Why I bought KMI last week, and why I might add some more this week.

Ok, sooner or later I am going to write about our investments.  We have a little bit of diversification between some Vangard funds, some actively managed mutual funds and some individual stocks.

In addition we have about 25% or so of our two largest accounts in cash.

What I like about KMI 

I have owned some form of Kinder Morgan stock for several years now.  I have a core position, but have occasionally traded around it.

KMI is a great company, It was built in part by Rich Kinder, arguably the greatest pipeline guy in history.

Rich Kinder has stepped up into an Executive chairman role, but the remaining management has been stable and they have a reputation for being an effective management team.

The company specializes in the owning and operation of Natural gas, CO2, crude oil, and product pipelines, gathering facilities, and they have other investments including some Jones act ships for domestic crude oil transportation.

KMI gets most of its money from its pipeline business and most pipeline contracts are ‘take or pay’.  Shippers contract for space on a pipeline.  Afterwards they pay KMI whether or not the product actually is shipped.  So the recent drop in Crude prices generally have a relatively small effect on KMI’s earnings.

KMI has a 49.6 PE ratio, a current dividend of $1.96 and a 5.67% dividend yield.  KMI is a regular corporation, they just rolled out of a very complicated LLC structure back into a normal corporate structure. about a year ago  The big advantage is that they have the ability to buy back stock, or to actually retain earnings unlike LLC’s.  They dont have to issue additional stock in order to grow.

Pipelines have a ton of depreciation, they are cash machines but wont ever have great earnings, so really they way to look at them is for their cash flow, their project backlog and their dividend.  I would encourage you to read KMI’s description of backlog, cash flows etc.

They are a complicated company with a lot of moving pieces but the biggest thing I see when reading their transcripts is that they are committed to paying $2.00 in dividends this year, and are on the record as wanting to grow that dividend 10% a year thru 2020.  If I have done the calculation correctly, that would put the dividend at $3.22/share or a 9.24% yield 5 years out.

So why is down from $44.71/share to $34.85?

Well a couple of things,

1) KMI trades in many ETF’s as an energy company.  So as crude oil prices went down, KMI went with them.  I think the market is oversold as KMI has less exposure to energy prices than other companies in its sector.

2) KMI also trades as a bond equivalent, because bond yields have been so low, people have bought KMI as a substitute.  Many people sold KMI with the expectation that the Fed would hike interest rates. It looks now as though the fed hikes will be later and slower than expected.  So you may see a return to dividend stocks in the second half of the year.

3) People are assuming that the low costs of natural gas and crude oil will slow down the availability of growth in the future.  I think this is true true to some extent but overblown.  The reality is during the boom in energy production, a ton of oil was shipped via train.  Its a lot cheaper and safer to transport it via pipeline. So I would expect that new pipelines will still be needed even if production goes down as producers move from rail to pipelines to cut costs.

Also even though the price of natural gas is really low, demand is high.  As a nation we are closing coal fired power plants at an unprecedented rate.  In large part that load is being replaced by natural gas power generation.  So it is very clear that demand for natural gas pipelines will continue to grow much faster than the economy as a whole.  This should provide additional opportunities for KMI in the future.

4) According to CNBC there may be some hedge funds trying to put a bear raid on a large fund with heavy exposure to pipelines.  Williams, ETP and KMI all have been selling off like their house is on fire.  The selling might not be completely done, but its got to be getting close.

Why now?

OK…so bought some additional shares of KMI late last week at $35.15, and I am going to try and get some more if it stays here or goes lower this week.  There seemed to be some signs of capitulation as KMI really moved down a lot.

I am looking at KMI over other pipelines because I am going to use funds in a retirement account (there are some issues with the way the IRS treats LLC’s that are held in tax favored vehicles like 401K’s and IRA’s).

Rich Kinder filed that he bought $3M+ of additional shares in the open market, and yes while its a really small portion of his wealth, Rich does have a pretty good track record of buying low.

The commentators on CNBC suggested they think the hedge fund forced pipeline sell-off has to be nearing completion.  This is the catalyst that creates imo a really good buying opportunity.

If I am wrong, this stock goes down a couple of more dollars at most.  Its already down 22% from its 52 week high.  I dont see much if any more downside left in this stock.  And you are being paid to wait with a dividend that should go up a lot over the next few years.

Like to hear your thoughts.

7/27 Update.

Was unable to buy more on Monday. A good sign was that KMI was up in a down market. I still think it is a good buy, but since we added to our position last week and the market is behaving badly, I will wait a little.  If the price comes down, I will add to our position.  If not, we will just stand pat with what we have.  IF we didnt already own a fair amount  (for us) of KMI, I would be a buyer here.

Our Real Estate Strategy

Why:

About two years ago as we decided to enter into the real estate game.  Done right, real estate has the opportunity to provide significantly better returns than the stock market.

Rental real estate provides some protection against inflation.  If we ever see the return of inflation, rents should rise correspondingly, and in retirement real estate should provide cash flow well above any other investment.

We felt interest rates were at a lifetime low and it was the ideal time to lock in a loan and two years ago it seemed as though the market for rental properties was taking off.  Properties were sold the week they came on the market and most of the deals being done were to cash buyers.

How:

We were mindful of having limited capital at least compared to most real estate investors.  So we decided that a major rehab, or even testing the waters of a foreclosure were probably not in our best interest.  Our first property needed to minimize the risk that comes with properties needing to be rehabbed.

We are willing to take risks, but not to the point of walking in a casino and betting our entire net worth on one number at the roulette wheel.  Sure if we do more deals, we might have the occasional property that doesn’t work. However we don’t want to be in a position where we are unable to make payments if any property is unable to perform

For our first rental property we decided that we wanted to put our toe into the water of the landlord game to see if we liked it, if it got us the types of returns we thought were out there etc.

We intend on investing money back into our property so that we may continue to attract top level tenants.  Over the last two years we have repainted both units, bought 2 new refrigerators, a new dish washer, a washing machine, refinished some of the hardwood floors, replaced carpeting in a room with new laminate flooring, replaced a few windows to make sure we have working windows in case of fire and have done some foundation work.  Knock on wood I think we have done most of the heavy lifting, there are a couple of things to get to, but I think overall we have gotten to most of the important items for now.

We don’t intend on taking any money out of our rental property at this time.  The whole point of our real estate at the moment is to have it pay for maintenance, to set aside reserves and to pay off the mortgage.  We have separate accounts for our rentals and try to pay for any expense using our rental checking/savings/cred cards.

We look for options in all of our deals in order to reduce risk.  Can we immediately dispose of any property we buy?  Do we have reserves if we needed to make a large repair? Can we live in a property we own? or can we make money renting a property we live in?  Is there enough equity where we could still sell any given property to get out from under a loan?  Can we afford the payments if one of us is unable to work? (Right now the answer to all of those is yes)

What:

We decided to look for and buy a nicer duplex in an up and coming area a mile from downtown and walking distance from a couple different districts with bars, restaurants etc. Each unit is 1500 sq ft, has two bedrooms and was generally in pretty good condition for a 90 year old house. It is nice enough property where we would be willing to live in it (and we actually did for a year).  Because of its location we have access to a lot of potential tenants that are young professionals and leasing has so far not been an issue.

Where:

Our strategy has been to purchase in trendy/ up and coming neighborhoods.  Our duplex clearly fits this situation, and our current residence does as well.  We think in the future there may be a possibility of converting our current residence into a rental.

We will keep looking for properties in neighborhoods that attract young professionals who want to live in urban areas.

The Future:

The goal is to have 4 or 5 properties each one cash flowing and hopefully paid off by retirement.

We will ‘digest’ our current properties, pay off a loan or two, build up some reserves and then save up a solid down payment for our next property.

We are open to buying a fixer upper, or foreclosure in the future.  We might even be willing to do a fix and flip .

I think we are at the end of the recovery from the financial crisis.  So unlike two years ago, the ability to just buy rental ready properties that have solid cash flow I think are gone.  Going forward I think we will have to have to look at other methods of bringing value, maybe fixing up a property, or buying a foreclosure.  Either way I believe we will need more capital available before we make our next move.

The Dave Ramsey Baby Steps

My wife and I are followers of Dave Ramsey.  I listen to his podcasts, have been thru Financial Peace and have even been to one of his book signings.

The Dave Ramsey Baby Steps:

1) $1,000 emergency fund.

2) Pay off all debts smallest to largest following the debt snowball. While paying minimum payments on all other bills.

3) Fully fund the emergency fund to 3-6 months of expenses.

4) Invest 15% of income into retirement.  Take a company 401 match where possible, then fill in with Roth IRA’s.

5) Save for the kids college fund.

6) Pay off the home early.

7) Build wealth and Give.

We don’t do everything he suggests to the letter, but we do a monthly zero based budget (using Everydollar).  We have an emergency fund, and are in the process of paying off the 401K loan (that was used to close on one of our properties).  Our goal is to have it paid off before the year is over.

I would highly recommend learning about Dave Ramsey and following his program.  Especially if you are sick and tired of being sick and tired.

Things I have learned as a relatively new Real Estate Investor

So I don’t want to oversell my experience with real estate investing.  My wife and I (in future posts I am just going to say “I” to refer to both myself and my wife) have only been at it for little over 2 years.

We began with a duplex.  During the first year, we rented out one of the units and lived in the other one.  In addition we rented out our previous condo (which we have now sold).

We use a realtor that markets and reviews prospective tenants and have been very patient to find tenants who have solid credit scores and pass criminal background checks.

We purposefully bought a really nice home that was built in the 1920’s, and is located near a trendy Dallas neighborhood.  Because of that we have been lucky to have lots of perspective tenants to choose from, and have gotten successively higher rents each time we have had a vacancy..

Knock on wood there have had fairly minimal vacancies, and have had a really good luck with renters paying on time.

Random Thoughts:

  • Have a strategy towards real estate.  In a later post I will talk about ours.  Yes it will change over time.  But have one.
  • I think our vetting process/use of areal estate agent has been so far a success.  Its a bit costly, but I think we get protection of better tenants, better contracts and it gives us an impartial person to provide feedback.
  • Even though we have had relatively minimal issues with vacancies, holy COW is it expensive.  It takes a few days to turn a property between tenants and every empty day is really expensive.  Dont underestimate the cost of lost revenue.
  • It takes a shocking large amount of money to turn a property.  Each time it seems like there are things you didnt think of that cost a lot more than expected.
  • The first few years, dont plan to take any money out.  Expect that you are buying a rental property that has some deferred maintenance.  Even if the property looks to be in fairly good shape when you buy it.   Off the top of my head we have fixed or replaced fences, light fixtures, circuit breakers, 2 refrigerators, a dish washer, a dryer, refinished floors, a garbage disposal, replaced a half dozen windows, bought a lawn mower, a trimmer, repainted both units and had the foundation repaired.
  • We set up a separate checking, savings account and credit card to use exclusively for the house.  I would highly recommend this.  It makes it so much easier to keep track of expenses for taxes etc.
  • Use Kwikset locks that you can reprogram.  So much easier than changing out locks each time you have a new tenant.

Overall I think our purchase has been a success.  We believe that there may have been as much as $80-100K of price appreciation and the cash flow seems solid.  Over the next few years I think it will provide a nice income and we hope to buy our next property soon.

Any thought or hints for relatively new landlords?

Who I am, and why am I doing this?

Welcome to my blog on personal finance.  The goal is to track our progress on a monthly basis as my wife and I invest, save and give to have a fulfilling life now and on into retirement. By writing, I hope to continue to learn about personal finance/real estate and to use the blog as an accountability partner.

I have tracked my (and then after we were married, ‘our’) finances in Quicken since 2007 and have found a huge improvement in net worth since doing so.  I will start with recent monthly Net Worth updates, and over time will go back in time to post some additional history.

Over the last couple of years my wife and I  have bought two properties, a duplex that we now rent out and a house.  In the future we would like to do a lot more with real estate with the goal of having a portfolio of properties that cash flows a healthy income in retirement.  Hopefully in the future I can get some discussion going about real estate and investing on this blog.

I have a degree in Engineering with an MBA, and I work in Finance, so I am pretty sure I am the nerd in the family

My wife just recently got through school and recently started a job.  Hopefully now with two incomes we can make some progress in getting kids thru college while simultaneously saving for retirement.

Our investing style is somewhat conservative, we will invest in the market in a low turnover, diversified manner.

I hope to hear your input and hope you will come back on a regular basis.

Thanks for reading.

George H. Puck