Archive | August, 2014

Duplex #3 Update – Our Real Estate Gamble Paid Off!

26 Aug

When we purchased our 3rd duplex in May, multiple offers required an aggressive strategy. Our winning bid was a leap of faith at $6,100 over asking and $11,000 over the appraised value. This post explains the rationale behind our purchase price, and an update on market activity since then.

Real Estate Gamble

(photo by sampsyo)

Beauty is in the Eye of the Beholder
It’s tricky to find newer duplexes in our area – and half of those are luxury townhomes better suited for owners-occupants. Both sides were rented at $850, with the seller filling similar vacancies at $1,025. A second opinion from our property management company estimated a market rate of $1,025-$1,050.

The property was listed at $194,900, with recent comparables selling between $185,000-$190,000. We expressed an interest in making an offer, but were told that we’d be wasting our time – 2 cash offers were already on the table so our financing-dependent offer didn’t stand a chance.

It was disappointing news, but then we started thinking – why weren’t these properties already selling in the mid-200s?

  • The 1% rule suggested we could pay as high as $205,000-$210,000 for the property and still expect income to exceed expenses.
  • Investor demand for multifamily properties has outpaced local inventory for some time now. This duplex alone had 3 interested buyers after only a couple days on the market.
  • The surrounding area is thriving – there’s a new freeway, plenty of commercial development, and rents have consistently increased. It would be reasonable to expect this suburb to keep growing.

An Offer They Couldn’t Refuse
Based on our priorities, we could justify a higher purchase price – and hopefully the seller would be extra motivated to overlook our mortgage approval. We were willing pay up to $205,000, and our realtor suggested $202,500 with no appraisal contingency. 24 hours later we were under contract.

After the inspection, the price was adjusted to $201,000 and it appraised for $190,000 – which meant we had to come up with another $11,000 at closing to make up the difference. This made our down payment 30% of the purchase price instead of the usual 25%.

And Now We Wait
It was a hard pill to swallow at the time, but also a matter of perspective. If we had come across a completely different listing asking $201,000 and offering $2,100 in rent from the start – where do we sign? The negative perception is primarily related to the fact that we know somebody else got a better deal.

Skip ahead 52 days – we were recently pleased to learn that a similar property on the same street sold for $5,700 more at $206,700!


We assumed the market would eventually catch up, but figured it might take a of couple years – not months.

Meanwhile, rent for both tenants adjusts to $1,050 starting in September, achieving a commendable 1.04% rent-to-purchase-price ratio. Probably a risk we wouldn’t have taken a few years ago, but we had a little more experience under our belts this time around – and so far, no regrets. 😀

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How We Saved $1,454 on Our Property Taxes, Part 1

12 Aug

Earlier this year, Corey successfully protested the valuation of our investment properties – this series shares his experiences and lessons learned along the way. The information below is definitely Texas-specific, and possibly county-specific, so please take caution when applying it to your local area.

A Rising Tide Floats all Boats – And Taxes
The official “Notice of Appraised Value” is sent by the Texas County Appraisal District (TCAD) in April or May of each year. You’ll only receive a mailed notice if the valuation has increased, but you have the right to protest regardless.

Pro Tip: keep your “owner address” updated with TCAD to ensure you receive these notices. You can verify the address on file and find
address correction forms at the appraisal district’s website.

This year, both of our duplexes were slated for significant increases:

Property 2013
Duplex #1 $173,740 $216,948 +25% $5,187
Duplex #2 $131,569 $161,105 +22% $4,784

With the local real estate market heating up, we weren’t surprised to see an increase – but a hike that steep warranted a closer look.

Always Challenge Your Tax Appraisal
Too often, homeowners are intimidated or don’t want the hassle of disputing their tax valuation. In truth, we get complacent because most of us don’t feel the sting of writing a giant tax check once a year (that’s intentional by the way – hiding the total cost by using “3 easy payments” is an age old marketing trick).


(photo by rxb)

Knowing what we know now – we could easily make that the argument that you should protest your valuation every year, regardless of the amount.

Reasons include:

  • You won’t know what the appraisal district is basing your valuation on until you begin the protest process and request the supporting documentation. Like us, you may find they used an inappropriate comparable or based their analysis on inaccurate data. At the very least, make sure the comps check out and then decide whether to proceed from there.
  • Consider the immense scope of an appraisal district’s responsibility. Hundreds of thousands of properties with unique qualities are being assessed annually – best case there is a considerable opportunity for honest mistakes. Like many instances in real estate investing (and life) – nobody is going to look out for your best interest like you will.
  • Texas has no state income tax, and a heavy reliance on property and sales tax revenue. Our notice even tried to compare the 2009 valuation (the height of our area’s bubble) to the proposed 2014 value in an attempt to distract from the significant year-over-year increases. Make no mistake – they have a duty to be fair, but they also really want your money.
  • Give some thought to the potential ROI of your time – Corey’s 2-3 hours of work netted him the equivalent of $485-$727 an hour of after-tax income.
  • Now assume that $1,454 is applied as a pre-payment on our mortgage – we’d save another $2945 in unpaid interest for a total savings of $4,399. This bumps up the ROI to $1,466-$2,200 an hour of after-tax income.

Just remember: there’s a significant potential for savings, you only get what you ask for, and they’re not going to penalize you for trying. 🙂

Coming Soon: Filing your protest, early strategy, and documentation requests.

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Investment Property Balance Sheet – 2014 Edition

5 Aug

With a third property recently under our belt, it’s a good time to update our balance sheet. If you’re curious how the numbers have changed over time, you can reference earlier versions reflecting one and two duplexes.

Duplex #1

  • Total cost: $181,350, latest comp $232,000 (Mar 2014)
  • Down Payment: $45,350 (25%)
  • Mortgage: originally $136,000, currently $130,247
  • Estimated Equity: $101,753

Duplex #2

  • Total cost: $144,000, latest comp $157,000 (Mar 2014)
  • Down Payment: $36,000 (25%)
  • Mortgage: originally $108,000, currently $101,708
  • Estimated Equity: $55,292

Duplex #3

  • Total cost: $201,000, latest comp $190,000 (Apr 2014)
  • Down Payment: $61,500 (30%)
  • Mortgage: originally $139,500
  • Estimated Equity: $50,500
Revenue Duplex #1 Duplex #2 Duplex #3 Monthly Total
Unit A $995 $950 $850  
Unit B $1,095 $895 $850  
Less Vacancy $46 $59 $53  
Total Income $2,044 $1,786 $1,647 $5,477
Principle & Interest $699 $531 $738 $1,968
Taxes $346 $310 $355 $1,011
Insurance $64 $72 $69 $205
$150 $150 $150 $450
Carpet Fund $13 $26 $26 $65
HOA $50 $0 $0 $50
Property Mgmt (10%) $204 $179 $165 $548
Leasing & Releasing (30%-60%) $82 $71 $79 $232
Total Expenses $1,608 $1,339 $1,582 $4,529
Cash Flow $436 $447 $65 $948

Notable changes:

  • Additional Duplex – our newly-acquired tenants are currently $200/mo. under market rent. Both sides increase to $1,050/mo. in September, which will get property #3’s cash flow in line with our other two duplexes. Surprisingly, both sides are expected to renew at the higher rate. Sweeeeet.
  • Moved Vacancies to Income – I decided vacancies were better reflected as a reduction of income, rather than an expense. I’ll assume 1 unit from each property will be vacant once a year. Best guess: property #1 will probably be vacant for 2 weeks, the others for 3 weeks.
  • Repairs – easily the least predictable line item – some months and years will simply be luckier than others. I was expecting two costlier-than-average “first time” vacancies in duplex #3, but with both tenants staying I think an average of $150/mo. per property is as good a guess as any.
  • Carpet Fund – during our last make ready, the largest expense was replacing the carpet for $800 – a necessary evil. To better cash flow that in the future, I created a new “variable expense” that assumes a 5 year (optimistic?) carpet lifespan.
  • HOA Windfall – it had been about a year since we purchased property #2, and I realized we’d never been billed for our HOA dues. Turns out this is actually paid by the tenants via the municipal utility district. Score!
  • Hired Property Management Company – the expense of hiring a property management company was steep, but rent increases have gone a long way to off-set that additional cost. There’s no temptation to save money by self-managing again; as far as we’re concerned this is simply a cost of doing business. I am looking forward to seeing total cash flow slowly increase from this point on.
  • Added Renewal & Listing Fees – using the vacancy assumptions above, I budgeted one renewal fee (30%) and one releasing fee (60%) per year, per property. Between lost income, make ready repairs, and releasing fees – it really does highlight how much a single vacancy can take a bite out of cash flow. Setting this aside as another variable expense should help level out these inevitable hits.
  • Removed Income Tax Savings – now that I have 2 full-years of Schedule Es to compare against (see 2012 and 2013), I determined we were still over-estimating the amount of income taxes we need to set aside (thank you depreciation!). I expect another tax loss in 2014, so I’ll discontinue this line item moving forward.

I’m pretty pleased to see that nothing seems to be going completely going off the rails.  🙂 The rest of this year will be focused on shoring up our savings, and I’ve got a few pet projects in mind depending on my level of motivation. I’d like to explore umbrella insurance, streamline my make ready process, do a better job at reporting on equity in addition to cash flow.

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