Should You Use a Property Manager?

The key to financial freedom is passive income or cash flow so that you don’t have to work, right? Well, managing rental real estate isn’t truly passive, so a hiring a property manager to do that work on your behalf is enticing. But are the benefits worth the cost?

We have 12 rental properties, and 5 of those are self-managed. While I’ve mentioned the benefits of a property manager, I wanted to run through the reasons we don’t have a property manager on all of our properties. It comes down to time management and cash flow.

THE DETAILS ON SELF-MANAGED HOUSES

The very first property we bought was in Kentucky, while we lived in Virginia, so we needed a manager on that one. But then we bought two houses in Virginia. They were right next door to each other, and I worked about 10 minutes away. Without kids, I had the time and flexibilities to manage them. Plus, both houses had active leases on them when we took possession. Without having the immediate need and learning curve of finding a new tenant, it was easy to manage the rent collection and any minor issues that came up on the houses. A property manager would have cost us $105 each month on each of these houses. Even now that we don’t live near them, the houses are newer and we know they don’t have any major issues, and the tenants keep renewing their lease, so it’s [relatively] easy to manage from afar. There are some maintenance hiccups – like the flooring debacle – but mostly I just collect the rent electronically. One house is routinely late on the rent, so I have to manage that property more than the norm, but it’s all via electronic communication and doesn’t require me to be on site.

Our third purchase in Virginia was of a vacant 2 bedroom house. Still, no kids meant that I could manage listing and showing the property to prospective tenants. This was the first time that we had to figure out the tenant search process, but we were able to show it to a couple and have it rented the first weekend it was listed. Again, the house requires very little attention, and I just collect rent. Even when the house had to be turned over, the tenant leaving put us in contact with a friend of their family’s, and that’s been who’s living there for several years.

Our last two that are self-managed are the two that we have with a partner. I handle the rent collection and paperwork. When we have an issue, we’re more likely to call a handyman than do the work ourselves anymore, but again, phone calls and emails aren’t that difficult. We just had a handyman go out to look at two broken doors and to replace a missing fence panel. While I was there over the summer, I had secured the railing that was loose, but I didn’t want to do any of the other work. It also helps that we have a partner, so the cost of any work to be done is only half for us.

For the past year, we took over management of a property that had been with our property manager in Virginia. We knew the tenants from a previous house of ours, and we felt that our management of that house from afar would be easy as compared to the $120/mo we were saving by self-managing. We didn’t have any issues we couldn’t manage during the year. However, they’re now purchasing a home. We’re obviously not there to manage showings, so we gave this property back to our property manager. She listed the house and showed it for us. It’ll cost us $300 for the listing and 10% of the monthly rent for her management ($135). For the last 11 months, it has been rented at $1200. That means that we’ve had an extra $1620 worth of income for the year than we would have ($120 for 11 months, and the $300 listing fee).

PROPERTY MANAGEMENT

For our Kentucky houses, we are very hands off. We don’t weigh in on costs less than $200, and we don’t get any updates regarding rent payments or tenant searches. Sometimes it’s too hands-off for me. For instance, I don’t even get a copy of the executed leases until I ask for it, and I don’t get a copy of any receipts (I just get a summary of charges taken out of our proceeds). It has been hard on me psychologically, but I’ve learned to let it go over the past few years.

For our Virginia houses, we’re more hands on, and sometimes it’s too much. We still discuss all the details when an issue arises, so it’s just saving me the time of calling and coordinating contractors, which is rarely necessary. Then there are times that I even handle ordering and contractors; for instance, I just handled replacing the hot water heater and refrigerator at one of our houses. All of our tenants pay rent electronically, so that’s not even on our property manager’s radar (she used to collect rent and then deposit it in a joint account we gave her access to). Since she’s not responsible for rent collection, it’s then on me to let her know if someone hasn’t paid, and she handles the follow-up communication.

However, our Virginia property manager has been worth her weight in gold because she has handled multiple lease defaults for us (with one actually leading to an eviction), which involves going to the court house to file the motion and then showing up for the hearing(s). We had one tenant who had to be served multiple notices, but she eventually left on terms mutually agreed upon. We had another tenant vacate a house because his kids were attending a school out of the address’s district (and blamed us for that.. I don’t know!), but we took him to court to require payment of past due rent from before he vacated. Then we had a true eviction, where the tenant stopped paying rent and had to be taken to court multiple times. The judge ruled in our favor and told her to vacate the premises, which involved police officers escorting them out of the house. We have been very lucky that the houses we manage haven’t ventured into the realm of taking them to court (although one in close), and that our property manager has been able to handle everything on our behalf for these instances.

SUMMARY

We can get caught up in the “we’re paying for nothing to happen” mentality with our property managers. Each month, we pay out $720 for property management. In Virginia, our property manager doesn’t even collect rent, so most months there’s no action from her for the houses. In Kentucky, the property manager collects rent, holds it, and pays out our share the next month. It can be hard to see that total number that we’re paying, but for those months that involve a lot of coordination in receiving quotes, going to court, or meeting contractors, it’s nice that we don’t have to deal with it.

Sometimes it’s worth paying for peace of mind and relaxation, knowing someone else is handling your problems for you, but you need to choose where that balance is for you. Do you want to manage it yourself to know your money is being spent fully at your own discretion; do you want to have a manager while maintaining a lot of the decision making; or do you want to be fully hands off with a management company who you can trust to handle your property with your best interests at the forefront? It’s all a balance of how much you think that’s worth compared to your time spent and knowledge on managing rentals.

Risk Mitigation – LLC or CLUP

Not that I expect you to know these letters right away, but bear with me.

There’s a common question that comes up with rental properties: have you formed an LLC? An LLC is a limited liability company. This is a business mechanism in which you create an official business for your properties, thereby separating them from your personal finances.

That’s the positive to an LLC – an LLC separates the rental properties from your personal finances. This protects your personal finances in the event of a tenant suing you through one of your properties. However, for this protection to really work for you if you have multiple properties, each property would need to be within its own LLC. For example, if you put 12 properties in an LLC, then yes, they’re separated from your personal finances, but they’re not separated from each other. Meaning, if someone sues you, they can go after your entire portfolio.

Mr. ODA and I have discussed grouping a few houses in different LLCs, but we don’t see the benefit of the costs that go along with it. There are fees to form the LLC, put properties into the LLC, and then an annual fee ($50 in Virginia). We have an LLC for the two properties we have with a partner, but we went a different way for the properties that we own ourselves. We pay $250 annually for a Commercial Liability Umbrella Policy (CLUP).

CLUP

A Commercial Liability Umbrella Policy (CLUP) extends the limits of your primary liability insurance policies. Our CLUP is through State Farm, but our individual policies are not necessarily through State Farm. There are many nuances to how it works; for instance, you cannot have a CLUP on top of commercial liability insurance. We have individual personal insurance policies on all our houses, required to cover $500k, so we can have the CLUP extend those coverages. Each property is listed in the CLUP, even the ones we have with a partner because our ownership had to be at least 50% for it to be covered (which it is).

While the cost will vary based on each scenario and coverage, we pay $250 annually for a $2 million policy. Every 3 years, we’re expected to weigh in on our policy, which includes sending individual homeowners insurance policy documents, each policy’s 3 year loss report, and current pictures of the front and back of each house to our agent. We’ve only had one claim on a property, and that was a car accident that took out our air conditioner in House 1.

CREATING A PARTNERSHIP

We do have an LLC that has two houses in it, but that’s because we own them with a partner.

There’s a cap of 10 mortgages that an individual (or a couple, in our case) can have. When we reached that threshold, we asked our friend and Realtor about other houses we were interested in. Our Realtor purchased two houses as an individual, and then we put them in an LLC to give us ownership. After the first house purchase, we had our real estate attorney set up an LLC. Then after the second house closed, we just had to add that house to the same LLC.

When our partner went under contract on the first house, we created an agreement with him. We owed him half of the down payment and closing costs to be 50% partners on the property. At the time, we didn’t have the cash liquid, and he agreed to allow us to pay him monthly, with interest. So he paid the funds-to-close, and we structured an amortization schedule at the market rate to pay him back. It only took us two months to pay him the balance based on our cash flow, which equated to about $44 in interest for him.

I now manage most of the maintenance, collect all of the rent, pay all of the bills except the mortgage payments that our partner has on automatic billing, and pay him out his 50% share each month.

SETTING UP AN LLC

To establish the LLC, we paid our real estate attorney $393 (split 50/50 with our partner). We answered a few questions, and then we met in their office to sign the paperwork during a half hour meeting. The attorney handled filing all the paperwork with the state and were set up as the “Registered Agent.” A Registered Agent is an individual or business entity that accepts tax and legal documents on behalf of your business.

A year after the LLC was established, I received a bill from the attorney’s office. The bill was for $100 – comprised of $50 for the LLC fee from the state and $50 for the attorney processing the payment. If you’ve read more than one of the posts in this blog, you’ll know that wasn’t going to fly; we don’t pay extra for things that we can do ourselves. I started researching the purpose of a Registered Agent and who could serve as such a person, and I found out it’s not required to be an attorney.

I outlined my proposal to our business partner, and he agreed that we didn’t need to have the Registered Agent as the attorney. He would prefer his other LLCs be managed through them so nothing gets missed, but since I keep a pretty well organized business, I have mechanisms in place that will trigger a reminder of payment if I don’t receive the bill in the mail. We paid the $50 processing fee that year, and then I filed a change with the State Corporation Commission to eliminate the middle man.

LLC AFFECTS

One of the concerns with putting a new mortgage into an LLC was that the bank could “call” the mortgage through the “due on sale” clause. A due-on-sale clause is a provision in a loan that enables lenders to demand that the remaining balance of a mortgage be paid in full if the property is sold or transferred. Transferring a mortgage to the LLC risks triggering the “due on sale” clause, although there were historically very few times a lender would call the mortgage due to an LLC transfer.

Another weird nuance to owning a property in an LLC is that homeowners insurance companies charge more for the same house, with the same human clients, simply because its ownership is placed in an LLC compared to in personal names. For example, after we transferred one of our properties to LLC ownership, the same company increased our annual rate from $484 to $874. We have not been able to figure this one out. Presumably, the biggest source of risk to an insurer is the fact that the people living in the house are not the owners, although when we don’t have a house in an LLC, the insurance company still knows that it’s used as a rental. If there’s anyone out there that can help us understand this behind the scenes insurance nuance, please drop the info in the comments. We were able to find an insurance company with a reasonable price, but it’s still an odd nuance.


For our risk tolerance, we’ve decided that a CLUP is enough coverage in the event of a catastrophe ($500k in regular insurance plus $2M in umbrella). We haven’t established any other LLCs because the cost of establishing individual LLCs is more than we want to take on. However, we did use an LLC where we needed to establish a joint property ownership and be able to legitimately claim expenses for tax purposes. We have two houses, both of which are with the same partner, in one LLC.

Hear more from Mrs. ODA

Back in May, I was a guest on Maggie Germano’s Podcast, “The Money Circle.” I shared some of our background and how we started investing in real estate. We brushed on topics like establishing an LLC, tax advantages, and how you don’t need to start big to just get started. It was a brand new experience for me, but I’m passionate about our real estate experiences, and I loved being able to share. I hope you’ll check it out!

Home Inspection Clause

I’ve mentioned that you shouldn’t be afraid to [legally] walk away from a contract on a house that isn’t going to work. I thought it would be fun to run through the duds (houses) that we walked away from and why, but first, what is the home inspection clause and how does it work?

The home inspection contingency is a clause within the real estate contract that allows the prospective buyer to enter the home and inspect it before closing. The clause usually has an expiration date on it, meaning the inspection and any negotiations need to be done within X days of the contract ratification (ratification is once all parties have signed). I would recommend using a professional to look at the house, versus you thinking you can find the signs of a major a problem. It will cost you 1-2 hours of time and about $300-$600.

It’s important to note that even if a house is sold “as is,” you can still inspect it, ask for corrections, and/or walk away from the contract. “As-is” just means that the buyer should not enter the contract with the intent of the seller doing anything for them. But really, anything in life is negotiable, right?

Additionally, putting a home inspection clause in the contract doesn’t mean you have to perform a home inspection. So put the clause in there as a means to ‘escape’ if you need it.

THE LEGAL LANGUAGE

I was going to share a screenshot of one of our contracts, but the home inspection section is over a page long, so I’ll paraphrase. The contract was subject to a home inspection, and the Purchaser had to “provide the seller with all inspection reports, cost of repairs and Purchaser’s written repair request no later than 10 days after the Date of Ratification.” It continues to state that the inspection is paid for by the Purchaser, and the Purchaser cannot require the Seller to perform any inspection or pay for it. Then there is an outline for how long each party has to review the request and return it to the other party (e.g., negotiation period). Finally, there’s the clause that allows the Purchaser to walk away.

In one of our Kentucky contracts, it also states that all inspections must be ordered and paid for by the Buyer, and that the Seller must provide reasonable access to the property to perform inspections. Interestingly, the Kentucky contract focuses heavily on removing any responsibility from the Realtor(s) during the inspection process. I hadn’t noticed that nuance before, and now I’m curious how much has gone wrong in Kentucky that there are several sentences along the lines of “The parties hereto release the above Realtors and real estate companies from, and waive, any and all claims arising out of or connected with any services or products provided by any vendor.”

The Kentucky contract’s home inspection contingency is as follows. “The BUYER hereby agrees that he/she has inspected the property and hereby accepts the property and its improvements in its present “AS-IS” condition; with no warranties, expressed or implied, by SELLER and/or Realtors. BUYER may have the property inspected and may declare the contract null and void, with earnest money returned to the BUYER, by notifying SELLER or SELLER’s agent in writing within 15 days from contract acceptance. Failure to have inspection and notify SELLER or SELLER’s agent in writing within said time shall constitute a waiver of this inspection clause and an acceptance of the property in its “as-is” condition. The time frame established in this paragraph is an absolute deadline.”

I’ll say it again: I applaud Virginia’s plain language use in their contract templates. While the home inspection clause is lengthy in Virginia’s template, it’s written in an easy way to read and understand, unlike this Kentucky paragraph. I’ve also read New York’s template, and it’s even more painful to read and is written in legal jargon.

Quick aside. Virginia is a “buyer beware” state. This means that the seller does not have to disclose anything about the condition of the property to you. Whereas Kentucky requires the seller to fill out a form that identifies all known issues. Know the requirements where you’re purchasing/selling.

THE INSPECTION

Remember that you need to have the inspection completed and the inspector’s report written up with enough time for you to review it with your Realtor and decide how to proceed (e.g., ask the seller for repairs), all within the timeframe established in the contract (e.g., 10 days from ratification). If you want the house inspected, you should look to hire that individual within the first day of ratifying the contract.

When you hire a home inspector, they’re going to look through the house and identify any deficiencies. They’re looking at all the major mechanics of the house, identifying any safety issues, recommending repair/replacement, and making note of items that aren’t currently a concern but may develop into one. You should have a good understanding of the house’s foundation, roof, plumbing, HVAC, electricity, and appliances through the inspection.

While it’s not required for you to be there during the whole inspection, I’ve found it to be more helpful if you are. We’ve done it where we were present through the entire thing, but there’s a lot of down time for that, and we’ve been there just for the end to get a walk through of the findings. If you’re not there to see it in person, the pictures and explanations may not be completely clear.

The inspector will provide you with a detailed report within a couple of days of the inspection, which has pictures of the deficiencies and possibly an estimated cost of repair. The issue could be as small as paint imperfections, or as big as a structural issue. Here are some examples we’ve had on homes we did purchase.

BUYER’S NEXT STEPS

  • You can accept the deficiencies identified and take no further action. Sometimes there’s a contract addendum that’s required where you state you completed the home inspection and are requesting nothing from it.
  • You can request repairs from the seller, or you can negotiate the contract price to compensate for the deficiencies. The seller is unlikely to address superficial notes (e.g., painting), but may take notice for any major issues (e.g., gutters, roofing, HVAC). You can request the seller to repair any item from the list, but understand that you’ll catch more bees with honey. If you submit every item to them, they’re more likely to say no to many items on the list, and you no longer hold the control of what’s getting fixed. If you provide a short list that appears important, they’re probably going to accept the repair list. The list should be formally submitted (i.e., signatures) to the seller, and the seller should have to sign the list, agreeing to the repairs, within a certain period of time. As good practice, the buyer should be walking the property within a day or two of closing; you want to verify that the house is still in working order and the same condition as when you signed the contract to purchase. We did have an issue where the seller was not performing the tasks agreed to on the home inspection request form, and we had to make a few trips to the house to ensure it got done.
  • In extreme cases, you can invoke the termination clause and walk away from the contract. We did this on a house that several maintenance issues that were deferred and a structural issue; on another house that had several issues that were fixed poorly and one tenant showed us a huge mold issue in a closet; and on another house that had fire damage that was never fixed. Sometimes the seller will request the home inspection report. It’s a service you paid for, so you’re not required to provide it (but check your contract language to verify you’re not required to turn it over).

HOME INSPECTION MINDSET

If fatal flaws are uncovered through the inspection, you may feel like you’re committed once you’ve spent $500 on a home inspection; think of it in terms of how much you’ll save in headaches and costs down the road fixing all the things that you were made aware of through that process. Real estate investing is a business, and sometimes there are just costs of doing business that may not feel good, but are worth you moving forward in a positive direction in the long run. Just know that the home inspection contingency is a tool in your tool belt as a buyer.

The 4% rule – How does Real Estate Play In?

The common goal in the FI/RE (Financial Independence, Retire Early) community is to reach a point where your net worth is 25x your annual spending, meaning your expenses are 4% of your net worth. This is an extreme oversimplification of things because of the number of variables associated with where your net worth might be, and how to access it. For example, retirement accounts have requirements to be met before drawing funds; while you may have hit the 4% expense to net worth ratio, it may not mean that you have that money liquid to cover your spending.

When the ODAs started down the path of FI/RE, we did it with a real estate rental portfolio. This path of net worth growth really doesn’t fit the traditional mold. It provides regular cash flow, rather than an account with a balance that’s drawn down. 

As mentioned in previous posts, there are numerous ways to make money in real estate. The path we have taken is probably one of the simplest and most repeatable for anyone. We own a portfolio of single family rental houses, most of which were bought straight from the MLS. These basic properties are in basic neighborhoods with regular tenants. Nothing special. We acquired these properties by focusing on the 1% rule in real estate – try to secure 1% of the property’s purchase price in monthly rent. Another oversimplification of how things really go, but if we were able to find a $100k property that rents for $1,000 a month, we know we’re going to make money long term. 

For these properties, we typically put 20%-25% down and finance the rest through a conventional mortgage. We find a tenant, and then the 4 ways to make money in real estate go to work for us: appreciation, tenant mortgage pay-down, tax advantages, and most importantly for our situation and FI/RE – cash flow. 

I want to talk about how we can reach a FI/RE number through real estate cash flow differently and more quickly than using traditional stock market investing. 

The $100k house had a 20% down payment and mortgage rate at 5% interest, which brings the monthly principal and interest payment to $429. Add another $121 for taxes and insurance (using round numbers here!), $100 for maintenance and capital expenditures savings, and $100 for a property manager; this comes to $750 worth of monthly expenses. At $1,000 per month of income, you have $250 per month of cash flow in your pocket. $250 per month equates to $3,000 per year of cash flow. With the $20,000 down payment and about $5K in closing costs, it means that our $25k investment nets us $3k per year in cash flow. 

Circling back to the 4% rule for stock market investments, $3k in cash flow requires a savings of $75k. But we only had to invest $25k! We’re banking on the monthly cash flow, rather than a “stagnant” savings.

We took that math and ran with it. Our rental portfolio has 12 houses in it. While we’ve shown in prior posts that each house’s numbers aren’t as clean and simple as this example (some better, some worse), if we take that $3k annually and multiply by the 12 properties, we have $36k in annual cashflow for only $300k invested. 

What would you rather need to produce $36k income – $300k or $900k?

Can you scale a rental portfolio to reach enough annual cashflow such that you can live off the cash flow? 

Rental property investing is not completely passive. We have tenants to manage, properties to maintain, property managers to manage, income and expenses to track for taxes, lending efficiencies to explore, and the list goes on. But if you’re willing to put in a little work to reach financial independence (the FI part), you can do it substantially faster by finding strong properties to provide significant cash flow than if you were to take the totally passive route of simple stock market (index fund) investing. 

Note, there’s nothing wrong with that – we have a substantial position in the stock market due to the tax free growth benefits of retirement accounts. The power of real estate investing saw our net worth grow faster than we’d have ever dreamed since we bought our first rental in 2016. The proof is in the pudding and we advocate to anyone to just get started!

2021 Rental Terms and Lease Expirations

Spring is a time for lease renewals or preparing to re-rent a house.

Spring and Summer are times when people are most active in the real estate market. It’s the best time to be listing your house for sale and for rent, which may yield you a better sale/rent amount because of greater competition. This timeframe is likely most active because of the better weather for moving and the school year – if a family is looking to move, they’re more likely to do it when they don’t have to transfer their kids to a different school district mid-school-year. Personally, when I was in college, nearly all the rentals were available in May or June. I remember being frustrated that I couldn’t get an August lease and had to pay for the summer months even though I’d be back living at my parents’ house. Now that I’m older and have more experience, it all makes sense. Below, you can see the increase in applications processed by SmartMove (the way we process tenant applications) that occur during the summer months, which indicates the most active time in the market.

We have seen this reflected in our days-on-the-market and rent prices. When we can list a house in the Spring months, we’re able to get it rented with very few days vacant. Houses that we’ve closed on at the end of the Summer (when school starts) and in the Fall have taken us more time to find a tenant, and we’ve had to reduce our asking monthly rent amount.

For those houses that we had purchased in a less-opportune time of year, we’ve worked to get them back to a Spring-time market for renewal.

  • We purchased two in September 2019 that we weren’t able to get rented until November 1st that year; we offered those tenants an 18 month lease so that their lease expiration would become May 31st.
  • We did similar with a house that we purchased in August. After that first year, a prospective tenant tried negotiating the list price for rent, and we said we were willing to reduce the rent a bit for an 18 month lease; they agreed, and we got our rental on a Spring renewal.
  • We recently had a tenant break their lease (with our concurrence), so that house has a lease expiration of October 31st now. We intend to offer a 6 month lease term to that tenant when the time comes.

With that said, we have lots of activity at this time of year.

We have 9 houses in Virginia and 3 in Kentucky. These markets are so different for us. We do our best to work with our tenants to encourage them to continue renting with us. I wrote about this in detail in my Tenant Satisfaction post.

Here’s a break down of how we handled all the leases that are expiring at this time of year.

In Kentucky, one lease was set to expire at the end of April and another at the end of May. These two properties are under a property manager. She attempted to increase the rent for a new lease term, but the tenants pushed back. Landlords don’t have a lot of leverage in a pandemic. Since the property manager is the one who handled the communication, I don’ t know what the details were. We believe both these houses are rented for less than market value, so that’s unfortunate. But, we’re grateful that both tenants renewed their lease for a year, so we don’t have to work to turnover the houses. Within reason, we’d always rather rent for a few bucks under market value than to handle turnover and lost rent (vacancy) by trying to maximize monthly cash flow.

In Virginia, we have an array of situations. Richmond was quick to acknowledge the property value increases that have occurred over the last year or so. This means that they increased our assessments, which effectively increases our property taxes.

We have the first two properties that we bought in that market, which are next door to each other and both have long term tenants (one since we before we purchased it, and the other is the second tenant who moved in a year after we purchased). We inherited their rent at $1,050, and then we increased it to $1,100 two years ago. With the property assessment increases, it was time to raise their rent again for this July. I initiated a letter to each of them stating the rent will increase as of July 1, which gave two options: they could leave the property by June 30th in accordance with their lease, or they could sign on for another year at the increased rent rate. Both chose to stay in the property, and they signed another year at $1,150. This is still below market value for the houses, but we’re happy with the lack of maintenance needs in these houses over the last 5 years. We’re in the middle of replacing the flooring in one of the houses. That house has a family of 5 and a dog living in it, so it’s not surprising that it’s worn out faster than the identical one next door with one person in it.

We have a 2 bed, 1 bath house that rents at $795. She’s been in the house since July 2018, which means that her lease ends June 30th of this year. Based on the 1% Rule (i.e., we’re looking for the monthly rent to be 1% of the original purchase price) for this house, our rent goal is $635. Since we’ve exceeded that goal for the life of our ownership, and the house hasn’t cost us much in maintenance, we chose to not increase her rent if she wanted to renew for another year, which she did. She has also spent some of her own money to spruce up the house and make it her home, and we recognize the value to us that her efforts also bring.

Another house reached out to us and asked if we were willing to renew her lease for another year. She’s been there since we purchased the house in 2017, and we’ve never increased her rent. She usually pays rent early and doesn’t ask for anything. The 1% Rule puts us at $660, and we’ve been collecting $850. Since we’ve been lenient on rent increases, I thought it a good idea to re-evaluate her terms. I plugged all the numbers into Mr. ODA’s calculation sheet to see how we were doing since the taxes increased so much on this house. Our cash-on-cash return (which we aim to be at 8-10%) came back at 19.8%. A rent increase for the sake of increasing rent isn’t worth it for such a good tenant, so we agreed to renew her lease for another year at the same rent. She wrote back: “omg thanks so much for the good news!” Happy tenants = good tenants, remember?

As for the others that I haven’t mentioned:

  • Two of our houses were put under a two year lease last year, so they didn’t require any action from us this year.
  • We have another house in KY that has a lease ending 7/31 and is under a property manager. We’ll offer a renewal option for them (i.e., we’re not interested in asking them to leave), but we haven’t worked out those details yet. Since we’re very hands off for our KY houses, we don’t know the satisfaction level of those tenants to gauge. Historically, we’ve had trouble renting this unit, costing us long vacancy times, so if we can renew their lease for even the same rent, we’re happy. Plus, having a 7/31 end date starts pushing us closer to the Fall for any future year-long rental agreements.
  • One of the houses that we have with a partner has a difficult tenant. I mention the tenants almost every month in the financial updates because they don’t pay their rent on time, and getting information out of them is like pulling teeth. They’ve rented there long before we owned the property, and their rent has always been $1,300, which is well below market value. We plan on offering them a drastic rent increase and a new lease term (we’re still managing under the previous owner’s lease agreement) in July for their September 30th expiration term.

While we don’t have any houses to turn over, we’re going to get into each house this summer. Since so many of our houses don’t typically have turnover, we don’t get into them as often as we should to make sure things are running correctly (i.e., don’t want small issues to go unnoticed and cost us in the long run). Specifically, we need to make sure that the HVAC filters have all been changed and verify there aren’t any red flags. I plan to give the tenants at least a month’s notice before we enter, so that if there are any maintenance activities they should have been performing, they have time to get it situated. I’ll walk through with our typical move in/out inspection form and note any concerns or areas of interest. I also understand that by being visible, I’m opening myself up to being asked for things that a tenant may not necessarily ask for via email or text, but I’ll cross that bridge when I come to it. For now, we’re just grateful that we have no houses to turn over and no expected loss of rental income for the year thus far!

Purchasing our Used Vehicle

Buying a new car is exciting! It’s shiny and clean, and it’s all yours. Well, after a couple of vehicle purchases, Mr. ODA and I learned a few things. And in the end, we’ve decided that buying a “pre-owned” (used…) vehicle is a more practical decision. So while I understand that this approach isn’t for everyone, maybe I can break this down in a way to get you on board.

Whether you’re buying the vehicle new, buying it used, or leasing it, you’re going to have basically the same costs of ownership after the initial purchase. You’ll need to pay for the registration, insurance, and taxes on any of these options. In all cases, you’re going to have to purchase fuel to make the car work. Unless you’re purposefully looking for a new vehicle after a short amount of time and ignoring maintenance, there will be maintenance costs (e.g., oil change, new tires, other fluids). However, the cost of those maintenance activities will depend on the vehicle.

In some states, you also have a personal property tax that may be an up-front tax on the vehicle, or could be an annual tax based on the vehicle’s value. Examples – In Georgia, there’s a one-time Title Ad Valorem Tax that is 6.6% of the fair market value of the vehicle at the time of purchase. In Virginia, there’s an annual personal property tax. Make note of this – the tax is directly related to the value of your vehicle. The more expensive and new the vehicle, the more you’re going to pay to Virginia in taxes – every year. At least each year that passes, the value of the car decreases, and therefore your tax owed decreases.

DEPRECIATION

I’ve brushed on depreciation with the mention of a car’s value; that was the biggest determining factor for our move towards purchasing pre-owned vehicles. Depreciation is the loss of value over time. A very literal definition from dictionary.com says, “a reduction in the value of an asset with the passage of time, due in particular to wear and tear.”

While the value of a car decreases each year, it’s not a linear amount of value that’s lost each year. According to Edmunds, a car loses about 20% of its value in the first year. That means that if you spent $30,000 on the car, you probably can only sell if for about $24,000 after one year. Depreciation slows down after that first year, but the value continues to decline.

Source: Edmunds.com Depreciation Infographic

No matter the vehicle, you lose the most value as soon as you drive it off the lot. This is where purchasing a pre-owned vehicle is beneficial; someone else endured that largest loss of value.

You can look into Certified Pre-Owned (CPO) Vehicles, versus just a used vehicle, to give you peace of mind. According to cars.com, a car can only be labeled as CPO after a dealer has certified to the manufacturer that the car passed a multipoint inspection, which can encompass 150 or more items, and repairs have been completed as needed. A CPO vehicle comes with a free car history report, which will show you all the maintenance activities performed, as well as any accidents. A CPO vehicle may even come with a warranty and be in better condition than a non-CPO car. They are supposed to have been reconditioned to like-new condition, and they come with additional benefits that may not be provided on other used cars. But, CPO cars will cost you a bit more on average than a “regular” used car due to this due-diligence and other benefits.

RISKS OF PURCHASING A USED VEHICLE OVER A NEW

When buying a used vehicle, you have to weigh the cost against what you’re receiving (as you would with any purchase, really). Even when buying a new car, there’s no guarantee that it will work perfectly, but you’ll be covered by warranties and (hopefully) a reputable dealership. With a used car, you are taking on a risk that there are issues caused by the previous owner, including not knowing how the car was maintained. Was it owned by someone who followed the user manual, maintaining the right fluids and putting the right gasoline in it? What was their driving style – was it hard starts, stops, and turns with aggression, or was it a gentle, defensive driver that owned it? Was it owned by someone who knew they were getting rid of it in 1-3 years, so no maintenance was necessary in their mind and it wasn’t driven with care?

The question you ask yourself is whether you’re willing to take on this risk of how the car was treated for the cost you’re paying, and what that initial loss of value really means to you.

LUXURY VEHICLES

CPO vehicles began with luxury vehicle lines, but they’re more widely available now. If a luxury vehicle is something you’re interested in, there are some things to keep in mind. Not only does a luxury vehicle cost more up front, the maintenance, and possibly the fuel, will cost more as well. These are recurring costs that you should be considering when taking on the responsibility of a new vehicle.

An Audi was my dream car. I could not wait for it to be my time to make that purchase. Then I started hearing stories about how my friends’ Audis were in the shop. Not only were they costing them for having to be in the shop more than my car, but the maintenance itself was more expensive! I was used to paying $19.99 for an oil change on my Honda Civic in Albany, NY. The thought of paying $75 or more for an oil change because it’s an Audi was gut wrenching to me. Then there’s tires. I paid about $400 to put four new tires on my Chevy Equinox. Tires on an Audi? Double. I didn’t look into the cost of insurance, but usually it ends up being more to insure these sportier vehicles.

I had to truly take the time to consider how much I wanted this vehicle – was it something I needed and would accept the increased ownership costs, or was I ready to let go of this dream?

KEYS TO THE PURCHASING PROCESS

Don’t talk to the salesman in terms of monthly payment. I had quite the experience holding strong to my “what is the total cost of the vehicle” question and not talking about the cost in terms of monthly payment. I don’t want anything buried in my monthly payment. I repeated “don’t worry about what I want to pay month to month or how much I can afford in terms of a monthly payment.” I wanted to buy the car for $17,000. He wouldn’t say yes or no. He kept offering us a different monthly payment, and then we’d sit there, do the math, and say, “nope, that comes to $17,500.” You’d think after the first, or second, time we did this, he’d catch on that we’re not playing his antics and would be verifying the principal of the loan. We were there for hours. Hours. I got it though.

Know what price you want for any trade-in vehicles. When you trade in a vehicle to the dealership, you’re eliminating the hassle of selling it yourself (e.g., how do you market your car, how do you let someone test drive your car, how do you negotiate to get what you want?), but you’re probably not getting top dollar for it either. We’ve traded in two vehicles. The first was straight forward. The second had a fair market value of maybe $6,500 in fair/good condition (e.g., broken antennae, scuffs in the trunk from our travels and house work, a broken door arm rest from where the dog would stand on it to look out the window). Even though the car’s cosmetic issues were factored into the fair market value cost, it’s hard to say we would have been able to get $6,500 selling it personally. When the dealership offered me $5,000, I accepted it. The vehicle looked good, but it was those small details that would add up to any private buyer with a fine tooth comb, and I didn’t think I had a leg to stand on to negotiate over a few hundred dollars with the dealership.

OUR RECENT USED CAR PURCHASE EXPERIENCE

We found our used vehicle through cars.com. There are several online search tools you can use, as well as just showing up to a dealership. My search parameters were fluid: I’m willing to pay for the right value, versus “I have $20,000 to spend, what can I get?” I wanted a van, probably a Pacifica, with relatively low miles (I’m talking about averaging less than 12,000 miles per year), and somewhere around $20k. The Pacifica is set up where the base model has all the features I’d want, so I didn’t have to do a lot more manipulating of features (Chrysler has a lower tiered minivan with less features, versus 6 or more levels within the ‘Pacifica’ itself). The biggest deal breaker for me was leather seats – in that we did not want leather seats. I’d trade off the slightly more effort in cleaning the seats for not feeling extra cold or extra hot when we get in the car (and I have car seat mats under my kids’ car seats that protect the fabric anyway).

The dealership that had the van that best hit our search parameters was just over an hour away. We weren’t able to get there until near closing time, so I rushed through the review of the vehicle. In the future, I plan to do the following better:

  • Check all doors open and close correctly, without rattle, several times. Drive the car somewhere else, and open and close all the doors again.
  • If you have removable and/or movable seats, move them. Spend the time figuring it out. I couldn’t figure it out, so I just gave up and said “it’ll be fine.” They’re not fine. I didn’t know it because I didn’t know how it was supposed to work, but after using it a few times, I figured out that one works right, and the other gets the job done, but isn’t ‘right.’
  • Look for dirt. Don’t assume that a dealer’s deep clean is deep by any means. The car was dirty, but I put faith in their final ‘detailing’ process. They didn’t even wipe the dirt off the driver’s side arm rest or the back wall of the trunk. But they cleaned an obvious orange stain on the carpet.
  • Drive it on the highway. I get nervous about taking the car too far from its ‘home’ before it’s mine. Do it. See how the car operates at highway speed for more than a mile. Two kids at the dealership, COVID precautions, and it being near closing time meant I rushed myself. There’s a rattle that I should have noticed, but I didn’t drive the van more than a few miles up the road.
  • I negotiated a buff out of scrapes (maybe as far as gouges) on one of the panels of the van. They said they would ‘attempt’ it, but they weren’t making any promises because the paint was gone. But they did it! The panel looked brand new, and I’m so glad I got something right!

The average cost of a 2017 Pacifica was around $21,000 on these websites (the sites themselves give you a lot of data to see this type of information). The one we went to see was listed just below $18k, so I knew it wasn’t going to be in mint condition. The question is always: what is your tolerance and is the as-is product worth that value to you? It was to me.

We were about to trek all over for two months with a lot of our stuff (like an entire crib and mattress), two kids, and a dog. I wanted the van. During my test drive of the van, I noted quite a few scratches (possibly in the realm of gouges) on one of the door panels. I really didn’t know what I could or couldn’t ask for, so I countered their offer with $17,000, buffing the door panel, and detailing the vehicle. They accepted! I was happy with the imperfections against the price and was now the proud owner of a 3 year old van.

I’m 7 months in to owning the van, and I love it. I got its first oil change a couple of months ago, and the mechanic said the car is in excellent condition and then was surprised when I said I bought it used. We have put the van to the test with all our travel and house work. I hauled 12 sheets of drywall, a bath tub, a toilet, and a vanity with its counter.

STORIES WE’VE HEARD

“I’m looking for a new car because I just made my last payment on this car.” What? You WANT to always have a car payment? Is your car broken or not functioning well? Is it worth purchasing another brand new vehicle, paying the loan for 5 years, and then repeating the cycle? In my opinion, it is not. Try relishing in your newfound $300, $500, $700 each month that you don’t have to pay towards a car. Enjoy the car that you know you can rely on. You’re still paying all the maintenance costs on a vehicle, so you’re not really saving anything, unless you’ve planned it so that you drive so little that your tires last you those 5 years. Another variation: “We get a new car every three years, but it’s ok because we pay it off early so we own it outright.”

“I’m going to lease so I can get a new car every 3 years.” Why do you need a new car every three years? The dealer is loving the fact that they can count on you to rent the car from them for the car’s three most expensive years of ownership, only to give it back to them and do it all over again, and again. Is your goal to keep up with the Joneses or to make solid financial decisions?

LONG TERM COST OF OWNERSHIP

Manufacturers have reputations, based on years of empirical evidence, dictating how long their vehicles usually last and how well they hold their value in the resale market (e.g., Toyota is known for retaining value well). If you can avoid the early stages of a car’s life by buying something a few years old, keep it for many years, maintain it well, and choose a brand that has a strong track record for resale and “car life,” then you can hit the trifecta of a smart purchase.

Mr. ODA is still driving his first adult car. A Nissan. While it was bought new, he has kept it for 11 years thus far and it still runs strong. Each year he owns it, the original purchase price compared to the depreciation to date lowers the average annual cost of his ownership. Since 11 year old cars are depreciating at a very slow rate, if he keeps it maintained, he can save a lot of money compared to the other option of ‘upgrading’ to a newer car that would inherently cost him more money to own each year. Had he bought it 3 years later, it’s possible he could’ve purchased for half the price and still would have owned it for 8+ years while cutting 5 digits off the total cost of ownership. In hindsight, and with our view looking forward, that 3 years of owning it “new” isn’t worth $10,000+.

SUMMARY

The main point here is to be aware of the immediate depreciation of a brand new vehicle’s value. Allowing someone else to take that large value decrease by driving it off the lot can save you money, while still getting a fairly new vehicle. Through Certified Pre-Owned programs, you may even still be covered under vehicle warranties as if you purchased a new vehicle. Or, you can pay still a little less, accept a bit more risk, and get a used car that hasn’t gone through the CPO process. When making the decision on whether to lease, buy new, or buy CPO/used, be sure you’re well informed and weigh all the factors against how this purchase will affect your money, both in terms of cash flow and net worth.

Moving States: Part II

I shared the background of our decision to move to KY in my last post. Here, I am going to break down the details of our moving decisions, mostly focused on the financials. My next post will be how we made housing decisions.

MOVING LOGISTICS

I was spoiled. Every single move I did between college and this past year was orchestrated and paid for by the government. NY to PA; PA to DC; DC to Richmond, VA. I didn’t touch a thing. Movers came and packed up all my things for one day. Then they came the next day and loaded a truck. Then they delivered my goods and put the boxes and furniture in the right rooms.

On our way to Richmond, VA, we decided to build our house, so we needed temporary housing. That also meant that we needed storage. The movers packed up our things and brought them to storage until I called to schedule the delivery to our house. I asked for one step extra that time – unpack all the boxes and take away the boxes and packing material. I never thought it was necessary because I liked having things clean and organized in boxes that could be pushed to a corner. Well, having them lay everything out on a flat surface (they didn’t put things away in cabinets and such) made me have my entire house unpacked and put away in a weekend. Yup. S P O I L E D!

Fast forward back to our move to KY. I no longer work for the agency that paid for relocation; I wasn’t taking a new job that would have made me eligible anyway; and Mr. ODA’s agency doesn’t pay for relocation, nor was he taking a new position.

So where do I begin?

  • We’re moving from one state to another, 500 miles.
  • We need storage for an indefinite amount of time, but something like 7-8 weeks.
  • How am I to pack up a house, while still needing things to live and managing an infant and toddler?
  • What’s the financial threshold for this adventure? Am I looking at 10k or 30k? What’s the itemized cost of each step for me to determine if it’s worth the money? Can I parse out each step?
  • How big of a storage unit do we need?
  • How much do I need to pack for our ‘homeless’ time? Oh, and it’s covering summer (with beach time) and fall temperatures.

It cost us $5,500. We did a lot ourselves.

I started by trying to find a quote at all the “pod” type places. Several of them required me to make a phone call. You know what’s really not easy to do with an infant and toddler? That’s right, spending time on the phone. My absolute most favorite is when there’s an automated message that I need to verbally respond to, while kids are screaming (whether positively or negatively) in the background, and the robot just keeps saying “I’m sorry, I didn’t get that. Let’s try again.” Eh, digressing like usual…

I went with UHaul. Their website wasn’t able to create my order, so I had to call. It kept claiming my goods would be stored only for the 500 mile trek, and kept trying to pick a delivery date one week after pick up. But once I called them, they were able to get it all squared away.

UHaul’s boxes are smaller, about half the size of the big ‘pod’ type things you’re used to seeing in driveways. We liked that if we ordered 8 boxes, based on their recommendation for our house size, but didn’t use all of them, they wouldn’t charge us for the unused boxes. Unfortunately for that plan, we ended up needing a 9th box. They were super accommodating; since their truck carries 5 boxes at a time and our order required two trips anyway, they just loaded the extra box on the second truck without charging us for the drop.

I had called the ‘all inclusive’ type movers before making this decision. Their quotes were anywhere from 12k to 35k. Well, once we heard that we were looking at about $4k for UHaul, it wasn’t worth the luxury option. The $4k included the boxes being dropped off and pickup in VA, shipping to KY, and storage for 2 months in KY. It didn’t include delivery from storage to our house in KY, but more on that shortly.

Mr. ODA had faith that I could pack up the house while raising children. 🙂 I did it! Also, with the help of many neighbors, I didn’t pay for a single box. One neighbor works for CVS and was able to bring home their boxes from deliveries, and several others dropped their Amazon or old moving boxes off for me. We purchased packing paper, bubble wrap (I actually liked the packing paper better), and packaging tape from Walmart.

Closing was the 18th, so I hired movers for the 16th. There were several questionable reviews about movers not showing, and I wanted the buffer to pivot if that came to fruition for us. It was $415 for 2 movers for 4 hours. They ended up coming with a trainee, so they had more help, but didn’t get everything packed. Our house was 2,850 square feet across two floors, with 4 bedrooms. The part that wasn’t factored in well was all the storage that was kept in our walk-in attic and all the things in the garage. They were able to get the house emptied, but didn’t do most of the garage. We had a friend come help with the odds and ends, but it was worth it to pay for the movers. They could get things out of the house a lot faster than if we had done it ourselves. Our movers weren’t great about not hitting the walls and being nice to our furniture (I walked in to one guy trying to move part of our sectional down the stairs by himself, and just let it slide down the first set of stairs – beautiful). Perhaps if we paid a bit more, we could have gotten a better team, but nothing broke and the worst was just paint scuffs.

UHaul came and picked up 5 of the finished boxes on the 16th, so that was nice to have them off the street in under 24 hours.

The plan was to deep clean the house on the 17th and close on the 18th. I hung out with friends on a nice day and didn’t get nearly enough done. We had to figure out where to sleep for that last night without most of our things, so we kept the kids’ cribs and an air mattress available. So on the morning of the 18th, we threw the rest of our things in the last UHaul box right before the lady came to pick up the last of the boxes around 8 am. I was so worried about boxes being there on closing day, but it worked out well that the truck driver said she could come first thing that morning to clear the rest of the boxes.

Then it was time to gather the things we deemed necessary (or unpackable in storage) for our two months before our new home was ready. We packed up the van with all these things, which took significantly longer than I expected it to. We had to be out of the house for the final walk through by 11 am, and by some miracle, our 5 month old daughter slept until we had to wake her up to take down her crib at 10:50! We were literally throwing things in the van while the buyers waited for us to get out of their way. I was disappointed in myself.

UHaul would store our things near the pick up or drop off location. I chose the drop off location for storage because we didn’t have a definitive date for closing on the new house. I wanted to be able to give a few days notice for taking our things out of storage versus waiting two weeks from notice to get to us, and having the possibility of delays (which were quite common during the pandemic).

There was a hiccup on the back end of this transaction though. We paid about $200 for the ‘box drop and pick up’ at our packing location. We couldn’t figure out why we only had a $1300 option on the unpacking end. When we arrived in Kentucky, we went over to talk to someone about it and see if we had more options in person. It turns out that their reason for not having the $200 option is because they don’t have the flat bed truck! Crazy. They had trailers to rent, but most carried one box at a time. They had one trailer that could carry 2 at at time, but then we also needed to rent their truck that could tow that weight. We had a couple of weeks to figure out the logistics of moving day and how long it would take to have to make so many trips back and forth to UHaul, which was 25 minutes away.

We rented the truck and 2-box trailer, and we hired a guy who used to work for that UHaul location to be our box runner. We had him pick up two boxes and drive them to our house. We had a team of friends and family here to unload the boxes into the driveway (luckily it was a beautiful 60 degree November day). Then while the guy drove back for two more boxes, our friends here took things from the driveway/garage and brought them to the right rooms inside. The plan seemed perfect, but it turns out that the process of bringing things inside was about 1/10th of the time it took for that guy to go back and get two more boxes, so there was a lot of down time. But hey, none of our friends were upset about down time! We paid the box runner for 6 hours of his time and gave him a tip. We had some issues because he didn’t fill the gas tank when he brought it back, so we got charged for that (which we were pretty unhappy about after giving him a substantial tip), but UHaul took the charges off our card for that.

For dropping 9 boxes, moving the boxes 500+ miles, and storing them for 2 months, we paid $4,420. Then add in the $420 for the movers on the packing end and $500 for the driver on the unpacking end. That was significantly lower than our 10k expectation!

Prepare for a Closing

We have purchased 16 properties directly (3 personal residences) and 2 properties indirectly (partner); we’ve sold 3 properties. All houses have been mortgaged because we choose to leverage our money rather than own them outright (at least at first). This post covers the closing process in terms of clearing the loan processing.

Your loan must pass through underwriters before being approved and issued. The underwriter is evaluating your financial statements to determine risk and credit worthiness. While you’re given a pre-approval based on your credit score and report, the underwriter is verifying there are no other risk factors in the details. I’ll probably never cease to be amazed at what an underwriter focuses on – sometimes they want every account’s statement and several explanations, and sometimes they want you to confirm you don’t own a property that you never did own while ignoring the accounts you do own.

While a deadline is rarely given, you should provide the paperwork within a couple of days. The longer you take to gather the required documents, the more you jeopardize being able to close on time (the timeframe is set within the purchase agreement).

The are several documents that are going to be requested every time that you can keep filed away or know to start gathering them when you make the offer (some need to be more current than having them filed away). Inevitably, there will be follow up requests from the underwriter, so it’s best to get these files to them as quickly as possible.

  • Most recent 2 years of tax returns
    • Usually we just hand over the PDF version of our tax returns. One time, we actually had to fill out a transcript request form on the IRS page.
  • Proof of income (e.g., W-2)
  • Most recent paystub(s) (e.g., cover 30 days)
  • Color copy of drivers licenses
  • Most recent 1 or 2 bank statements
    • At the beginning of our purchasing, we had to provide a statement for every account (e.g., retirement, investments, banks). Over time, the request has become more focused on showing the statements associated with the accounts that will be used for funds as closing. I don’t know if this is related to our credit worthiness, or if it’s simply how they’ve streamlined the process. Here’s an example that shows they only requested accounts that make up our closing funds.
  • Proof of paid earnest money deposit (EMD)
    • EMD is a deposit made along with the signed contract. It’s the buyer’s showing of good faith to purchase the home. There are different expectations on the amount of the EMD. Sometimes it’s 1% of the purchase price, sometimes it’s a flat rate. We’ve just followed our agent’s lead on the amount to put on there, and it’s usually $1000 or $2000. The EMD is held by your Realtor’s office and credited to the total due at closing. If the buyer breaches the contract, the buyer may forfeit this deposit to the seller (e.g., backing out of the purchase without invoking a clause within he contract, such as the home inspection clause).
    • Proof is usually given by showing the check image along with the bank statement from the account it cleared.
  • Insurance agent contact information
    • This isn’t always known at closing, but you’ll need to provide your agent’s information before closing so that escrow can be set up. If the property won’t be escrowed, then you’ll need to provide proof of an executed policy before closing.

When investment properties are involved, you’ll need to provide documentation associated with those properties. For instance, a mortgage statement may be sufficient if you have the taxes and insurance escrowed. If you don’t have it escrowed or don’t have a mortgage, then you need to provide the current tax statement and insurance declaration. You’ll also be asked whether the property is subject to an HOA, and, if it is, you’ll provide a statement or coupon book showing the payment schedule. Neither Mr. ODA nor I are patient when it comes to illogical requests. For example, we were asked to give mortgage statements for all of our properties, as well as tax documentation and insurance policies for every property. Well, if the property is escrowed, then I don’t have tax paperwork because it’s sent to the bank, nor should I have to prove that the taxes are paid since it’s managed by the bank. I eventually provided all the tax documents though – it just took a while.

There may be large deposits or withdrawals that you’re requested to explain. For instance, I had to sign a statement that the deposit in our account was from the sale of our house. While it can be tracked with paperwork, there are many instances where the underwriter wants the details explicitly stated, versus making assumptions. For the example below, I provided the corresponding withdrawal from our main checking account.

Our first home purchase was at the same time as our wedding (we closed on our house on July 15 and got married on August 4!). A NY wedding isn’t cheap, and we were attempting to pay 20% down on our DC suburb home ($$$), so there was a lot of money movement around this time. Since my parents were helping pay for the wedding, we had large cash deposits into our account that had to be explained. We also had several investment account liquidation transactions. The underwriter had a hard time following the flow of money, and it took me several, very detailed, emails to show how each liquidation entered our checking account. We also had to provide gift letters, which stated we were gifted these sums of money and there was no expectation of paying it back (thereby creating another liability). That’s probably been the hardest closing in terms of our financial status, to date.

You may be requested to provide updated bank statements closer to the closing date, especially if there’s over a month between the initial documents given and the closing date. When you go into a closing, you’re told that it’s not a good idea to open new credit cards, make large purchases, or do anything along those lines that would affect your credit worthiness. They run a recheck of your credit before closing to ensure your credit card balances are about the same, and that there’s been no new credit opened in your name. Verification of more recent bank statements accomplishes the same.


We’ve had two closings delayed.

House 5‘s sale was about 6 weeks delayed due to the buyer’s lack of responsiveness. They didn’t respond to information requests quickly and struggled to provide the necessary documents to underwriting. Unfortunately, as the seller, our only ‘play’ is to take their EMD and walk away. If it’s bad enough, this is worth it. But it brings you back to square one. This was an off-market deal, which is enticing to see through rather than attempt to list and sell it. If we decide not to sell, we’re now looking at January or February before we had a renter; it could be even longer since we struggled in the summer to find someone for the house. Plus, the EMD doesn’t cover the lack of rent we experienced while under contract, where we expected to lose only one month of rental income, but it turned into 2.5 months. We had our Realtor (who was a dual agent, unfortunately for this matter) lean into the attorney on the buyer’s side after already being weeks beyond the contract’s closing date. By the time their delays were acknowledged, it was Christmas, which delayed closing into January, unfortunately.

Houses 12 and 13 were purchased together (and not yet discussed here). That closing was delayed a week, and it was completely the loan officer’s fault. We, the consumer, obviously get no restitution for their mishap. He didn’t order the appraisal timely and then had to put a rush on it, but it still didn’t come in on time. He created several errors in our paperwork (including the house number of one of the purchases). It got so bad that we just worked with the title agency, and she was awesome at getting all the documentation in order, even if it was a week later and Mr. ODA had to be my power of attorney!


Be prepared and be responsive. Understand that the bank is doing their due diligence and you want to be able to close on the loan and purchase that property. While there will be several requests for information, keep in mind that it’s over a short period of time and will soon be over.

Amortization Schedules

An amortization schedule is a document that is a huge spreadsheet of numbers that tells banks and their software how to apply your monthly mortgage payment. It defines the amount of each payment going to principal to pay off the loan balance, and the amount going to interest for the bank allowing you to borrow their money.


Let’s rewind. How does the bank figure out how much your monthly principal and interest payment is going to be? This is a function of several things:

  • Loan amount (purchase price minus down payment)
  • Interest rate
  • Loan term (length)

Want to see a formula for that?

  • loan amount = x
  • interest rate = y
  • loan term (months) = z

Looks like a blast doesn’t it? I saved this formula into my spreadsheet for evaluating properties so that once I fill in the purchase price, expected down payment, loan length, and the predicted rate from my lender, it will auto-populate the monthly mortgage payment amount. I then take that number and can calculate predicted cash flow based on a rent estimate.


Back to the point of the post. Loans with long terms borrow the money for a long time. Loans with high rates borrow the money more expensively. In both cases, the early stages of the amortization schedule give much more money to the bank as your fee for borrowing (interest) than they do to pay down the loan. This is because every dollar of that loan principal is being borrowed and needs paid for.

In the first payment, the entire principal amount borrowed is in that formula above, so it’s expensive to the bank to give you that money. Fast forward 15 years of a 30 year loan and you have far less outstanding principal left, so the interest charge associated with that is less. Since your total monthly mortgage payment (principal and interest, ignoring escrows) total doesn’t change, the interest applied towards a smaller balance leaves more ‘room’ to pay toward more principal. Basically, the bank gets its money out of your monthly payment first, and what is left over can go to principal pay-down.

DAILY INTEREST

To better explain the cost of borrowing each dollar over time, it’s likely easier to break it down into daily interest. An amortization schedule calculates the cost to the borrower for giving you the bank’s money on a per day basis. So while I have access to $X for the whole month, I owe the bank for every day I’m carrying that principal. Multiply by 30 and that’s what the bank charges me for interest for the month. Then, remember that the leftover is what goes to the principal pay-down.

How to calculate. Divide your annual interest rate by 365 to get your daily interest rate. Multiply that rate by the outstanding principal to get your daily interest charge. Multiply that by the days in the month (or most banks use a standard month length = 365/12) and come up with the interest the amortization schedule charges you for that month’s payment.

We mentioned the different types of amortization we’ve seen in the House 1 post. This loan calculated your monthly principal part of the payment by the exact number of days in the month so each month’s proportion of principal to interest varied up and down. This is in contrast to what most banks do that I mention above.

THEORETICAL EXAMPLES

A pretty standard rate in the last decade is 4% on a 30 year fixed mortgage. Lets say the loan amount is $100k. Plugging that into my formula above, we get a monthly payment of $477.42. Above are the first 10 payments on that loan. Only about 30% of your monthly payment is actually paying down principal at the beginning. It takes 153 payments (i.e., months) before the amount of each payment going to principal is actually more than paying interest. Total interest on the full loan in this scenario is $71,869.


Now lets look what happens when we change it to a 15 year loan. The total payment jumps to $739.69 because you are paying the principal down twice as fast. But, the first payment you make is already $406.35 worth of principal pay down. Compare it to the first loan example in the terms of daily interest. The rate is the same. The amount is the same. So the interest due for the month is the same. But because your amortization schedule knows that you’re paying the loan off much earlier and requires a larger total payment, the leftover for principal pay-down is far more substantial.

Next, look how much quicker the interest charge drops after just 10 payments compared to the first example. $320.98 vs $328.95. This is because you are paying principal down more quickly, so the outstanding balance decreases and the daily interest is then lower too. Total interest in this scenario is $33,143.


In this example, we move back to a 30 year loan, still at $100,000, but we bumped the rate to 6%. The total payment rises to nearly $600, and the principal to interest ratio of the beginning payments is quite poor. Only 17% of the payment is going to principal pay down, which means that the daily interest is high, and stays high for many months. It’s not until month 223 (18 years later!) before the amount of principal in each payment is higher than the interest payment. Total interest in this scenario is $115,838.


Side story – Mr. ODA’s parents paid off their 30 year mortgage on their residence in 12 years. As a child, Dad would explain to me their process. They printed out the amortization schedule and put it on the fridge. Each month, based on their regular cash flow of life, they would choose ‘how many months’ they wanted to pay to the loan. So they’d make their regular payment, then they’d pay the principal portion of the next 2-3 months on the amortization schedule also. They’d make some really gnarly extra payments with weird dollars and cents, but it was a calculated decision. Then they’d cross those months off the schedule, knowing that with that extra payment, the interest that was tied to that principal portion on the schedule was simply avoided/canceled, by paying that principal early. This was a powerful tool to help me understand how the loan process worked, and one that help create the foundation for me to look at time value of money, opportunity cost, guaranteed return vs potential invested return, etc. Dad missed a lot of stock market gains by accelerating a 30 year mortgage to 12 years, but very few people ever regret owning the roof over their head free and clear – with a byproduct of NO MORTGAGE PAYMENTS for the 18 years that would’ve been remaining! Now he can make more investments with that leftover cash flow of life.


Amortization schedules are one of the largest “gaps” in understanding for the typical mortgage customer. They typically get told what to pay each month and ascribe to a “set it and forget” mantra that they know in 30 years, their house will be owned free and clear. Anytime before that, why bother understanding the background math?

As you can see in the examples, a shorter loan means faster pay down with less interest overall, and a lower interest rate means a smaller payment. When looking at loan options, understanding how the math operates to get to your options can help you determine what your priorities and goals are, and how to execute them.

In our recent refinancing post we talked about analyzing when was a good time to refinance our existing loans and which ones we’d target first. Simple advice you can find on the internet is that it’s a good idea to refinance if you plan to keep the property for longer than the result of closing costs divided by monthly payment. Most times this was about 2 years for us. You can see above that the 6% example had a $123 larger monthly payment than the 4% example (30 year term). So if closing costs are $2,000, it would only take 16 months (2000/123=16) to “break even” on a refi to go from a 6% loan to a 4% loan. No brainer!

There’s another hidden benefit there too, that gets missed to make it even shorter than 16 months. Look at the principal portion of the monthly payment. On the 6% example, it’s only $99 on payment 1, but on the 4% example it’s $144. That’s another $45 benefit! You’re paying down the principal at a faster rate. Add that extra principal portion embedded within the monthly payment to the $123 lower payment savings ($123+45=$168) and you get a “break even” point of only 12 months ($2000 closing costs/$168=11.9)!

Understand how your mortgage math works so that you can speak intelligently to a lender, ask good questions, and set yourself up with the best scenario for your finances and your future.