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Monday Mixed Bag – Flooding, Appraisal Protests, and Prospecting Letters

10 Aug

I hope everybody is staying cool out there! We’ve been keeping plenty busy this summer – I recently got back from a trip to South Padre Island to pre-celebrate my sister’s wedding.

South Padre Island Beach

For the most part our rentals have been blissfully business-as-usual, but I do have a few notable highlights worth sharing:

Memorial Day Weekend Floods
You may have already seen this on the news: Central Texas experienced some extraordinary rain and flooding over Memorial Day weekend. On one hand we could use the rain, but things got a little cray cray there for a bit.

My cousin in central Austin!

My cousin in central Austin

Luckily our properties were not affected, but it did give me reason for pause at the time. We have homeowners policies but nothing that covers flooding – should we have a flood policy? Then again, this was a pretty darn good stress test and the properties passed with flying colors, so we ultimately decided to keep our current coverage.

On a related note, many moons ago an insurance agent shared this nifty website that estimates flood risk using a map interface. I don’t know how legit it is, but it might be worth a peak when considering a new property.

2015 Appraisal Protest Results
After last year’s unbridled success, Corey tried his hand at protesting our tax appraisals again. The proposed year-over-year increases were… steep.

Property 2014
2015 Proposed
% Change

Duplex #1 $179,362 $239,473 34%
Duplex #2 $149,488 $164,749 10%
Duplex #3 $151,313 $191,984 27%

Good-ness. But compared to our latest comps (and the appraisal district’s) the proposed values were reasonable – we simply didn’t have a lot of contrary data points to work with this year.

Corey still managed to knock a few thousand off the appraised value and saved $157 in taxes. Once that is applied to our mortgage pre-payment goal we’ll save another $255 in unpaid interest for a total savings of $412.

Reducing Competition in a Seller’s Market
As you’ve probably deduced, our real estate market is really hot right now. You might recall we were competing against multiple cash offers when we purchased duplex #3 last year.

We were recently the recipients of some crafty prospecting letters that were attempting to find duplex sellers BEFORE the competition can get involved:

Dear [Name], My wife and I live in the [city] area and we are interested in purchasing a duplex on [street]. If you ever consider selling your duplex, please let me know.

Would have been a little more convincing if there wasn’t a 2nd letter in our mailbox asking about a different duplex and claiming they live in a different part of town. 🙂  4 months later we received another letter (just one this time) from the same couple, with a refined message:

Dear [Name], My wife and I are interested in purchasing a duplex in [city] and came across your property on [street]. We are pre-approved with a local Austin lender and can close within 30 days of contract. Minor repairs and issues do not represent a problem for us. Please contact us if you have thoughts about selling.

Little white lies aside, I do wonder if there’s any merit to this tactic. It would be easy to recreate if you had a few neighborhoods in mind, and then cross-referenced those addresses against the county appraisal district’s website to get owner addresses.

Looking Forward
We’re gearing up for 2 vacancies in September and October. For the first time ever we’re going to let our property management company handle the majority of the make ready work, but I’ll still take a day off to inspect things for myself and tidy up loose ends. I find vacancies a LOT of work, so I’m looking forward to seeing how this higher cost/less hassle trade-off treats us.

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Don’t Confuse Real Estate Investors with Landlords

16 Feb

Be wary of the excuses people give themselves when dismissing rentals – the reality is not so black and white. Many of the perceived pain points (finding renters, late night phone calls, challenging tenants) are primarily landlord fears, and being a landlord is not the same as being a real estate investor.

Landlord vs Real Estate Investor

Investment properties pose unique challenges and they aren’t for everyone, but discouraging yourself and others from doing something you haven’t even tried because “it’s too much work” is a weak sauce argument. And not necessarily true.

Our Changing Priorities & Responsibilities
In 2011, we were excited to jump into this real estate experiment, prioritized cash flow over convenience, and wanted to keep close tabs on our investment.

Excited Boy with Toolbox

(photo by ocbeejay)

We started out as proper landlords managing everything ourselves:

After our 2nd duplex we were a little burned out, but we still believed in the long-term benefits of investing in real estate. Today we have 3 duplexes (6 units) in addition to our full-time day jobs.

Hire Property Management Company for Rentals

(photo by Nguyen Hung Vu)

It didn’t take long for us to hire a property management company, which delegated the vast majority of our day-to-day hassle. I no longer worry about how to get a plumber to show up on a Sunday or remembering when the next lease comes up for renewal.

Our workload today is about 20% of what it was:

  • Approve the occasional expense or request
  • Bookkeeping
  • Coordinating insurance policies
  • Make ready work

Delegating isn’t an all or nothing proposition either – the work we’ve chosen to do ourselves is generally more predictable and easier to fit into our schedules. Your time vs. money balance might be different than ours.

Golden Rule: Choose Properties with Flexibility
When buying a new property, we follow the 1% rule and then plug estimated costs into our balance sheet to vet out any financial deal breakers.

Even if you intend to manage the property yourself, I highly recommend including the cost of hiring a property management company into your cash flow assumptions.

changing priorities of being a real estate investor vs landlord

(photo by R/DV/RS)

Nothing wrong with being a landlord and pocketing the extra cash flow, but 30 years is a long time and priorities can change. You’d be doing yourself a favor to keep your options open by buying a property that can support the costs of hiring a property management company – just in case. This “flexibility insurance” will dramatically increase your odds of having a positive experience with rental properties long-term.

Play your cards right and you can still build substantial assets and realize early retirement without the day-to-day hassle of being a landlord. Rental properties require many hats – but you don’t have to wear them all yourself.

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2014 Goal Results & Highlights

22 Dec

Earlier this year I created goals for 2014 to keep me on-track. The results:

✔  Pay Down Mortgage Debt$3,522 applied to mortgage #2
✔  Expand Property Management – done!
✔  Mean Tenants – replaced with pleasant people at market rate
✔  Try Discounted Gift Cards – success!
✔  Another Property – technically, but we weren’t expecting a rental
✔  25 Blog Posts – squeaked in at 27 posts this year, yay!

Having goals was quite motivating – a way to ensure “someday projects” get prioritized. When reflecting on the past year, a few key initiatives stand out:

Buying Duplex #3
Our third purchase last May made three properties in as many years – not too shabby! It was also the second time we saved a down payment for a primary residence and ended up buying a rental property instead.

What can I say, we have a problem. 🙂

rental property living room 3

We stumbled on some legitimately good deals, but also wanted to maximize our advantage as DINKs (dual income no kids) while we could. It’s not hard to see a future where adult responsibilities stall our current momentum.

This acquisition was unique because the cash flow and appraised value were low for the purchase price, but our research suggested it still had potential. After a $200/unit rent increase (both tenants stayed!) and a new sales comp – we were back on track a mere 2 months later.

Series: How We Saved $1,454 on Our Property Taxes
Corey’s victorious quest to protest the tax valuations on two properties, broken into a 4-part series:

  1. Receiving a Notice of Appraised Value
  2. Filing a Notice to Appeal & Requesting Supporting Documentation
  3. Compiling the Evidence
  4. Appraisal District Meeting & Outcome

A good example of a financial skill that should be taught in public education, but usually isn’t. I group it in with preparing your taxes, the effects of compounding interest, and calculating student loan payments before a student chooses a college or major.

Aspirations / Running the Numbers
It’s fun to daydream about the future of our real estate empire. I noodled through hypotheticals like how many properties we’d need to retire and whether it would be faster to finance or buy outright.

day dreaming clouds

(photo by Kevin Dooley)

Turns out we could probably buy 13 leveraged properties faster than 5 paid off ones – all things being equal – while generating the same net income. Realistically, we’ll probably do a combination of both, and now that we’ve topped off our rental savings we’re cooking with pre-payment fire again!

Make Ready Kit + New Additions
I continue to adore our make ready kit, and got the opportunity to try it out in the field during a vacancy in November.

Make Ready Vacancy Kit Additions

Through trial and error, I’ve added to the inventory a bit:

Now the real question is whether to expand to a second bin….

Discounted Gift Cards
For those tempted to give discounted gift cards a try, I’d recommend waiting until just after Christmas. An influx of holiday gifts will likely upset the supply/demand model in your favor. More inventory = better discounts.

Also, a big thank you to those using our Raise and Cardpool links – any referral credits are going straight to our mortgage pre-payment efforts!

Cardpool Referral Credit

Previous Recaps:

“By three methods we may learn wisdom: First, by reflection, which is noblest; Second, by imitation, which is easiest; and Third, by experience, which is the bitterest.”  -Confucius

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Mortgage Pre-Payment Plan Update – December 2014

2 Dec

Our mortgage pre-payment effort has had a few setbacks this year, mostly due to the purchase of our 3rd duplex in May. This created the double-whammy of (1) tapping our reserves to pay for down payment/closing costs and (2) raising our rental emergency fund minimum (we aim for $5,000/duplex).

Curvy Roads

(edited photo by allison.hare)

As such, we’ve been replenishing our savings ever since, which hasn’t left much in the way of discretionary rental income for mortgage pre-payments:

  • Nov 2013 – $94
  • Dec 2013 – $1,146
  • Jan 2014 – $800
  • Feb 2014 – $881
  • Mar 2014 – $863
  • April 2014 – $0
  • May 2014 – $0
  • Jun 2014 – $0
  • July 2014 – $0
  • Aug 2014 – $121
  • Sept 2014 – $0
  • Oct 2014 – $0
  • Nov 2014 – $0

Wanting to see faster progress, I decided to track and periodically apply small “windfalls” to duplex #2’s mortgage. Particularly things I could easily justify not doing in the first place – like clipping a coupon, waiting to order something until a discounted gift card arrives, or completing an incentivized survey.

Below is my log of about 2 1/2 months of “found” money:

  • $118 – Discounted gift cards
  • $1 – Amazon ‘No Rush Shipping‘ book credit
  • $3 – Remnant rewards from a closed credit card
  • $10 – Social media promotion by my apartment complex
  • $150 – Health screening from my health insurance
  • $424 – Leftover auto insurance premium savings
  • $22 – Returning to DSW to apply a forgotten coupon
  • $129 – Blog revenue

That $857 applied to the mortgage saves an additional $1,724 in interest!

Counting this latest payment, we’ve paid a total of $4,762 in extra principle which translates to ~$10,666 in unpaid interest over the life of the loan. That’s already almost half of the interest savings projected from my conservative pre-payment calculations of ~$94/month.

Mortgage PrePayment Update Dec 2014

Mathematically, we’d probably be better off applying cash flow towards another property, so it’s fair to question whether we should be paying extra at all. We’re both happier with the idea of (eventually) having paid off properties, so I expect we’ll do a little of both. We’re almost done building that larger emergency fund, so progress should accelerate in early 2015.

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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!

anigif_enhanced-buzz-27918-1390853665-0

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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An Unexpected Opportunity – We Bought a 3rd Duplex!

30 Jun

Big news – our rental empire just got a little bigger! We weren’t actively looking for another investment property, but we stumbled upon this little beauty and decided it was too good to pass up.

The Property
Compared to our investment property wish list, it checked off all the boxes:

  • Duplex – for easier cash flow and diversified vacancy risk
  • Expected monthly rent is at least 1% of purchase price (a.k.a. 1% Rule)
  • Newer construction – ideally built after 2000
  • Reasonable driving distance from where we live (trying for a 20-mile radius, but we’ve made exceptions before)

Both sides are rented with long-term tenants, but they are each paying significantly under market rent (~$400/month total). That means the 1% rule doesn’t apply just yet, but the long-term outlook is solid.

I also like that the duplex is in a 3rd city – just in case a certain part of town appreciates better or worse than others. We’re generally optimistic in the growth of the area – plenty of shopping, freeways, and the town is being considered for multiple industrial projects (*crossing fingers*).

Current Rent: $1,700 total
Market Rent: $2,050-$2,190 total
Purchase Price: $201,000
Current Rent-to-Purchase Ratio: 0.84%
Future Rent-to-Purchase Ratio: 1.02%-1.09%


A Calculated Risk
We found ourselves in a bidding war with 2 other buyers, both making cash offers. In order to be competitive with a mortgage, we paid slightly more than asking because we still saw value in the rent-to-purchase-price ratio. Additional funds were required to make up the small gap between appraisal price and purchase price.

We had the better part of a down payment already set aside for a single family home, so that was reallocated plus a little more from our personal savings. It was a bit of a financial stretch, but it worked out alright.

Down Payment: $61,500 (30.6%)
Mortgage (30 year fixed): $139,500


Next Steps

  • Get Units to Market Rent – We don’t have the luxury of keeping tenants significantly below market rate right now, so we’ll be upping the rent when leases expire – and dealing with the resulting vacancies.
  • Address Repairs – some minor issue were found during the inspection that can wait until we have a vacancy, but we don’t want to let them linger longer than we have to.
  • Replenish Savings – we like to have at least $5k per property set aside for a rainy day, so we need to beef up that account to $15,000 – ideally $20,000 if we can swing it.

Between the additional emergency savings, our recent make ready work, and this purchase, our mortgage prepayment efforts have come to a screeching halt. With all the moving parts, we feel a little financially exposed – so you might notice an uptick in money-related posts as I keep a closer eye on cash flow. 😉

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Investment Property Goals for 2014 – Staying the Course

3 Mar
Credits

(photo by paraflyer)

I’ve been distracted by tax paperwork lately, but I did want to outline our 2014 plans before too much more of the year has passed:

  • Double Down on Property Management – we’ve been very pleased with our management company experience thus far, and I’m looking forward to consolidating both locations under one company. While the property management company handles the day-to-day demands and rent collection, I’m still very involved in the bookkeeping and make ready work.
  • An Ounce of Prevention – last year a tenant was unhappy that we deducted their neighbor’s security deposit (the garage walls, ceiling, floor – all painted pink). As a result they have stopped reporting repairs, and subsequent communications have been cold or hostile. I’ve been dreading the drama and hassle, but the lease is ending and we’ve decided not to renew. Bonus: that unit is currently $85/month under market rent, so we should realize a small income bump for our troubles.
  • Leverage Discounted Gift Cards – I want to experiment with a new cost-savings strategy. Maybe for the entire year, or perhaps just during vacancies (we have a tenant moving to another city soon). We’ll see how it goes, and I’ll detail the results afterwards.
  • Purchase our 3rd Property – we’re actively saving our 3rd down payment (36% to goal currently), with the intent to purchase another investment property later this year. This purchase will be unique because (1) it will probably be a single-family home instead of a duplex and (2) we’re planning to occupy the property for at least the first few years. Finding a property that suites our personal and investment wants/needs could be a challenge.
  • More Blog Posts! – I published 24 posts in 2013, so I’ll aim for at least 25 this year (I know, big stretch). The tenant communications category is a crowd pleaser, so I’ll try to incorporate more example letters when I can.

Nothing too glamorous, but I just have to remind myself that slow and steady progress is still progress!


I think in terms of the day’s resolutions, not the years’.  –Henry Moore

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Installing Staircase Handrails

20 May
Installed Handrails

“After” Pic of the New Handrails

When we purchased our recent property, improvements were necessary to get the place ready for new tenants. Early candidates included the handrails installed along the staircase leading to the 2nd floor. A previous owner had used two closet rods back-to-back on each staircase, and didn’t even bother to drill into the studs. The result was a wobbly accident-waiting-to-happen. We purchased two 14-ft handrails from Custom Hardwoods, LLC in red oak to match the kitchen cabinets.

The hardest part involved correctly installing the returned ends to each rail to give it a finished appearance. The curveball came when I opened the box and found a collection of parts and screws with no instructions of how they were even remotely related to the installation. YouTube.com to the rescue:

 

Spoiler alert: the video makes it look a lot easier than it actually is for mere mortals. I burned through the better part of a weekend and 5 returned ends to get 4 attached correctly, and that 5th part can go back to the pits of hell from whence it came.

Once everything was attached, we stained (Minwax, Cherry finish) and added a couple coats of semi-gloss polyurethane, sanding in-between coats. That gave us 2 respectable handrails ready for installation. Indulge me for a moment while I gush over the Painter’s Pyramids that allowed me to apply coats on both sides in the same sitting. Super handy and surprisingly stable.

Stair Rail Staining

The overall installation strategy came from This Old House:

 

If I had to do it all over again, I would be tempted to try out the 45-degree cuts like they did in the video to create a corner that ends back at the wall instead of using the bolt kit to add end caps. I suspect it would be a little less work for more reliable results.

We used brackets like these to install the handrails, using 4 per staircase. Hard to say exactly, but I think the 2-part construction gave us a little fudge room with the angles that might not have been possible with a 1-piece bracket.

Wall Brackets

I’m very pleased with how the handrails turned out. The finish looks great, the installation height feels natural, and I expect they will stand the test of time.

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Investment Property Balance Sheet – 2013 Edition

15 Apr

Now that we’ve closed on our 2nd duplex and found tenants, I wanted to share an updated balance sheet looking at the both properties combined. The original balance sheet was created after we purchased our first property in 2013.

Duplex #1
Total cost: $181,350
Down Payment: $45,350 (25%)
Mortgage: originally $136,000, currently $132,930

Duplex #2
Total cost: $144,000
Down Payment: $36,000 (25%)
Mortgage: $108,000

Revenue Duplex #1 Duplex #2 Monthly Total
Unit A $995 $850
Unit B $910 $850
Total Income $1,905 $1,700 $3,605
Expenses
Principle & Interest $699 $531 $1,231
Taxes $351 $304 $655
Insurance $62 $68 $130
Repairs (7%) $133 $119 $252
Vacancy Savings $38 $85 $123
HOA $50 $42 $92
Income Tax Savings $152 $159 $311
Total Expenses $1,334 $1,149 $2,483
Cash Flow $419 $392 $811

A few significant changes vs. the 2010 version:

  • Rent Income – our first property was originally earning $875/unit, and luckily rents have been strong in that area. Combined rental income is now $155 higher per month than in 2010.
  • Vacancy Rate – now that we’ve experienced vacancies for both properties and have a better sense of the timing required to find new tenants, I’m using a vacancy rate assumption of 2% and 5%. 
  • Repairs – rose from 5% to 7% based on past experience. I definitely think I tend to err on the side of higher quality choices with my repair & improvement decisions compared to the average investor.
  • Income Tax Savings – this category was decreased; last year was our first full year with an investment property, so we didn’t know what to expect. After all was said and done, we owed ~$1600 (for one property), which was significantly less than the ~$4k I was setting aside.

On those days when managing our real estate investments is inconvenient or difficult, keeping in mind that I’m effectively earning $811 after taxes per month for my trouble helps keep things in perspective. And that is admittedly an over-simplistic way to look at it, since there are other benefits like appreciation, equity building, etc.

I’ve got some ideas on what I’d like to do with that extra $811 moving forward. Initially I want to beef up the investment property emergency fund to $5k per property, so $10k total. Then I plan to start pre-paying the debt on one of these mortgages in the interest of risk-reduction.

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How a Redfin Alert Saved us $6,000 on Our Duplex

6 Feb

Let me set the scene: redfin-logo

  • There are a row of identical duplexes, and several of which are up for sale as foreclosures under Fannie Mae’s Homepath program.
  • The 1st property we bid on ended up in a 6-way bidding war. Our best offer was $145k, which was lost to a bid that was “substantially higher” than ours, according to the seller’s realtor.
  • For the 2nd property we bid on, there were also multiple offers but we won the contract with a $150k final bid.
  • 2 weeks before our closing, we received an email alert from Redfin for that first property. It had closed at $143k… $2k LESS than our bid on the same property!

Whaaaa?

This was especially confusing because we were told that the inspection results were really a take-it-or-leave-it situation; there was no room for negotiation.  We contacted our realtor, who contacted the seller’s realtor, who confirmed that the original bid was much higher than our own, but that the final sales price was adjusted lower because of the appraisal value.

So the obvious next question – well what did our appraisal come in at?  Here’s the catch – I was previously told that our lender was forbidden to request an appraisal because it was a Homepath property. Come to find out, Homepath properties can have a conventional loan or a variation of a conventional loan called a Homepath loan.  It was the Homepath loan that prohibits an appraisal by the lender.  We had no idea our mortgage broker was assuming a Homepath loan – all of our paperwork says conventional, not realizing a Homepath loan is also a conventional loan.

Once we figured out what was going on, we immediately ordered an appraisal (which came in at $144k), submitted the appraisal and contract price adjustment to Homepath, who immediately rubber stamped the new price.  Apparently their take-it-or-leave-it policy doesn’t apply to the appraisal like it did for the inspection.

End results: $6,000 savings (less the price of the appraisal) all thanks to our Redfin alert from that first property!

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