Was buying 2 properties overseas a better investment than buying them in the US?

So yesterday I was having a discussion with my wife about the condo we sold in San Diego two years ago.  I looked it up on Zillow to see how much it had appreciated, and to my surprise it had appreciated by $100K.  So I was wondering if we made a mistake of selling it too early.  Did we leave money on the table?

It made me think about the 2 properties we bought in Mexico in 2013 and 2014.  The big issue with buying properties in Mexico is that there is no way to see how much they appreciate as sites like Zillow do not keep track of properties appreciation in Mexico.  This has kept our net worth from growing as fast as we had hoped.

Our 2 properties in Mexico cost us $450K, so what if we had spent that amount in San Diego to buy a rental property, would we have a higher net worth than we do now?

Let’s look at the numbers:

Buying a property in San Diego:

 

The San Diego Condo we soldElysian

Let’s say we had bought a 2 bedroom condo in San Diego at $450K which would be similar to the one we sold.  let’s compare apples to apples and buy the condo cash as we did with both properties in Mexico, because financing there is very difficult to obtain and the interest rate is ridiculously high.

So with no mortgage payment, the only cost to us would be the HOA of $370.00/month, property taxes of $440.00/month, homeowner’s insurance of $160/month and add $150.00/month for miscellaneous repairs, total expense cost is $1,120.00/month.  To be competitive in the neighborhood we lived in, we would rent it at $2,500.00/month.  So in theory we would clear $1,380.00/month, which is really good as a passive income.

Buying properties in Mexico:

This is our Condo complex in CaboPCV

We bought our first condo in the very touristy town of Cabo San Lucas, and our second condo in the equally touristy spot of Playa del Carmen on the Carribean side of Mexico.  The great thing about buying properties in Mexico is that the property taxes are almost non-existent.  The yearly combined taxes we pay for our condos is $600.00!  I know it is crazy to believe that it can be this low.  They do get you though when you sell your property, as the capital gain taxes are at 35%.  There are ways to get around that by hiring a good lawyer.

We don’t do yearly rentals and have chosen the vacation rental path.  It has been very lucrative for us to rent them daily and weekly.  We chose that route so that we could vacation at our properties whenever we choose to.  Last year we netted $2,400.00/month with our rentals.

Conclusions:

At first glance buying the properties in Mexico has yielded a better monthly and yearly return than if we had purchased the property in California.  We have been investing the profits into our Vanguards Accounts, and were able to put away more than $100K the last 3 years.  The only big positive of buying the property in California, is that our property would have appreciated yearly.  We would have probably increased our property value by at least $100K.

As a conclusion, I would say that either options would have worked really well for us.  Like any investment that one makes there is always a certain degree of risk involved, and that is how we rationalize buying the 2 properties in Mexico.  We will probably sell one of the properties in the next few years, and keep the other property for about 20 years.  I am currently 45 years old and do not see myself still having a rental property when I am 65, but who knows…

Should I change my portfolio from balanced to aggressive? Here is my 4 Basket Strategy!

Yesterday I was talking to my father in law about investing, and he was amazed that I had a balanced portfolio at my age.  He is 73 years old and even though we both invest in index funds, he is heavily invested in stocks.  His portfolio is 95% stocks and 5% bonds.

We had a constructive debate defending our positions:

My argument was that with the current president, there are so many unknowns that I just couldn’t trust the market.  Therefore I changed my portfolio from an 80 stocks/20 bonds to a more conservative 60 stocks/40 bonds.  I also did it because I didn’t want to risk losing my nest egg by putting all my eggs in 1 basket.

His argument was that he wanted to gain as much as possible, and grow it as much as he could when the economy was doing well.  He accepted the fact that if the market tanked he wouldn’t touch his portfolio. His safety net is that he has a pension that he collects, as well as the social security.  These 2 are enough for him to cover all of his expenses. He now has to take out the required minimum distribution from his 401k, but he doesn’t really need this income.

So this got me thinking, am I being too conservative with my investments and should I get more aggressive?

After doing some research and forensic work on my portfolio, I realized I had too much cash on hand and was playing it too safe so I decided that maybe I should give it a try and invest more money in equity.

Here is my strategy: I shall call it the 4 Basket Strategy!  

I would like to be able to rely on 4 streams of income to minimize my risk and be ready for any scenario that life might throw at me.

Here are my 4 Baskets:

  1. Cash/Emergency Reserve: I have heard from a lot of people in the personal finance field, that a 6 month cash reserve is a good milestone to reach, so that you can cover your expenses for 6 months in case you lose your job.  With my job being so unpredictable I put aside 2 years worth of emergency fund aside.  I love the security that it gives me as I always have a full year of expenses paid for, and it gives me a year to replenish it. I know some people might think that is too much money to have in a liquid account, but the peace of mind is worth a lot to me.  The security of not having to worry about my day-to-day expenses is wonderful!
  2. Rental Income: Our 2 rental properties are doing really well and we are cash flow positive on both properties. This is a great way to generate a passive income, as we don’t really do much work on them because we have 2 property managers who handle the rentals and maintenance.  This income covers most of our monthly expenses and our goal is to increase it to where it covers all of our expenses.  We use this basket to replenish our cash reserve each year.
  3. Vanguard Portfolio:  I have a SEP IRA that I max out every year.  I have actually started doing a Roth Conversion this year, which was actually easier than I thought through Vanguard.  My CPA helped me out with paying the least amount of taxes on the converted money.  I also max out a regular Roth IRA each year and these are the 2 retirement accounts that we have.  We have a huge amount of money invested in a taxable mix of index funds.  This is where I had a 60/40 ratio of stocks versus bonds, but I have since changed that to a more aggressive approach of 90/10.  Our goal each year is being able to save at least $24K into our Vanguard accounts, and through our frugal living we have been able to save $100K in the last couple of years. So far so good!  I almost forgot to mention that in case of emergency I could tap into my taxable investments, and according to the 4% rule this basket would cover more than half of my expenses.
  4. Work Income from my company: I am self employed and able to work the hours I choose.  The beauty of my job is that I am location independent and can work from anywhere in the world as long as I have access to wifi and internet.  Though it is a very high pressure job, I love the excitement of it and it brings me an income that I can either use for my cash reserve or invest in my Vanguard portfolio. I also expense a lot of my bills through the company which is an added bonus of being self employed.  This basket is large enough to cover baskets 1 and 3.

This is how I developed the courage to become more aggressive with my 3rd basket, as it is a basket that I am not planning on touching for a long time while reinvesting the dividends to keep it growing.

I am still contemplating on how I could develop a 5th basket.  I keep telling my wife that I have a few hours a day I could dedicate to another way of creating an additional passive income basket.  Ideally I would like to find a way to monetize Frugal Safari as I am very passionate about personal finance, and would love to be able to generate income while pursuing this passion of mine.

I look forward to going to Fincon 17 to meet like minded folks and who knows, maybe I will learn how to monetize my site and create my 5th basket!

Stay tuned guys!