Month: December 2021

Refinance Results

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There’s a company in Virginia that offers $0 closing costs for refinances. That applies to personal residences being refinanced. They still cover most of the closing costs associated with investment properties, but there’s an investment property fee that we need to pay. They also have a fee associated with taking cash out as part of the refinance. Another stipulation is that the new loan has to be at least $100,000 after the refinance. I spoke of the initial details in a post last month, and now I can discuss the details and results of the refinance.

We first talked about taking $50,000 out for each Property2 and Property3. Then we added Property8 into the refinance. The opportunity to use this company to refinance a loan is only available in Virginia. We decided it was best to pay off both Winchester, KY houses instead of just one. The appraisals came back higher than anticipated, so we decided to increase each loan to the max amount of 60% loan to value ratio.

Note the change in value on these houses. We’ve owned 2 and 3 for 5.5 years, and we’ve owned 8 for just over 4 years. The value of these houses have more than doubled in that time, with minimal effort on our part, all the while having a tenant cover the mortgage and maintenance costs.

CASH FLOW

At first, the thought of going from $60-70k to $123k-138k worth of loan payments is an overwhelming sight. I’m a visual person, so I broke it down to a place where I felt comfortable with this move. That comfort is in the cash flow.

With the $190k cashed out, we paid off two loans. Due to a huge issue with our insurance payments, our escrow accounts were substantially negative. Therefore, the payoff required making the escrow accounts whole. Our bank that held these loans used to have such a great online system. Through the course of 3 updates, they killed it. They took away loan history in an easy-to-view format, they took away options to make principal-only payments same day, and they removed the payoff request concept (they had made it difficult in the last update by making it a request that you would have emailed to you, and then in this update, they took it away all together, forcing me to call an automated system that just kept telling me about covid-relief options….. I’m not bitter).

After these two loans were paid off, we were left with just under $50k in cash. This will be used for a downpayment and closing costs on a new rental property, which is a search underway.

To the cash flow part – the removal of those two loan payments was worth $1,184.62. The three properties refinanced had their mortgage payments increase by $1,117.70. The change in my monthly cash flow is now $67 more than I had been netting. I’ll note that the cash flow also involves one of the houses going from a 20 year mortgage to a 15 year mortgage, which increases the monthly payment disproportionately to just an interest rate change.

That’s the black and white, month-to-month change; there are some caveats though. Previously, Property2 hadn’t been escrowed, so I was paying that on my own. Now, with the two houses paid off, I’ll need to pay those previously-escrowed costs on my own. When I factor those details in, my annual cash flow actually decreases, and my out of pocket costs for the year increase by about $700.

While the monthly cash flow increase of $67 isn’t a drastic difference, the fact that we have cash left over and $50k of the new loan balance will be used to create more cash flow with the purchase of a new rental-producing property benefits our portfolio.

MANAGING BILLS IMPLICATION

With the payoff of the two houses in Winchester, KY, I now am responsible for paying the taxes and insurance on the properties (instead of escrow). In October, Kentucky sends the owner as of January 1 of that year the tax bills (meaning, if you own the property on January 1, 2020, then you receive the tax bill on October 15, 2020). It’s frustrating. It’s on the old owner to forward to the new owner if there was a sale during that year. They also send it to the owner even if there’s a mortgage with escrow. So every year, I need to call the mortgage company and make sure they received the bill themselves. Even though I need to stay on top of paying the taxes and insurances now that there’s no escrow, it’ll actually save me time because I won’t have to call these companies to make sure they received the current tax bill. Oh! They also give an incentive for paying early, so I’m always worried that the escrow payment won’t be released to give me that incentive and that they’ll focus on the due date.

Property2 had not been escrowed. There was a screw up in the paperwork that I capitalized on because I don’t like that escrow keeps my money tied up without any incentive to me. Well, Mr. ODA thought I had said I preferred things to be escrowed, but I don’t remember ever definitively saying that. I may have said a comment like “gosh, it’s nice to not have to remember to pay this bill,” but not that I’d prefer to see my monthly payment go up each year because of an escrow reanalysis (I feel like I wrote a post about this……). Property 2 is now escrowed through the refinance.

I removed two tax payments to Virginia and one insurance payment, but then I added back 4 tax payments and 1 insurance payment for each year. The one insurance payment for two properties is what caused me to have an escrow fiasco, so now we’ll avoid that mess by paying it ourselves. Plus, when we pay the insurance ourselves, it can go on a credit card where we earn cash rewards.

SUMMARY

In 4-5 years, we’ve more than doubled the value of these houses that we purchased. While that isn’t immediate cash in our pockets, that’s a substantial increase in our portfolio’s net worth. That increase in value costs us more in taxes in each year, but it also provided us with this opportunity to refinance and take cash out to purchase another property. With two houses paid off, we have also increased our monthly cash flow by about $67. On top of all the near-term gains for this transaction, there’s also the interest payment gains we received. All 3 loans dropped their interest rate, and one loan transitioned to a 15 year loan from a 20 year loan, which decreases the interest owed as well.

December Financial Update

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Here’s one for the “I don’t want to be a landlord” category. At 9:30 pm on the night before Thanksgiving, our tenant EMAILED us that their basement flooded. This basement has been a terror from the start; every few months an issue (a water issue, at that) rears its head. While I appreciate that she wrote a very nice email and included pictures, email isn’t the best way to communicate this to your landlords. She also acknowledged that there was a holiday, and that they turned the water off to everything in the basement, so this could wait until Friday. After a quick panic of “what the heck am I supposed to do about this at 9:30 pm the night before a holiday,” I let it go. I couldn’t do anything about it until Friday morning – the same as if I was living in the house and needed to contact a plumber. I texted my plumber at 7 am on Friday. He responded at 8 am that he’s sick. I called a big company (I don’t prefer big companies), and they were able to get me an appointment for Saturday morning between 8 and 10. After I confirmed that, Mr. ODA sent a text to someone who did some major plumbing reconstruction work for us, and he said he could be there in an hour. So before noon, we had the issue taken care of! $250.

Mr. ODA wanted to take our cash balance and throw it at the mortgage that we are planning to pay off with our cash-out-refinance that’s scheduled for mid-December. The thought was, why pay interest on the current mortgage balance while we have money sitting in our account not earning anything for us. I went a little higher on the amount I “allowed” because we always seem to come into some sort of money throughout the month that increases the balance from my projection. Well, I didn’t factor in a very expensive Black Friday for us. It was 16 separate purchases, but it wasn’t too bad… we didn’t hit 4 digits. Lucky for us, Black Friday fell the first day of a new credit card cycle, so we have until January to make this payment.

On top of Black Friday purchasing, we bought things for our basement finishing project: 3 cabinets, a sink, and a minifridge/beverage cooler. That was about $1000 worth. We have the basement cabinets in place now, and we’re waiting to be told the countertop has arrived so we can get this all installed and finish the baseboards. We have a flooring appointment today to get the final big piece out of the way. We still have to do the window casings and moldings around that, too.

I’ve paid 2 tax bills on houses that aren’t escrowed, a large medical bill (plus several smaller ones), and our car insurance payments. December is a big month for bill paying. It helped that we have dividends from some of our accounts go into our checking accounts instead of being reinvested, so that was about $5k more of income than we planned.

At the beginning of last week, we closed on 3 refinances. I’ll go into details on a separate post, but these refinances are why this financial update is a little later than usual. I wanted the cash influx, the loan payoffs, and then the credit cards to be more tame before updating the financial status.

We have 12 rental properties and our personal residence. We’re carrying 8 mortgages (well, two are in our partner’s name) now that we paid off two houses. It’s nice that we have 5 houses owned outright now; although that does mean that I need to be on top of paying the taxes and insurance on them now. With that said, since we took a substantial amount of cash out in the refinances, our loans on investment properties have increased this month. Our investment properties have continued to increase in value, especially once we learned of the appraisals on the 3 refinances. Our investment and retirement accounts have taken a hit since last month. So while our overall net worth has increased, there were some big changes in the line items themselves.

House 11

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Our 11th purchase was a 4 bedroom and 2 bathroom house, which we were excited about. We only had one other 4 bedroom, and it only had 1.5 baths, so this was a new demographic we could meet. We again needed a mortgage, but we were tapped out (max of 10 mortgages allowed per Fannie Mae), so we went to our partner. I went through the process of establishing the partnership in the House 10 post.

The house had been listed for sale in July 2018, dropped the price in October 2018, and we went under contract on it on December 1, 2018. We went under contract at $129,000, which meant, according to the 1% Rule, we would look to rent it for at least $1290.

The house required a lot of cosmetic work (relative to our usual purchases) before we could rent it. The biggest hold up was the carpet replacement, but we had to do a lot of cleaning and painting also. We closed on February 4, 2019; got to work on the house on the 6th; and then had it rented on March 3, 2019. That’s a longer turnaround time than we’d like, but we thought the long-term benefits of a 4/2 house would be worth it. Plus, with our goal being $1290 based on the 1% Rule, we were happy that we rented it at $1300 and through March 31, 2020.

LOAN TERMS

We were given two options from the loan officer. Both options required 25% down. We could do a 15 year mortgage at 5.05% or a 30 year mortgage at 5.375%. The 15 year mortgage payment was $865, while the 30 year was $640. Since both options required 25% down and we aren’t concerned with our monthly cash flow (as in, we’re not living off of every dollar that comes out of these houses right now), we chose the 15 year. Escrow changes over the last few years have increased the mortgage to $941, unfortunately. However, we’ve been paying off this loan with pretty substantial chunks of money thrown at it. The loan started at $96,750, and the current balance is $21,350. We would have liked to have this paid off a few months ago, but we need to time our payments with our partner, who recently paid for a wedding, renovations to a new house, and a new tear-down property adjacent to his personal residence that he’s going to build a garage-type thing (city living = street parking for him).

We went under contract at $129,000, and the house appraised at $140,000, so that was a nice surprise. The current city assessment is at $148k, but it would likely sell for more than that.

PARTNERSHIP

Since the LLC was already under way when we purchased House 10, we needed to add this one to the LLC. We contacted our attorney. He processed all the paperwork, and we showed up just to sign everything in a quick meeting. At this time, we also requested an EIN be established for the LLC. To process adding this to an established LLC, it cost us $168 (which we paid half of since we’re split 50/50 with our partner).

PREPARING TO RENT

This house was probably the second most effort we had to put in to prepare it for renting. We had to replace quite a few blinds that were broken, do a deep clean of everything, install smoke alarms, paint, replace the carpet, and do some subfloor work.

We had to paint nearly every room (one room we even painted the ceiling the same color as the walls because the ceiling was in rough shape, and it wasn’t worth the time for precision of the edges).

The floor at the front door was rotted by termites. The guys had to cut out the floor and replace the wood before the new carpet could be ordered. We needed the house treated for termites at that point since there was an active infestation that we found. Depending on time and price, I’d rather replace carpeted areas with hard surface flooring for easier maintenance. Since we were already losing time with all the maintenance on this house to get it ready to rent and it was a small area, we just went the easy way out and put new carpet in. The carpet was only in the living room and hallway; all the bedrooms have hardwood flooring.

FIRST TENANTS

We were able to get a family in the house fairly quickly after we finished our work. We rented it at $1300. They signed it on March 3rd, and I had set the terms until March 31, 2020 (this comes into play later). The family had been renting with a roommate (and the husband’s boss!), and that guy had wanted to leave the house. In January 2020, the tenant said, “we signed the lease on March 3rd, so we want to be out at the end of February.” That’s not how leases work. The lease signed said until March 31, 2020. Some time between us telling him that he was in our lease until the end of March, not February, and the end of February actually coming, they decided they wanted to renew their lease. They signed a new lease with us on March 11 to cover 4/1/2020 through 3/31/2021.

In April 2020, the tenant received a job offer in Texas. He asked about a lease break, and we offered an option. All the communication was done via text message, so it was technically in writing, but there was never a “wrap up” text that identified all the agreed upon terms to allow for the lease break. I used this as a teaching opportunity for the 3 of us in the LLC that clearly documenting agreements in writing (preferably with signatures) is important.

The tenant offered to pay May rent without prompting, so we thought that was covered. The part that needed to be detailed was what was considered a “lease break” fee. We had agreed to 60 days worth of rent, and the security deposit couldn’t be used to pay that. Mr. ODA tried to contact the husband on multiple occasions to get rent paid at the beginning of May, but there was no response. I finally sent an email, detailing that they agreed to pay May’s rent, and that technically, they were on the hook for the entire year’s worth of the lease (quick aside: while that’s what the lease says, I think a caveat in the law actually means they’re not really liable for the whole amount because once the house is vacant for 7 days, it defaults back to our ownership, and then we have to show due diligence to re-rent it, leaving them liable for only the gap period). Well, as usual, the landlord gives us a guilt trip (their daughter was in the hospital in TX) instead of separating that from the concept of “pay your debts owed.” As a person, I feel for you on this; as a business owner, it’s not my responsibility to manage your finances and personal life.

The tenant called Mr. ODA and yelled at him. A few hours later, presumably with a more clear head, we received a fair response via text. He even apologized for yelling on the phone. He paid the last few hundreds that were owed, and we all moved on.

SECOND TENANTS

After our first tenants vacated the house, we had to get the house turned over. There was a good bit of work that needed to be done for just a year of someone living there. They had also left stuff behind that became our responsibility to get out of the house. We listed the house for rent. Our partner showed it to 3 younger people who would rent it together. They seemed great until we ran their background and credit check. They had evictions they didn’t disclose (claimed they didn’t know), so we shared the report with them and continued showing it.

We ended up showing it to a couple, and they liked it. After we accepted their application, we were able to get the lease signed on May 7, 2020. Since this was at the very beginning of the pandemic, we had to get creative. I signed this lease on a street corner (hadn’t realized that the place I had selected with outdoor seating was closed!), and they paid their first month’s rent, security deposit, and pet fee in cash that he handed to me in a sock (with a warning that told me this wasn’t the first time he handed someone cash like this haha). They’ve been great tenants, and they renewed their lease.

MAINTENANCE

The new carpeting when we first bought the house cost us $700. Between the termite treatments and other general pest control, we’ve spent $950.

Once the first tenant moved in, we learned of some other issues that weren’t apparent by us just working there and not living there. We had the plumber come out to fix several issues with the hot water that cost us $1450! Then we found out that the master bathroom shower wasn’t installed properly, and it was missing a p-trap; that cost us $325.

Our insurance carrier didn’t like that there wasn’t a handrail for the front steps of the property, so in March 2020, we had to have one installed at $190.

We had to replace the washing machine in April 2020 for about $500. As I’ve shared, we try to not include any ‘extra’ appliances because then maintenance and replacement are our responsibility. This was a fun one – we replaced it just to make the tenants happy and not deal with maintaining it, and then those tenants left right after that, and our new tenants brought their own appliances (so they just have two washers and two dryers in their kitchen).

We had an electrical issue with the master bathroom that cost us $150.

Luckily, I did the inspection over the summer, and nothing came of that initially. We did end up replacing a fan in the master bedroom because the light part of it stopped working with the switch. Since we don’t live near the house anymore, and our partner was in the middle of getting married, we went through Home Depot to have it installed, so all together (fan/light and install) it was about $175.

SUMMARY

This has been a good house. We didn’t realize that the house is located outside the city limits, so we needed to figure out trash pick up in the county (not included in the taxes). Other than a few maintenance hiccups, things have been smooth sailing. We’re happy with the tenants who are there, that they’re maintaining and cleaning the house, and we’re getting our desired rent amount (that they pay on time every month). The street is in a decently nice neighborhood with a lot of original owners, which helps it keep (and increase) its value.