Quick post about our 3rd investment property purchase. After we closed on House #2, the seller said he was interested in liquidating the house next door, which was a mirror image of the house we just purchased. The story here is how the offer was made.
We agreed to purchase for the same bottom line as House 2. There was some confusion about what “bottom line” actually meant, where we meant it should account for our side of the transaction not using a Realtor. It took us over a month to go through the financials and have an agreed upon purchase price.
We purchased House 2 for $117k with $2000 back in closing costs. Our first offer on House 3 was $113,400. The selling agent countered that he came up with 117,000-2,000-1,170 (commission to our agent on that house) = $113,830, but he had to forward the offer to the seller. Then we received this from the seller:
The selling agent agreed that Mr. ODA’s math was closer to accurate than the sellers, and that if it came down to a few hundred dollars difference, he was willing to eat that from his commission since he didn’t have to pay to take pictures and list the house.
And so here’s the final response from Mr. ODA, and a view into how his brain works. He never fails when it’s math.
He paid 4% commissions to agents on the last purchase. That 4% was derived from a $117k sales price, which equals $4680. That $4680 gets subtracted from my funds at sale, or $115k. $115,000-$4,680 = $110,320. Thus his “net” that he “walked away with.” If that “net” were to be matched on this price, you would take $110,320 and divide it by 0.97 which would equal $113731. As a check, if you take 3% of $113731 it is $3,411. Subtract $113,731 from $3,411 and you get $110,320 – the same ‘take’ as he got from 1718. An arbitrary reduction in price of just Krissy’s portion of the commission is incomplete, as your 3% is no longer equal in each transaction. The way your math works, his walk away is $113830 less the 3% = $110,415. That is more than he took from 1718. Since I know that Mike is willing to “walk away with” $110k, I offered a purchase price that, when reduced by your 3% commission, comes to $2 shy of $110,000, his stated in writing goal for this transaction.
We paid $113,732 for the house. 🙂
TENANTS
This house has had the same tenants since we purchased it in 2016. We raised their rent by $50 in 2019, and we expect another $50 increase upon their renewal in a few months. The house has appreciated greatly since we purchased it, which has caused our taxes to increase from $750 twice a year to now $870 twice a year), which we need to account for in the rental income of the property.
They take good care of the house, and they actually border on being too cautious about maintenance needs. We’ve had several issues with the plumbing, which has culminated in it being their children putting things where they shouldn’t be, which means the cost is on the tenant because it’s not routine maintenance.
The tenant replaced a stove and refrigerator, at their expense and with the understanding that either they leave those behind or replace them with reasonable, working appliance. For the stove, they sought approval from us to upgrade their stove to something that’s more conducive to his culinary expertise. We told them that they could replace the stove there, but that a working stove must be there upon their vacating the unit. About a year ago, we were there for a maintenance call and noticed an upgraded refrigerator, which they didn’t tell us about. We again told them that since we provided a refrigerator with the unit that a working one must be put in its place when they vacate.
This is the house that we installed a backsplash in the kitchen. The tenant said that he cooks a lot and there’s been grease splatter that’s been hard to keep off the flat-painted wall. We agreed that a backsplash is better for the longevity of the house. There were several options available, so we even let the tenant pick from a few samples. We did the peel and stick style, so we saved on cost and labor, but accomplished the goal of an easy-to-clean surface.
Twice, they’ve reached out to us about a rent-to-own offer. We aren’t interested in selling because our financial goals require a month-to-month cash flow, this house is newer and still in good condition, and we have a low rate mortgage on it; but knowing how much the house has appreciated, we may be interested in a 1031 exchange option if the offer is right.
House 1 was purchased from a family member because we saw an opportunity when they were getting ready to sell their townhome. House 2 was purchased because we were looking for a way to make our profit from the sale of our first home to get to work for us. While in the process of purchasing House 2, the seller said he was interested in liquidating the house next door, which was a mirror image of House 2, and so that became House 3. Both House 2 and House 3 came with tenants, which was a big advantage, but delayed a few lessons in rentals for us.
After we sold our house outside of DC, we moved just outside of Richmond, VA. We spent a few months looking at the neighborhoods and analyzed the markets available in Richmond. I was more interested in the college area, where it’s a market I knew well, having been a college kid who rented in an old house that was sectioned into apartments. Mr. ODA was more ambitious (in my opinion), looking into neighborhoods that families would rent in. Many investors are looking to rent in areas of Richmond that fit the quintessential Richmond mold (e.g., walkability to restaurants and shops, bike routes). However, these houses don’t come close to hitting the 1% Rule.
We’ve purchased several houses on the east side of town, and they’ve worked out very well and most don’t have turnover. The value of House 2 since we purchased it has increased by about $70k as the neighborhoods in the area continue to decrease crime and increase value. Both houses are about 13 years old, 1200 square feet, and have 3 bedrooms and 2 baths. All of the rooms except bathrooms and kitchen are carpeted, which is something we’ve since tried to stay away from.
THE EXCLUSIVITY AGREEMENT
After we saw House 2 and wanted to make an offer, our Realtor relationship went downhill. We had a Realtor for our home purchase when we moved to the area, and we continued the relationship to have access to the MLS. After we purchased our home and started looking for rentals, we soon learned that our Realtor 1) had an agenda to get the most commission, regardless of the best deal or our interests, and 2) kept pushing areas she knew versus areas we were interested in. We had made it known that we wanted to buy several properties, and I believe by the time we wanted to make an offer on a house, she realized we weren’t looking to further this relationship after this deal. Since she had shown us a few houses, we expected to see this deal through with her. That’s when the straw broke the camel’s back. We received the offer to review, and it came with an exclusivity agreement.
An exclusivity agreement is a contract established by the Realtor to protect their interests. If the client signs it, then it means that the client is committed to that agent for the terms in the agreement (e.g., a single purchase, a period of time). We hadn’t needed one in Fairfax, and the one we had for our personal home contract covered a month’s time. When we received the contract for House 2, the exclusivity terms were until October 4, 2016, from the date of the contract, which was May 4, 2016. We requested the date be changed to match the “close no later than” terms in the contract, which was June 17. That’s when the bs-ing commenced. I’m sure the average buyer wouldn’t have noticed nor cared. We saw right through it, and she kept digging in deeper with holes in her story and guilt.
First, she claimed that she made it 6 months (although it was 5 months) so that it gets through closing and we didn’t have to sign again. We countered with three pieces of logic: 1) the field can accept an address, so change it to the house’s address to cover us for the entire time it took us to get to closing, whenever that may be; 2) the exclusivity period on our personal residence’s contract expired long before we actually closed (because it was a new build, and the contract was signed before construction began), but we never had to re-sign an agreement; and 3) we never experienced a 6-month closing on a routine purchase.
Instead of addressing that the field could accept the house’s details rather than a period of time, she said: I’m committed to helping you guys look for houses and make offers, are you committed to working with me? Red flag. When we said we wanted it changed to the house address, and that we didn’t mind signing on for each property we made an offer on, she furthered the guilt with: We have know each other for almost a year and I honestly didn’t think it would be such an issue. If you are not willing to sign it I am not going to be able to work with you. If it’s not supposed to be a big deal for us, why is it a big deal for you/your broker?
One of the first things we learned in the real estate market was to not sign an exclusivity agreement. It eliminates your rights as a buyer and ties you unnecessarily to an agent. On the Realtor’s side, I understand that a lot of time and effort goes into working with clients, and there is a possibility that one Realtor shows a client a house, but that client uses a different Realtor to sign the contract, which causes the agent who showed the property to lose the commission. However, I believe that if there’s a good relationship with the Realtor and client, it shouldn’t need to be in writing that they’re committed to each other. I also don’t believe that it’s routine that a Realtor shows several houses to a client, and then that client finds someone else to make an offer. I was also surprised that it’s at the contract stage in the process, and not at the showings stage.
When she wouldn’t write the offer without us signing an unnecessarily long exclusivity agreement (again, we were willing to sign it as associated with this offer/property), we called our old Realtor and asked if she could write the offer for us even though she didn’t cover that area. (An Agent’s license covers the whole state, but typically their access to the MLS is confined to local metro areas unless they want to pay for other regions.) She wrote the offer for us. She also introduced us to a loan officer who we have used for every property purchase since then, and recommended to others.
EXPENSES
This house is relatively new, so we haven’t had any major expenses. We had a couple of HVAC service calls, one was a legitimate concern and one was a misunderstanding by the tenant on how it works in extreme temperatures. What we haven’t paid for in physical house repairs, we’ve made up with in learning new things about tenants.
TENANTS
We had a tenant move in right before we closed on the house. She had gone through a divorce and was living on her own. At the end of the year, she got back together with her ex-husband and moved out. We touched up the paint, cleaned the carpet, cleaned the kitchen and bathrooms, and then listed the house for rent. We chose two ladies, one of which had a criminal record for forgery a few years prior. Other than that, they were the best qualified financially.
Our only issue in the first year was that they had a ‘friend’ look at our HVAC unit. We told them that it’s not their property, and had anything been wrong, it would have been on them to fix because we didn’t authorize tinkering with our very-expensive property. The issue was that it was 100 degrees outside, they had the thermostat set at 60, and it wasn’t getting to that temperature. That’s not surprising. Our technician went out, checked the unit, and explained to them that when it’s that hot, you can’t expect it to get to such a different temperature in the house. He suggested using fans.
They moved in June 1, 2017 and one of the ladies is still there.
At the end of their second year, we increased their rent by $50/month to $1100. This is still under market value for the house, but not having to turnover the unit was more important than a drastic increase in rental income.
In February 2020, we learned a new aspect of the law – domestic disputes. One of the ladies reached out to us and requested to be released from the lease because she had a restraining order filed on her roommate. We researched the requirements associated with restraining orders (because the two she gave us were expired) and then her rights as it related to being a tenant. She had paid her portion of the rent each month, so we weren’t aware of issues. We released her from any responsibility immediately and notified the roommate. Per Virginia Code, the remaining tenant is responsible for the entirety of the lease from then-on. We gave her the opportunity to vacate the property within 30 days if she could not pay the full lease amount going forward, but she chose to stay on the property.
The world shut down a month later. Other than an issue here and there with our other properties, this one has been the most affected. She doesn’t communicate up front anymore when she won’t be able to have rent on time. We received a letter from her stating that she had been furloughed, but things in the letter didn’t look professional and piqued my interest (recall the forgery charge). I called her employer who informed me that her hours were cut, but she was not furloughed; the woman who answered the phone sounded exasperated and indicated she had explained this to our tenant several times. I informed the tenant that I had done an employment verification and that we could be flexible, but rent was still expected. Then a few months later, after she didn’t pay rent or tell us what was happening, she claimed she couldn’t pay rent because of an issue with a check showing up. We requested her employment information again, and I verified she was fully employed. When I asked her what was going on, she stated that she wasn’t required to tell me where her rent was coming from and whether she was employed didn’t mean she could pay rent. Fun.
Then, a few months later again, I received an email from the Commonwealth of Virginia asking me for my tax identification number and other information because our tenant had applied for rent assistance. I was confused because the rent assistance program was for unpaid rent balances, and she was fully paid. I watched the rent assistance program training and attempted an application myself so that I could see how the process works before I questioned anything more. I verified that the program was indeed for past due rents and couldn’t be requested for future rent. I contacted the State office to gather more information, and the tenant had submitted that she didn’t pay January 2021’s rent, which she had. The State made a note in her file. I informed the tenant that the program was for past due rents, which she had none, and that she was not qualified for such a program, but we were willing to work with her if she had any problems paying rent timely in the future.
Each time she’s not paid full rent by the 5th of the month, she has paid rent in full before the end of the month. After she took full responsibility of the property’s rent and lease, we had her sign a new lease with just her name. That lease ends on June 30 this year, and we’re currently decided whether we’ll offer her another year at an increased rate (last increase was 2 years ago) or we’ll request her to vacate the property.
When people talk about having rental properties, usually the first thing we hear is, “I don’t want to hear about a clogged toilet at midnight.” Does your toilet clog at midnight? No. So why do people think that tenants have issues that you wouldn’t typically see in your own house? A tenant can’t expect service faster than you’d get on your own property.
Even when there’s a month that requires a lot of our attention to be on rental properties, it’s still always worth the income/expense ratio. 2020 was a year of big expenses. However, I kept the perspective that we had several properties that we didn’t even hear from, and this was just one year of 4 so far.
Here’s a look back at what happened with our rental properties in 2020.
House #7 required a roof replacement. We have dealt with leaks since we purchased the house, and the time finally came that the replacement was more cost effective. This house also required HVAC repairs and plumbing replacement. Since we purchased the house, we had issues with the upstairs bathroom sink not draining properly. After several attempts to unclog it, our plumber finally made the call – it wasn’t a matter of cleaning a clog, it was time to replace corroded copper pipes… from the second floor to the crawl space. And so we did that. We then had to pay someone else to repair the drywall. All together, this house cost us $7,600. However, about $4k of that was the roof, which has to be depreciated over 27.5 years, so we only claim about $75 of that cost this year.
House #1’s roof has also troubled us from the start, but it’s under HOA control. We had a leak that was bad enough to require the HOA’s attention. It was a multi-week process to get them to even acknowledge me, and I have no intention to ever own a townhome again. I like having more control over my property than being in a position to hound an HOA to address a water-related issue as I watch more rain in the forecast. In the end, they repaired it, but we’re responsible for the drywall repair, which was $76.
House #6 required the main sewer line from the street to the house to be replaced, which was $4k including the scoping trip to put a camera in the pipe and see how deteriorated it was.
We had quite a few HVAC issues this year, after only having 1 issue on all our houses (well 2, but that second one was someone driving over our unit and insurance covered it). We had House #3 require a new fan, which was $635. House #9 had an entire HVAC replacement at $5k, depreciated 27.5 years. House #12 required HVAC work at $500.
We had to replace a dishwasher, stove, washing machine, and refrigerator among the properties as well. These were the major purchases and don’t account for several smaller plumber and electrician trips that were needed among the properties.
On the positive side of things, we paid off one loan, paid $23,500 paid towards another, and refinanced a property (reducing our monthly payment by $104).
Of 12 properties, we had to turnover 3. Turnover is the most time consuming to us personally because it requires our attention to touch up paint, fix things, order appliances, and coordinate any other maintenance issues. Then we need to handle listing the property and showing it when we don’t have a property manager, which was the case for 2 of our properties.
In March, we had the tenant at House #11 request a renewal of their lease. A couple of weeks after signing the renewal, they requested to be released from the lease because they were moving to another state. We worked with them, for a fee, to be released from the lease, and they vacated the house as of April 30. I had to repaint, clean the bathrooms and kitchen, fix a few things, and clean the carpet (which was only a year old at this point). We listed the house, had several inquiries, and had it rented on May 7.
In September, we had the tenant at House #7 request to be released from her lease because she was buying a house to take advantage of low interest rates. The Fall isn’t a good time to be listed a house for rent, but it’s hard to not help someone help themselves like that! We agreed to release her from the lease for 2 months worth of rent. Shortly after that agreement, an old tenant of ours reached out asking if we had something coming available in October or November, and this house fit her request perfectly. I met her to show her the house and had a November 1st lease signed the next week. We asked the new tenant if she could move out before October 31st, and we would refund her for the days she left early. We spent two days touching up paint, fixing an old water leak patch (the roof had since been replaced by the drywall work in the laundry room hadn’t been addressed), and cleaning the house. Our paint touch up was far from perfect, but we didn’t have time to repaint the whole house. I offered the new tenant an incentive of $50 per room and $25 per paint can if she wanted to paint herself, and she actually did 3 rooms so far.
The final house that had turnover is managed by a property manager. Our house was the first the tenants had rented, and they didn’t quite understand all the details of having to give notice that they were leaving. We worked with them while they went back and forth deciding if they wanted to renew or leave. While our lease stipulates that we require 60 days notice if they plan to leave at the end of the lease, we wouldn’t typically post the house for rent more than 3 weeks out. They eventually decided they wanted to leave the house, but then at the last minute asked for more time. We had a lease lined up for two weeks after they were going to vacate, so we were able to give them an extra 10 days in the house. Once they left, we had the carpet and house professional cleaned, and I touched up some paint. The property manager handled the listing, showing, and background checks. The new tenants haven’t asked for anything since they moved in back in July.
We were not heavily impacted by the pandemic. We hadn’t realized it until the Spring, but nearly all our tenants work in health care, which is just an interesting coincidence. During 2020, we only had one tenant that we had to constantly keep up with regarding her employment and ability to pay rent. She didn’t always pay on time, but we would have all the month’s rent before the end of the month each time. Then we had a tenant here or there that needed another week or two to pay rent in full, which we had no problem allowing. We didn’t collect any late fees in 2020.
While a year of several big expenses can be overwhelming, it’s helpful to know that this has not been our norm and the issues were centralized to a few houses. It also helps that 5 of our houses have long term renters (renewed more than once). Having a tenant renew their lease saves us time and money.
I manage all the financials for my family. Mr. ODA makes the maneuvers, and I record them. Excel is where our organization lives and dies. Sure, I have a degree in Finance and Information Technology Management (i.e., Excel), but it doesn’t need to be complicated or difficult to make tax prep easy for you.
This level of organization allows us to do our own taxes. After the first year of purchasing rental properties, we thought we’d have to hire someone to do our taxes because it would be complicated. It’s not any different than filing your own personal taxes. The software systems available online walk you through the entire process. Each property’s income and expenses have to be entered separately, which is time consuming if you have several properties, but it isn’t difficult.
The most important thing to be ready for your taxes is to make it a whole year activity. If you record income and expenses as they occur, it’s less of a hurdle when the year is over. By recording the activity all year, it then becomes a verification process when the year is over, thereby reducing the possibility of missing something or recording something wrong.
At the beginning of each year, I create a projection of income and expenses, which helps Mr. ODA adjust his W2 tax bracket throughout the year so that we break as close to even or owe very little when it comes to tax filing. Let me dive into that aside quickly.
Taxes Part 2 is what I’m particularly referring to, but you may need the lesson in Part 1 to know what that means. There are IRS penalties if you fail to pay your proper estimated tax (when you don’t pay enough taxes due for the year with your quarterly estimated tax payments, or through withholding, when required). Title 26 of the United States Code covers the penalties. Essentially, the IRS is saying, “You have to estimate your annual taxes owed, and you’re not allowed to only pay us taxes on April 15th every year, but you have to pay the taxes over the course of the year.” People get excited to receive a refund from their taxes, but really that’s just an interest-free loan you’ve given the government. Perhaps some people do need that forced savings, but wouldn’t it be nicer to have that extra money in your pocket throughout the year?
Back to the point…
I create a new workbook every year with each house having its own spreadsheet. Schedule E is going to require you to put your income and expenses, per property, not as a whole, so it’s important to have expenses assigned to a particular house. I set up each spreadsheet in an Excel workbook to identify all known costs for the coming year. Not all of these apply, but these are typically the categories of my known costs for each year: property management, HOA, utilities (City of Richmond bills the owner (not tenant) for sewer fees), property taxes, insurance, annual mortgage interest, cost basis depreciation, and prepaid points depreciation. There’s also a chance that you’re carrying appliance depreciation costs (meaning, the purchase of a washer, dryer, refrigerator, etc. aren’t recorded as an actual expense in the year purchased, but are required to be depreciated over its useful life).
As the year goes on, I record any mileage (record the actual miles along with the mileage cost) and maintenance costs. The IRS posts the standard mileage rate for each year here. If a roundtrip to a rental property is 40 miles, then the expense is calculated as 40 miles multiplied by the standard mileage rate, which is $0.56 for 2021. I’ve learned over the years that the software systems just request your miles and do the calculation for you (which is smart and safer on the calculation side), but we want to know what the calculation is going to be, so I enter it as $22.40 in my spreadsheet.
You’ll be expected to input the days your property was vacant, so record that once it’s known.
Each spreadsheet is linked to a master sheet at the beginning of the workbook that shows the net income and expenses for each property. The difference of these amounts are what Mr. ODA uses to adjust his W4 deductions.
I personally assign costs month by month so I can keep track of them, but it doesn’t even need to be that fancy. A running list of these expenses are enough.
The categories are based on what’s going to be requested through Schedule E.
Then in January/February of the following year, I go through my filing cabinet and my email to ensure I’ve captured all of the expenses that I have receipts for, and vice versa to ensure that if I’ve recorded an expense, I have a receipt for it. Having already captured the expenses throughout the year serves as ‘checks and balances’ and doesn’t make the task feel too overwhelming.
On the surface, a jump of $1.1 million in just over 2 years seems impossible, but here’s the break down of how things changed in our finances during our child-rearing hiatus.
The highlights: – Mrs. ODA left her job; – We purchased three new properties; – We sold one property; – We paid off two mortgages and significantly paid down two others; – Our investments grew based on market fluctuation, as well as our continued investment; and – The value of the properties we own appreciated.
401K
Since I met Mr. ODA, I maxed out my Thrift Savings Plan (TSP, the Federal government’s 401k) contributions each year. Before that, I had been putting money into the TSP, but hadn’t maxed it out. I left my career position in May 2019, at which point I stopped contributions to my TSP. However, we put in as much as we could for the year before I quit (if Mr. ODA has his way, we’d have maxed out my contributions); I contributed $13,070 over the first 4 months of 2019. My balance on June 30, 2019 (it’s a quarterly report) was $300k. I have gained $127k over 19.5 months based on my investment strategy for the account with no new contributions. Mr. ODA continues to max out his contributions of $19,500 per year. His account balance has increased due to annual contributions, a loan repayment, and market fluctuations.
IRA AND TAXABLE
A Roth IRA has maximum contribution limitations per year. For 2019, 2020, and 2021, that amount is $6000. We each put $500 per month into the Roth IRA to max out the contributions. We have maxed out the contribution limitation every year we’ve known each other (10 years), and Mr. ODA had done so before Mrs. ODA knew such a thing. We don’t time our contributions throughout the year because we don’t want to stress about when the perfect time is and then possibly end up throwing five grand in when December rolls around. We have taken the ‘set it and forget it’ (essentially dollar cost averaging) approach to the Roth IRA investment.
Dollar Cost Averaging – Since we know we want to put $6,000 in for the year, we break it down into $500 a month and contribute on the 30th of every month regardless of individual pricing. This eliminates the need to pay attention to, and the effect of, volatility in the market. Some may say that dollar cost averaging is not a prudent idea because the market always goes up over time (essentially you’re setting yourself to pay higher and higher per share as the year progresses, on average), but I just can’t handle the psychology of dropping $6k on January 1 and not having anxiety for the rest of the year that it was the right decision.
As for the taxable accounts, this includes accounts we have set up for our children – UTMAs (however, the growth of these funds are not taxable to us because they are taxed at the minor’s rate – 0% for us). An UTMA is the Uniform Transfers to Minors Act. It allows an account to be set up in the child’s name without the child carrying the tax burden of the money. The IRS allows an exclusion from the gift tax up to $15,000. We put $50 per month, per child, into the account. This is also ‘set it and forget it’ with automatic deductions from our checking account.
CASH
Our cash balance really has no meaning. We bring in income and we pay our bills. We don’t purposely keep a savings account balance (as I shared in the Leveraging Money post, we’re not interested in maintaining 3x our monthly income in a savings account at 0.01% interest rate). We don’t purposely project how much to put towards mortgage principal.
We currently have a larger-than-normal cash balance, which is left over from selling our primary residence in September. It hasn’t been dwindled lower yet because we have a fence install that needs cash and we were paying down the last of our large credit card. Now that most of these things have happened, we’ll put more of our cash balance towards the investment property mortgage we’re currently paying down.
PERSONAL MORTGAGE
In October 2018, we had been living in our previous house for just under 3 years. In January 2021, we had only made 1 mortgage payment on our new home. While our current home cost slightly less than our last home and we put 20% down for each house, we had more years of principal pay down in October 2018 than we currently have.
PERSONAL RESIDENCE AND VEHICLES
We sold our Virginia home for $400k in September 2020. The valuation of that home rose significantly over the 2019-2020 years due to lower inventory with high demand in the Central Virginia area (probably all over the country, but I don’t know those details).
Also in September 2020, I traded my vehicle in for a van (and I couldn’t be happier :)!). That increased our vehicle valuation since the van is 3 years newer and a higher cost than my previous vehicle.
Even though my vehicle value rose slightly, Mr. ODA’s vehicle’s value continued to decline, and we purchased a home in a lower cost of living area, therefore having a lower value.
INVESTMENT PROPERTY VALUES
Since October 2018, we’ve purchased 3 properties, increasing the total property value of our portfolio. Additionally, all of our properties continue to increase in value. The Virginia homes have increased significantly over the last two years. In the table below, I’ve provided each property’s change in value from January 2020 (oldest snapshot per property I have) to February 2021.
Note that this is a projection based on the internet’s valuation and not an exact science. The only house that we have a recent appraisal on is the one that we refinanced in January 2020. That house’s appraisal was $168,000; we paid $112,500 in July 2017.
INVESTMENT MORTGAGES
Of the three most recent purchases, one was purchased with a partner, split 50/50, and the other two were the last two KY houses purchased. These three added $215k of new debt. However, you see that our mortgages on investment properties have only increased by $27k, which doesn’t exactly say “we bought 3 new houses.” That’s because we’ve paid down (and sold) about $150k of mortgages in addition to 2+ years worth of mortgage payments going towards these loans.
In May 2020 and January 2021, we refinanced two properties. Quick tidbit – we signed the refinance papers in May under a tent in a parking lot, and we signed the January refinance at our kitchen table with a traveling notary. While the interest rate and monthly payment decreased, the loan balances increased because we rolled closing costs into the principal and took $2,000 cash out (the maximum allowed) in each case.
We sold one property that we had been paying down the mortgage on; in October 2018 it had a balance of $11,142, and we sold it in January 2019. We had been paying down the mortgage because it was our lowest balance. When we made that decision, selling the house wasn’t in the immediate future. An opportunity presented itself, and we sold it.
We’ve paid off two mortgages during this period. One was in January 2019 with a balance of about $44k, and another was in April 2020, which also had a balance of about $44k in the October 2018 calculation. Our intent to paying off mortgages was two-fold. It increases our monthly cash flow that helps Mrs. ODA stay home with the kids, and it gets Mr. ODA closer to being able to leave his job. Plus, due to Fannie/Freddie requirements of having no more than 10 conventional loans, it creates the opening for us to get a new mortgage if the opportunity arose. The downside is that it de-leverages the house’s financials and creates a smaller cash-on-cash return for the property.
We have also paid down 2 mortgages over the last two years that aren’t completely paid off. – One of those properties is the one that we purchased after October 2018 with a partner. It has our highest mortgage rate. The affect on the numbers here just shows that the principal balance of that mortgage is smaller than it was originally, thereby not increasing the mortgage total ‘fully,’ if you will. The principal pay down on that mortgage has been $44k total, but we’re only responsible for half of that. – On the other mortgage, we’ve paid almost $28k towards principal between October 2018 and now.
CREDIT CARDS
We open new credit cards with 0% interest for an introductory period when we have large purchases looming. Not only is the 0% interest beneficial to us for an introductory period of 12-15 months, but we strategically choose new cards that come with a welcome bonus (points or cash) when you reach a moderate spend level in the first several months. Given the strategic timing of a new card before a large purchase, this bonus is easy to achieve. When we have large balances on credit cards, it’s because we’re purposely carrying a balance month-to-month at 0% interest. We have never paid interest on a credit card balance.
LIFESTYLE
Despite Mrs. ODA leaving the workforce, our net worth increased for all the reasons listed above. The one unmentioned piece, because its not directly tied to any accounts, is lifestyle. While our net worth, rents, and investments have increased, our lifestyle has not creeped. We still make strategic decisions, spend money mainly on needs, look for wants that provide our happiness without breaking the bank, and generally keep our financial future at the forefront of our daily lives. We live like no one else does so eventually we can live like no one else can.
Living intentionally allows us to get to where we want to be.
One Dollar Allowance 