Making an Offer

While the housing market has cooled some since I started this post in the Spring, there are still some areas that are moving quickly and aggressively, and this information is still helpful regardless of you being in a multiple offer scenario. Over the course of 6 years and 18 properties purchased (and countless offers made), we’ve caught on to some helpful parts of contracts. Again, keep in mind that I’ve seen real estate contracts in New York, Virginia, and Kentucky; this is not all encompassing or what may work perfectly in your market. This also doesn’t include all parts of a contract since most of them are standard and/or can’t be anything but matter-of-fact (e.g., will the property be owner occupied; is the property subject to a homeowner’s association).

BASICS

Your contract is going to encompass the basics of the purchase each time. This would be the buyer and seller names, address of the property, offer price, and closing date.

Typically, the buyer’s agent draws up the contract with the information being offered. If the offer is accepted by the seller, the seller signs the contract. If there are negotiations, the buyer’s agent will adjust, have the buyer re-sign, and then submit to the seller for signature. When the buyer makes the offer (which is just filling out the contract and sending it to the seller), the buyer will typically include an expiration date of the offer. This isn’t always enacted, but it’s there as a protection so the buyer isn’t sitting idle for extended periods of time waiting for a seller to make a decision. For example, we had an expiration clause in a contract recently where our offer expired at 8 pm that night, but we knew they weren’t going to review offers until the end of the weekend; we had put it in there as a way to hopefully push the seller to make a decision with just our offer instead of waiting for more offers to roll in. We ended up getting the contract on the house, even though our expiration date had technically expired.

In Virginia, the closing date language says “on or before X date, or a reasonable time thereafter.” In Kentucky, it says “on or before X date,” and if you can’t close by that date, you and the buyer have to process an addendum to the contract with a new closing date. We had a contract, as the seller in Virginia, close 2 months after the date in the contract. We were furious about that. We could have walked away and kept the buyer’s earnest money deposit, but then we’d have to formally list (it was an off market deal) and manage that process along with the home inspection issues that may arise. We also had a contract in Kentucky where our lender messed up and delayed our closing, so we had to sign an addendum to the contract to allow us to close a week late.

EARNEST MONEY DEPOSIT (EMD)

Earnest money, or good faith deposit, is a sum of money you put down to demonstrate your seriousness about buying a home. In most cases, earnest money acts as a deposit on the property you’re looking to buy. You deliver the amount when signing the purchase agreement or the sales contract, and it’s applied to your balance owed at closing.

This is not a requirement, but it’s showing your “good faith” to purchase the property because there’s a penalty to you if you try to walk away from the purchase.

In most cases, you pay the EMD to your realtor’s office and they hold it until closing. In Kentucky, they’re on it right away, asking you to send the check as soon as the contract is signed. In Virginia, I didn’t always send the EMD. The amount is listed in the contract, so if I were to default on the contract as a buyer, I would still owe that amount even though I hadn’t paid it to my realtor’s office.

Typically, you’re looking to put 1% down. On a $90k purchase, we gave an EMD of $900. On a purchase of $438k, we gave an EMD of $5,000 (but there were other factors at play as to why we went higher than 1% on that, which I’ll cover later).

CONTINGENCIES

Some items we’ve seen in our contracts are options for the buyer to back out of the contract, or a contingency.

Financing

A sale can be subject to financing. If it’s not an all-cash offer, and there will be a loan secured to purchase the property, data can be entered to protect the buyer’s interests. Typically, it’s going to list the years of the loan to be secured (e.g., 30 year conventional), a downpayment amount, and a maximum interest rate. The interest rates hadn’t been fluctuating much, but this would play into things in the past few months. If you tried to purchase a home when the prevailing interest rate was about 4%, and then interest rates rose to 5.5%, it may affect your ability to qualify for the loan or put you outside a comfort zone for your monthly payment amount. For example, on a $250,000 loan at 4%, your monthly payment is about $1200 per month (principal and interest); if the rate raises to 5.5%, your monthly payment becomes $1420 per month.

This information does not lock you into that break down. If the contract says 80%, and you decide to put 25% down based on the rate sheet, the contract isn’t changed nor is it voided.

Appraisal

If the sale is subject to financing, then it has to be subject to the appraisal. This is a lender requirement to protect their interests. There are some caveats to this, but I will cover them later since they’re more advanced. An appraisal will cost the buyer in the realm of $450-600.

If you’re attempting to qualify based on rental property income, the lender may require you to pay for a rental appraisal as well. We’ve seen this cost at an additional $150, but we’ve typically been able to negotiate our way out of that by providing leases and income history.

Home Inspection

This is one that I almost always recommend including in your offer. This is your “out” in almost every situation. If you get a home inspection, and it finds anything, you can walk away from the contract and not lose your EMD. If a house is important enough to you (a personal residence that you want regardless of what you find on an inspection report), you may eliminate this contingency, but you’ll typically include it. You can even include that you’ll do a home inspection and decide to not do it.

If the house is being sold as-is, it doesn’t mean you can’t get a home inspection. You can still get the inspection to know whether you want to move forward with the purchase. Being sold as-is just tells the buyer that the seller is not willing to negotiate price or fixing items if the home inspection finds something.

The buyer is responsible for the cost of the home inspection. We’ve paid between $300 and $650 for it. The inspector will take about 2 hours to look through the house, including the roof and mechanical parts behind the scenes. Sometimes the inspector will say “this doesn’t look right, but you need to consult a professional in that trade,” which is usually what happens when it comes to roofing. We have done a home inspection, found too many issues to manage (e.g., stairs built out of code) and walked away from the contract. In that scenario, we don’t lose our EMD, but we did pay about $500 for “nothing” (unless you count all the savings of not throwing money into the house to make it safe and livable).

If you find items on the home inspection that you don’t or can’t fix yourself, and the house isn’t being sold as-is, you can request the seller address them. An addendum to the contract will be filed to identify what the seller agrees to fix, and professional receipts have to be supplied before closing to satisfy the requirement. A seller may say they don’t want to be bothered with coordinating the trades to fix the items and offer financial compensation (e.g., we project the cost of these fixes to be $1000, so we’ll take $1000 off the purchase price).

In the realm of “the contract can say almost anything you want,” here’s an example of an additional term that was in one of our contracts. On this particular house, we should have walked away. The closing process was a nightmare because the seller hadn’t paid the electric bill, so we should have known that them wanting a free pass on inspection items was a red flag.

Virginia has a clause to protect the seller’s ability to walk away from the contract in the event of drastic home inspection repair costs.

Wood Destroying Insects (WDI)

A WDI is basically your termite inspection (may include carpenter bees, ants, etc.). We learned with our very first home purchase that this inspection is pretty useless. You can teach yourself what outward signs to look for regarding termite damage. It’s a visual inspection of what the technician can see. But the damage caused by WDIs is behind the drywall. If there’s signs of WDIs outside the studs of the walls, you’ll see it, and that means you have a big problem. Pay the $35 for a professional to say there are signs of active termites.

Another way we found that the WDI is useless is that we had a major termite problem in our house. We were paying for treatment when we sold the house. The treatments weren’t working and the next step was pulling up all the flooring in the basement and treating under the foundation ($$$). The termite company wrote their report: There is an active infestation of termites that are actively being treated. Technically, true. Productively, not the whole picture.

‘ADVANCED’ CONTRACT OPTIONS

I don’t know that these are necessarily advanced, but they’re less common options when making an offer. Some of them come in handy at opportune times, so it’s helpful to know the options at your disposal.

Seller Subsidy

The seller subsidy is the seller’s contribution to closing costs. It reduces the seller’s bottom line based on the offer amount, and it reduces the amount of money the buyer needs to bring to the settlement table. If a contract offer is $102,000 purchase price with $2,000 seller subsidy, then the seller’s bottom line is $100,000.

There is a limit of how much seller subsidy can be in a contract, which is based on the lender’s requirements and is typically 2% of the purchase price. We have had to adjust the contract to account for this limit before we were aware of it; we kept the seller’s bottom line the same, but adjusted the numbers so that we could maximize the seller subsidy.

In Virginia contracts, there’s a boiler plate section identifying the possibility of seller subsidy. In Kentucky, it has to be written into the additional terms section.

Escalation Clause

If you’re in a multiple offer scenario, it may be helpful to offer with an escalation clause. This is an option that a prospective buyer may include to raise their offer on a home should the seller receive a higher competing offer. The buyer will include a cap for how high the offer may go. It’s essentially a way for the buyer to compete with other offers, but not necessarily pay top dollar for the house.

Most recently, our offer was $420,000 and we were told there were at least 4 other offers. We added an escalation clause to our offer. We decided to make it a strange number (e.g., increase by $1770 at a time), and we capped it around $450,000. We were basically saying that we were willing to pay up to $450,000 for the house, but we didn’t have to commit to that number by making our offer at $450,000. The highest offer outside of our offer was about $436k, so our escalation of $1770 over highest offer got us the house for about $438k.

Appraisal Gap Clause

As mentioned, a home purchase with financing is going to be subject to an appraisal. With the housing market exploding purchase prices in the last couple of years, houses have been selling for well over list price. This is nice in theory, but that doesn’t mean that a bank is going to agree that your purchase price is “fair market value.” If your contract is for $500,000, but the home values in the area only support $420,000, the bank is not going to give you a loan based on $500,000. Either the seller has to agree to accept the lower purchase price, end the contract and start over with the listing, or the buyer has to agree to pay the difference in value in cash. A gap clause is preemptive attempt to address this difference between the contract price and the potentially lower appraisal price.

If the buyer believes that the area’s home prices will support a purchase price of about $450,000, but they want to make an offer of $500,000, the buyer may include a gap clause of $50,000. This means that the buyer is more attractive to the seller because the seller’s risk of the contract falling through after the appraisal comes back is minimized. This also means that a buyer would have to be able to show the lender that they have the cash to cover the gap clause needed (if needed), the down payment, and the closing costs.

We used a gap clause on our most recent purchase. The list price was $415,000. I was confident that an appraisal would cover up to $425k, but I didn’t see many comparable sales higher than that without venturing into different neighborhoods. We offered, with an escalation clause, up to about $450,000. Since we weren’t sure that the appraisal would go that high, we offered a gap clause of $25,000. Our final purchase price was $438k, and the lender waived an appraisal need, so our gap clause wasn’t enacted.

RANDOM CLAUSES

I mentioned that a contract can almost say whatever you want. Here are a couple of examples of protections we put in an offer that had to be satisfied within the term given or we could walk away from the deal with no penalty.

SELLER THOUGHT PROCESS

The seller’s comfort comes into play when you’re in a multiple offer scenario. A buyer can make an offer saying almost anything they want (within reason of a residential real estate transaction). You can manipulate your offer to show the seller how vested you are in the purchase. Sometimes a seller just cares about the bottom line numbers, but sometimes (like if you’re competing with a similar offer), a few tweaks to your offer may make you more desirable.

I mentioned that we went higher than 1% on our EMD for our personal residence purchase. We wanted to show that we were very interested in the property, so one way to do that is to show that we have a lot of “skin in the game.” If we default on this contract, we’re out $5,000 and getting nothing. Whereas, when we’re purchasing a rental property without emotion, if it doesn’t go through, it doesn’t go. Sticking to about 1% is showing that we’re “checking the box,” but not that we’ll do anything and everything to make sure this deal goes through. We would still be out some money and get nothing if we walked from a contract without enacting a contingency, so the higher EMD you include, the more serious you appear.

A seller may not understand the big picture of providing the subsidy, so that could be risky. If a seller sees that they’re contributing to $2,000 of your closing costs, they may balk at it. Hopefully, they have a realtor on their end that can explain “think of your offer as $100,000 instead of $102,000.”

Eliminating a home inspection may make a seller feel more comfortable too. They may know of some issues in the house and are waiting for the “shoe to drop” through the inspection process, so it could eliminate a stressor for them. I wouldn’t recommend eliminating a home inspection unless you’re confident there aren’t any fatal flaws in the house (e.g., quarter width cracks in the foundation, wet marks on the ceiling, warped/sunken flooring).


The housing market has slowed down, so some of the out-of-the-norm clauses may no longer be worth the buyer’s risk just to compete for a house, but these are some options out there. The general concepts still apply, like when to pay for extra inspections or to expect financing and an appraisal to go together. Know that everything is a negotiation and don’t feel stuck in a contract if red flags are flying.

New Credit Cards

We turned over a rental in April, bought a new house that requires work in June, and turned over another rental in July. Those activities have a lot of expenses associated with it. While we could have strategically spent the money and paid off credit cards, it’s nice to have a cushion. When we’re faced with a lot of large expenses, Mr. ODA searches for a new credit card.

Why do we open a new credit card for big expenses? Because it’s a free short term loan for us. We’re looking for a card that provides an introductory 0% interest period, as well as some other bonus(es). Carrying a balance on a credit card and paying up to 25% interest is a non-starter in our financial portfolio.

Mr. ODA had searched for a new credit card back in the April timeframe, but we had multiple credit hits around that time, and I didn’t want to risk it. We paid off the expenses for the first rental turnover through our regular credit cards. Once we bought our new house and we knew that turning over another rental was looming (with big expenses like carpet replacement), Mr. ODA found a credit card he wanted.

At the last second, Mr. ODA switched which card he wanted. The card gave an introductory offer of $200 back after you spent $1000 within 120 days, up to 5% cash back on two categories you choose, 2% cash back on one everyday category, and 1% on all other purchases. It had 15 months of 0% APR and no annual fee. He received a credit limit of $500. Seriously. He called to get a credit increase and find out why it was so low, but they said they required another credit report pull to talk to him about anything. Nope. So we have this random $500 limit credit card in our portfolio. We’ve spent our $1000 and will get our $200 cash back (unless they find a loophole, which I would expect based on how this company’s relationship has been so far), and then this card will just sit unused until they close it years from now due to inactivity.

Since that was a bust, Mr. ODA opened a different credit card in my name (spread the wealth on credit inquiries). I was granted a $9,000 credit limit, and we got straight to work spending that. There’s no annual fee; it has a 15 month 0% introductory period; and earn 5% cash back on purchases in your top spending category (automatically, without choosing a category) up to the first $500 spent and 1% cash back after that. It gave us $200 cash back after we spent $750 in the first 3 months.

Two of our first few expenses were a vanity for our new master bathroom and 1,000 sf worth of vinyl plank flooring for a rental. Our balance within the first week was over $5,000. As much as I can’t stand to see that balance sitting there, it has helped us move money around. Usually we focus our spending in the categories that each credit card offers with higher rewards, but for these bigger expenses, we’re focused on being able to float them for several months.

We used a Home Equity Line of Credit (HELOC) for the down payment on the new house. Originally, we had been paying down the principal on that, and put $14k towards that over the last month. We then decided we should focus more into buying the dip of the stock the market instead of paying down that account with 4% interest rate (although that’s variable). That’s what we’re currently focusing on, knowing that when we sell our current house, proceeds will pay off the HELOC in a short few months. We currently have about a $1500 cash cushion because we know that we have the HELOC to fall back on. For instance, we’re replacing the driveway and walkways at our new house, and we’ll pull cash out of the HELOC to pay for that (they don’t take credit).

If your credit is in favorable standing and you have large expenses looming (without a need for a new loan/mortgage in the near future), then look for a new credit card. Don’t open any random one. You’re looking for 0% interest for 12-15 months, no annual fee, and the possibility of a reward system (whether it’s an introductory offer related to spending, a cash back incentive for spending, or some form of both).

Jumping on the I Bond Wagon

What are I bonds?

Series I savings bonds are a type of bond offered by the US Government, with the intention of hedging against inflation. They provide the purchaser a return that is commensurate with the rate of inflation during the life of the loan. The caveat – this rate adjusts every six months. Between the months of May 2022 and October 2022, these bonds will pay an annualized interest rate of 9.62%. Guaranteed. Depending on what inflation does by October, that rate may go up or down, but as long as you purchase the loan before Halloween, you can enjoy that rate for the first 6 months of ownership. This is because the rate only changes every 6 months and the interest accrued compounds semi-annually.

Some Rules

I bonds must be held for 1 year. Therefore, you need to be sure that money can be made illiquid for that amount of time. Think of it like a Certification of Deposit, or CD, you can buy from a bank; however, in today’s numbers, an I bond has a FAR higher rate of return. If you need to liquidate the I bond before 5 years, you must forfeit the final 3 months of interest from when you sell/cash it (e.g., if you hold it for 18 months, you earn interest for only 15 months). After 5 years, there is no penalty. The bond will earn interest at the prevailing semi-annual rate for 30 years if you don’t cash it out, and after that it wont earn anything. The rate will never go below zero, even if the inflation rate (Consumer Price Index for all Urban Consumers) does go negative, although is can be 0%.

There’s a minimum purchase amount, which is $25 for electronic purchasing and $50 for paper purchasing. Then there’s a $10,000 individual, annual (calendar year) limit for owning bonds each year for each individual, which covers receiving or giving them as gifts as well. Example, I can buy $20,000 in a year if I’m giving a relative $10,000 of them, but that relative then cannot buy any because they now own that $10,000 I gave them. There is not a limit per household, so spouses can double up.

I bond earnings are subject to federal income tax, but not state.

Calculate the Rate

The I bonds have a fixed rate and a variable inflation interest rate.

The fixed rate is stays the same through the life of the bond. The fixed rate is set each May1st and November 1st, and it applies to all bonds issued in the six months following the date the rate is set. The current rate is 0%.

The variable interest rate is based on the inflation rate. It is calculated twice a year and is based on the Consumer Price Index.

These two rates are then put into a formula to get the “composite rate.” Composite rate = [fixed rate + (2 x semiannual inflation rate) + (fixed rate x semiannual inflation rate)]. This means that currently, it’s [0.0000 + (2 x 0.0481) + (0.0000 x 0.0481)], which equals 9.62%.

Interest is compounded semi-annually.

How to Purchase

Series I bonds are bought through TreasuryDirect.gov after creating an account. This helps ensure legitimacy and provides simplicity for the purchase and ownership of the bonds.

You pay the face value of the bond. For example, you pay $50 for a $50 bond, and then the bond increases in value as it earns interest. For electronic purchases, you can buy any denomination, to the penny, between $25 and $10,000.

You can buy paper Series I bonds if you don’t want to set up an online account or make online purchases. When you file your tax return, include IRS Form 8888. Complete Part 2 to tell the IRS you want to use part (or all) of your refund to purchase paper I bonds. Purchase amounts must be in $50 multiples and you can choose to have any remaining funds delivered to you either by direct deposit or by check. There’s a limit of $5,000 worth of paper bonds. More information can be found on the Treasury Direct website.

I Bonds for Me

A guaranteed return of 9.62% for the first 6 months of ownership is quite enticing. High Yield Savings Accounts and bank-issued CDs are still hovering in the 1-2% interest range, and the most recent year over year inflation report announced for April 2022 was at 8.3%. Given COVID-19 numbers trending upward again, American and global supply chains still struggling, and the effects of trillions of dollars of extra money entering the American economy as bailout for the American public taking a long time to stabilize, I figured the consumer price index numbers that I bond rates are based off wouldn’t be dropping quickly anytime soon.

My logic. Again, a guaranteed return near 10% is phenomenal, even if possibly short term and variable. “Best” case scenario – the rate stays high and the interest keeps compounding for many semi-annual cycles. Granted, this also means that the inflation rate stays high and that isn’t something I’d prefer for my total financial outlook. But Series I bonds are hedges for the effects of inflation. So at least I’m “keeping up” in this section of my portfolio.

The most likely/medium case scenario – control over inflation happens in the next year or two and the rate drops several percentage points, such that it’s a real decision whether to keep a guaranteed return of 4-5% or to cash out the bonds and put that money into other investments. This would also mean that I’d lose 3 months’ worth of that 4-5% interest if this decision happens sooner than the 5 years.

“Worst” case scenario – for THESE bonds at least. Inflation stops and the interest rate on these bonds plummet. I cash out the bond in a year or two and I lose 3 months of interest. But let’s face it, the reason I’m quick to cash out is because the interest rate is low anyway. So I’m not losing much! And then, that also means that the rest of the American economy and my portfolio have been stabilized and things look a little more predictable.

When forecasting any of these three scenarios, I saw a fairly win-win-win situation, so I pulled the trigger on a major purchase of these bonds with some of the discretionary cash Mrs. ODA and I were sitting on as we navigate the craziness in our life right now.

HELOC

HOME EQUITY LINE OF CREDIT or HELOC

A HELOC is a line of credit secured by the equity in your home. This is different from a loan or mortgage.

What is equity? It’s the appraised value of your home that is not mortgaged. You may have put 20% down when you bought the house, and now you’re looking to tap into that equity along with the principal of the mortgage you’ve paid down. Or perhaps your home value has increased drastically, and you want to utilize the equity.

What is a line of credit? It is a revolving account of credit. This means that when you close on a HELOC, you don’t get a check cut for that amount right then. You need to “draw” on the account, as needed, which is essentially writing checks from that account to either yourself or another entity. As you make principal payments, the amount of principal becomes available again for a future draw, as long as you’re within the draw period of the line of credit.

Do you have to disclose the purpose of the HELOC? There are no parameters on what you can use the money for when you draw it from the HELOC. You may want to pay off a credit card that has a higher interest rate, do home improvements, do other construction projects, medical bills, etc. While you’d want to utilize this for larger purchases, you can draw smaller amounts as long as you draw the minimum required by your terms (e.g., no less than $100). You earn interest from day 1, so this isn’t more beneficial than a credit card that gives you a short-term “loan” for your statement period (you don’t pay interest on a credit card balance that is paid off by the due date).

TYPICAL TERMS

The application process is similar to applying for a mortgage. A bank wants to see your credit report, along with some backup documentation (e.g., tax returns, account statements). We also had to update our homeowners insurance to show the HELOC as a mortgagee.

A HELOC will typically only cover a portion of the equity in your home, depending on the bank’s terms. If your appraisal value is $400,000, and your mortgage balance is $250,000, then the equity in your home is $150,000. While there may be instances where a bank would approve a HELOC for the full amount of $150,000, most are going to approve 80% or 85% of that amount.

There are no closing costs associated with the HELOC. Typically, the bank processing the HELOC will cover the costs associated with the line of credit initiation up front. However, they will require those fees to be paid back to them if the HELOC is closed within a certain period of time (usually 36 months). For our first HELOC, when we closed it within the 36 months, we paid back a prorated amount of the fees (e.g., if the fees were $300, and we closed it after a year, we owed $200). For our current HELOC, if we close it within the 36 months, we’re required to pay back 100% of the fees they covered, not the prorated amount.

A HELOC has a variable interest rate, which may adjust monthly or quarterly based on the lender’s terms. A variable interest rate can adjust up or down. But this is something to be aware of because it’s not like a loan or mortgage that has a fixed rate made known up front. The rate, in our case, is set at the index rate with a margin. However, there’s a floor to the bank’s rate. What does this look like? The index rate is 3.50%. The margin is -1.00%. However, the bank’s floor is 3.00%. Therefore, even though 3.5-1=2.5, the minimum interest rate they’ll lend at is 3.00%. Therefore, our current rate is 3.00%.

There is a “draw period,” which means you can only take funds from the line of credit for a certain period of time (e.g., 10 years). When you do draw from the line of credit, you’re charged interest on the principal balance. During the draw period, you must make the minimum required monthly payments on the account, which is typically the monthly accumulated interest owed, but some banks may require principal payments during this period also. When the draw period is over, it enacts the principal repayment period, meaning you have a certain amount of time (e.g., 10 more years) to repay the principal balance of the HELOC. There is no charge for the HELOC existing though; it can be there and never drawn on.

OUR PROCESS

The most recent HELOC we closed on had a different process than the first. We expressed our interest, and since they already had our documentation on hand from a commercial loan, they didn’t ask for supporting documentation (e.g., account statements). However, for some strange reason, she said she couldn’t use the credit report from our commercial loan, and she had to pull our credit again. At the time we were applying for another mortgage, so the hit on our credit counted as “mortgage shopping,” so we gave up the fight and let it happen.

This company would have given us 100% of the equity available in our home. However, two weeks after initiating the HELOC process, we told them we needed a pre qualification letter for an offer we made on another personal residence. They then told us that since we’re on record as wanting to sell our home, they would only approve 80% of the equity.

The loan officer asked for two references for each of us. There was no information given on what this personal reference had to know about us. We both handed over our people, but they were never contacted, so we won’t know the purpose.

Finally, they asked for our homeowners insurance to show them as a mortgagee on our policy, which I was able to do with one quick phone call to that office.

Typically, the process will include an appraisal. This bank had a valuation system that they used. Based on this woman’s inputs into the system (which were all wrong), she said that she could approve us for $100,000 without paying for a full appraisal. We don’t need more than that, so that was sufficient to us.

We closed the HELOC a month after expressing interest. Our process may have been slower than the typical period it would take because we were fighting the credit pull for a while (not to mention the company we were working with is notoriously slow at responding to inquiries). Mr. ODA expressed our interest in pursuing the HELOC on April 12th. We were cleared to close as of May 11th, but we chose to close on that following Friday. We went to a local bank branch, and a relationship banker went through the documents with us as we signed them.

WHY THE HELOC FOR US?

My general plan was that we’d have a HELOC initiated, so that when we found a new personal residence, we could use the HELOC for the down payment of that house without having to sell our current house first. In the past, we’ve sold our home, went into temporary housing, and then moved into a new home. Granted, all our past home purchases were in a completely different locale than where we were living, but I really didn’t want to manage storage of goods or go into temporary housing with two kids and a dog again.

We initiated the conversation on the HELOC without having any intent to move yet. Not to go into too much detail on this topic, but we need to be residents of this house for two years to avoid paying capital gains. Our 2-year mark isn’t until November, so we weren’t in a rush to move before then. A home with the same floor plan around the block from us sold for $190k more than what we bought this house for less than two years ago, so we expect there to be a hefty chunk going to capital gains if we don’t meet the two year requirement.

I was keeping an eye on the market, but clearly had no plans to move. To me, a regular check on Zillow lets me know what I can get for my money. However, there are some things related to our current personal residence that are concerning, and we had decided that this wouldn’t be a long term location for us. With the market right now, I knew we’d either be paying a higher mortgage than I ever anticipated in life, or I’d be compromising on my wish list. Well, a house that met a lot of our wish list popped up in the area we liked for less than $500k, so we jumped on it. The house needs work, so even though we’ll close on it over the summer, we aren’t in a rush to move into a construction zone.

Once we close on the new house with funds from the HELOC, we’ll start accruing and paying interest on the balance. We’re not required to make principal payments until after the draw period, which is 10 years. When we eventually sell our current home, the proceeds from the sale will pay off the HELOC seamlessly through the closing process.

Laying LVP

We had a tenant abandon a property, and he left it a mess. There was some furniture and garbage left behind. I’d love to know what tenants do that destroys the walls in less than two years. I’d say the dog never went outside based on the carpet stains, but there was a giant pile of grocery bags fulled with poop outside the back door. We hired a carpet cleaner that was available the fastest, and that was a mistake. They basically just came and put lines in the carpet. I was not happy. Not only was their effort the absolute minimum of the task on hand, we had asked for it to be “rotovacced,” and it clearly wasn’t.

Recently, we received an updated assessment from the county, which included the comps they used. We bought the house for about 86k. The comps range from 110k to 130k. The comps at the high end had no carpet and upgraded fixtures. The low end had all original things. Looking to resale value, I wanted to lay Luxury Vinyl Planks (LVP) in the living area instead of replacing the carpet. Since we were nearly a month into unexpected lost revenue, the goal was just to address the main living area that would catch your eye.

WHAT IS LVP?

LVP is vinyl flooring made up of planks instead of being one sheet. It’s a floating floor, which means you don’t glue it or nail it down to the subfloor (e.g., plywood). The boards “click” together. When you get the connection right, the board lays flat on the subfloor.

Ironically, it was hitting the market around 2015/2016, and I declined it in the house we were building. I didn’t realize that it was going to be the “go to” flooring by 2020, and that it would be in our new construction house we bought then.

INSTALLATION TIPS

First, we had to remove the tack strips and staples from the subfloor after the carpet was removed. The floor needs to be mostly level. There was one spot where two pieces of plywood were not level, and it did cause issues with keeping the pieces connected.

Start in a left-most corner of the room, on the longest wall. Our living room is nearly square (13×13.5). The deciding factor on which way to lay the floor was to eliminate cuts against a schluter edge where there’s tile in the kitchen and dining room. When you enter the house, you walk up a flight of stairs, and you see the tile edge right away. Since this was our first time installing flooring, we wanted that edge to look good. The best way to do that was to not put any cut edges against it, but to lay the planks parallel to it.

Stagger the boards and create a random pattern. You don’t want to see a pattern in the flooring (e.g., don’t lay a full board, then a half board, then a full board, to start the rows). You also want to open 3-5 boxes at a time and mix up the boards. Different boxes may have different variations in the coloring, and you don’t want a splotch of a lighter shade of flooring in one section, so it’s best to mix up the boxes.

You’ll have waste. When you plug quantities into Home Depot or Lowes, they typically ask if you want to add 10% for waste. We calculated needing 9-10 boxes, and we opened 12, with 3 full boards left. There was a mishap with one of the boxes, but that probably lost us 4-5 planks, so I think we still would have opened 12 boxes.

Lay the short edge together first. The second board lays under the connection of the first board that’s already on the floor. When you connect the long edge to the board above it, just wiggle it until it lays down flat and you see no seam. Sometimes you need to use a tapping block to get it to fit together better, but when you get the right connection, it’ll literally just fall in place.

To cut a piece to fit at the end of a row, use a utility blade along a straight edge. When you go to snap the board, hold the straight edge in place. Both Mr. ODA and I tried snapping a board without the straight edge, and the board snapped in a different place.

When needing to cut the entire length fo the board, use a circular saw or table saw. It won’t be easy to score and snap because of having less leverage. To cut small areas within a board, such as floor vents, you can use a jig saw. Cutting the board with the circular saw makes a gigantic mess. Think of it like packing material that just explodes on you. However, there is a benefit that it’s not the clingy type of material, and it does sweep up easily.

At the end of each row, cut the board about a quarter inch too short. You’ll need to fit a tool into the crevice to pull it into place. I had been cutting it to fit under the baseboards, but then you can’t get the boards connected. At the end, you add shoe molding or quarter round to cover the cuts.

COST & TIME

The flooring, shoe molding, threshold to cover the carpet to floor transition, and an installation kit cost us about $700. We picked LVP because it comes with a cork type material attached to the back of each plank, and it doesn’t require underlayment.

We picked the LVP instead of getting new carpeting because of resale and because of the cost and time associated with carpet installation. At Home Depot, if you pick in stock carpet, it’s not subject to the free install. If you spend $499 otherwise, you get free installation. We would pick a carpet that is about $1/sf, so we wouldn’t get to the $499 price for free installation.

We arrived at the property at 10:30 am. We had to remove the tack strips and staples. Mr. ODA removed all the tack strips, and I started on the staples. When I got an area clean, he started laying the planks while I kept working on the staples and sweeping. At 2 pm, I will still working on staple removal, and he took a break for a work meeting. I took over laying the boards. We finished laying the floor, installing the quarter round, and caulking the seam between the baseboard and quarter round at 6:10 pm.

There was a big learning curve on how to get the boards to click together most effectively. We could have probably eliminated an hour of work where we were trying to figure things out rather than laying the floor. I also had a big speed bump trying to get the piece at the bottom of the stairs in place (a lot of cuts and having to figure out leveling the board since it couldn’t be butted up against the bottom of the step, which wasn’t level), which was probably a 25 minute delay. With that said, my back was killing me. It’s probably a project that’s better suited to be split over multiple days as a newbie, rather than powering through 8 hours of work.

I asked Mr. ODA if he would do it again (as we both complained about how much our bodies hurt), and he said yes! We just wouldn’t be in such a rush to finish one room in one day in the future, even if it was only about 200 sf.

The Mentality from an MLM

These days, you’re probably not immune to being asked to join or buy from a multi-level-marketing (MLM) business. Also known as network marketing, it a way for companies to sell their product through individuals who market product(s) to their sphere of influence. It gets a bad reputation with “pyramid scheme” and the like, but it’s legitimate and makes sense if you take the time to step back and learn about it instead of repeating the rhetoric you’ve heard from your parents.

Our experience with an MLM led to being open to buying rental properties, which eventually led to me quitting my job and being happy outside of a career. Here’s what I learned by keeping an open mind to an MLM, even though we make $0 from that business today.

This is my experience with our time in an MLM. Mr. ODA would probably have something different to say. 🙂

AMWAY

BACKGROUND

By now, you may have seen the documentary on LulaRoe. Our experience was with Amway, and it was different from how LulaRoe operates. Now, Amway is the black sheep of the MLM world if you go just based on name. They’re one of the original MLMs. But they sell good products in the health, beauty, and home cleaning genres. As a “consultant,” you’re called an “independent business owner” or IBO. I thought the best part was that there’s no inventory you need to hold. If you want to do “parties,” then you need products on hand. However, it’s much different than how LulaRoe would have hundreds of leggings on hand and makes direct sales out of their on-hand inventory. To earn money, you can recruit more business owners, or you can have customers who just order directly from the Amway website each month. You make money off of what your customers buy, as well as the income that your IBOs below you generate.

TEAM SUPPORT

There are multiple “teams” associated with Amway. It’s the education arm of the business. Our team met once a week, and you were expected to be there if you really wanted to be in-the-know and considered serious about growing. They helped you structure your business to take advantages of bonuses offered by Amway, and they taught a lot about having the right mentality. Their goal was to foster personal and business growth, provide mentoring and coaching, and provide the tools to grow your business through conferences and seminars.

This is where we got our start. I know it’s hard to believe, but we both were exposed to a lot of growth through this team. The things we learned through the meetings and books we read during these couple of years gave us the courage to make the big decisions we did, getting us to currently having 13 rental properties.

THE CASHFLOW QUADRANT

Our introduction to the business was started by being given Rich Dad, Poor Dad by Robert Kiyosaki. The book references an earlier book of his, the Cashflow Quadrant. Each quadrant has its strengths and weaknesses.
– The upper left corner of the quadrant is for those who have Employee mentality. This is someone who is trading time for money. You work an hour and earn $20. If you’re not working, you’re not earning. You’re making money in someone else’s system, and there are people over you who are making more than you (e.g., a supervisor is making more than a secretary).
– The upper right corner is for Business Owners. You own a system that works for you. You have passive income in this quadrant. You may have an employee that is generating income that you earn.
– The lower left corner is for Self-employed people. Here you’re still trading time for money, but you have control over how much you earn based on how much effort and time you put in. This is a risky area because you don’t have security and may not have an established system to rely on and project your income.
– The lower right corner is for Investing. Your money makes money for you. This can also be risky because you’re not guaranteed positive returns on your investments. If you want to make a lot of money, you need to take on more risk.

The point here, according to the team we were on, was that you want to be a business owner. You want to generate passive income so that you’re not trading time for dollars. While someone else is selling to a new customer, you’re earning a percentage of that sale while not doing anything. As you grow your Amway business, you have more and more people generating income through these sales, which you get a percentage of. The kicker is that you need to hit a certain level within your own business before you earn. We set up recurring purchases to use the products we were selling, and had customers set up with recurring orders, so that we could hit that threshold to be eligible for the passive income.

OUR MOVE FROM MLM TO REAL ESTATE

The biggest hurdle to our success was the price of the products. We aren’t someone who values a better quality to be able to justify the higher price. There are people out there that value this, but it’s not our passion. A peanut butter meal bar comes to $3.14 per bar as a customer order (as an IBO, you get the product at cost, which would be $2.82 per bar). The peanut butter granola bars we buy are $0.50 per bar. Clearly, this isn’t a marginal difference in our expenses. The products were good, but not good enough for our finances to take such a hit. I tried to focus on the beauty side of the business and held parties where I recommend products and let women try it. I had passion behind it, but I wasn’t someone who washed my face regularly and put lotion on. I could see the benefits, but I wasn’t practicing what I preached, and I lost my drive.

The next hurdle was location. Our original meeting was with our specific team within the larger team (based on your “pin level,” you had a meeting with the people who were your “downline.”). We moved down to Richmond, and our closest meeting was Fredericksburg. It wasn’t insurmountable, but it was a 40 minute drive there and back once a week. The larger team would all come together in DC every quarter for a conference. We felt like time started moving faster, and we weren’t close enough to make these our friends between conferences, and so we stopped attending the big conferences. Then we stopped attending the weekly meetings. Then we cancelled our team membership. We still maintain our Amway IBO number, since it’s just $62 per year to do that.

The thought process that we learned from their weekly teachings and reading books we probably wouldn’t have read otherwise led to our desire to generate passive income. Mr. ODA had already been interested in the concept, and then when we were talking about venturing down that path with our Realtor selling our Northern Virginia home, he really got the urge to pursue it.

When we sold our Northern Virginia home, we had about $120,000 in our bank account. About $70k of that went to the downpayment and closing costs of our new house. The remaining went to finding a rental property… or two.

REAL ESTATE, PASSIVE INCOME, AND NO JOB

Real estate is in the business quadrant, but it’s not completely passive income. Truly, the Amway business wasn’t completely passive because you still needed to have the sales (either through your purchases or customer purchases) to be eligible to earn all the passive income available to you in the business. Most months with real estate, I take the rent money, pay out our mortgages, and that’s it. Sometimes I need to make some phone calls to contractors. However, we have to do very little to maintain our business of investment properties. We can also decide that we don’t want to field the phone calls and hand off the rest our properties to a property manager for 10% of rent. If we don’t have a new property or a property to turn over, then we probably put about 100 hours per year into managing the houses.

We knew we didn’t want to be in the employee mentality for the rest of our lives. Funny, because my goal when I was in college was to work for a “big 4” accounting firm and spend 80s hour per week at work. Then I started working for the government, and my goal was to be CFO in my 30s. Then I got to the headquarters office in my late 20s and hated the environment, so I decided I wanted to be no more than a state office’s financial manager. Then we had kids, and I decided I wanted to be home with them to see all the little moments. Things sure did evolve.

I believe that the time we spent with our Amway team changed my heart. I believe that time was important for me to see a different lifestyle and a different mentality. I don’t know that I would have seen the benefits of pushing ourselves to buy more rental properties had I not seen a lifestyle of entertainment.

I started to realize it would be nice to spend time with my family while the kids were little. Who wants to wait until retirement to spend time at home, when your kids are grown and moved out of your house? Why not spend the quality time in their early years? Let’s travel more and experience more in life. Let’s have more time with the kids than the hellish hours of 5 pm to bed time.

Our cash flow each month is about $7k, just based on the rental properties. That doesn’t include expenses that come up, and every once in a while we get hit with a major system that needs replacement, but most of the charges are a couple of hundred dollars here and there. Some days, I wish I could still do what I loved to do in the transportation world, but I don’t miss the office politics and the moderately strict work schedule.

I’m happy for all the experiences that have led me to this point in life. Perhaps you can read Rich Dad, Poor Dad or Cashflow Quadrant and learn a little bit more about all the options out there. Perhaps you just didn’t know that there are opportunities out there where you’re not trading time for money, or where you’re not cushioning the pockets of an executive while you make a certain salary. Perhaps you just needed your eyes opened to the chance to make your money work for you. Or, perhaps you’ll learn that you like the stability of being an employee, and you don’t want to change. But I urge you to take a look at the options and see what works best for you, now that you’re away that there are options.

Tenant Evaluations

When looking to rent your house, you should do your due diligence. Our concerns are whether a person has a history of late payments, collections accounts, and if they have a criminal history.

We do two steps of initial screenings before asking a tenant to pay an application fee. The first two steps given them the opportunity to disclose anything that may be seen as unfavorable or not meet our rental criteria. This way, once they pay the application fee, it’s a verification step, and they’re not wasting any money for me to find out that I’m going to decline them.

Here are the details of how I go through the evaluation process, and specifically how I just did it for our new rental.

RENTING CRITERIA

First, I send everyone interested an “Interest Form.” We ask for their legal name, contact information, credit score, employment data, number of occupants, whether they smoke, if they have pets, if they’ve been evicted, and if they’ve been convicted of a felony. I also ask them to provide any other information they think I should know that may affect their ability to rent the house. I send this form to everyone who expresses interest, and it’s the first step before scheduling a showing. I request the data before scheduling a showing because I don’t want to waste my time or theirs showing the house, when they had adverse responses to our criteria. This was more important when I was scheduling individual showings, but I now conduct an “open house.” I set aside two hours to be at the house and ask they come during that time. If that doesn’t yield a tenant, then I’ll evaluate who couldn’t make it and field new requests to see it to determine if I’ll show it individually or host another open house.

We have this at the top of our Interest Form.

Properties are offered without regard to race, religion, national origin, sex, disability or familial status.

Required standards for qualifying to rent a home are:
• Each prospective applicant aged 18 or older must submit a separate application.
• We limit the number of occupants to 2 per bedroom.
• Your combined gross monthly income must be at least $4,000.
• You must be employed and/or be able to furnish acceptable proof of the required income.
• You must have a favorable credit history.
• You must have good housekeeping, payment, and maintenance references from previous Landlords.

Compensating factors can include additional requirements such as double deposit and/or a cosigner.

Our typical rental actually requires 3x the rent as the monthly income, but since our last house was more expensive, we put the requirement as a dollar amount threshold instead.

Then I would historically review those who say they’re interested and pick the one that appears to be most qualified. I’d send them a “pre-application” form to fill out. However, for our last tenant search, I asked everyone interested to fill out the “pre-application.” The tenant screening system doesn’t tell me their last landlord information or their employer, which are both necessary for making phone calls and checking their information given. The “pre-application” repeats some of the questions on the Interest Form, but the pre-application requires them to sign the form as an “affidavit” that the information is accurate.

If they tell me that they’re going to have a low credit score, it helps me to know the reasons for it up front. Additionally, by letting me know any issues up front, it saves them money. If they self-report that they have several collections accounts, then it could be cause for me to move on to a different person interested. If they don’t tell me that they have some issues in their history that may be unfavorable, and I send them the application, then they’re spending $40 per person only to potentially not get the house. I prefer to use the online tenant screening as a final verification step than an initial screening and potentially waste someone’s money.

One time I got through all these steps, had 3 different people submit an application for a house, and the report came back with an eviction. We asked why they didn’t disclose that to us originally. They told us a story about how they were asked to leave somewhere, but they didn’t know that it was reported as an eviction. We told them that they were disqualified. We went with our “runner up,” and they’ve been in the house almost 3 years without any issue or late payment.

We also had two people submit an application and then a bankruptcy was reported on the credit report (it was before the pre-application step I implemented). She said she didn’t see a place to explain a bankruptcy, so she didn’t think to mention it. For future reference, if I ask for your credit score and you have anything concerning in that credit report, it’s helpful to be upfront about it. In that case, everything else was fine and her explanation for the bankruptcy was clear and thorough. We gave them a chance, and they were amazing. She was rebuilding her life after taking on a lot of new bills after a divorce, juggling single-income life, and it was a way to consolidate the debt.

DECIDING BETWEEN TENANTS

In this last situation, I had several people express interest in the property.

I held the open house, and I asked everyone to let me know by noon the following day if they were interested in pursing an application after seeing the property. I received 6 or 7 people who were interested in the house.

I don’t look at one factor. I weigh all the information given to me in my head. In a perfect system, I may assign a weight to each data point, but that’s more effort. I’m reviewing the data and trying to see who has the best, well-rounded criteria.

The house is big (2100 sf with 4 bedrooms), and rent is higher than anything we’ve ever managed. I looked at what they are currently paying in rent. If they’re currently paying $1500 per month, then that made me more confident that they’d cover the $1750; if they are currently paying $400 per month, then I was concerned that they weren’t prepared to cover such a large expense difference. Along those lines, I also gave more credit to someone who has a stable job that they’ve been at for more than a year, versus a few people who said “I’m starting a new job at the end of April.” We have a tenant that goes through jobs every 1-3 months and is always a pain with rent, so I’m probably more scarred by job history now.

I gave more credence to those who had at least a 600 credit score, but I didn’t rule out anyone with a credit score less than that. One woman did have a lower credit score, but she had other good information, so I didn’t rule her out.

Finally, the determining factor came down to availability. My top two contenders had different desired move dates. One said early April, and another said June 1st, but May 1st may be ok. When I asked her to explain about her move date, I received a detailed story that didn’t have any conclusion on when she was available. Since this is a business, and I had a qualified group interested in the house sooner than others, they were the ones selected. If I didn’t have someone qualified for an April move in, then I would have waited for a May 1st rental instead of lowering my standards.

Luckily, I had enough interest in the property that I could select someone who was well qualified and get it rented sooner than later.

APPLICANT SCREENING

Once I’ve given someone these two opportunities to disclose unfavorable information in their credit or criminal history, and they’ve provided favorable responses that meet our criteria, I send the link for the application. The potential renter enters their data into the system, which helps keep their information secure (e.g., I don’t have their social security number) and helps eliminate any typographical errors that I may make transferring the information into the website instead of them entering the data they already know. Additionally, the tenant pays the fee (currently $40) directly to the website, which helps them understand that once the report is run and the fee is paid, it was for a service so it’s not refundable. I heard multiple stories this past week where people paid “application fees,” but were later told that they weren’t the first to respond. That’s not fair. I don’t need to know everyone’s detailed reports and cost people money if they aren’t going to get the property. So here’s how I handle the tenant screening process.

The system generates a report for me to see that includes their credit history, criminal history, eviction history, and income verification.
– The credit history shows any missed or late payments; collections accounts; bankruptcies filed with the chapter, date filed, and amount settled; and their score. I’m more concerned about late or missing payments than anything else there. The collections accounts are typically related to medical bills, but if they’re for general credit cards or an enormous car loan, I’d find it more concerning. I’ve also not ruled someone out simply because they’ve filed bankruptcy; two of our tenants actually have a bankruptcy in their report.
– The criminal history tells me if they’ve had any judgements against them. I’ve seen traffic violations, misdemeanors, and felonies. The report also tells me if they’ve been listed on any sex offender registry. If they have felonies, multiple misdemeanors, or are on a sex offender registry, it’s automatic disqualification. I’ve gone down the road of giving people chances, and it hasn’t gone well. This report isn’t fool-proof either. I know how to use the court record system where we have most of our houses, and I now look them up in all the nearby jurisdictions to be sure there’s nothing reported.
– The eviction report will tell me if they’ve been formally evicted. This doesn’t capture any times where a tenant and landlord agreed on the tenant’s departure outside of the court system. This also may miss some jurisdiction evictions. We had someone show up in a separate jurisdiction when I went looking for their information in the surrounding areas, but it didn’t show up on the report. Don’t think that this report is fool-proof.
– The income verification comes with a built-in caveat. I don’t know the details on how the report is run, but the result is something along the lines of “we believe that the self-reported income is near accurate.”

The report suggests whether to accept or decline the applicants. I suggest reviewing the data and making a decision for yourself. Some reasons why the recommendation will be to decline include: criminal history, bankruptcy, and low credit score.

We have given several people “chances” that don’t perfectly meet our criteria. Below is a screenshot where the recommendation was to decline. However, we ended up asking for more information and giving them a chance. They ended up spending a year in a rental of ours, moving out of the area, and then asking for our rental availability when they came back to town. They always paid on time, hardly asked for anything, and took great care of the house.

We have also accepted tenants that had some concerns in their report, but the system recommended we accept them. We tried to overlook the issues, but we’ve ended up regretting it. We have one tenant who has a criminal history (forgery) and we ended up having to release her roommate from the lease because of a domestic violence and restraining order issue. She’s also consistently late on making rent payments and doesn’t keep communication lines open. We plan to ask her to leave at the end of this lease term. We also had a tenant with a 480 credit score who wrote us a letter about her low credit and asked for a chance. She ended up consistently paying late (she always paid, but it was always a fight); we threatened eviction when it got to a breaking point where she was combative, but she left on her own terms. That’s a good example where she was a terrible tenant, who we gave multiple opportunities and even restructured her rent, but her eviction report won’t say anything to that effect.

DEPOSIT

Once I have an approved application, I request a deposit to hold the property and remove the listing. Typically, the lease signing doesn’t occur immediately. In those cases, I want protection of my cash flow that I’m holding the property for someone specifically. I’ve had a couple of houses that have signed a lease immediately, but typically there’s a lag between “acceptance” and the lease being signed (forming a contract).

In this last instance, the tenant was accepted on Friday, but the lease wasn’t going to be signed until the following Thursday. I requested a $400 deposit, which will be applied to their balance owed to get the keys transferred to them. I originally was going to request $500, but I realized that the week’s worth of time at the rent per diem rate came to $408. If they back out between now and Thursday, then I haven’t lost income if I had chosen someone else and not held the property until the date they wanted a lease. Ironically, they ended up paying a deposit of $500. For them to obtain the keys, they owe a security deposit ($1750), the first month’s pro rated rent (about $1300), and a pet fee of $500. Their total is $3,550, but the $500 I’ve already collected is applied to that balance. Therefore, on Thursday, they’ll owe me $3,050 for me to hand them the keys.

Usually, I require the first month of rent to be the full amount, and then the proration is applied to month 2. Since for this tenant, they already paid rent at their current address for the month of April, and the rent here is higher than our average, I went ahead and prorated the first month so they didn’t have to put so much cash out of pocket in a short period of time.

SUMMARY

You can see how I am not making black-and-white decisions. I’m not hanging my hat on one or two factors. I’m being reasonable in my decisions and understanding that there’s a person, and maybe a family, on the other end of this transaction.

Be fair. Utilize a variety of factors in making your eligibility determination. Keep your communication lines open with potential renters until you have a deposit and/or lease signed on the property.

Treat this as a business and make informed, logical decisions instead of emotional ones, but be reasonable.

Credit Card Rewards

A while back, I wrote about how, if you really wanted to put the effort in, you could be maximizing credit card rewards. If you don’t want to put the effort in that I’ll get to in a second, then you could at least have one reward-earning card that you use for all your purchases and pay off each month.

Important reminders:

We don’t use cash. Everything goes on a credit card unless it’s prohibited or there’s a service charge that outweighs our rewards.

We pay off the balance of every credit card every month. We have never paid interest on a credit card balance.

Let’s dive in.

REWARDS

Credit card companies are offering rewards for using their card for purchases. Some even give a reward for making payments on it too. The rewards can be in a point system, cash back, or incentives for specific companies (e.g., Delta, Disney). We prefer more generic reward options, but some people like to use a specific reward card. The best reward credit card for you is one that matches your spending habits.

An example of a specific reward credit card would be a a Disney card. As you earn money, it goes towards their trip to Disney. Psychologically, they feel that their expensive annual trip to Disney is “paid for.” While this may work for some people, our thought process is that if I earn $1,500, then I have the flexibility to put it towards a Disney trip or can buy something else.

The simplest way to collect rewards is to have an all-category-cash-back credit card (e.g., 1% cash back on all purchases). However, to make the most, you could be using multiple credit cards so you can earn extra rewards in different categories. Then you need to know which card to use when, and also keep track of your statement periods so that you pay it off in full each month. A category type credit card can give rewards in multiple categories (e.g., 4% on gas, 3% of restaurants, 1% on all other purchases), can rotate reward categories (e.g., first quarter is 5% on gas, second quarter is 5% on groceries), or can be geared towards one specific category all the time (e.g., 5% on gas). There are typically earning caps in these categories.

CHOOSING A REWARD CREDIT CARD

Each credit card company has a variety of cards that offer different rewards. You can decide what fits your spending pattern the best. If you don’t want to identify the categories that you spend, then the Citi Double Cash is a great “catch all” with no annual fee and no reward earning cap. You earn 1% cash back on each dollar spent, and then an additional 1% on each dollar paid towards your credit card balance. We deposit our earnings into a checking account instead of a statement credit, because we learned that we don’t earn cash back on the statement credit made.

Some credit cards have an annual fee. We typically shy away from anything that has an annual fee because we don’t like paying money to spend money, but we did have a couple of exceptions. For instance, one card had a $450 annual fee. You earn 3% points (one point is the equivalent of a penny if cashed out) on all travel and dining purchases and 1% points on everything else, but if you redeem the points earned through their travel portal, you get a 50% bonus. One of the rewards was reimbursement of $300 worth of travel costs. The card reimbursed the cost of TSA Precheck too, which as $75, and had a DoorDash credit of $30. Then the last $45 of the fee was offset by the rewards granted through point usage. But the annual fee increased to $550, and we no longer thought it was worth keeping and that the cost would be fully offset by the rewards.

We also look for a sign on bonus. If we’re going to have our credit checked, we want to capitalize on it. Sign on bonuses are typically additional cash back or points once you hit a certain spending threshold. For example, the card may say “once you spend $3,000 in the first 3 months, you’ll earn a statement credit of $300.”

In addition to a sign on bonus, we would also prefer opening a card that offers a 0% introductory rate. I’ve shared before that we most often look for a new credit card because we have a large expense coming. When faced with paying for in-vitro-fertilization out of pocket, we opened a new credit card that had 15 months worth of 0% interest. This way, when we paid the tens-of-thousands owed, we gave ourselves an interest free loan. That particular credit card was only used for that expense because the reward categories were worse than other cards we had. However, we didn’t close that card because it helps our credit by having more of credit line open.

OUR REWARD USE

Besides the Citi Double Cash, we’re partial to the Chase options out there. We use different cards for different categories, and then use the Citi for anything that doesn’t fit into a category.

Between 5 credit cards, we brought in $4,232 worth of rewards last year. That’s money in our pockets that we did nothing except spend other money to get. In the past, it’s usually about $1,500 per year that we bring in with credit card rewards. The amount in 2021 was higher due to sign-on bonuses that were earned in a previous year, and then the credit card changed their reward redemption options, allowing us to pay ourselves back for restaurant purchases. We had previously been using the rewards to purchase travel needs through their portal, but we were able to dwindle down our rewards with this reimbursement change.

What could you do with a “free” and “extra” $1,500?

If you’re smart with credit cards, they can be a powerful tool to create financial flexibilities.

Commercial Loan

We closed on a new type of loan last week. It wasn’t a completely smooth process, but it was easier than a residential loan.

WHY COMMERCIAL?

Residential loans on second+ properties were over 4.5% on their interest rates last month. The commercial loan gave us options that were lower than that. It comes with a catch though. While the loan is amortized over 25 years (there was a 20 year option too), there’s a balloon payment after 5 years. There were also 3, 7, and 10 year options. Being that this was our most expensive investment property purchase, 3 years was too much of a risk to take on that balloon payment. The interest rates for 7 and 10 years didn’t make it worth going the commercial loan route. While the interest rate is fixed (unlike in an ARM or adjustable rate mortgage), this balloon is a risk.

By going through a credit union, our costs were also minimal. Our closing costs were just over $1,000, rather than the typical $2k-3k that we’ve seen on closings that cost less than half what this house cost us.

The only other “catch,” if you want to call it that, is that there is no escrow. I already handle the taxes and insurance payments on my own for a handful of our houses, so that’s not a big deal. I also appreciate having control over my money instead of having to check in on escrow regularly and making sure all the escrow analyses are actually done correctly (because one recently wasn’t!)

PROCESS

We filled out an application, which they called the “personal financial statement” and included our detailed financial status. It had me list all our account types and balances. I assume that’s what they used to compare against our credit report, because we actually didn’t send any account statements to them (glorious!). We had to provide the last 3 years of tax returns (ugh… we haven’t done 2021 yet so we had to give 2018).

I developed a rent roll and gave that as well. It listed all real estate owned, purchase price and date, current market value, monthly rent, mortgage balance, monthly mortgage payment, and whether or not it’s occupied. I added the HOA payments on the houses where it’s applicable because that always seems to be a last minute request for documentation.

Once the application was completed and reviewed, that was it. We were asked a few follow up questions about the numbers on our forms, but we weren’t asked for anything further. Essentially, “underwriting” happened as part of the application process, versus in the middle of the application and closing dates, spanning days and maybe weeks of documentation gathering and answering of questions.

Instead of a “rate lock,” the rate given is the rate that was present at the application submission, pending any exceptions (e.g., if credit isn’t what we said it was or we have outstanding loans not disclosed). As an auditor, it was hard for me to accept that we weren’t going to be hit with a surprise somewhere along the way because we never signed anything agreeing to loan terms! 

We saw no documentation until the Monday before our Thursday closing. There was no initial disclosure, and no “rate lock.” We had no idea how much the closing costs actually were going to be. The responses to our questions were slow or nonexistent. We didn’t see our appraisal until the Friday before closing. Not knowing the process or knowing when we’d find out how much this was costing us was more than we’re used to handling emotionally.

We received the HUD settlement statement on the Monday before closing. Luckily, everything was correct. Our sellers had already moved out of the area, so we had to have the statement sent to them, signed, and sent back to the Title attorney. They did that perfectly, and we had an easy closing on Thursday. We signed all the paperwork in about 20 minutes!

FIVE YEAR LOAN

Mr. ODA ran some numbers to show me why we should go for the 5 year loan instead of the other terms.

We didn’t consider the 3 year option because we didn’t want to manage that balloon payment or refinancing so quickly.

As a reminder: the closing costs for the commercial options are the same regardless of the term, and were about $2k less than the traditional loan; all the commercial loans are amortized over 25 years, but have a balloon payment at the end of the term given; all are based on 20% down (because there was no incentive for 25% down).

The final decision to go with the 5 year loan was that we haven’t shied away from risk in the past, so take the incentives that come with the shorter term (i.e., lower monthly payment and less interest paid). Our portfolio has made drastic changes over the last 5 years. Therefore, we don’t see a reason to pay more interest, reduce less principal, and have a higher monthly payment (thereby lowering our monthly cash flow) just because a balloon of $167k is concerning.

BALLOON PAYMENT

The loan is $193,600. After 60 payments (5 years), the principal balance (with no additional payments made) will be $167,500.

Let’s face it, if we had $160k+ liquid, we wouldn’t be paying the first 5 years of interest on the account. We can make additional principal payments over the next 5 years to dwindle the balance before the balloon payment is due, and/or we can look into refinancing the balance at the end of the 5 years.

We had another private loan that had a balloon payment at 5 years. That loan was originated at about $70k and we paid it off in about 3 years. We had several issues with that lender, so we had the incentive to throw money at the loan and be rid of it, versus attempting to refinance it at the end of the 5 year term.

It’ll be interesting to see what we do on this going forward. The balloon payment would typically be an incentive to make additional principal payments. However, we have six other loans with an interest rate higher than this loan’s, and one loan with the same interest rate. We’ve been focusing on either the one with the lowest principal balance or the one with the highest interest rate. This new loan doesn’t fit either of those categories!

SUMMARY

Mr. ODA asked me if I would do this again, and I would. It was frustrating to ask someone in customer service a pointed question and not get an answer, but overall this was easy. There was minimal documentation needed, the requests didn’t drag on, and the closing costs and interest rates available were favorable. The balloon payment is something that needs to stay on your radar over the next 5 years (and mostly in that final year), but refinancing is always an option. It doesn’t mean that you have to be ready to fork over $167k on that date, but you do need to plan for closing times and ensure you keep your credit worthiness in good shape (although isn’t that always the goal?!).

Should you take the raise?

Yes.

It seems it’s time to revisit this discussion.

A raise does not mean you’re making less money because it’s “taxed more.” The tax rate is not greater than 100%, which means each individual dollar is not taxed at a rate greater than or equal to that dollar. The highest tax rate for 2022 is 37%. So even if you’re at the highest tax bracket, you’re still bringing home 0.63 cents on the dollar. So let’s revisit the United States tax system: marginal tax brackets.


MARGINAL TAX BRACKETS

Your income is taxed by the IRS according to a marginal tax bracket. This means that each dollar fits into a separate “pot” to determine how much it’s taxed. This does not mean that if you make $15,000, it’s all taxed at 12%; or if you make $95,000, it’s all taxed at 24%. This means that each dollar that fits into these “pots” is taxed at its respective rate. For ease of seeing how the math works, this post is just going to assume you’re filing single, but there are other options, which changes the bracket amounts.

Let’s say you make $80,000, and you’re considering a raise to $95,000. This is a difference of $15,000 in gross income. Only $5,925 falls into your “new” tax bracket. Your net raise (take home pay, barring any other deductions for the year) is $11,581.50, and you’re paying $3,418.50 in additional taxes.

Let’s do an example where you receive a raise, but you stay within the same tax bracket. You’re making $80,000 and offered a 5% raise, which would bring your salary to $84,000. You would make another $3,120 in net income, and you’re paying $880 in additional taxes (which is 22% of the salary increase).


Making $90k instead of $80k does not mean that your entire pay check is now taxed at that higher rate. This is the common misconception about earning more money. Each dollar is taxed within the bracket it falls into. In 2021, single filers get taxed on 10% of their income up to $10,275. That means that the first dollars they earn are taxed at 10%, but the $10,276th dollar they earn is taxed in the next bracket, or 12%. The 12% bracket goes to $41,775. Similarly, the $41,776th dollar they earn will be taxed at 22%, and so on.

Mr. ODA posted about how bonuses are calculated by your payroll processors back in 2019. I’d rather take the additional money in my pocket than worry about how it may appear to be taxed more when you see a new paycheck.