rent

Buying versus Renting

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I have a tenant who, in the same day, told me that she couldn’t pay rent on time and asked whether she could buy the house. She said she paid $60,000 to me and that could have gone towards owning a house. While I understand the lump sum of what you paid being a pain point, owning a house isn’t that simple. I thought I’d break down a comparison of what she would have done to own this house versus her renting it over the last several years.

RENT HISTORY

Based on the proximity to Main St and the comps in the area, we went into the purchase expecting about $1,000 per month in rent. At the 1% Rule (where you set monthly rent at 1% of your purchase price), we should have been at $1,020. Knowing that it was October/November by the time we would get it rented (there aren’t as many people looking for a new rental in the Fall, after school has started and holiday activities are ramping up) we chose to list it at $975 and keep it below that 4 digit threshold. It sat for 3.5 weeks with hardly any activity, and we dropped it to $875. We found a tenant in under 2 weeks then, but we weren’t thrilled amount our cash flow on it.

The tenant’s lease started on November 1, 2019. Her rent was $875. My property manager incorrectly established a one-year term lease instead of an 18-month lease like she was supposed to, so we had to do a 6-month extension after the first year. Then in March 2021, we tried to increase the rent to $900, and she complained that due to the pandemic, she couldn’t afford that. We let it go and she renewed a year lease at $875.

Come February 2022, we were significantly under market value for rent and she hadn’t been a friendly tenant, so we were content pushing a raise to $950. If she didn’t want to pay that, she was free to leave and we would take the vacancy hit to fix it up and get it re-rented. She complained about the increase, and our property manager told her to take a few days to look around to see if she could find somewhere to rent that was at a price she would feel more comfortable with. She came back and said she couldn’t find anything and accepted the increase to $950.

Not including a few late fees she has owed over the last nearly-five-years, she’s paid us $52,850. While in total that appears to be a significant number, that number does not mean that you’d have $52k in equity in a home had you paid towards a mortgage.

OUR PURCHASE INFORMATION

We paid $102,000 for the house in 2019. We asked for several options for the loan structure. We asked about putting 20% versus 25% down, and whether the rate for a 15 year, 20 year, or 30 year loan would have the best rate. Going through those details is something I’ve done in the past, so for this purpose I’ll just note that we chose to put 25% down because then we didn’t need to “buy down” the rate. The rate for each loan length was 4.55%. With no incentive to do a shorter loan term (and therefore increase our monthly payment), we chose the 30 year term. I do want to note that our interest rate is higher than the average for 2019 (3.9%) because it was an investment property and not a loan for a primary residence.

Based on the 25% down and the closing costs, we had to come to the table with $26,589.12.

Our mortgage was $538.46, which includes escrow. We paid off this loan fairly soon after we closed on it, so we don’t have a monthly mortgage payment. However, I do need to plan for our current mortgage and insurance payments each year, which is currently over $2,000.

FACTORS TO CONSIDER

To keep this more consistent in the message, note that the loan discussed will be based on the purchase price of $102,000.

First, you need to have favorable credit to qualify for the mortgage. In an example, the lowest credit score I could plug in was 620. However, in much of what I’ve read, anything below 680 is questionable on qualification. Our requirement to rent a property is to have a credit score of 600. Perhaps there are lenders that will process a mortgage if your credit score is below 620, but you’re going to pay a premium via the interest rate.

With a credit score of 780, say you’ll have a rate of 6%. But then with a score of 680, you’re looking at 6.5%. At 6%, your principal and interest payment (doesn’t include the escrow required) would be $599.19. At 6.5%, it goes to $631.69. That’s only $32.50 per month extra; over 30 years, that’s an extra $11,700 paid to the bank. I have some tenants where an extra $32 per month is a big deal.

Without at least 20% down on a loan, you’ll likely have to pay private mortgage insurance (PMI). This amount could add a monthly premium to your mortgage payment anywhere from 0.2% to 6%. I did a quick calculator with the example of $102,000 purchase price, $3,060 down (typically the lowest available without any special loan structures is 3%), and a credit score of 620 (lowest it allowed). The PMI was calculated as $187 each month.

I mentioned that our final closing costs were over $26k. If I remove our down payment, that leaves $1,089 in closing costs. I will note though, that our contract had $2,000 in seller subsidy (a credit). Without that purchase agreement structure, that means your closing costs are actually $3,089. This means that you need to come to the table with $6,149. Buying a house is not like buying a car where you can roll all the costs into the loan, and I feel like people don’t realize this.

Your debt to income ratio also plays a factor in whether you can qualify and what your interest rate would be. So even with a decent credit score, you need to show a low debt-to-income ratio, meaning you can’t have your credit cards maxed out. The lender wants to see that you don’t have high monthly costs that would prevent you from paying your mortgage.

That brings me to the flexibility of paying rent. She paid $475 worth of August rent (due August 1st, with a grace period to August 5th before a late fee is owed) on August 20th. If you pay your mortgage late, there’s a late fee and it gets reported to the credit bureaus. Your late payment of rent doesn’t get reported to anyone. She also has the extra advantage that I’m willing to work with her on late payments. An apartment complex type owner is going to immediately file for eviction on the 6th without full rent payment, regardless of your story.

SUMMARY

While a mortgage payment of $538.46 looks favorable against a rent payment of $950, it’s not that simple. I was able to qualify for the mortgage, qualify for a favorable interest rate, and put significant money down.

If I add a premium to the rate we were able to get, assuming my tenant’s credit score is similar to what it was when she rented our house, and then add the PMI that would be applied by not having 20% down, then the mortgage payment (including escrow) would have been $903.02. PMI stays on the mortgage until you reach 78% loan to value ratio (unless you pay for an appraisal and can prove 80% earlier than that). That threshold in this example is $79,560. That principal balance would be achieved in over 11 years, which means you’ve paid $25,058 for essentially nothing.

Then on top of paying these premiums for the mortgage, she would need to pay for the maintenance of the property herself, which is included in my rent factors. I’ve paid over $3,000 for repairs and maintenance on the house over the last 5 years (which is fairly low). However, that includes a deck replacement that we did ourselves and probably would have cost $4,000 instead of the $400 we paid in materials.

So the next time you think that you could be paying half of your rent with a loan, know that you’re not looking at the whole story. There are many factors that go into a mortgage, especially the initial ability to qualify for such loan.

Lack of Rental Payment

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I was going to include this in a financial update post, but it was too long and complicated to include there. I really want this to be a lesson for anyone reading this – mostly on the renter end, but perhaps for a budding landlord as well. We tried really hard to work with the tenant, but we can’t work with someone who doesn’t communicate up front and doesn’t keep her word constantly. When using statements like “I need to keep the water and electricity on for my kids,” understand that the roof over their head isn’t a given. I’m a private landlord and be lenient, but an apartment complex type situation isn’t going to allow you to not pay for months on end; they’re going to file for eviction on the first day 6.

THE DETAILS

After this house was flooded by a tenant, we got it fixed up and on the market. The options at the time were limited; plenty of people were interested, but they weren’t qualified. The area called for $2,200, but I wanted it to move quickly, so we listed at $1600. The previous tenant was paying $1200, so this felt like a huge jump. No one qualified for the property. We had two options that were close enough to our requirements.

We chose a single mom who worked two jobs herself to be able to afford this place. Honestly, kudos to her for her effort. She lost both those jobs (we knew about one, but not both) and ran into some other troubles. She has worked hard to get herself back on track. I commend all that. She’s wonderful like that. Her communication (or lack thereof) was infuriating.

At the beginning of October, she said she’s back on track now with a steady income (replacing both jobs), but with all the outstanding bills, she’s going to need time to catch up. I’m a very understanding person and work with my tenants as long as they work with me. Instead of telling me WHEN I should expect to see payments, she left it open ended with “sometime in October.” I gave her the benefit of doubt. Then two Fridays passed with $0 paid. I asked for an update through our property manager.

On the 16th, she sent over $300 (after we had to ask for payment), and wrote, “I will be sending another payment this upcoming Friday and typically Fridays going forward.” Typically. She reiterated that October would be paid before the end of the month, and then she’d need about two weeks to pay November’s after that. She did pay $500 that following Friday, and then missed the next Friday.

My property manager had to follow up with her 3 times before she actually received an answer. The tenant claimed she had been too busy to respond. Excuse me, but keeping a roof over your head should be a priority in your life (this will be a theme). I asked for a payment plan instead of this open-ended concept of payment. On November 1st, she finally responded that she was going to pay $400-700 every Friday, going forward, unless she needed to pay other bills. Again. “I’ll pay you when I pay you, unless I don’t pay you.” This isn’t appropriate.

She paid $700, as goods and services, on November 3rd. All fees are the tenant’s responsibility, so now she owed another $15. She ended up sending $50 over that same day. At this point, it’s November 3rd, and she’s still $60+ short on October’s rent and $0 towards November. As expected, Friday November 10th came and went with no communication and no payment. She ended up sending an email in the early morning hours of the 11th stating she’s waiting on a deposit to clear, so she’ll pay something on Monday. She did pay that Monday. However, she had said she’d pay every Friday, and the 17th came and went with no payment. Again.

On the morning of the November 18th, I sent the notice of default. It said she had 5 days to pay the entire balance or we’d file for eviction. She threw a little tantrum, claiming she wanted to end her lease. It doesn’t work like that. My property manager had a good idea and was able to articulate our frustration sternly, yet professionally. The property manager said that “forgetting” and “life” getting in the way were not acceptable responses, and it was time to be responsible for herself and her bills, perhaps by setting alarms or utilizing her calendar for reminders. The offer included our waiving of December and January late fees ($160 each) if the tenant continued to pay every Friday without us having to follow up. I thought the incentive was great. The tenant then paid $700 on the 24th and $600 on 12/1. At that point, she was caught up on October and November (sans late fees though), while paying into December’s rent owed.

She paid the first two Fridays in December, missed the 22nd, and paid on the 29th. At the end of December, she had a balance owed of just over $500, which included all late fees, so that was a decent position. Then things went downhill again. She paid nothing until January 17th, and it was only $100 that day. She claimed an issue with the amount she was able to send over, but stopped trying. When we asked why she mentioned $400 in $50 increments, but only sent over $100, she acted like we did something wrong. Over the next week, she ended up sending $300. At the end of January, she owed $1,863.40.

TENANT VACATES THE PROPERTY

In mid-January, seeing that communication was getting worse, and payments weren’t even being made, we asked her to leave. I was really trying to get through February so that we’d have a more favorable market time to list it. She said she didn’t want to leave. That’s a bold statement from someone who owes a lot. On January 25th, we sent her the 5 day notice until eviction document, which showed her balance due. We offered her the ability to leave the house by the end of the month with minimal damages, and we’d just keep her security deposit. Her initial response was that she wants to finish interviews she has scheduled, and she didn’t want to leave.

Within 24 hours, she decided she did want to leave. For the first time in all of this, she fully explained her situation. She gave good reason to have until February 4th to leave (instead of the end of January). We allowed it, but she’d be responsible for those days of rent in February.

As a final goodbye, she told us she would be able “to make another payment that first week of February.” As I suspected, she meant the week of February 5th, and not the 1st or 2nd. She didn’t pay. On February 9th, she “kindly” asked for an extension for the final payment, since she was expecting her tax refund in the next two weeks.

I don’t need to tell you at this point – two weeks came and went. She did end up paying over $500 on 2/29 though. That was more than I ever expected. I don’t know how she arrived at her number (she did email an explanation, but the numbers didn’t add up), but I’m accepting it.

TURNOVER

She actually left the house in great condition. She had sticking LED light strips in a bedroom that said they were easily removed. However, when she removed them, paint came with it. I had to have someone touch that up. She bought blinds, but didn’t hang them, for ones that were damaged (she had asked us to pay for them when she first moved in, so that was a nice gesture to uphold the integrity of the request), so I had to have someone do that. Then I paid someone to clean the house, which is normal. Overall, she was difficult to communicate with, but I do believe she meant well.

BACKGROUND & EXPECTATIONS

I have a track record of being very lenient and very understanding. I promise. I can provide lots of examples where I’ve let people know to take their time, prioritize back to school necessities, waive the late fee, etc. I can not work with you if you don’t talk to me. I don’t know what you need. I don’t know you as a person and whether you’re “good for it.” I need to know your expectations, needs, and plan. Talk to me without me hunting you down for information. I don’t know where I’ve said this before in this blog, but I’m positive you can find that or a very similar statement made throughout. Understand that in nearly all other scenarios, a landlord is not going to be patient for 4 full months to try to get you to pay rent owed.

She said phrases to me that were generally that she has kids so keeping the water and electricity current is her priority (isn’t keeping a roof over their heads equally important?), or that she asked for grace and patience (what have I been doing? I could have issued you the first step of the eviction process on October 6th, and I didn’t, even though you didn’t pay a penny towards rent until the 16th). It’s things like that get under my skin and make my efforts feel unappreciated, making not want to work with you going forward. Take the time to acknowledge how gracious I HAVE been, that I have bills to pay in addition to you having bills to pay, that I deserve to be given regular updates and information without having to follow up and beg for information.

My property manager says “she’s young” and “she’s learning.” There have been learning opportunities, but it’s also not my role to mentor a tenant on how to be an upstanding citizen and uphold your commitments. There were two other late rent moments this summer where my property manager said that if there’s any issues with rental payment, we need to know ASAP, without us having to make phone calls or send emails. My property manager reiterated this expectation on October 31st over the phone – don’t miss a Friday rent payment, assume we know you’re not paying anything, and leave it at that (I already played the “benefit of doubt” game through October when we received $0 for half the month).

LESSON

Communicate with the landlord. Don’t put the landlord in a position where they’re having to keep track of your financials and whether you’re paying timely. Pay regularly or communicate up front. All of my leases state that rent is due without demand. My having to regularly ask for an update or why you haven’t paid a single penny halfway through a month is not in any realm an acceptable way of doing business.

Renters need to understand that landlords have bills to pay. Those bills (that mortgage) are not as lenient as I’m trying to be with you. If I don’t pay my mortgage, there’s a late fee and it’s immediately reported on my credit. They also don’t accept partial payments. If I don’t pay for long enough, it becomes a foreclosure. As a tenant, you don’t know if I have funds to cover that payment. Assume I don’t. If I don’t pay my mortgage, the house is foreclosed, and you’re kicked out anyway. You’re getting by without any credit hits, as you’re now two to four months behind on rent. I’m floating mortgage payments on your behalf. Lucky for you, I’m on top of my credit and paying these bills even if you’re not paying me, but that isn’t an assumption you should make.

Your actions have consequences. You can mitigate those consequences by upholding your word and keeping in regular communication on what’s happening (again, up front, not after the deadline passes).

Lease Break Agreement

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Last March, it was time to make a decision on renewing the tenant’s lease on House9. There were several variables at play, and we ended up adding “lease break” terms to the renewal agreement. Here’s how and why we did such a thing.

LEASE BREAK CLAUSE

All of my leases are set up as a lump sum fee. This means that if the rent is $1,000 per month, then the lease is a legal binding agreement for $12,000 for the year. If you wanted to leave 6 months into the agreement, I could hold you accountable for the entire sum. In reality, this wouldn’t happen. I’d have to show a good faith effort to re-rent the property once the tenant vacated the property, and they’d only be responsible for the time it was vacant, at most.

The point here is that there is no section of my lease agreement template that allows the lease to be “broken,” and the tenant to leave “early.” In some instances, a tenant will request the flexibility to leave early, and we typically charge up to a month’s rent for that ability. We most often use this for tenants that expressed interest in buying a home. There are some other fee structures that we use depending on the circumstances, but this will focus on those instances where we know in advance that this is a possibility.

ORIGINAL LEASE AGREEMENT TERMS

The tenants had signed their original lease in June 2020. From the beginning, they were clearly money savvy. They had said from the beginning that they were looking for a place they could live until he finished his schooling, which was about 2 years away. They negotiated a two year lease for $1,280. In September 2021, so 6 months before their lease was set to expire, he reached out with an offer. His program was set to end in May 2023, but they didn’t want to commit to any longer than that since he could be placed anywhere upon graduation. He asked to go month-to-month after that.

We agreed to extend their lease until May 2023, but it would be $1,300 (instead of $1,280) between 7/1/2022 and 5/31/2023. We decided not to engage in the month-to-month conversation that far in advance, which he understood.

In March 2023, we started discussions on their status. They were about to have a baby, the market had cooled for buyers, interest rates were high, etc. They didn’t want to rush their buying process. Instead of paying the premium for a month-to-month lease, we decided on another year-long lease, but it would have a “lease break clause.”

NEW LEASE AGREEMENT TERMS

The new lease was executed for $1,350 per month, which was still a bargain for their property. However, we added lease break provisions, as seen below.

The thought process here was that we were protecting our financial interests based on the time of year. First, we required a month’s notice. Our original lease already states that we can have access to the property to show it to prospective tenants, so that wasn’t repeated here (although it is worth noting that this in our lease agreement, since renting while a unit is occupied is not always a given; we struggled with our property manager in KY getting access to our properties (that was a property manager issue)).

I don’t know if there are facts to back this up, but it seems (through my own years of renting, as well as all these years as a property manager) that most people are looking for a rental to be somewhere between May 1 and July 1 as the start. A quick search tells me that the common months are May to September. However, in the south, we start school in mid-August. If you’re not moved by August 1st, I’d venture to say you’re not preferring a September 1st start date.

If the tenant left in the summer months, then the fee was only 1/2 of a month’s rent. We had a good chance of being able to re-rent the property if it was during the summer and before everyone focusing on back-to-school in the end of August/September. If they requested a lease break between September and the end of March, then it was a full month’s rent. This was due to the fact that the turnover process was going to be longer than our typical turnaround, and it would put us at a disadvantage in re-renting the property down the road. We then put that there would be no fee if they left in the last two months of their agreement because 1) we’d likely be able to rent it quickly, and 2) as a way of showing that we’d meet in the middle since they were such great tenants.

EXECUTION OF THE LEASE BREAK AGREEMENT

The tenant had used our property manager as their Realtor for a new home purchase. She tipped me off that they’ve be giving their notice shortly, sometime at the beginning of November. I naively thought that meant they were newly under contract, but by the time their notice was given, they had already closed on their new home. They purposely waited to give their notice so that they had time to move their belongings without being rushed (which is fine; I don’t know why that reads negatively). On November 24th, they let us know that they’d be leaving by 12/31.

While the fee was due upon notice, per the lease agreement, it wasn’t something I was willing to fight. If you’re a good tenant and hold the lines of communication open, I’m happy to treat you as an equal. They paid the fee on 11/29, and then they paid their December rent on 12/4.

LESSONS LEARNED

Honestly, it worked just as planned. We weren’t able to rent the house for January. The lease break fee alleviated the pressure to settle for a tenant just to fill the house because we had the month’s income already accounted for. We’ve done something similar in the past, and this set-up has worked well for us. It gives a little grace to the tenants and real life needs, while still protecting our interests as business owners.

We put the same type of clause in another tenant’s lease. They executed the clause on February 23rd, letting me know they’ll be leaving by the end of March. If they broke their lease in March or April, there was no fee (their lease was set to expire April 30th, so it’s one month early).

Their are times where a tenant doesn’t know up front that they’re going to find a house they love or a job is going to move them. We handle each on a case-by-case basis. Generally, it’s either going to be a month’s worth of rent as the fee or it’s going to be a fee of $250 (the amount I pay to the property manager) and they pay rent until we find a new renter (which has never taken more than 6 weeks, and is typically a few days turn around for me).

December Financial Update

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I’m not even sure where to start for this month. It has been a whirlwind. There were a lot of tax payments last month, and this month I was still paying those among several other things.

PURCHASES

I purposely paid my credit card statement a little earlier than the due date so that it wouldn’t be that high for this update, but then I put a bunch of charges on it over the last two days. To catch you up – we’ve been holding money in our savings account for as long as possible. When we were getting 0.2% interest on it, it didn’t matter when I paid the card, so I typically paid it shortly after the statement closed. Now that we’re getting 4.22%, it’s worth keeping the money in there to earn interest, and then paying the credit card closer to the due date.

Our regular-use credit card is currently holding: $300 towards my dad’s iPhone (I should really share that mess of a story in purchasing that) (also, that doesn’t clearly account for my sisters having paid $200 towards that because that’s just “cash” in our checking account balance), $500+ of the kids preschool tuition, renewing our zoo membership for $139 (honestly, 5 of us enjoying the zoo for the year for that price is wonderful), over $200 for signing our son up for tee ball, two car insurance payments, and a rental insurance payment. I don’t typically go through the charges like that, but it’s just been a bunch of just-big-enough charges to grab my attention on our credit card balance. We drove to-and-from NY, so our gas station payments are higher than average too. As a reminder, the credit card balance you see also includes $10k worth of new carpet that we’re paying slowly on a 0% interest credit card.

RENTAL PROPERTY EXPENSES

I paid two of our Richmond houses’ taxes. The taxes are due on January 14th, but if I pay them this year, then it reduces what’s viewed as our ‘profit.’ I make sure to pay any known January bills in December of each year. Those two houses are so tiny, so their tax payments being so much larger than they once were kind of hurt (I’ve discussed the increases in property assessments, thereby increasing taxes). It was about $2,000 paid out (on top of all the things I paid over the last two months).

I also had to pay two supplemental taxes for Lexington. Government entities not meeting deadlines is a pet peeve of mine (I used to work for the Federal government). Last year, I completely missed that paperwork I received was a supplement bill for education, and then I received a penalty.I thought it was their typical assessment notice since it was outside of tax payment time. Luckily it was a few dollars, but I was so lost. This year, I paid close attention when I received an extra tax-related document. This supplemental bill was for trash services. Again, a few dollars. But think of all the extra paperwork, staff hours, postage, payment processing cost to collect an extra $20 from every house.

RENTAL PROPERTY INCOME

We had two tenants give us notice that they’re moving out. While extremely unfortunate timing on the year, I’m also human and understanding of their need. One tenant had a traumatic work event that led to him being laid off, and another family bought a house. We’ll find a way to get the houses re-rented as soon as possible, even though our vacancy time may be longer than it would have been if we were looking for a May 1st or June 1st renter. We have someone interested in both houses at this time, so that’s encouraging.

We had 4 tenants not pay in full. They all reached out to me to let me know in advance, and they paid what they could by the 5th (I always appreciate that – it holds them accountable, and it allows me to not foot all of the bills that I have to pay on the houses). As of the end of the 5th, we were short over $3,000 worth of rent ($1300 of that was for the house that has been late since October 1st and is finally working towards paying their debts).

As of today, we’re short $2,400. The tenant who’s playing catch up only has a balance of $960 left, which is great (that’s been a long road). Another tenant typically pays $750 on the 5th and 19th. So they’re not late on $750, but they are late on the $375 they didn’t pay in the first half of the month (this is a special scenario that we put in place for them because they couldn’t pay all at the beginning of the month, so we increased their rent as a concession to being able to pay twice per month without creating more late fees for them… but they’re still late).

NET WORTH

The market significantly increased over the last month. We also had $28k come in as part of our insurance claim; our cash increased by $35k though, so there’s an additional savings in there. And even though we had large expenses on our credit cards, it’s still slightly down from last month.

BONUS STORY

Mr. ODA and I wait for Black Friday deals to purchase our iPhones. We typically purchase every 3 years. I usually bite for a new phone so that the camera is better, but I’m suspicious that Apple is sending updates to alter the clarity of photos on older phones. How can I take these BEAUTIFUL pictures for the first few months of having a phone, and then all my pictures are grainy suddenly? ANYWAY.

Walmart had a deal that you purchase the iPhone 14 on a payment plan, and they give you a $350 Walmart gift card. These are the deals we typically seek. Apple is still getting their full price for the phone, but Walmart is offering a deal to bring our net to $0. When you want to purchase the phone from Walmart, it asks you to log into your carrier’s account. For this phone, it’s Verizon. We spend hours trying to figure out who the primary account holder is and what that log in it. Verizon does it where you can create your own log in and see you phone’s data at any time, but to see the entire plan’s data, you have to be the account holder (makes sense, but complicates this particular instance). The primary account holder is my mom’s phone number. Who died in March. We finally get assistance with that and log into the account through Walmart. It brings up all the lines on the account, we select my dad’s number, and then it gets to step 2. It says they can’t verify the address on the account and we need to go to Walmart mobile desk in a store. I call Verizon. Can’t help. I call Walmart. They keep telling me to put the item in my cart, which isn’t how you purchase a phone. So no help.

I finally bite the bullet, and on the Saturday after Thanksgiving, march myself to the nearest Long Island Walmart. They can’t help because they need the phone in the store. I swear if I were at my Walmart in Kentucky, they would have helped me. It was actually at the point where I was going to risk waiting until Tuesday so that I could have my phone desk people help me. The Walmart employee actually wasn’t flippant or trying to blow me off; I believe he genuinely thought he couldn’t help me. What needed to happen was that he called their help desk people, and then he was the mediator to figuring out the address. I figure this because a Walmart customer service person transferred me to such a person, who said he’s not allowed to talk to me and has to have a Walmart employee talking to him on my behalf.

I gave up. Sunday comes. I hope that some “overnight” processing of information has magically cured the process. It didn’t. I call Verizon again. Some angel of a lady answered the phone and actually helped me more than I could have imagined. I told her that I wanted the Walmart deal because all the Verizon deals require me to change my plan to unlimited data. I let her know that I’ve already spoken to several people, and they keep trying to convince me that I get a “free” iPhone while my plan increases $30 per month in perpetuity (versus $23 per month for 36 months for the phone). She offered me a deal that equates to $5/month for the phone for 36 months. So I put 100x more hours into this than I should have, but it ended up working out in our favor!

Rental Cost Changes from One Year Ago

mrsonedollarallowance3 Comments

I keep updating my investment property tracking spreadsheet to reflect the current costs of insurance and taxes. My tracking shows last year’s amount, which I use as an indicator on whether I need to look further into this year’s bill (e.g., is the amount a reasonable increase?). For so many years, most of our insurance policies changed by a few dollars; now, I’m seeing large swings in what’s being charged. Where jurisdictions were slow to change property assessments, they’re now catching up, which increases the taxes.

As a renter, your rent is increasing to cover these costs of the landlord/owner. Here’s a comparison of my fixed cost increases against my rent rate increases. As you’ll see, I’m not trying to get top dollar out of these properties because the market has increased so much (and that leaves me more exposed if someone doesn’t pay their rent on time). My rent increases barely cover the cost increases that are happening on some of these houses. Remember that while I’m showing fixed costs, this isn’t covering the maintenance calls that I receive and how they’re more expensive than they once were also.

ESCROW, CONCEPTUALLY

In most cases, for a traditional mortgage, an escrow account is set up. It calculates your taxes and insurance payments for the year, divides by twelve, and is added to your principal and interest payment for the mortgage. In addition to covering the total payments to be made, there’s also a requirement that the balance of the account never falls below twice the required monthly payment.

If your taxes owed for a year are $1500, and the insurance is $300, then your monthly breakdown is $150 ($1500+$300=$1800; $1800/12=$150). The minimum monthly required balance is $300 (twice the $150).

As taxes and insurance increase each year (typically), there’s an analysis done to ensure the projected monthly balance never falls below that $300 threshold. If the balance is projected to fall below the required minimum amount, then it triggers an increase in your escrow payment. Your escrow payment will increase to cover the shortfall, but also to cover the new projected costs to be paid. So while you may be offered the ability to make a one-time payment to cover the shortfall, your mortgage payment may still increase to cover the projected costs. For example, if last year, your tax payment increased to $1750, and your insurance to $350, then your monthly payment to cover those charges is $175 ($1750+350=$2100; $2100/12=$175). Your mortgage will increase by $25 per month because now your escrow agent knows the projected costs to cover are higher.

The analysis uses the current year’s amounts owed to project the coming year’s monthly balances; it doesn’t account for the probability that these amounts increase each year, which essentially means that there’s perpetually a shortfall. In other words, while in Year3, they know that there was an increase in costs from Year1 to Year2, they don’t inflate the costs of Year2 to cover Year3 projected payments.

I prefer to not have an escrow, but at this point, for any mortgages we have, they’re all escrowed. We have six of thirteen houses with escrow. While I pay more as my mortgage to feed into that escrow account, it means I don’t have to manage the annual or semi-annual payments. On the contrary, this means I need to be managing our finances to prepare for large outlays throughout the year on seven houses (in the last quarter of the year, I’m paying out over $8,000 to cover taxes owed).

ESCROW REANALYSIS

This post was prompted by a notification that an escrow reanalysis was done on a mortgage that was just transferred to a new company. I thought that their break down was the most clear I’ve seen. A quick note – your escrow will pay the bills that come due, regardless of the balance in the account, even if it means it’ll overdraw the account.

They clearly showed that the anticipated property taxes are projected at $199 per month (although, I’ll reiterate that this is based on last year’s actual outlay numbers, which aren’t accurate for the coming year). Then they show that the taxes are $43.08 per month. They then go as far to show the total of these two required outlays. There’s verbiage that explains the required minimum in the account must be twice the total taxes and insurance ($242.08 * 2 = $484.16).

There’s another detailed breakdown of each month’s escrow income and outlay (that I don’t have pictured here) that shows the month that is projected to fall below the required minimum. That month’s account balance is -$136.37. The difference between the required amount of $484.16 and the negative balance of $136.37 is $620.53 (pictured above). When that’s broken down by month, it’s $51.71. Take the total taxes and insurance payments and add the shortage amount to get the new monthly escrow amount of $293.79, a change from $222.25.

Below, they show you that there is no change in the principal and interest payment, then it shows how the current escrow payment is adjusted to the new escrow payment, along with the shortage amount.

I created this table to show the differences between escrow payments over the two years. I kept the houses that don’t have an escrow because it can be compared to a future table in this post. There is no House5 in this table because we sold it several years ago (houses didn’t get renumbered because House5 still exists in terms of tax documentation).

TAX AND INSURANCE UPDATES

Each year, we see an increase in these amounts. Usually it’s across the board, but Kentucky districts had kept the housing assessments the same through the pandemic. As housing prices increase, your property assessment can be increased by your tax jurisdiction. The assessment increasing leads to an increase in taxes. This is why people getting excited that house prices in their neighborhood are selling higher than expected isn’t great if you’re not planning on selling any time soon; those increases in values means you’re paying higher in taxes.

In Richmond, VA, the property taxes are $1.20 per each $100 of the assessed value. In 2022, House2’s value $163,000. In 2023, the value was increased to $203,000. And let’s not forget that we purchased the house for $117,000. While it’s nice that the home values in the neighborhood are increasing significantly (and we knew the area was going to get better and better based on development happening), we can’t realize this gain until (and if) we sell. So in the meantime, we’re paying higher taxes on this amount. Although, I suppose the assessment could be even higher because the actual value of this house is probably more like $260,000.

Among 13 houses (don’t get confused – there’s no House5 up there because we sold it), I need to cover a total cost increase for taxes and insurances of over $4,500. This doesn’t include the higher costs of trades people if there are any maintenance calls, so this increase is the bare minimum for me to keep my same income.

RENT INCREASES

I constantly see complaints about the cost of rent, or that a landlord is increasing rent. Unless we’re looking for a tenant to move, our general philosophy is to increase rent $50 every two years. This worked fine because home assessments increased at a slow, reasonable rate until recent years. Now jurisdictions are capturing these larger increases based on those inflated sale numbers when competition was high in from 2020 through 2022.

In some cases, the rent for the area brought it in a higher amount than compared to our purchase price of a house. In those cases, we went several years without increasing the rent. Looking back, that probably wasn’t the best idea because now we’re behind on capturing how significant these last few year’s fixed costs have increased. However, the trade off to that is that we’ve kept great tenants in the house, haven’t had to pay to turnover the unit, and have minimal maintenance calls.

This table shows the total increase in insurance and tax payments from 2022 to 2023 in the first column. I divided that by 12 to get the monthly amount of that increase (second column). Then, since I said we typically increase our rent by $50 every two years for the same tenant, I multiplied that monthly amount by 2. I’m showing that if we want to only increase rent on long term tenants every other year, then I need to plan ahead on how much my costs are increasing.

This isn’t a perfectly accurate capturing of our cost increases since I’m not going back to 2021 to capture those changes in amounts, but it’s a general estimate. This shows that if I were to increase all houses by only $50 every two years, it’s cutting into my bottom line. Only 6 of the houses have increases less than $50 for two years.

SETTING THE RENTAL RATE

Let’s pause and talk about “bottom line.” Landlords have investment properties to make a profit. They’re looking for an income stream.

I regularly hear people say they can own a house for less than their rent, which is likely if you’re speaking only on principal and interest of a loan. However, you need to qualify for that loan. You may not have 20% down, so you may be required to pay private mortgage insurance (PMI). You may not have good credit, which means you’re probably going to pay a higher interest rate than I’m currently paying. You need to be able to cover taxes and insurance, which means you’ll have an escrow account set up, which increases your monthly mortgage payment. Then there’s all the other costs of home ownership.

That’s where people forget. When your hot water goes out, you call me. I spend $1,500 for about 2 hours worth of someone’s work to replace that. When you have a water leak, I spend $3,000 for a day’s worth of 2 plumbers’ work. When a storm drops a tree on your house, I’m the one spending hours on the phone with insurance, finding a contractor, getting quotes, and paying the contractor $3,700 before I get insurance reimbursement. Those are the big unexpected expenses. That doesn’t include all those smaller plumbing problems that cost $200 or $500 at a time.

Then in some cases, I probably put time and money into the house to even get it ready to rent to you. I didn’t always buy a house that was ready to live in. You may have projects that need to be done when you first move in also, so which costs money. Those are expenses that I’m trying to recoup through my rent rate also.

There may be other costs to my ownership that I’m trying to recoup through the rent, such as property management. I may have to pay someone else 10% of the rent, every month. I am projecting that there are going to be costs that I need to pay for also (e.g., water heater, roof replacement, plumbing issues). When I need to pay a plumber $3,000, I’m not coming to the tenant to say “I now need $3,000 to cover this cost.” Instead, I’ve set my rental rate the expect such a large payout on my part.

Not only am I trying to make sure that my rent is set at the right about to cover the costs that I’m putting into owning and maintaining the house, I’m also hoping that I’m going to make some money off owning this house so that I can live. I don’t get to pay myself for the hours I put into managing the property. Whether or not I have a property manager, there is still time that I put into managing the houses. Would you want to work for free?

BACK TO RENT INCREASES

While we manage each house individually on setting the rates (asking ourselves: do we think the tenant can absorb the increase, do we have to increase to cover actual costs now), this shows that our monthly income was increased by $475. If you look back at our total monthly increase in expenses of just taxes and insurance, it’s about $375; add in the cost increases for property management (increased rent means increased fees because fees are based on the rent price), and our fixed costs went up $415. On a whole, we’ve offset the increases.

However, you can see if we had one or two houses, some of those increases could be significant. House3 is costing us $64 more for each month, but our increases are typically about $50 at a time. We’ve had the same tenant in this house since we bought it. A $50 increase every two years hasn’t kept up with our costs. Since we have other houses, it helps cover the costs on House3.

House2 and House3 are identical in layout. House2 has been upgraded to all LVP, whereas House3 has carpet everywhere except the kitchen and bathrooms (granted, it’s new carpet two years ago). Since we purchased these two homes with tenants, rent was already set for us. House3 has been the same tenant since we bought the house, and the increases have brought us to $1200 per month in rent. House2 has been turned over 3 times: the first was a divorced lady who moved back in with her ex-husband; the second was there for several years, but we began having a lot of issues with her, and we told her the lease was up; the third was the one who flooded the house in December, and causing the need for the fourth. Now we’re renting that house at its market value of $1600. That means House3 is operating at a much lower rent than we could get if we rented to new tenants. However, the tenants are wonderful, and we’ve purposely not raised the rent on them in significant ways because we don’t want to cause them to move.

SUMMARY

Cost increases in rental properties can be significant over the years. With the rising costs of all goods and services, property values weren’t immune. The increase in property values leads to an increase in an assessment, which means an increase in taxes. That cost is relayed to the tenant, as this is a for-profit business. I’m trying to make an income for my family with rental properties.

I’m not trying to price gouge tenants, but make a fair living based on the costs of owning these houses. My first goal is to not turnover tenants, so I do what I can to make my tenants happy by taking care of the houses and not creating drastic rent increases each year. Secondly, I’m not going to set a price that my tenant can’t afford, thereby putting me in a hard position where I don’t have rent paid. Having multiple properties helps to offset the costs so I don’t have to play catch up on one or two houses worth of higher expenses, by putting my long-term tenants in an uncomfortable position where they can’t afford the rent.

Late Rent

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Rent is due on the 1st of every month. There’s a grace period until the 5th. (Aside: I find it frustrating when someone says to me “rent is due on the 5th”) At 12:00 am on the 6th, rent is considered late. At that point in time, there’s a late fee applied to the amount owed. Typically, the late fee is 10% of the monthly rent. If your rent is $1000, then your late fee is $100. Legally, with no rent paid by the end of the day on the 5th, I can send a “notice of default” letter. This letter states that you have a certain amount of days (varies by state and/or local law) to pay rent, or I’ll file for eviction. Rarely, do I get to this point.

LATE FEES

There are two schools of thought (well, maybe more, but these are the main two I’ve dealt with). First, a late fee is free money. We had a handyman who was showing us a portfolio of houses say, “go ahead and let them be late; that just means more money for you.” Second, I wasn’t planning any of my finances on collecting late fees, so why collect them? This is the one I follow most of the time.

Sometimes, I feel that a late fee is a lesson. I typically follow through on charging a late fee if I had to “hunt” someone down to pay their rent or if they’re perpetually late and ignore that a late fee is owed when late.

RENT INCOME MANAGEMENT

I have 13 rental properties to manage. Each month, I record all the rent I collected with the date it was collected. I then do a simple “SUMIF” function in Excel to add up all the rent collected and attributed to each month, which I then compare to the total amount of rent I expected to collect for the month. This is how I manage who has paid and who hasn’t, and whether anyone is owed a letter of default (a letter stating rent is late, and if it’s not paid in X amount of days, I’ll file for eviction). I’ve had two tenants who were regularly late with zero communication, so I automatically sent the letter first thing on the 6th. More often, I have tenants who tell me that they’ve had some struggle, and they
1) Request a delay in rent payment;
2) Share their plan to get caught up (e.g., I’ll be able to pay $600 today, and then I’ll pay the remainder on Friday); and
3) Offer an apology.

If you communicate with me before the 6th, there is a 0% chance that I’ll be sending a “notice of default” or filing for eviction. Now, if you say you’ll pay by the 10th, and then you don’t pay and there’s no communication, then there would be a letter at that point.

If you communicate with me before the 6th, you’re not typically late with rent, and you have a plan to get caught up, I won’t charge the late fee. I have a chance to make someone’s day. In their head, I’ve “saved” them money at that point. Nearly all of my tenants are living paycheck to paycheck. If they’re late, that means they’re already worried and juggling bills. I don’t want to saddle them with another $100+ worth of a bill.

With that said, there are times that I stick to the late fee. I have a tenant who didn’t communicate up front, and then still had to be asked when we should expect payment. I held tight to a late fee on that one. I want it to be known that there are consequences. I can ease up on any future need for a late fee, but I’m setting a precedent there. If you don’t communicate nor pay rent, there’s a hefty consequence. In this case, it was $160.

THIS MONTH’S LATE PAYMENTS

Note that the 1st fell on a Friday. In these cases, I expect to see rent paid very timely. When the 5th falls on a Friday, then I expect to get the majority of my rent on the 5th. If the 6th is the 1st Friday, then I expect to receive a higher-than-average amount of late payments, and don’t charge late fees.

As I mentioned, I have 13 rental properties.
– I had 5 houses pay all or partial rent before the 1st of September (this is very unusual).
– I had 2 houses pay full rent on the 1st, and 2 of those who had prepaid rent paid the rest owed.
– I had 1 house pay full rent on the 3rd.
– I had 2 houses pay full rent on the 5th.
– I had 1 house pay partial on the 5th, with the intent to pay the rest on the 9th.

That leaves 2 houses that haven’t paid anything.

Here are texts or emails I’ve received.

  1. Good morning! We had a change in pay dates which of course affects everything. Can I pay $750 today and the remaining $1000 on Friday? What will the late fee be?
  2. I hope you’re doing well. I was wondering would it be okay if I paid rent on the 8th? …doc appointments have been a little more pricey than anticipated.
  3. Good evening, Sept 5th rent will be a few days late. We will have it to you on Friday 9/8/23 along with the late fee. Sorry for the inconvenience.

For the first two, I won’t charge a late fee. In #1, I let her know that it wouldn’t be an issue. I appreciated the advanced notice. She’s been late once before over 17 months, so it’s not a common occurrence. In #2, she’s been late once or twice before, but has always communicated well and is taking care of the house. I note though that I don’t expect tenants to share personal, health related information with me, but this is typical conversation with this tenant.

In the 3rd, this tenant will pay the late fee. Notwithstanding the “Sept 5th rent” part ;-), this tenant is routinely late. We’ve made excellent progress in the communication side of things though. Now I get an email that lets me know when rent will be late. Their routine late payments led us to change their lease set up. Their lease was $1450 per month. We offered them the chance to pay twice per month, $750 each. This would allow them to pay more related to their paychecks. Yet 5 of this year’s 17 payments owed are still late. They don’t take care of the property, and they don’t communicate well. We attempted to remove them from the house by drastically increasing their rent, but they accepted the increase. Since the change to rent being owed twice a month, their late fee is only $75 per late payment, instead of the $145 it could have been if they couldn’t pay every month in full.

SUMMARY

The original point of this post was to share that having multiple properties provides a luxury to allow for late rent payments without the collection of late fees. Outside of any abnormal maintenance charges, I owe 5 mortgages each month, totaling over $4,600, and property management fees worth over $700. I need 5 of 13 houses to pay their rent for me to cover those expenses. Note that this doesn’t mean the remaining 8 houses are all income for me; I still have other expenses in property management each month.

If you have to pay rent late, your landlord will appreciate anything you can put towards rent at that point in time. I shared with a tenant once that if they could pay something, that’s better than nothing because I still have a mortgage to pay, even when they don’t pay rent.

Understand that there are due dates and consequences for missing due dates all over life. If you don’t pay your mortgage by the due date, there’s a fee. There may even be larger consequences like losing a promotional rate. Similar with a credit card. There is interest accrued on credit card balances, late fees for lack of timely minimum payment, and the possibility of losing any promotional opportunities given.

Charging a late fee is completely within my legal ability, but I also understand that issues come up and that my tenants are humans. I’m not here to take advantage of them, so if I can “throw a bone,” I like to be that bright light in their day, especially when they were probably so timid about even sending the notice that they’d have to be late.

Rental Work

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Every once in a while, I’m juggling a few rental property items, and I like to share the effort being put in. While it may be taking some of my energy now, it’s not something that happens often. Usually, Spring is our busy time because we have to manage leases ending or renewing. We have upticks in maintenance requests at the change of seasons each Fall and Spring (usually a plumbing or HVAC issue). For most months though, we don’t have to do much. I’m currently in a season (somewhat self-imposed) where we are busy and the rentals are requiring more-than-usual attention. Here’s that story.

RENT COLLECTION

One of the houses that I took over management for didn’t pay rent. I had to reach out to her on the morning of the 6th. She then asked to have until the end of the day. I told her that was fine, but if she didn’t pay by the end of the day, she’d have to pay a late fee (which is technically required after the 5th); she paid a few minutes after that message.

Another tenant let me know that they were sick last month, so they needed more time for rent. I let them know that was fine, and not to worry about the late fee. They paid a day earlier than when they expected to be able to pay.

LEASE ACTIVITY

Interestingly, several lease-related actions have been taken. I had to get 3 leases executed because I took over management of those properties (more on that below).

I had one tenant let me know that she won’t be renewing. She has been in that house since July 15, 2018. She sent me a text letting me know that she’ll be moving out on April 30th. Funny because her lease goes through June 30th of each year. But since she’s been there for so long, gave us ample notice, and so politely picked the end of a month, we’ll just go with it. It’s a 2 bedroom house, so we were surprised she spent as long as she did there. The first tenant we had in this house put us in contact with the current tenant. Ironically, the first tenant had recently asked if we had any 2 bedrooms coming available. At the time, I didn’t. But now we have the same house coming available, so I let her know. The person she knows looking for a house is interested in living there, so we’re going through the application process now!

I had another tenant tell me that they want to renew for another year. It’s for a house that I just took over management for. Since I don’t know them at this point, I didn’t want to agree immediately. Their notification deadline is March 31st, so we’ll revisit that renewal next month.

Then I had another tenant ask if they could renew. Their lease term isn’t up until April 30th, and their notification deadline is the end of February. Every year, they let me know their status some time in January. We reviewed their lease terms and decided to keep their rent at the same rate for another year. We typically increase $50 every two years, and their increase was at the beginning of this current term. She did play their hand and tell me they wanted to stay because rent is so expensive elsewhere, but we’re nice people. 🙂

WATER HEATER ISSUE

At the beginning of January, we received notice from a tenant in VA that their hot water wasn’t working. Being that it was really cold, it wasn’t surprising. However, the unit was installed in August 2021, so we weren’t happy to hear that. We called the company that installed the unit. They scheduled an appointment for the next morning. When the tech didn’t show, our property manager called them and was told they suspended all plumbing jobs and the scheduler shouldn’t have scheduled the job. So our manager got another guy out there that afternoon and discovered that the wires weren’t installed correctly. His report stated: Dispatched to home due to home not having hot water. Found burnt wires in electrical access due to improper installation. Two unlike wire materials, not joined together correctly. Cut and removed burnt wires and reinstalled the correct way.

Now I’m trying to get in touch with someone at the installation company to address this. We’d like our $200 reimbursed for having to call a different plumber out. I called to complain on 1/20. I was told that a service manager would have to call me back. No one did. I called this morning and was told I’d get a call back in a half hour. No one called this morning. At 1:15, I got a call from some guy who poorly introduced himself and wanted into the property right now. Um, no. I politely told him that I didn’t appreciate the way he was talking to me and that I’d speak with someone else. I called someone back in the office, and she had a different guy call me. I emailed him the paperwork from the other plumber. He agreed to process the reimbursement, and am now waiting on that confirmation.

PROPERTY MANAGEMENT

We’ve had some issues with our property manager in KY. Perhaps their actions are completely normal, but they haven’t met our expectations. We were asked to reimburse a tenant for a high water bill because they dragged their feet on timely fixing it, and then took two attempts to even fix it. Our contract deleted the automatic 10% uncharge on all contracted services (meaning, if they hired a plumber, and the plumber charged them $100, then they’d charge me $110). We argued at contract negotiation that their hiring of a plumber is covered in their monthly management fee and removed it from the contract. Their system automatically adds the 10%, which is understandable, but I would have to review every single invoice and ask for the 10% to be returned. That’s a lot of managing-the-property-manager.

Then we had a huge issue with them last May. I covered the first part of the issue through the Tenant Abandonment post. The second part of the issue was how their accounting manager handled the rest of the conversation. They took their management fee off of the security deposit. I had questioned this on the last property turnover, and they agreed to give me that money back. I thought it was the same across the board – that it was an accident in their system, with it counting as “income” so they took their share. The conversation disintegrated from there. They claimed that since the security deposit was being applied as rent for the month the tenant abandoned, so they could take their share. I said that a security deposit’s purpose is to cover damages, and there was A LOT of damage that I need to pay for, so I shouldn’t be at their whim to decide how the security deposit is going to be applied (not to mention it was their lack of management and effort that created the vacancy). He then started to claim that their level of effort was more than the $90 I was arguing over (1. false. 2. that’s not how my paying you works… what about all those months I paid you $90 for you to do literally nothing). It turns out that I put all my effort to respond to this person’s initial statement of “This security deposit for the tenant has been applied toward rent.” While he said that, that wasn’t actually the reason they took a fee from it, and in actuality, our agreement would have allowed them to take their commission out of the security deposit. But where the relationship really went sour was when this accounting manager started looking through all our charges and decided to hit us with two $500 charges, that we had already paid. We got the owner involved, stating we didn’t appreciate this “desk audit” to try to “get us” on something, even though we had already paid it. Mr. ODA went to meet with them, and everyone apologized for this one person’s brash actions, but that was the last straw for me.

We now live here, so I can take on management of the houses instead of paying people who I have to argue with every time a charge comes in. Unfortunate for the timing, we then purchased a house that we put a lot of work into over the summer, and then I was very pregnant, so we didn’t terminate the agreement immediately. Mr. ODA decided that the beginning of the new year would be a clean break, but by the time I got the letter out, it didn’t terminate until January 31st. They’ve been great about turning over all the finances and information thus far.

So as of February 1st, I took on 3 more properties to manage. I had to establish my own KY lease agreements, which meant referring to the leases currently in place through the property manager and my own templates from VA. I then had to meet the tenants for their signatures. I went to each of the houses, which was a reason to see their living conditions. I didn’t call it an inspection, and I didn’t require a tour of the house. I simply used the initial experience as a gauge on how they’re treating the property. For one, we turned it over after the tenant abandonment, so we didn’t expect it to be too bad. But we hadn’t seen the other two houses since 2019.

Over two days, I met with the tenants and executed the new leases. Two of the meetings were a half hour each, and one was a while longer because we were talking about some of the issues they had with the management company’s maintenance. Of course, meeting with tenants in person usually ends with a to-do list on my end. So once I got home, I put together their leases and the to-do lists for me. I now need to schedule going out there to do their fixes.

BURST PIPE

On December 27th, I received a call from one of my tenants letting me know that water was pouring out of the house next door (that’s also ours). The tenants had turned off the heat… when it was 6 degrees for 3 days straight. The water heater is in the attic and a pipe cracked during the freeze. When it started to thaw, the constant water running filled up the house. Our property manager went to the house and found two inches of water throughout the entire house, along with a collapsed ceiling in the master bathroom. Over the next two days, the ceiling in the adjacent laundry room and the master bedroom also collapsed.

The tenant’s renters insurance was responsible for removing their belongings. They created quite the speed bump, and the tenant’s items weren’t removed for 5 weeks. We finally got their things out, and now we’ve been working with contractors to get the house put back together. We agreed to a contractor who worked with our insurance to get their full amount of work covered (there was about a $6k difference between the insurance adjuster’s estimate and the contractor’s estimate). The insurance company agreed to the new estimate.

We’re now working on the contract with the company who will put the house together. The initial contract required 50% payment up front, which we didn’t feel comfortable doing. Now we’re waiting on an updated contract with a new pay schedule that will split the payment into thirds.

Our next step once the contract is executed is to pick out all the replacement things. On top of them fixing the bottom 2′ of drywall throughout the entire house and all the ceilings that collapsed, along with replacing insulation, fixing the crawl space, etc., we have to make selections for new bottom cabinetry in the kitchen, new vanities in the bathrooms, and new flooring throughout the whole house. I’m hoping that once these selections are made, it’ll be smooth sailing. The contractor is 3 weeks out to begin, and the contract says it’ll take 40 days to complete.

While there’s a lot of things being juggled right now, it’s still not equivalent to a full time job. Since insurance is paying for the replacement of damaged items in the one house, it’s not a high spending month. It’s just requiring more brain power than usual.

January Financial Update

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Life is different these days. Our 3rd child was born on Thanksgiving, and we’ve been finishing up some projects around the house. We’ve had a few things happen with rentals, and, basically, I’m just tapped out to keep up with blogging. Mr. ODA asked me what our net worth is at these days, and so I’m updating our spreadsheet.

“JANUARY”

It’s January, so that means I have to create my two main Excel workbooks for the year: the paycheck to paycheck monitoring of our expected income and expenses, and the management of each rental property. The paycheck to paycheck spreadsheet is where I have a line item for each house’s rental income each month, each house’s mortgage payment (where applicable), and then all our bills owed (credit cards, utilities, investments). I break this down by paycheck because that’s the easiest way for me to make sure I have enough income to offset the bills owed during that two-week period. That worksheet in that workbook feeds my net worth calculations, where I also update loan balances. There is actually several tabs in this workbook, but those are the main two. I finally got that all set up today. I haven’t even started creating the investment property workbook.

January also means I have to go through last year’s investment property workbook to verify all the expenses listed are supported by receipts, that all receipts I have are recorded, and that my income is accurate. Then I read off the data to Mr. ODA, who enters it into an online tax portal to file our taxes. I haven’t started that daunting task either.

RENTALS

We had one of our properties flooded by a burst pipe. That’s a mess and is hardly making progress because the tenant’s renters insurance can’t get the tenant property out of the house. We had an electrical issue with a hot water heater in another property. That got fixed, but now I am in a position where I have to fight Home Depot about their shoddy installation a year ago and have them reimburse the cost of rewiring. I finally moved forward with the judgement against a tenant for destruction of property, and our attorney established that collections account.

Surprisingly, we didn’t have any issues with rent payments in December or January. Usually I hear from one or two houses that they need a couple of weeks to pay all of rent. While not everyone was on time, they communicated well and were only a few days late. One tenant reached out and asked if they could pay rent on the 6th (since that’s Friday, and pay day); I told them not to worry about the late fee and that would be fine. Little gestures like that can make a big difference for your tenant’s life.

I sent a letter to our property manager for the KY houses that we’re releasing them at the end of this month, so that’s a new development that is taking my time as well. You’d think my property management company would have a way to communicate this change with the tenants, but alas, that would be too logical. Wish me luck while I add 3 more houses under my own purview. While we moved to KY two years ago, it was easier to maintain status quo with having a property manager. Unfortunately, it has taken too much of my effort to manage the property manager and to fight for our money.

PERSONAL

We finished our master bathroom in the home we bought over the summer (and the room we gutted immediately… only took 6 months to get us to the finish line… and by finish line, there’s still paint touch ups to be had). We bought all the supplies to gut and renovate the basement bathroom in this house. Mr. ODA built a bench for our kitchen table so that we have more seating easier. We made the plans to get the mudroom bench and shelves in, and hopefully those supplies will be bought this weekend.

Truthfully, while I updated most of my net worth spreadsheet in December, I never posted it because I don’t even know where all our money is. When we sold our personal residence at the beginning of November, we were handed a large check. In the past, that check type mostly went towards a downpayment on a new house, but that wasn’t the case this time. Mr. ODA immediately started investing that money in short term treasury accounts that I can’t even begin to explain. Between that account, another savings type account, and our regular investment account, I can update what I see online, but I don’t know what I may be missing. I’m hoping Mr. ODA will chime in soon to describe the type of investment decisions he’s made.

NET WORTH

Several property value assessments declined over the last couple of months. So while our investments are on the upswing from November’s update, those updates to property values have caused a decrease to our net worth.

Tenant Evaluations

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

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

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

RENTING CRITERIA

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

We have this at the top of our Interest Form.

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

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

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

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

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

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

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

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

DECIDING BETWEEN TENANTS

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

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

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

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

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

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

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

APPLICANT SCREENING

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

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

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

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

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

DEPOSIT

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

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

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

SUMMARY

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

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

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

March Financial Update

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We have been surprisingly busy around here. I’ve been juggling a few rental issues, staying on top of some billing issues, and trying to make it through a commercial loan process.

At one point, most of our loans were held by one company. That was a more simple life. Even though we’re down to 6 mortgages under our name, it’s through 5 different companies. I’m really struggling keeping up with them and getting in a groove after our most recent refinance. I’ve mis-paid things 3 times now. I’m always on top of our payments, but something just isn’t clicking right now for me. I just paid one of our mortgages due April 1 instead of changing the date to be an April pay date. At the moment, we have a buffer in our account because we’re getting to this closing next week, but we usually don’t, so hopefully I have this figured out now that I’ve made so many mistakes.

RENTAL PROPERTIES

LEASE RENEWALS

We had 3 properties process their renewals this past month. Each of them had cost increases to their lease renewal (875 to 950 effective 5/1, 850 to 900 effective 8/1, and 1025 to 1100 effective 5/1). We have another property that will have a renewal offer go out this week. Then we have 3 that will need action by the end of April because the leases expire 6/30, and one that will need action by the end of May because it expires 7/31.

MAINTENANCE

We had a tenant reach out to us that they found bugs in their bathroom tub. She sent pictures and, sure enough, they were termite swarmers. I have way too much experience with termites. I called our pest company, and they sent someone out for an inspection to confirm they were termites. Then I got a call that because we didn’t pay the annual fee to keep our warranty current for the last 3 years (we had the house treated for termites in February 2019 when we bought it because there were active termites and extensive damage by the front door that needed repaired), they could charge us $650 again. However, since we’re considered a business account, she’d be happy to let us back pay the termite warranty and they’re treat it. So I paid $294 for the treatment instead (split with a partner on this house). She also informed me that they had cut off the hot water to the kitchen sink because there was a leak. I don’t know why tenants don’t tell us these things right away! I had my plumber out there the same day, and he replaced the whole faucet. That was $378. That’s one of those charges that’s frustrating because we could have replaced the faucet on our own, but we don’t live there anymore. Oh well; it’s also a cost split with our partner, so that helps.

We had another tenant reach out saying that her kitchen sink drained slowly. She’s been with us since we bought the house and never asks for anything. She’s on top of communication and was super appreciative each time we agreed to renew her lease. We had done a huge sewer line replacement project at this house, so I was skeptical of the issue. It turns out there was a plastic fork lodged down there, but I just let it go (meaning, she’s then technically responsible for the cost). Our property manager let her know that if it happens again, she’s financially responsible, but we’ll cover the cost ($200) this time.

RENT COLLECTION

We FINALLY got the check for one of our tenants that had an approved rent relief application. They submitted an application in November to cover December, January, and February rent. By mid-December, they ended up paying December rent because they hadn’t heard (and the application expires, meaning their protection from eviction expires (not that I would have pursued eviction for this group because they’ve been great tenants for several years)). They received approval for 3 months worth of rent and 2 late fees on January 11. We received the check on March 4th. So frustrating in that process, but still better than an October approval and us getting those 3 months paid at the end of January.

We had our usual suspects not pay rent. On the one house, they didn’t tell us they weren’t paying rent for the longest time. Now, they tell us they’ll pay us on a later date. I let it go this month, but with them paying on the 23rd, that means we’re in a perpetual cycle of not getting rent on the 1st. We have a partner on this house, so I plan to address it next month if they claim another 3+ week delay in getting us the rent. On the other house, she let us know in February that she’d struggle to pay rent and she gave us random amounts throughout the month. I let her know she was still $106 short from February and that she was now in default of March’s rent, and I got no response. Then Mr. ODA had $1000 show up in his account on Friday. She still owes $371 between the two months, but at least we have the mortgage payments covered. She’s also the tenant that we plan on not renewing her lease because she’s caused issues throughout her tenure.

BUYING A NEW PROPERTY

We’re still in the process of getting through closing on a new rental property. We’re expecting to close not he 24th, so we’ll see how that goes. It’s a commercial loan, and it operates different from residential mortgage underwriting, so we’re in the dark. Communication has been next-to-nothing. We’re currently waiting on the appraisal to come back. That was our one hurdle to getting into the house. I said once the appraisal clears, then we (as the buyer) shouldn’t have any risk in getting to closing. Therefore, we were hoping to have the house painted before we close (I would do the painting), then we could refinish the floor and get the rest of the cleaning done the weekend after closing, and get it listed for rent for April 1. I suppose I wouldn’t be trying to get to the house before Friday, so I guess I can be patient and wait to see what happens with the appraisal for a few more days (even though the appraiser was on site last Tuesday, and I’ve never had it take more than a day or two to get the paperwork).

REFINANCE FOLLOW UP, STILL

We still have an issue with the mortgage that I ended up paying 3 times for the 2/1 due date. Our refinance was difficult, and the communication continued to be difficult after closing. I asked on 2/1 whether our loans had been sold yet because I was surprised I hadn’t heard. Usually, I see a note saying to pay the new company before the first payment, thereby not paying the first payment to that “first payment notice” place that comes with the closing documents. The company’s contact said to keep paying them because they hadn’t sold the loans yet. I didn’t open the attachments in his email because I assumed he was reiterating what he said in the email. Turns out, one of the loans was already sold, and I should have paid the new company. Well, I processed a paper check to go to a completely different company (started with a C, and I didn’t catch that I selected the wrong one in bill pay). Luckily, that company sent us our check back, saying they think our loan is closed with them and they can’t process the payment (thank goodness we once had a loan with the address I put in the memo line so they could clearly make a connection and say “we don’t want this!”). When I noticed my mistake on the 14th, I sent a handwritten check that I rushed to the post office at 4:55 to get post marked. In the meantime, I found out that I was able to set up an online account with the new company even though I didn’t have the loan number yet (they gave it to me over the phone). I paid the new company online to make sure I didn’t have anything on my record claiming I didn’t pay by the 15th and it was late. I figured I’d rather manage 3 payments being made than fight the credit companies to change my credit report. Well, the initial company cashed my handwritten check, but they still haven’t sent the money to the new mortgage company. They just kept telling me they have 60 days to get it to them, and I said that’s unacceptable that they’re holding my money. That was a week ago that I was told I’d get a call back, and I haven’t heard from them.

PERSONAL EXPENSES

Now that the basement is done, I had a strong urge to finish projects. There were several things that were starting but not completed. Those final punch list items always seem to take forever. I was impressed that Mr. ODA pushed to get some of the things in the basement done right away, even though they weren’t on a critical path. However, I didn’t uphold my end of the project by painting those things, so I got back to that. I mentioned several of the projects in a recent post, and I’ve done a whole lot more since that post. But all that to say, I’ve spent a lot of money in the last month. I bought a lot of supplies to finish off these open projects. I also had big purchases of cabinet hardware, a dining room table, a desk, and a wood. We haven’t done very much out of the house, so we don’t have a lot of other expenses than these projects, which means our credit cards are actually have the usual balances. We did book an AirBnB for a trip at the end of the summer with friends of ours. That was a big hit on the credit card for a week at the beach, but they reimbursed us for their half.

SUMMARY

It feels like I just keep lowering the balance in our investment accounts each month, but I went to look at February 2021 to see the total. Even though some balances have decreased, we’ve still contributed to the accounts, so overall they’re $21k higher than last year, which is encouraging. I guess I should also focus on the property values raising significantly. We’re over $500k higher than last year in our assets, and our liabilities (i.e., mortgages) are about 13k less than February 2021. We’re also still over $3M on net worth, even if we’re hovering right around that. We’ll add about $50k to our net worth by the end of the month, as long as we close on the new property on time.