House 11

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

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

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

LOAN TERMS

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

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

PARTNERSHIP

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

PREPARING TO RENT

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

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

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

FIRST TENANTS

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

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

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

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

SECOND TENANTS

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

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

MAINTENANCE

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

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

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

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

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

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

SUMMARY

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

Escrow Payments

A theme I stick to in this blog is that you need to watch your money. I’ve talked about ways that I’ve fought to get money back where it wasn’t billed correctly (e.g., medical bills), and today’s warning is about escrows.

An escrow account, in the sense that I want to talk about it, is tied to your mortgage. Your monthly payment includes an amount that goes into a separate account held by your mortgage company, and they manage paying out your taxes and insurance on your behalf.

The benefit of an escrow is that you don’t have to manage your insurance and tax payments. You don’t have to pay out a large sum of money once (or twice) a year because you’re paying towards this account every month that will manage that billing for you. The downside is that this escrow account requires you to maintain a balance, so it’s holding your money where your money isn’t working for you. Another downside is that your money movement is less transparent, and you just expect that the payments will be made accurately. The bank basically takes on the administrative burden of paying these bills on your behalf, in exchange for continually holding this money without paying you interest.

Each month your mortgage payment includes principal, interest, and escrow. For example, I have a mortgage payment that is $615.34. The P&I total will remain the same amount each month, but the principal portion of each payment will slowly increase while the interest slowly decreases. In my example, the total P&I is always $428.11, but the breakdown of what’s principal and what’s interest changes (e.g., October’s payment due included principal of $119.58 and interest of $308.53; November’s was $120.03 of principal and $308.08 of interest). The escrow amount each month for this mortgage is now $187.23; this number stays the same until there’s an escrow re-analysis.

An escrow analysis is conducted once per year to verify that the escrow account will have sufficient funds to pay out the bills received (typically taxes and insurance), while maintaining the required minimum balance. Sometimes the increase is known ahead of time because you can see that the estimates for the initial escrow contributions were off (or in our case, new construction uses estimates based on last year’s tax payment, which only included land value and not the final sale of the home, so we know there will be an escrow shortfall in our future). A shortfall may also occur when there’s been a drastic change in your property value assessment, causing taxes to increase more than an expected amount (like in 2021!), or when insurance costs change more than projected.

Below is an escrow analysis of one of our accounts. The highlighted row shows that when our taxes are paid, the balance will fall below the required minimum. The document says that the minimum “is determined by the Real Estate Settlement Procedures Act (RESPA), your mortgage contract, or state law. Your minimum balance may include up to 2 months cushion of escrow payments to cover increases in your taxes and insurance.” If you are projected to dip below the required minimum, they’ll offer you the opportunity to make a one-time contribution to the escrow account or your monthly payment will increase to cover that projected shortfall.

The increase is calculated in the image below. My payment to escrow at the time of this analysis was $126.18. They take my insurance and taxes owed, divide by 12, and come up with my monthly base escrow payment ($149.81). At the lowest point in my escrow balance (highlighted in yellow above), the account will be -149.43. The difference between this balance and the required balance of $299.62 is $449.05. Divide this number by 12 to get the $37.42 in the image below indicating the monthly shortage for the account.

The new escrow payment is added to my P&I payment (which stays the same), and this is my new monthly mortgage payment.

An escrow analysis showing that we’ll fall below the balance required inevitably means that my monthly cash flow will decrease (because we always opt for the change in monthly payment instead of a one-time contribution). As taxes and insurance increase, so does your requirement to fund your escrow account. While the reason for the escrow increase is to cover the taxes and insurance, which I would have to pay anyway, the escrow increase is higher because of the required minimums. One of our houses started with $766.96 as the monthly payment, and it is now $802.96 due to the escrow analysis. Another one started at $477.77, and it’s now at $537.60.

SO WHAT HAPPENED?

Honestly, the only way I’ve checked my escrow balances in the past is at the end of the year when I’m verifying the insurance and tax payments “make sense.” I’m not even verifying the details behind the numbers, just that it was similar to last year’s amount as I update my spreadsheet. Well this time, I logged in to update my spreadsheets with the new mortgage balances for the October Financial Update, and I saw my escrow account was negative by over $1000! That makes no sense because these accounts are reviewed annually through an escrow re-analysis to ensure you’re not projected to dip below their required minimum balance, and if it were to be negative, it would only be by a much smaller amount.

We had recently changed our insurance. Usually when we change insurance providers, we pay the current year on our credit card (to get those points!), and then all future billing goes to our escrow account. I don’t know why we didn’t do it this way for the most recent change, but I’m inclined to blame the fact that the process took months to get new insurance because this company hasn’t been responsive, so we just wanted it done and weren’t thinking. Since we didn’t get the new policy issued before our old policy was billed, both insurances were paid out by our escrow. Sure, that should have affected our escrow balances, but still not by $1000.

One house had a policy that cost $573.31 and the other had a policy that cost $750.06. The new policy includes both houses under one policy (this becomes annoying and it makes me uncomfortable for reasons I can’t seem to articulate to the agent) and costs $1,180.87. Each mortgage escrow paid out the original policy amounts since we didn’t execute the new policies timely. After these were paid out, the mortgage company received a bill for $1,180.87. For reasons I can’t quite figure out, the company paid $1042 from each of our escrow accounts, and then one escrow account paid $138.87 (which is the balance of 1180.87-1042). The $138.87 covers the policy fees; so someone realized that there was a separate line item for policy fees, but didn’t realize that the $1042 should have been split between two houses (even though they knew there were two houses because they took from both escrows).

I questioned the process with the new insurance company, but he didn’t take responsibility for it. He claimed that the mortgagee had to know to split it and they don’t manage any of that. I explained that I’ve had multiple houses insured by one company and have never been given one policy number for it. He acted surprised. My gut says this is wrong and isn’t going to work, both for future billing and the possibility of a need for a claim. We did receive a check in the mail for $903.13 (the difference of $1042-138.87), but we still have paid the $138.87 and want it reimbursed. I sent an email this morning explaining again that I’ve confirmed with my mortgage company that this insurance company was paid $1042+$1042+$138.87. He again responded that the $138.87 is the fees portion of the bill, and I again said that I know, but it’s been paid twice, and I’d like it back. So now I’ll stay on top of that $138.87 to make sure we get it back.

You need to fight for yourself. You need to know what companies are owed and know what you’ve paid. Then don’t back down to keep asking for an update. I recently discussed how I had to fight for medical bills (multiple times) for a year at a time to get the money reimbursed that I was owed. I even recently had to call on another medical bill that I paid before realizing it hadn’t been submitted to insurance (I would love to understand why this keeps being an issue that my medical bills aren’t submitted to my insurance before billing me). Then they submitted it to insurance and sat on my reimbursement until I called twice asking for the reimbursement (that both times they agreed I was owed and it was “in process.”). Manage your money. Especially because that $138 that I’m waiting for now could mean a big difference to a family in need or living paycheck to paycheck.

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.

Medical Bills

Here’s something different. Medical insurance isn’t something I’m going to pretend I understand fully, but I know enough to protect my money. So here’s two quick stories about how due diligence saved us hundreds.

First, an overview.

When you see a provider (e.g., doctor), they bill your insurance on your behalf. The claim that’s submitted is reviewed by the insurance’s benefits administrator, and any coverage is paid out. Your insurance will likely have a “disallowed” amount (what your insurance deems is too expensive to be billed for the given service), a benefits paid amount (what insurance pays on your behalf), and then a member responsibility amount (what you owe). Once the claim is processed, these are outlined in an explanation of benefits, or an EOB. If and when you receive a bill from the provider, verify against your EOB to ensure that it aligns with your insurance benefits.

Here’s an example of an EOB. By using a provider that is in-network (in a negotiated agreement plan with my insurance company), the doctor and the insurance have agreed costs for services provided. My insurance’s “allowances” are negotiated with each provider who participates in the network. Allowances may be based on a standard reduction or on a negotiated fee schedule. For these allowances, the provider has agreed to accept the negotiated reduction and you are not responsible for this discounted amount. In these instances, the benefit paid plus your coinsurance equals payment in full. So here, for the services that I received, the insurance company is saying, “I see you billed for $115, but we agreed that this service only costs $65.34, so that’s what we’re allowing.” You, as a covered member, are not charged for the ‘disallow’ amount of $49.66.

In our case, we have a high deductible plan, which means we have to spend a certain amount of money on covered services before the insurance pays out benefits. Ours is $3,000. This means that for the first $3,000 worth of doctors visits to in-network providers, we’re paying the total allowed amount (e.g., our son had to go to the ER, and we paid $609 for the visit, which is the fully allowed amount). There are plans out there where you don’t have a deductible, but you have a copay (e.g., I had a plan where I paid a flat $20 for each doctor’s office visit and $125 for each hospital visit, but I was also paying a higher premium for that coverage type). In a future post, I will share how we compared our plan options and chose a high deductible plan.

After we meet the deductible, most of our services are covered at 95% (i.e., we’re responsible for paying 5% of the allowed charges). In the example above, we had to pay 5% of the $65.34, or $3.27.

There are tons of nuances to insurance though, but hopefully this broad overview helps understand how to read the EOB. I have more stories of where my interpretation of the coverage in my brochure doesn’t seem to match the benefits administered, but those are for another time. For now, here’s how we protected hundreds of dollars by staying on top of our coverage.

MR. ODA’S STORY

Speaking of nuances, here’s one of those. Preventative care is covered at 100% (e.g., maternity screenings and annual physical exams). Mr. ODA needed a physical to qualify for his agency’s wellness program (they’re given 3 hours per week to exercise). When he went to get the physical, it got coded as a sports physical because the doctor had to sign off on a paper that said he was healthy enough to participate in the wellness program. A routine annual physical is fully covered by insurance, regardless of deductible. Apparently, a sports physical is not the same concept and regular coverage requirements apply.

Mr. ODA had to call back to explain that the exam was routine with a signature on paper, and not any more in depth to be considered a sports physical. The doctors office offered a reduction in the amount owed, twice, but eventually realized they were spending more in postage and phone calls than the bill was worth while Mr. ODA fought the coding, and they wrote it off.

MRS. ODA’S STORY

I saw a doctor in December 2019 when having pregnancy complications. In February 2020, I received a bill, which I promptly, and erroneously, paid. A few days ago, I received a check for the amount I paid a year and a half ago. So it wasn’t a quick resolution, but I wasn’t going to let $300 go.

The bill said:
Charges to Date: $451.00
Payments/Discounts to Date: $157.85
Remaining Patient Balance: $293.15

I had seen multiple doctors in a short period of time, so I was just in auto mode to pay all the medical bills that I had. After I paid it, I realized that on the back of the bill there were more details about that “payments/discounts” line item. There were three columns: Insurance Payments, Patient Payments, and Adjustments to Date. The total $157.85 was in the Adjustments to Date column, and the insurance column said $0. I checked into my insurance claims online and didn’t see this date of service. Well, I’m insured, so this should have been submitted to my insurance for review first. I called the hospital to indicate that there was an error made, and I shouldn’t have paid this in full, even with an “uninsured discount” they graciously offered me.

I called the hospital to ask why this wasn’t submitted to my insurance and discovered that my name was spelled wrong, my insurance was entered wrong, and this claim wasn’t tied to all my other hospital-related claims I had processed. Supposedly, they updated my information and resubmitted. I still didn’t see it on my online claim history after the 30-45 day window they told me, so I called again in April 2020. I was told they would resubmit. Two months later, I was managing a newborn and we were just deciding to move, so this fell off my radar. Then all of our things were in storage for two months. By the time I got this paperwork back out, it was March 2021.

I explained my story to the hospital again and asked for it to be properly submitted. I was again told they would submit the claim, but this time they’d submit by paper handling. Again, nothing showed up in my insurance. I called in April 2021 and was again told that they would try submitting again. This time I escalated to a supervisor. I said that this was unacceptable, and I didn’t want to keep being told they would try again, delaying my reimbursement by another 30-45 days each time I called. The supervisor said she would ensure the paper claim was sent out and call me back in a week. I never got the call. On May 18, I called again, immediately asking for a supervisor. This supervisor said that my account showed a refund was approved, but he needed to issue it (why couldn’t that just have been done?!).

Well, on June 1, I received a check in the mail for $293.15. That’s the amount I paid back in February 2020 for a December 2019 date of service. I could have written this off in my mind a year ago and not made these five or six phone calls, taking about 90 minutes of my time in total. I could have said to myself, “I called. There’s nothing more I can do.” But we wouldn’t be in the position we’re in now with our finances if I kept saying “oh well, that’s all I can do.”

The moral of the story is that you should be an informed consumer. If you know how to determine your benefits and calculate your coverage, you can make sure the proper payments are made to the provider, and that you aren’t overcharged.

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.

House 7: Two broken leases that have worked out

This one has been pretty easy, but we did have an interesting issue arise with the first tenant.

This is our largest house at 4 bedrooms and 1.5 bathrooms, and 1281 square feet. It’s a cape cod style house, so the upstairs has slanted ceilings, the half bath is not anything to write home about, and the HVAC struggles to work up there. The carpet on the stairs could really be replaced (but it hurts me to spend money on stairs because they’re soooo expensive compared to carpeting a room!). But the house has a huge fenced-in yard with a nice deck that’s a great selling point.

The kitchen was renovated at some point, so that’s held up well – and lets face it, who doesn’t choose baby pink knobs for their new kitchen cabinetry? But the plumbing and roof have been painful.

I’ve already told many of the stories about this house through other teaching posts, so bear with me if things sound familiar.

LOAN

The house is in Richmond, VA, and the purchase was very simple. We offered $109,000, and the seller countered with 112,500 and 2,000 in seller subsidy (i.e., closing costs), which we accepted. It was listed on June 22 at $119k, and we offered on June 25, so I’m actually surprised we got the contract agreed to so quickly.

Quick note here: after reviewing real estate contracts in NY, KY, and VA, Virginia wins. Sure there are several states that I haven’t ventured into, and this is an extremely small sample size. The paperwork is simple yet thorough, all while being in plain language. So if you’re needing a template to work off of, look up Virginia’s purchase agreement.

We settled on a 30 year conventional loan at 5.05%. We received a $200 lender credit since we closed on several properties in a short period of time. This is the house that we refinanced and received an appraisal of $168,000! We had already started with equity in the house because it appraised at $114,000 at closing.

INSURANCE

Interestingly, we couldn’t insure the house through the company that we had gone with because they have a 5 rental limit. Our agent was able to quote us through another company though, so our process appeared seamless. However, the quote was much higher than we anticipated. We went through a friend to insure it, but shortly after closing (literally a week), we were able to find an even cheaper option – that was awkward.

THE NEIGHBORHOOD

Not a category that usually gets mentioned. I discussed the neighborhood of the one house we sold already, which was because I didn’t realize it was in a higher-than-average crime area that tenants honed in on. But this neighborhood is worth mentioning.

Rentals aren’t prevalent here. In fact, many of the homes are the original owners. While working on the house when we first purchased it, the neighbor across the street approached me. He as-politely-as-possible threatened me that this is a nice neighborhood, that everyone keeps up their property, and that they don’t want any trouble. I assured him we have good standards as landlords, and we haven’t had any neighbor complaints for any of the tenants we had in our houses.

The location also comes into play for our first tenant.

TENANT #1

This house is under a property manager for 10% monthly rent.

As with most of our tenant searches, no one fits perfectly into our requirements. We offset this by a higher security deposit or having another signatory on the lease. We had two prospective tenants – one was a mother/daughter combo (an adult daughter) and both had bankruptcies in the last year; the other was a man and his family that had an eviction 7 years prior. We chose the one with an eviction. His application actually said that he “will also respect the property to the utmost.” Boy did he.

He first requested that the carpet be replaced. It was actually a reasonable request because it wasn’t the best. Here’s the carpet on the second floor. Old, bottom of the line padding; a gorgeous blue; lots of wear spots.

We decided to refinish the wood floors on the first floor because 1) he wasn’t moving in for two weeks, and 2) it would save us in the long run to put that investment into the floors instead of carpeting every few years (and risking someone completely ruining it before its useful life was up). It was $1850 and the company was able to start immediately and get it done before the tenant moved in (granted, it was the day he moved in, but it did get done). And the refinish turned out great!

He asked us for a screen door, but we said that wasn’t a necessity. He asked if he could install one himself. We agreed, as long as it didn’t prohibit our access (e.g., he can’t lock it, give us a key). This later becomes an issue because he locks it after vacating and we need it rekeyed.

This tenant had a few late rent payments and struggled with paying rent on time, but overall he was a good tenant to have. He took care of the property and let us know when he ran into issues (it’s amazing how many people don’t tell us of a problem in a timely fashion).

Just as we did on House 5, we offered this tenant the opportunity to pay rent in two installments each month. His rent was $1150 from August through February. He took the opportunity and we executed an addendum to change the rent to $600 twice a month. Again, it’s an inconvenience to us to collect two rent payments, but it theoretically should save the tenant money if they’re constantly in a position that they owe late fees (if he usually pays $1150+115=1265, then 1200 is a better position).

And then the fun happened!

I was at WORK one day, answered my work phone, and someone on the other end asked to speak to the owner of [this house’s address]. I barely used my work phone for work calls, so to receive a personal call on my work phone was very surprising. I informed her that I was the owner. She then went on to ask me questions about the tenant occupying the residence. I couldn’t answer a single question – hah! I let her know that I really didn’t know who was living there or the status of the home because I have a property manager. She was very nice and understanding, and she called my property manager.

She was with the school system. Apparently, our tenant had moved into the City public school district, but kept his kids in the adjacent county school system. It was April. I thought it was ridiculous that the school system would investigate this with 6 weeks left of school, but technically, he was in the wrong. And get this – he blamed me for it! Our nice tenant turned on us and went crazy. He claimed that he could just walk away from the house …. honestly I don’t remember his reason for it, but somehow he thought he had a case.

Virginia has a wonderful statute that says if the house is vacant for 7 days, the owner takes possession without any court interference. There’s also a statute that says we can’t collect double rent, and we need to be doing our best to rent it out if given notice. We tried to keep communication lines open with the tenant, but he was silent. We had told him that we were willing to release him from his lease obligations if we found another tenant, which we did. He was responsible for May’s rent and late fees, and we would have a new tenant move in June 1. We also informed him that he would be responsible for the leasing fee associated with finding a new tenant, which was basically considered the ‘lease break fee’ and is fairly generous ($300 instead of a standard two-months rent that’s typically seen as the fee). It kept going south from there.

On top of the rent owed, he had several lease breaches – room painting (clarification: rooms are allowed to be painted as long as it’s a neutral color or painted back to a neutral color before vacating), wall patching and painting, house cleaning, mowing, re-keying, and utilities since he turned them off. By mid-June, he still owed us $874.76. We made an arrangement with him that he’d pay a certain amount each pay check, but he failed several times. We finally threatened to take him to court, which would affect his credit score and increase the balance owed since court fees would become his responsibility. Since he had been working to rebuild his credit since his bankruptcy, we thought this would light a fire under him.

We went to court.

Court also added a 6% interest charge on the outstanding balance, which now included the $58 court fee.  

It took him over a year to pay the balance. By the time the court judgment arrived, his balance (after paying $50 here and there was $660. The court doesn’t put a timeframe or process on the judgement, but leaves it to the two parties to determine the payment schedule. He didn’t adhere to it well, but we did eventually get the whole balance paid. Mr. ODA also took this opportunity to have fun with calculating interest payments on a declining ‘principal’ balance that isn’t getting payments on a predictable schedule!

TENANTS #2 & #3

These tenants were/are much easier. The second tenant in the house had several large dogs, but we didn’t see any damage to the house. She eventually broke the lease to buy her own house in November 2020; we can’t fault someone for wanting to take advantage of low interest rates! She gave the appropriate amount of notice, but the lease was going to be broken as of 10/31, which isn’t a great time to have a rental come open. She ended up being very gracious with the situation, paid us one month of a lease break fee, and we kept her security deposit.

Right after she gave us notice, we had an old tenant reach out to us. They had moved back into town (I’ve mentioned them several times) and asked if we had a 4 bed/2 bath house available. Amazingly, we did. We showed them the house and they signed a lease within a few days.

Since turnover was fast, and I didn’t really know the status of the house, I didn’t get a chance to paint the house. All the rooms had been white except for the one room that I repainted after the first tenant had painted it lime green. The house really needs a whole paint job, and so I offered her an incentive. If she wanted to paint any of the rooms, she could knock $75 off the rent per room. So far she’s painted three rooms.

MAINTENANCE AND REPAIRS

The plumbing in this house has been horrendous. We had the tub snaked as soon as the first tenant moved in ($150). We then had issues with hot water, which required several adjustments to the water flow rates to coincide with the tankless hot water heater ($325). We had the upstairs toilet serviced ($120). Then a year later, we had to service the hot water tank again ($570). Tenants had complained that the upstairs sink drained slowly. We had attempted to snake it and fix it several times, but it never seemed to work. We finally just bit the bullet and replaced the plumbing – from the second floor to the crawl space. That work and the drywall patching cost us $1563.

Then there’s all the roof work. Shingles had flown off during a storm, so we had those replaced ($350). We also had a leak in the flat roof over the laundry room. We had a roof guy come out, and he said the roof hit its life expectancy. He replaced the pitched roof ($4135), and not the flat roof. So we’ve still had issues there that will need to be addressed.

SUMMARY

That sounds like a lot of money, but we’ve owned this house for 4 years now with our rent being double the mortgage (slightly better now too with the recent refi). When purchasing properties, any good investor is going to build maintenance and capital expenses into their numbers that determine if it’s a worthy investment. Rent cash flow wins out, and all the rest is just the cost of running our business – not to mention the $60k of appreciation we have on paper in just 4 years. It’s also worth noting that these things took up about 10 days worth of action from us over those 4 years, so most months, we just collect the rent with no other action required from us.

No property is going to be perfect, and this business relies on people, the tenants, to make the business profitable. No path will take a straight line, and being flexible to the ebbs and flows of rental property investing help make it fun too!