn’t find the time/motivation to sit in front of a computer. I missed it though!

Since it is of no use crying over spilt milk, I will just go on and update you on what happened in my life in the past 5 months (many exciting real estate news!) but first I want to update you on my financial net worth at the end of January 2018.

Cash 44,900
Peer to Peer 700
Pensions 71,920
Security deposit for current house 4,000
Rental Property #1 100,000
Rental Property #2 133,000
Debt (Rental Property #2) -94,000
Total net worth 260,520

This is, of course, mine and my husband’s. Our combined savings rate this month was 37% (mostly due to husband’s salary lower than usual as he took parental leave since mid-January).

Check out the next post to see how I am managing my first real estate property and how I am currently on my way to buy the second one!

Tracking my expenses

Yes, I do not (yet) track my expenses. I know how important it is but since I was pretty happy with our savings rate (around 60%) and my husband was not a fan of tracking expenses I decided there was no point in doing it myself.

Luckily, nowadays banks do this for you since they categorize your expenses automatically. You just need to make sure it is the right category and categorize a few when the bank does not have information on the correct category of a specific expense. The only thing you have to do is try to use your card always, if possible. If it is not possible and you need to cash out, which in our case it is only to pay the cleaning lady and some lunches/coffees, it is fine. So, I managed to convince my husband and we will track our expenses from today onwards!

This graph below is my idea of how I currently spend my money. In one month, I will compare it with how I actually spend my money.

expenses

Keep posted, I will keep you updated on my real expenses and on my first month as a real estate investor. I have learned so much in this process of buying a house for short-term rental and hiring a management company and I will share all the tricks and tips that worked for me!

Is renting really too expensive?

This is by far the best calculator I have found online that provides an estimate between the cost of renting vs the cost of buying. I love this calculator because it takes into account all the costs of owning a house, which are underestimated by some people, in addition to the opportunity cost of not investing in other assets that might yield better returns, in particular on the value of the down payment.

This should be used to evaluate the pros and cons of buying the apartment/house you will live in. Do not make the mistake of just comparing the monthly bank payment with the monthly rent. Much more (significant) costs have to be considered when owning a house.