fees

Year in Review: Part 1

mrsonedollarallowanceLeave a comment

Just over a year ago, I decided it was time to put more effort into sharing what we’ve been through. When I’m looking to learn something new, I like to find examples of how other people handle it. I want to know the places they struggled and how they learned. I find it a better way to form my opinion than by reading an article that doesn’t have any meat in it, only providing an outline.

In the last year, I learned that blogging wasn’t as easy to keep up with as I thought it would be. I have a list of topics still to cover, so it wasn’t a matter of content. But raising two kids hinders my ability for an uninterrupted thought process to write an article, unless I get to it before they wake up.

The blog was started by Mr. ODA in 2018. He wrote a few posts, and then it sat for two years. I decided to pick it back up in January 2021. During 2021, we published 65 posts. Each month, I wrote a post about our financial update; I included any major expenses, how management of rental properties was going, and how our personal spending may have changed month-to-month. I shared our purchase of 11 out of 13 of our properties, our sale of one property, refinancing mortgages, paying off mortgages, renting properties, maintaining properties, etc. I also shared just general life decision making along the way.

Part 1 for my year in review will address what happened with our rental properties. I’ll dive into our personal finances in Part 2.

As a quick recap, we have 12 rental properties. Nine of them are in Virginia, and three of them are in Kentucky. Two of the houses in Virginia are owned with a partner because we still had cash available to buy more houses, but at the time we had the maximum number of mortgages allowed by Fannie/Freddie (max is 10). The houses were purchased between February 2016 and September 2019. All 3 houses in Kentucky are managed by a property manager, who gets 10% of the monthly rent each month. I manage 5 of the Virginia houses personally, and then we have a property manager who manages the remaining 4, who also gets 10% for each house.

RENTAL PROPERTY MORTGAGES

In January 2021, we completed a refinance of one property, and then in December, we completed three cash-out refinances. The loan balances on these 4 properties increased; one increased because closing costs were rolled into the loan balance, and the other 3 included $190k worth of equity taken out from the houses and creating new loans.

We went from 11 mortgages (two of which are actually owned by a partner) down to 8. House 6 had a balance of $26,447 coming into 2021, and that was paid off by June. Two other houses had a total balance of $157,500 at the beginning of the year. Their balances dwindled through regular monthly payments and one lump sum payment right before we completed the cash-out-refis and completely paid them off.

We have been working on paying down another mortgage that is owned with a partner. Between the two of our families, we paid off about $44,000 additional principal for that mortgage. We’re matching each other’s additional principal payments so that the math is easier to follow, so we can only make additional payments in line with what he can do also. We each owe about $10k on this mortgage now.

Even though there were so many mortgage-related transactions in the year, our overall loan balance only decreased by $6,000.

The market has continued to rise due to the limited supply, and so our home values on the rentals actually increased over $500k over the last year.

RENTAL PROPERTY LEASES

We turned over 1 property the whole year! The tenant that was living there had already told us that they were renting until they found a place to buy, so we knew they wouldn’t be long term tenants. We had a relationship with them from a previous house, when they had moved out of the area and then back. They had a poor experience renting in another area and reached out to us since they appreciated us as landlords. They found a house towards the end of their first year, but we let them out of the lease early. Their lease was slated to end October 31, 2021. We don’t usually have leases that start/end in the Fall if we can help it, but we had let the previous tenant out of her lease early to purchase a house also. The tenant said she was able to be out at the end of August, and we preferred moving the lease closer to the summer months anyway.

We raised the rent on 6 properties.
– The one house that was turned over went from $1200 to $1350 per month. However, we added a property manager who gets 10%, so our cash flow only increased by $15 per month.
– Two of our properties have long term tenants; the rent is significantly below market value, but we value not having to turn over the house. These houses are on a cycle where we increase the rent $50 every two years.
– Our KY property manager tried to increase rent on the 3 properties she manages. One was increased by $25, another by $5, and the other one cried that she couldn’t afford an increase. That’s the one where we plan to increase by $75 next month, and if she doesn’t accept, we’ll turn it over and get $75-$100 more per month.
– We increased rent by $150/month for one of our properties that we have with a partner. It was a risk, but this is a house that claims 3 people live there, but they have 5 queen size beds in the house. We figured either they leave and we get several big things fixed up that have been deferred because of all their things in the way, or we make up for all the years that we didn’t manage their rent and didn’t increase it. They accepted the increase.

RENT COLLECTION

We were very grateful that we made it through those initial months of the pandemic without tenants not being able to pay rent. We had a few people let us know that they were laid off or unable to work (e.g., restaurant business), but we learned most of our tenants worked in the health care field. So while we made it through 2020 without many issues, 2021 brought more challenges. Nothing was insurmountable, and it wasn’t debilitating financially, but it was still something to manage.

We had some big struggles with non-payment of rent on one house. She was 31 days late paying August rent, then she didn’t pay September’s rent, and then she applied for rental assistance to cover September, October, and November, which we didn’t receive until February 2022. That was all on top of her generally being a week late in paying through the beginning of the year too. She doesn’t maintain employment, she doesn’t communicate, and we’ve just had something new and different pop up as an issue every few months. We eventually received January 2022’s rent, but we still haven’t received all of February’s rent – just in time for March rent to be due.

We have another property (the one that was raised $150 per month) that is perpetually late. They eventually pay, and they’re getting better about actually paying the late fee (when they pay rent 20+ days late…), but they were late for 10/12 months of the year.

Everyone else paid their rent on time. In general, we’re lenient with late fees and issues. If you reach out to us and mention that there was a hiccup and you’ll need one more pay check to pay rent, our response is typically: please pay what you can now, pay the rest next week, and don’t worry about the late fee. However, when you don’t communicate and/or you’re consistently weeks late and we’re having to carry the expenses, there needs to be a consequence to incentivize you getting back on track.

RENTAL EXPENSES

We replaced the flooring in House3 ($4,000), hot water heater in House9 ($1,500), HVAC in House10 ($3,300), washing machine in House10 ($250), and HVAC in House12 ($3,900). We also had various electrical and plumbing work that needed to be done in several houses. We also spend about $7k per year in property management fees.

Usually turn over is an area that requires us to put a lot of money into a house. Luckily, the one house that we turned over this year only required some paint work, and we didn’t have any other turnovers.

While it’s nice that our assessments have increased and our housing values have increased in our net worth calculation, it comes at a price. Our taxes have increased on all the properties. In total, they’ve increased over $2,500 in just the one year (meaning, that doesn’t include all the previous years worth of assessment increases that have occurred!).

GOALS

In this year, we hope to add one more rental property to our portfolio. We’ve been actively working on it, but this market is crazy! We’re not willing to overpay on a property and get into a bidding war just to be done with the search. It’s interesting to see that we haven’t bought a new rental property in almost 2.5 years, when we had purchased so many all at once. We had gone back and forth with saving for another down payment or just paying off more mortgages after we paid off House6 in June. Once the cash-out-refi was a possibility, we decided to go ahead with purchasing another property. We’ll self-manage whatever we acquire. We had been looking in Virginia and Kentucky, but have started to settle into a Kentucky property (I like the laws for tenant/landlord relationships better in Virginia) so that we can save the 10% management fee and the expensive leasing fee, since housing prices are significantly higher than what we’d prefer for the rent ratio we’d be getting.

We have 8 houses that still need negotiation and/or lease termination coming this year. Two houses have already agreed to their rent increase, and we just need to get the new lease signed. Five houses will be offered a new lease term with a rent increase (averaging about $50 per month on the increase). One tenant will be asked to leave at the end of her lease term.

We want to remove the tenant from House2 at the end of her lease term. She has been a concern in numerous legal ways, does not hold steady employment, and the house is well under market value rent. Turning over that property will require us to go to Virginia to work on it. It’ll need repainted, the carpet will probably have to be replaced, and I worry that she’ll do some damage when we tell her we’re not interested in renewing her lease.

SUMMARY

I like to look at the details of the rental properties all at once in this format. Sometimes, I get caught up in all the things that I need to get done, and I feel like it’s so much work. In those moments, I forget that there are most days of the year where I don’t even think about the properties. Even when expenses seem to be piling on top of themselves, to look back and see that our expenses totaled less than $15k over 12 houses is encouraging. We’ve also reached the point where we’ve replaced most HVACs and several roofs, which are areas that can create problems that compound on themselves, whereas a replacement is expensive, but then I don’t have to get all the calls that something went wrong.

Should You Use a Property Manager?

mrsonedollarallowanceLeave a comment

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.

A Second Home & Summer of Travel

mrsonedollarallowance1 Comment

Why did we do so much traveling and activities this spring and summer? Most people probably assume all our travel was making up for a year of not traveling during the pandemic, but we came at it from a different perspective.

We’ve had a long term goal of a beach/lake/mountain home. After another failed search to make this dream come true this past Spring, we decided to redirect that money to trips this summer. I’ll run through the background, the financial decision, and how we spent our travel “budget.”

BACKGROUND

We first looked into a vacation rental in Snowshoe, WV – six years ago. Snowshoe is a ski resort, and one of the better available ones to those of us south of the Mason Dixon. It also has a draw during the summer with hiking and mountain biking, albeit not as constant of a stream of people needing a rental. The draw for us was that it was halfway between our home in VA and Mr. ODA’s family in KY.

We went as far as meeting a Realtor and looking at properties. If the house was off Snowshoe proper, it was a good distance from the ski lifts and not in great condition. If the house (condo) was on Snowshoe proper, it came with a lot of rules and regulations and costs. Everything near the ski lifts had to be under Snowshoe’s management, which included their cleaning costs, and their booking process. This meant that someone couldn’t necessarily go onto the website to book our unit. Someone would go on their website and book “a 2 bed and 1 bath unit” and the system would cycle through the bookings. With the high condo costs and the uncertain bookings for those units, as well as the distant location of the units that weren’t subject to the condo process and cost (plus finding a management and cleaning company for that), we stopped the search.

Since then, it’s been on the wish list, but we weren’t sure what direction we wanted to go. 

When we moved to KY, we decided to look into a lake house. We want it to be close enough that we could just pick up and go (e.g., trying to keep it under 2 hours), we want it to be on a lake that allows motor sports (so this rules out anything that’s “no wake” or prohibits motors of any kind), and we want it to be lake front (we learned this during our recent search, and hadn’t fully realized how much we wanted this until we saw a house that wasn’t on the lake directly). 

We looked at parcels of land and kept an eye on a few houses listed in the March/April timeframe of this year. Our initial thought was that we would purchase land and hold it until we were ready to have a house built. The parcels of land we looked at didn’t meet the criteria we wanted (good size, on the water, ability to build a dock). I started to feel like we were pressuring ourselves to make a decision for something that we didn’t actually need. 

We took a break and just kept an eye on Zillow. We went to see a new construction house on Herrington Lake, but it wasn’t actually on the lake. It was next to the community pool, across the street from the community’s dock, had 3 bedrooms and 2 bathrooms with a loft, and it was brand new. It even had a two car garage, which wasn’t something on our wish list. However, the price tag was high; it had been listed for many months, and we didn’t feel the comps supported such a cost for it not being literally on the lake. We spent a lot of time mulling it over, but decided to not even put an offer in. Lucky for the seller, they did get a full price offer shortly after that. 

I decided that we should wait at that point. I figured we may have better luck waiting until the end of the summer (perhaps people will think they’ll spend their last summer on the lake and then unload it?), and that we shouldn’t force this decision to not get exactly what we want for something that isn’t a necessity. 

THE FINANCIAL DECISION

If we purchased a $250,000 second home, and I assume an interest rate at 4.5% (even with excellent credit, the rates you see advertised are for primary residences), we’re looking at a mortgage payment of $1,200. On top of that, we’ll have escrow costs, HOA costs, the possibility of management fees, and then even PMI costs. That was another big factor; we’ve been throwing any ‘extra’ money towards paying off two rental property mortgages, so we don’t have $50,000 liquid to cover a 20% down payment. Without having the 20% down payment, it wasn’t even guaranteed that we’d be able to get a loan for a vacation house.

Knowing $250,000 was even more than we expected to spend, I conservatively assumed $1,200 in monthly house costs. Instead of spending $1,200 each month to go to the same destination over and over again, why don’t we just mentally allocate $1,200 each month to travel and go to all different places? And so, months of a crazy amount of travel began.

HOW DID WE SPEND OUR ENTERTAINMENT ALLOCATION?

MAY: $618

We started with a last minute trip to Atlanta to see the Braves. We spent 4 nights in Atlanta, went to two baseball games, met up with family for lunch, visited Stone Mountain, and explored the city parks. We stayed in a 2-bedroom hotel room because it was cheaper than any AirBnB options, and I was highly focused on giving the kids separate sleeping spaces. The hotel experience was less than favorable (dirty, AC broken, limited breakfast, roaches … and a good name hotel!), and after some conversations with the hotel, we ended up not paying for it. They had credited us one night without us asking after the AC continued to not work after their “fix.” Mr. ODA then had a casual conversation with the manager about the stay as he was checking out, and the manager credited a second night. I thought we paid for the rest of the nights, but it never showed up on the credit card. Our total trip cost was $460.

Later in May, we went camping in the Daniel Boone National Forest with some family. We booked a “cabin” (I used that term loosely; it was walls, a roof, and platforms for sleeping bags, but it had electricity and AC!) for two nights. We went swimming, rode bikes, and hung out under a canopy while it poured on us for most of the main day we were there. Our dog got to come on this trip, so we didn’t have any pet fees. We brought groceries to cover our meals since there’s nothing close by. Since we’d be buying groceries anyway and gas is negligible since it’s an hour away, I’ll just focus on lodging, which cost us $158.

JUNE: $200

Almost a year ago, we planned a trip with the extended family to Hocking Hills. This shouldn’t really count against our “monthly allowance” mentality since it was going to happen regardless, but I’m including it anyway since we didn’t do any other June trip. Mr. ODA’s parents covered the cost of lodging, and the rest of us covered the cost of food and our canoe rentals. We went hiking, got rained on, and played games at our rental. On the last full day, we rented canoes and went down the Hocking River, which was a great experience. We went with 6 kids, 3 of which were under 3 years old. So if you’re a beginner or looking for something to do with little ones, this was a fun time for $52 per canoe! This trip cost us about $200.

JULY: $690

Before we left Virginia, we discussed doing walk throughs of our properties and being more present with them. There were some properties that we hadn’t seen since we bought it because they don’t have maintenance requests or we call someone else for the work. Well, it was a whirlwind to move, and we didn’t do that last summer. After the debacle with the flooring replacement at one of the houses, we knew we needed to get back there to tie up loose ends. We have a wedding to attend in the area in September, but decided this couldn’t wait until then. The first weekend we could go ended up being the 4th of July. Being in Richmond, VA, there isn’t a large AirBnB market for a normal sized family. All of the options that were available were meant for multiple families in a large house, and we just aren’t interested in paying $700 per night for ourselves. We went with a hotel halfway between Richmond and our old neighborhood, and because we stayed for 5 nights, it was considered “long term,” and it only cost us $525, which included $75 for the dog being with us. Since our entertainment was either working on rental houses or visiting with our old friends, we just had food and gas costs. The total trip cost was $690 (and most of that was tax deductible!).

AUGUST $1069

We learned that St. Louis is only about 4.5 hours away from us, so we looked to see the Braves’ schedule. They were scheduled for mid-week games for the first week of August, so we marked it down. Unfortunately, things were busy, and I didn’t make the plans in advance. I struggled to find pet care for our dog, and I ended up booking an AirBnB the morning before we left. We searched and searched, and this one randomly popped up that morning, and it worked out well. Lodging cost us $585. Our entertainment (tickets and parking) cost us $135. Food and gas cost us $213. Total trip cost was $933.

My plan to visit my family in NY in July didn’t come to fruition because we had to manage 4 days worth of our builder being here to fix things in the house, and then I had a doctors appointment pop up that had to be a specific time. Instead of driving there and back (12+ hours each way), we booked some flights. We’re able to go from Cincinnati to JFK directly (such a blessing with 2 kids under 3!). The flight was 2 hours, plus an hour on each side for driving (although, it took us an hour and a half to get to my parents’ house when we landed at JFK because a 3:20 arrival, plus what felt like a 2 mile walk from the gate to passenger pickup, put us at getting on the Belt Parkway at 4 pm – that’s not good for that area!), and getting to the airport an hour early. We left out of LGA, but it was still a direct flight, and we arrived 25 minutes early! We had hardly any wait at TSA for either leg, no issues with boarding or the flight, and we got our gate checked bags easily. I’ll take 5-6 hours of travel over 12+ hours. The flights were booked through our Chase Travel Portal, costing us the equivalent of $833 in points. The parking is $9 per day, the gas to get there is negligible, and we actually didn’t spend anything on food (I very much owe my parents for that!). Our entertainment goal was to go swimming in my parents’ pool the whole time, and that’s just what we did! The trip cost us $36 in parking and $100 for our dog’s boarding.

On top of these long trips, we also did a lot more activities that were just for one day. We went to 2 Reds games, the Cincinnati Zoo several times, a UK baseball game, Bernheim Forest, and random family/friend activities. It turns out we didn’t spend the $1200 per month we had mentally allocated, but we kept ourselves really busy and had a great time making memories! 

Now it’s time to enter a new phase of life: preschool and sports! I’m pretty excited!