interest rate

House 12 & 13

mrsonedollarallowanceLeave a comment

Surprisingly, I didn’t cover all our houses in posts last year. I was going to say, “let’s finish this up,” but we’ve since purchased #14! This is a long post. I tried to separate the stories, but since they were part of the same purchase, it was too convoluted to decide which story went with which house.

We spent the summer of 2019 living in Lexington, KY. Mr. ODA took a temporary job for 3 months, and we spent our summer looking for more rental properties to try another market. The housing costs in central Kentucky were less than central Virginia, but the rental rates were also lower.

We drove around with our Realtor for quite some time. We were hoping to find a multi-door complex. However, 4-8 door units have just not been well taken care of. We take care of our houses, and I didn’t want to inherit all the deferred maintenance of a poor landlord. Many of the places had long-term tenants, so there wouldn’t be a vacancy to ease getting work done either. Additionally, there were several that we saw where the tenant was home, smoking and telling us all that was wrong with the property. It was abysmal.

So after searching through many other options, we settled on two houses at the same time.

FIRST OFFER

Mr. ODA actually made an offer on a house in Winchester that I hadn’t seen. It was a large house that had been converted into 2 units. Mr. ODA and our Realtor went after work one day, and it wasn’t worth me packing up the baby and driving a half hour to meet them for one house. However, I did get to see some of it because I took on the home inspection appointment. Since I had never walked through the house, it was easy for me to objectively see the information on the inspection and convince Mr. ODA to walk away. There was just too many big-ticket items (e.g., not enough head room for stairs, water damage not properly cleaned up in multiple rooms, several code violations) and deferred maintenance that it wasn’t worth us putting the money into it. The tenants were sitting on the porch smoking during the inspection, and I didn’t love the idea of inherited tenants that were allowed to smoke in the house.

SECOND OFFER

I can’t tell the history of these purchases without this gem of a story. Mr. ODA found a house that was in a decent shape in Winchester.

Aside: We focused on Winchester because while the rent income was low, the housing cost was also low. Whereas in Lexington, the rent was low, but the housing prices were higher.

We made an offer on the house. In the offer, it lists the seller’s name. It was a State Senator! When we sent over the offer, the seller’s agent agreed to our details, but asked for a pre-approval letter before he’d sign. The amount of weight the people in Kentucky put on a pre-approval letter is absurd, in my opinion. We went through the effort to get the letter and send it over. About that same time, the seller’s agent said someone else came in with a better offer, so we could either submit our highest and best offer, or lose the deal. The sketchiness of the action floored us.

The house had been on the market for a month. We had a verbal agreement (that had even been put in writing, but not yet signed). What are the odds that someone came in at the same time as us with an offer over asking for a house on the market a month? We called his bluff, and we were wrong.

THIRD AND FORTH OFFERS – UNDER CONTRACT

In August 2019, we went under contract on two houses in Winchester, KY.

Property12 had been owner occupied and flipped to sell. The owner had lived there long enough that she wouldn’t Docusign the contract, and we had to wait for her to initial, sign, and date all the pages by hand. The house had been listed for 36 days when we made the offer. It was listed at $115,000, and we went under contract at $112,000 with $2,000 in seller subsidy (closing costs) on 8/7. It’s a 3 bed, 2 bath ranch at 1120 sf.

We received the home inspection on 8/14. We asked for the items below to be addressed, or to take $1000 off the purchase price. They agreed to fix the issues.

Property13 had been listed for nearly 3 months before we made an offer. It had been most recently listed at $105,500. Our offer was for $102,000 with $2,000 seller subsidy. We also included the following requirement in the contract: Seller agrees to remediate the water and mold in the crawl space, fix the down spout next to the crawl space door so that it channels the water away from the home, replace the missing gutter on the front of the house, and repair the rotted facia and sheathing on the front of the house.

Additionally, we had a home inspection on the house and identified the following items for them to repair.

Getting the sellers to identify that these items were done before closing was not an easy task. We checked the day that closing was originally schedule for and noted that several things were not complete.

Then, at 7:30 pm the night before closing (which had already been delayed a week), we received one receipt identifying a couple of things were done. Eventually we received documentation that it was taken care of.

LOAN DETAILS

The options we typically ask for when considering the direction of our loan are as follows.

We chose the 25% down – 30 yr fixed option for both properties. Our goal is to not pay points, so that led us to the 25% down options. Since there was no incentive to take a shorter term (thereby increasing your monthly mortgage payments and decreasing your cash flow), we chose the 30 year option.

These loans were originated in September 2019. We processed multiple cash-out-refinances on some of our properties in December 2021; we used it to pay off about $66k on Property12 and about $74k on Property13.

LOAN PROCESSING & DELAYED CLOSING

We had a lender that we loved in Virginia. She couldn’t cover loans in Kentucky, but the company itself had a branch that could do it. She referred us to someone in Kentucky. It was the worst experience I’ve had in closings. Our closings are always annoyingly stressful in that last week, but this was bad throughout the month and then bad enough that our closing was delayed a week – completely due to the loan officer’s inability to manage the loan.

We had multiple issues over the course of the week we initiated our relationship just accessing the disclosures. They kept telling us to sign things we didn’t receive, or they’d tell us our access code and then when I say it doesn’t work, act like they never told us different information and give new information.

On August 16, I had to tell the loan officer that one of the addresses was wrong. THE ADDRESS. On August 26, we received conditional approval of our loan from underwriting. On August 27, we received our appraisal with no issues noted. But at that point, our August 30 closing was delayed a week already.

That’s where the problem was – our appraisal was ordered late, had to be rushed, and still didn’t make it in time for them to develop the Closing Disclosure (CD) and get us to a closing on August 30. The loan officer never once acknowledged that he ordered the appraisals late, causing this delay. It took asking for timelines from his supervisor, and piecing together emails we had on hand, to show that it was his fault.

On August 29, I finally made contact with the loan officer’s supervisor and was rerouted to someone else to get the job done. I had to repeat all of our issues and the errors that were found on the CDs.

On September 3, I was given disclosures that were still wrong. The new loan officer claimed that what she put in the system was correct, so she wasn’t sure what was wrong, causing me to once again outline all the errors.

On September 4, I was asked for more documentation that wasn’t caught during underwriting. I was furious.

On September 5, I gave up talking to our lender about issues on the CD and spoke directly to the Title Attorney’s office, who was much more knowledgable and responsive. Here’s an example of what I’m questioning when I look over a CD. Some of these seem small (e.g., $4 difference, $25 difference), but you can see how these add up, both on a single transaction and when we’re processing several homes in one year. Not to mention – why pay more for something than you were quoted or you’re supposed to?

Another surprise that came our way was a “Seller Agent Fee” for $149 per transaction. At no point in time was an additional fee disclosed to us by our Realtor. A typical transaction has 6% commission paid by the seller, which is traditionally split 3% and 3% for the buyer and seller representation. Being that these were Rentals #12 and 13, in addition to 2 personal residences we had purchased, imagine the surprise when we, as buyers, were being charged for representation. We questioned why this wasn’t disclosed to us up front as a Re/Max requirement, and it was taken off our CD.

CLOSING DAY

I had planned to leave town the Friday after the original closing date because that was the last date that we had our apartment. I didn’t want to move me and the baby into my in-laws house and continue the poor sleep we had been dealing with by not being at home. So even though closing was delayed, I left. Mr. ODA had to be my power of attorney. He had to sign his name, write a blurb, and then sign my name on ALL those papers that are part of a closing….. times two. Eek. I didn’t know that at the time (but baby went back to sleeping perfectly once we were home, so it was worth my sanity 🙂 ).

At 11:30 am on closing day, the lender claimed that the power of attorney documents (from the lawyer…) were not complete enough to be counted as filed on their end. I appreciated the snip from the attorney when questioned.

I always wondered why tv shows always showed both at the closing table with a ceremonious passing of the key. We’ve had our share of weird closings (in a closet, in a parking lot, at our dining room table), but we never sat at the table with the seller in Virginia. We were so confused about how specific the closing attorney was being about the closing time options, and then we found out that the seller and buyer are at the table together in Kentucky. The seller for Property12 was so rude to Mr. ODA through the transaction! She kept grilling him on whether he addressed the utilities. The seller shouldn’t be allowed to talk to the buyer! We’ve since been able to process 3 transactions in Kentucky and avoid the seller at the table, but I’d like to advocate that Kentucky move away from this buyer/seller meeting process!

RENTAL HISTORIES

Property12 was listed at $895 on 10/2. Based on my birds-eye-view of the area, I thought $1000 was going to be easy to rent it at. Based on the 1% Rule that we had followed in Virginia, we should have a goal of $1,100 per month. However, we were trying for a Fall lease, which is more difficult than a Spring lease, so I thought listing at $995 would get quick movement instead of letting it sit for too long. Our property manager disagreed. She also said we were limited our pool of candidates by not allowing smokers; but, the whole house is carpeted and I was not budging on that.

We found a tenant on October 16 and allowed her to move in right away, but not start paying rent until November 1 if she agreed to an 18 month lease (we really wanted to be on a Spring renewal going forward). That was an unfortunate blow to our expectations – nearly two whole months without rental income on a house we didn’t need to do any work to.

We increased rent to $950 as of 6/1/2022 after no previous increases.

Property13 was listed for rent at $995 with no movement. We dropped to $875 and offered free October rent for however long was remaining in the month. A lease was established on 10/18/2019. Our property manager was supposed to establish an 18 month lease and didn’t. Luckily, the tenant agreed to a 6 month extension.

Property13 renewal came in April 2022. She had balked about the state of our economy in 2021, and we backed off the proposed increase at that time. Well, all the jurisdictions finally jumped on the increased assessments, and we saw a drastic increase in our costs. We told her that the new offer for a year lease is $950, which is higher than we’d typically increase in one year ($75 instead of $50). But we told her that we were willing to let her walk if she didn’t agree to it since she originally negotiated a lower cost and argued an increase at the 18 month mark, which we let go. She tried to fight it, but our property manager told her to check the rental options in the area to see that she’s still getting a deal. She agreed to the increase.

MAINTENANCE HISTORIES

Property12 requires a new heat pump in June 2021. We paid $3900 for a whole new system, which is a funnily low number just a year later.

The tenant there complained of high water bills. I asked to see a history of the water bills to know how much was considered higher than their average usage. The property manager agreed that the toilet was running and causing higher bills, but also admitted that they attempted to fix the toilet twice over a 3 week period, with multiple days between receiving a maintenance request and taking action. While I agreed that we could compensate her for the issue, I couldn’t quite pinpoint why this was my financial burden and neither the tenant’s nor the property manager’s. I followed up with more information from the property manager with questions like: Why did it take the tenant from 9/20 until 10/11 to identify the issue still remained and that there was a waste of water? They indicated that they believe they made a good faith effort to address the issues as reported. I eventually settled on a $25 concession on one month’s rent.

Property13 had several issues with the hot water installation that were eventually resolved, which was frustrating after we tried to manage issues with the hot water heater through the home inspection process and received documentation as if it was complete. The tenant requested pest control in July 2020 claiming that a vacant house next door caused an increase in pests. I was frustrated because that’s not how it works. I approved treatment at that time, and then she came back with another request in October. Luckily, I haven’t heard about pests since then. In my Virginia leases, we’ll handle some pest control requests, but if there are roach issues once a tenant has been there for some time, we don’t typically pay for that type of treatment.

SUMMARY

All in all, these tenants have been pretty quiet. They ask for random maintenance things here and there, but they’re not usually big-ticket items (except that HVAC replacement!). Our property manager has been more difficult than the tenants.

Being that we were used to the 1% Rule when we purchased these houses, it’s unfortunate that even at 3 years in, we’re not renting it at 1% of our purchase prices. Our cash-on-cash isn’t completely accurate right now because I won’t see our taxes for this year for another month or two. Being that jurisdictions kept the tax amount steady through the pandemic, I’m expecting to see an increase in assessments for this year. I’ve also seen big increases in our home insurance policies, so that will probably eat into our cash flow as well. Our cash-on-cash analysis on Property12 is about 6.5%, and it’s about 7.5% on Property13. These numbers are only slightly lower than our expectation/desire, with our average being about 8%.

In the upcoming year, we’re going to look to get rid of our property manager, so these houses may begin needing more attention from us. It’s been hard to take on more when paying a property manager has been a sunk cost at this point. However, the frustration of managing their management (e.g., making sure charges are correct, not getting a full picture of what work is being done, and then paying them a significant amount of management money and leasing money only for them to claim that checking on the property requires additional fees) has led to us wanting to take it on since we’re in town now. The current lease terms are up in April and May, so if we’re going to take on management, it should be before the possibility of paying them half a month’s rent for leasing it (not to mention they’re notoriously 4-6 weeks out in every leasing attempt they’ve done for us, whereas I’ve never had an issue getting a property leased within a week).

Making an Offer

mrsonedollarallowanceLeave a comment

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

BASICS

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

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

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

EARNEST MONEY DEPOSIT (EMD)

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

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

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

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

CONTINGENCIES

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

Financing

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

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

Appraisal

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

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

Home Inspection

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

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

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

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

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

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

Wood Destroying Insects (WDI)

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

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

‘ADVANCED’ CONTRACT OPTIONS

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

Seller Subsidy

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

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

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

Escalation Clause

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

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

Appraisal Gap Clause

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

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

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

RANDOM CLAUSES

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

SELLER THOUGHT PROCESS

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

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

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

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

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

Jumping on the I Bond Wagon

onedollarallowanceLeave a comment

What are I bonds?

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

Some Rules

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

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

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

Calculate the Rate

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

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

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

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

Interest is compounded semi-annually.

How to Purchase

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

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

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

I Bonds for Me

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

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

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

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

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

HELOC

mrsonedollarallowanceLeave a comment

HOME EQUITY LINE OF CREDIT or HELOC

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

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

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

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

TYPICAL TERMS

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

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

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

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

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

OUR PROCESS

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

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

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

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

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

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

WHY THE HELOC FOR US?

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

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

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

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

Commercial Loan

mrsonedollarallowanceLeave a comment

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

WHY COMMERCIAL?

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

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

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

PROCESS

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

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

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

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

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

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

FIVE YEAR LOAN

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

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

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

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

BALLOON PAYMENT

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

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

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

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

SUMMARY

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

House 7: Two broken leases that have worked out

mrsonedollarallowanceLeave a comment

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!