Cooler weather is here! We have a full calendar these days with pre-school and sports. I’ve been managing that by setting a lot of alarms giving me a half hour warning that we need to leave the house for something. We also celebrated our son’s 3rd birthday with both sides of our family, which was so much fun. He knew all about a birthday and the traditions, did a great job at being grateful for his gifts, and hasn’t stopped playing with all those new toys. This month, his birthday party and a long weekend trip to Virginia were our big expenses, while the sports and activities kept us home and not eating at restaurants in between those things! On top of all this craziness, Mr. ODA went on a work trip, then I picked up a few shifts at the race track to help them out. And so, here we are, two-and-a-half weeks since my last post.
NET WORTH
About once a month, we have a meeting with our financial advisor. During last month’s meeting, his software system said that we hit $3 million net worth! Unfortunately, my numbers last month didn’t say that, and they still don’t, but we’re right there. I didn’t think it worth it to line up my information against how the software is reporting the number because a lot of our net worth is based on the current market value of our real estate, which isn’t necessarily an exact amount. I know Mr. ODA had a goal for the first million in net worth, but I wouldn’t say that we had a goal to hit this particular number. With the financial advisor, we’re working on our mentality. We’re basically trying to figure out what’s our true goal (instead of just this number), and if we had (and did) everything we wanted, what would that cost difference be? I’m working on two other posts about our mentality, and I’ll have to include this side of the thought process as well.
DETAILS
One of our credit cards has a balance of over $2,200 in this net worth update. That includes almost $1,000 of a hotel that Mr. ODA had for a work trip, the hotel for Richmond at $450, and an AirBnB charge for an upcoming trip of $424. It also includes Mr. ODA’s food purchases while on travel, which amount to about $180, and an Uber trip of $10. The work expenses will be reimbursed, but that’s not yet accounted for in the math since the payment hasn’t hit our checking account yet.
With the child tax credits coming in, our investments have gone up each month. We’re putting some of that into the kids’ investment accounts. We’ve also had other unexpected income, which led to another $500 transfer into Mr. ODA’s investment account. Usually, we see an automatic contribution of $1100 between our Roth accounts and the kids’ accounts. This month, we had $1,900.
All of our housing expenses were about the same. This coming month has a trip planned, a day to hang drywall in the basement, and me working at the race track nearly every weekend.
This house was purchased in 2018, and it was actually purchased by our Realtor and friend, under the plan that we would formalize the partnership after closing. Mr. ODA had been searching for another investment property, but we had 10 mortgages already (9 investment properties and our personal home), which is a Fannie Mae cap (see the Selling Guide, section B2-2-03). One of our loans was a commercial loan, and we had hoped that it didn’t count against the 10 mortgage limit, but it did. Fannie says that the cap is the number of properties being financed, regardless of type, when looking to originate a new loan. Our Realtor had one rental property on his own and had mentioned how he wanted to purchase more properties to create an income stream through that option.
Mr. ODA and our partner went to see the house without me in March 2018. After the initial visit to see the house, they requested the information for the tenant that was living there. We received their applications, current lease, move in check list, and rent roll. They had started living there October 1, 2015, and while they had been late, they had always eventually paid rent with the late fee. During some of our initial searches, we had someone tell us that rent on the 6th was more profitable because they’re pay with a late fee. While we don’t encourage late payments (and we’re actually really lenient with late fees in general), this eased our tension when we saw late payments.
The house is a 4 bedroom, 2 bath, with a fully finished basement. The condition of the house was probably slightly lower than what I would have accepted based on the pictures, but I hadn’t seen the house in person. I actually had only seen one room of this house before our walkthroughs this past July. Our partner and Mr. ODA said that the pictures didn’t do the house justice, and it was worth purchasing.
After our partner purchased the house in April 2018, we established a Limited Liability Corporation (LLC). My last post goes through the details of why we established an LLC for joint ownership, but we don’t use LLCs for our personally owned properties at this point.
LOAN TERMS
We requested three different options for the mortgage numbers: A) 20 year fixed with 20% down was 5.125%; B) 20 year fixed with 25% down was 4.75%; or C) 30 year fixed with 25% down was 4.875%.
All of the options included ‘points’ without us being told upfront or requesting it. We questioned the reason for the quotes having these points and were given a half-hearted response that sounded sketchy. We ended up with a 30 year fixed, no points, and a rate of 4.875%. There wasn’t an incentive to go with a shorter loan (and therefore a higher payment each month) at a higher rate just to put 20% down. We went for the 30 year instead of the 20 year to increase our cash flow opportunity since we have a partner on the house and are only getting 50% of the income and taxable expenses.
PARTNERSHIP
Our partnership actually started with a loan for the down payment of this house. Mr. ODA and our partner agreed to allow us to pay him back over time for our 50% of the closing costs. We didn’t have the amount needed liquid, but we knew we could make up the amount owed over a short period of time instead of liquidating money from our investment accounts. We were able to pay most of what was needed for his closing, but we “took” a loan from him for $8,000. I used a loan agreement template that I found online and manipulated it for our purposes.
We established the loan terms to be the same as the mortgage he was entering into (4.875%). Most personal loans are for five years, so we chose that timeframe, even though we knew we’d pay it off much earlier than that. We could have just agreed to the terms and not documented it based on our relationship, but I’ve always felt better having things overly documented. I was basically an auditor in my career, and I’ve seen how “gentlemen’s agreements” over rental-related things haven’t worked out. I formalized the process through this contract and had all of us sign it. While the contract was mostly for our partner’s benefit (to make sure we paid him and he received interest), this was the only documentation we had that once he closed on the house, he then had to give us 50% share of the property ownership.
I established a simple amortization schedule through Excel’s templates. We established the loan terms as 5 years (60 months) at 4.875% (same as the mortgage being executed). When I made extra payments to him, I logged them in the spreadsheet. We only made two payments to him, but he made $44 for not having to do anything except accept our money. 🙂
We had to establish an LLC to be able to claim the tax benefits on this house for our 50% share. The attorney required us to have the tenants acknowledge the transfer of ownership to the LLC since we hadn’t executed a new lease in our names. The attorney then took care of the establishment of the LLC with the State and transferring the deed of this house to the LLC.
RENT COLLECTION
We’ve had the same tenants since we purchased the house. We inherited the tenants, who had moved in 2.5 years before we purchased it, and had rent established at $1300.
As a reminder, we purchased the house in April 2018. They paid that July’s rent late, and despite reminders about the late fee, they didn’t pay it. And so began this constant story with them. The main frustration was that they wouldn’t tell us to expect rent to be late, so we kept having to follow up with them. After two months in a row of it being late at the beginning of 2019, Mr. ODA actually explicitly said: In the future, it’s better to communicate issues with rent payment up front to see if there’s an opportunity for us to work with you. We had been lenient and informally requesting the status of rent, but this was their warning that we’d be sending notices of default going forward.
In January 2021, we hit a wall with rent payment. I sent the notice of default on the 6th of the month like usual. However, because of the pandemic, I had to adjust my verbiage to highlight all the rent relief options available and remove the late fee requirement. My understanding is that a late fee can still be collected in Virginia, but I can’t proceed with eviction just because they don’t pay the late fee portion (which isn’t something we’ve ever held any tenant to regardless). While the rent payment is typically due within 5 days from notice, Virginia now required me to give them 14 days to request a payment plan or pay rent owed. We then had to text and email them several times and never got a response. I finally sent an email with the following at the beginning:
We are very flexible landlords and willing to work with all our tenants. However, we are unable to work with anyone who does not preemptively share possible rent payment delays nor respond to requests for information. Please respond to this email by noon Sunday January 24, 2021 or pay the rent owed by that deadline to prevent proceedings for eviction filing with the court.
Virginia was very lenient with rent payment throughout the pandemic, but they were also fair. The lack of response from a tenant or the tenant not working with the landlord didn’t protect them from eviction. I finally got a response that the rent would be paid that week.
Since then, we’ve been told that rent will be late. We’re simply sent an email that says “you’ll receive rent on 2/12. Sorry for the inconvenience.” It’s as if they feel they have the upper hand and control. We hadn’t received any late fees until I finally sent an email in response to their “you’ll receive rent when we get to it” email for August’s rent that there’s a late fee due.
In 3 years, they’ve been late 14 times. When I put it in that perspective, it doesn’t seem that bad. In the moment, it seems like it’s a constant battle with this house. That’s probably because a majority of our houses pay rent without making it a painful process!
RENT INCREASE
We hadn’t raised rent in the 3 years we owned the house, and they had been paying $1300 since they moved in on October 1, 2015. That’s a great deal for them! Depending on our ownership costs, we would typically look at raising rent every 2 years, and likely around $50. We’ve raised the rent on only 2 tenant-occupied houses we have (meaning, raised the rent on people who continued living there, versus raising it between tenants); both were rented under market value when we inherited the house, and both have received a $50 increase every two years. We typically raise the rent during vacancy times, which has worked out pretty well for most of our other properties.
For a 4 bedroom and 2 bath house, $1300 is low. We mulled over our options. The house is currently on an October 1st renewal, which is a poor time to be looking for new tenants. I wanted to get the house on a spring lease moving forward. My original proposal to our partner and Mr. ODA was to offer them a 6 month lease (ending 3/31/22) at $1400. Our partner said we should include our expectation that we’ll be raising the rent to $1500 for a year long renewal as of 4/1/22. I struggled for weeks on the verbiage for this double proposal. Eventually, Mr. ODA said we should just risk it. We should lay out an 18 month lease at $1450 to split the difference, and if they don’t want it, they can leave or attempt to negotiate.
We offered them just that, and they accepted. Of course, true to form, they were a week late in meeting the deadline to sign the selection that they want to continue living there at the increased amount. Now the rent will be $1450 as of October 1, 2021, and their lease will run through March 31, 2023.
MAINTENANCE
We started with a clogged drain right off the bat. We had our partner go over there and try to unclog it with store-bought items, but it didn’t work. We ended up hiring a plumber for $300 to work on it. We’ve had several plumbing issues in this house, including a clogged sink that backed up and flooded the kitchen and basement. We ended up needing to have the line jet blasted and a camera put through it for $550! This plumber’s quote for the ‘fix’ was $6k. Mr. ODA sent the video footage to another plumber, and that guy said he didn’t see that anything was needed, so we didn’t proceed with the ‘fix.’ The jet blasting appears to have worked, and we haven’t had any damage reported. The other plumbing issues included fixing leaks in the basement bathroom and replacing that toilet.
The inspection didn’t identify active leaking on the roof, but our insurance company was hounding us over the condition of it. We ended up sending our roofer out there to do the items that came up on the inspection report. This was $350.
We then had several more issues with the roof that cost us $125 before we just decided to replace it. The replacement was quoted at $5,500 and surprisingly that’s what we paid. We expected to have additional costs for plywood replacement due to all the damage we had seen.
Interestingly, while not communicating about rent nor paying rent, they felt the need to tell us the washing machine wasn’t working. We ended up replacing the washing machine for them. We try to not supply any non-required appliances because then it’s on us to fix them or replace them, but since the tenants already lived there when we bought the house, we inherited that the washer and dryer are our responsibility. More interestingly, as I was writing this post and going through my receipts, it dawned on me that the washing machine that was in the house when I did my walkthrough last month isn’t the one that we just sent them in February.
While collecting rent has been frustrating with this house, and we’ve had a lot of plumbing and roof expenses, the house is still profitable and worth our investment. The house is in an area of Richmond that’s being revitalized, yet at the same time it’s in its own pocket of the city that’s also protected from big changes and is mostly original owners. Appreciation has really taken off, so even though our maintenance issues have eaten big chunks out of our cash flow, this house will be well worth it when we eventually sell it and move on to a new investment.
This has been a crazy month. We went to St. Louis and New York, we tiled the basement bathroom that we’re building, I refinished a desk that I purchased 6 years ago, and we had several activities to occupy our time. Being that we’ve been so busy, we haven’t set any new goals and are still talking through what we think the next few years look like. We are still managing sleep disruptions with our nearly 3 year old, and that takes a lot of time from my day and night. Anyway, here’s how things shook out over the last month – very high credit card bills to cover many large expenses.
just for fun – my before and after of the refinished desk that I bought for $15
Utilities: $240. This includes internet, water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant. I find it interesting that it’s not routine to have irrigation in Central KY, and that’s led to surprisingly low water bills. Our water, sewer, and trash is all together each month, and it’s only $53 in the middle of the summer!
Groceries: $390. On top of that, I had a charge for a 4 month supply of the vitamins that I take, which I pay for up front because I don’t want to pay a surcharge to pay monthly (if I can afford to pay $300 now, I’d rather pay that then end up paying $340 for the same product at the end of 4 months).
Gas: $230
Restaurants: $215
Entertainment/Travel: I broke down the St. Louis trip costs in my previous post. We booked our flights to NY through the Chase portal using points. It was the equivalent of $833 for 3 round trip flights (our daughter as a lap child). We paid for parking at the airport ($36), and that was it. On top of those costs, we had several sports fees and activities that we paid for. I didn’t add up the details, but I estimate that those cost us about $300 this past month.
I paid $3,800 worth of medical bills (high deductible plan… we got there).
We spent about $175 on tile supplies for the bathroom, which includes returning about $40 worth of materials.
Rental work cost us a good bit this month.
Our plumber made his rounds to 3 of our houses on one day to address items that I found during the walk throughs in July; this cost us $730.
Somehow (very unlike us), we had an outstanding pest control bill from December. When I called to schedule another appointment, they requested payment (rightfully so!). We spent $290 on pest control then.
We purchased a hot water heater and a refrigerator for a rental property after our property manager did her walk through. We also purchased a fan and had that installed (we would have done it, but we don’t live there anymore), but we split that cost with our partner. These cost us $2,317.
As usual, two houses were late on rent. One paid on Friday and actually included the late fee (10% of rent). Another gave us a letter about a car accident she was in and said she wouldn’t have rent until she received the settlement money from that. It’s the 16th and we still don’t have rent. The positive here is that we have several other properties worth of income that cover the expenses on this house (mortgage), so we’re not floating the mortgage with our own money for this one house.
Here’s a tidbit of my spending. I don’t have Amazon Prime. Rarely do I need something in 2 days or less than $25 that I would need to pay for this service. I search Amazon for things that I eventually want, put it in my cart, and then when I need to hit the $25 free shipping threshold, I add the items to the cart to check out. This is how I handle Christmas shopping basically. I have thoughts on what to get for people, keep it in my “save for later” section, and then order it when I place an order. I actually have several Christmas gifts already purchased.
NET WORTH
Since I’m not able to find the time to coordinate updating all our accounts with Mr. ODA, this is just a rough update of our financials. Our net worth has increased about $58k. I’ve paid down the very high balance on our Citi card already this month, so this snapshot in time isn’t showing that I’ve already made $5k worth of payments towards that. About half of that increase is attributed to an increase in property values. The rest is attributed to the usual mortgage payments and investment balances increasing.
We paid off a mortgage! Reaching this accomplishment was threatened once again when I was told another rental property needed the HVAC replaced ($3,900), but we were able to cover the cost of the unit replacement and pay off the last $3,000 on the mortgage. This gives us $391 worth of positive cash flow each month going forward.
Our two usual suspects are late on rent. One said that her bank account was frozen, and she has no idea why. With a history of forgery, fraud, and domestic abuse, I can’t imagine how this could have come about (sarcasm..). The other just casually emails us and says “Rent will be late. Sorry for the inconvenience.” Lovely. They also don’t pay the late fee, although I’m tracking that to be able to recoup it from the security deposit.
Last month, I mentioned that we had credit card rewards expiring without our knowledge. After several unanswered phone calls, it was resolved through a checking account credit.
Utilities: $420. This includes internet, cell phones (we pay quarterly, so this is a big bump from last month’s total), water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant.
Groceries: $590.
Gas: $327. We traveled to Virginia this month, so that caused a higher use of gas. Mr. ODA’s work trip also caused an increase in gas usage, but that’s covered through his employer.
Restaurants: $275.
Entertainment/Travel: $1,167. But this includes $485 worth of Mr. ODA’s work hotel that was reimbursed. This also includes $535 for our hotel stay in Virginia for 5 nights.
Investment: $1,100
Rental work cost us about $150 in supplies, and I paid one house’s quarterly HOA dues of $240.
Our net worth has increased again this month thanks to the stock market and property values. We’re down to 7 mortgages. We’d like to pay off one of the houses that our partner holds the mortgage on, but we need to re-evaluate our finances together first because that equates to about $20,000 for each of us.
ANNUAL TRACKING
I don’t love the format of these posts, so I’m brainstorming ways to share updates going forward. For now, I created a chart to show our spending so far this year and how it has changed month-to-month. I have a feeling I’m not categorizing our spending consistently after seeing this information, so I’m going to dive in deeper. At the end of each year, Mr. ODA asks me what our spending by category is, and I need to recreate that information each time. I thought I was being better about it this year with these monthly updates, but I’m not.
That’s my lesson learned for this month – while tracking your spending, track it consistently and look back at previous months. I thought $300 in gas was consistent with previous spending, but now I see that it’s much higher. While we did travel to Virginia this month, is that really representative of such a drastic increase? We may be ok with the entertainment that driving more has given us, or we may decide we want to scale back our spending in this category. It’s also important to know that some spending is seasonal. While our gas usage is high during the summer, we knew we were planning several trips and wanting to be out of the house more than we were over the winter.
Overall, I don’t feel like I have a good grasp of our spending after seeing this graph, and I plan to dig deeper into the costs. I’m glad I looked at it in this format halfway through the year, before I would have to go back through all 12 months of spending! It’s easy to see an increase in net worth and be complacent, but I’d rather be more intentional with our spending than we have been over the last few months.
Back in May, I was a guest on Maggie Germano’s Podcast, “The Money Circle.” I shared some of our background and how we started investing in real estate. We brushed on topics like establishing an LLC, tax advantages, and how you don’t need to start big to just get started. It was a brand new experience for me, but I’m passionate about our real estate experiences, and I loved being able to share. I hope you’ll check it out!
I just shared the details of the home inspection contingency in the real estate purchase agreements in my last post. I was laying the foundation to share what we’ve encountered to invoke the termination clause of the home inspection contingency.
COMMERCIAL PORTFOLIO
There was a time where we were trying to grow fast. We wanted to work smarter not harder, so we investigated commercial portfolios instead of buying one single family house at a time. We worked with our Realtor’s office’s commercial team to find an off-market deal of several houses. The owner of all these single family houses had lumped several houses in his portfolio by geographic area of Richmond, VA. He had provided us with 13 ‘sub-portfolios’ to review, but he was willing to sell individual houses.
We went through the entire portfolio to decide which houses we were interested in. We were able to eliminate several from the start because his rent to purchase price ratio were far from the 1% Rule we aim for (the monthly rent amount (e.g., $1000) is 1% of the purchase price (e.g, $100,000). We identified 10 houses we wanted to see and met up with the owner’s property manager to get into each house. Afterwards, we went through the list of houses, the comps we could find for purchase price, and discussed the condition of each house as we saw it. We ended up making an offer on 5 houses.
We received the ratified contracts on May 9th of that year, and we immediately contacted our home inspector to come through the houses with us. We met with the property manager, our home inspector, and our Realtor to inspect the 5 houses in one day. We negotiated with our home inspector that he didn’t need to write a report for each of the houses; I would take notes as we went through everything, and he wouldn’t charge us full price for the inspections.
We knew the houses weren’t in great shape, but we weren’t prepared for all the details we found in the home inspections. During our time at the houses, the tenants were quick to complain about the maintenance on the properties, saying things would take a long time to get fixed or they wouldn’t ever be addressed. The inspection found strong evidence of mold, patch jobs in structural beams in the crawl space, appliances not in full working order, windows screwed shut, and several other minor things.
We attempted to negotiate by the seller providing $10,000 per house in seller-paid closing costs. We didn’t ask for anything to be fixed because we saw the work that had been done in these houses, and we wanted it done right. The seller denied our request for funds to address the home inspection issues, and we walked away from all of the contracts.
FIRE DAMAGE
This was a hard one for me to walk away from. The house itself was in a high-crime neighborhood of Richmond. However, only THREE! parcels away, houses were being torn down, rebuilt, and sold for significantly higher than purchased. I saw the potential of the area’s revitalization. But we were not in the business of flipping houses nor doing major repairs. Not only were we not interested in that because we wanted to be able to create the cash flow as fast as possible, we also want to be able to hold these properties as rentals instead of flipping them so we maintained a continuous income stream.
There were several concerns when we walked through the property. The kitchen was a mess, there were signs of water damage in multiple places, the floor felt soft upstairs, the upstairs deck didn’t seem stable, the house needed a lot of TLC with the overgrowth, and then best of all – clear fire damage to the structure of the home when we went in the basement.
This isn’t a picture from when we were looking at the house, but this is the condition 3 years later, which shows just how ‘great’ of a house it was. 🙂 This is the backyard.
We were under contract for $72,500 in May 2017. The house recently sold for $296,000. Although it seems we missed the opportunity that I felt was there, I found pictures of a failed flip attempt in 2019/2020 that uncovered even more damage behind the walls than we even knew (although we suspected), and none of the houses around it have sold for nearly $300k. Therefore, we don’t believe that was a reasonably-expected sale price had we taken this beast on. And what’s not known in those numbers is just how expensive the flip was to that owner, both in headaches and wallet!
A KENTUCKY MESS
Mr. ODA went to see a house in Winchester, KY without me (it was easy because he was working near there, and it wasn’t worth me packing up our baby to go walk through a house that we may not even want). He and our Realtor walked the house and decided it was worth putting an offer in. The house had two units set up inside it, which was a goal of ours (duplex = one building the maintain with two income streams). The cash flow on it was great, so he probably turned a blind eye to too many negative issues during that first visit.
The inspection was $500. I was there for the event, but didn’t walk the house with the inspector. He ran through everything with me after he was done, but the tenants were present, and I didn’t want to bring my baby into their smoke-infested house (first red flag because we don’t allow smoking in any of our properties).
The first thing the inspector said was that the roof needed replaced. He pointed out that several tree limbs were in contact with the roof, and the roof had considerable algae growth on it. Basically, everything on the outside of the house needed repaired or replaced: siding, decks, roof, gutters, removal of vines on the house, negative slope of ground towards the house. The doors and windows were old and broken, so none had the proper seal to prevent water infiltration, in addition to not being able to maintain temperature.
On the inside, there were several code violations with how the kitchens were built (e.g., venting for range), and several large cracks in the walls, some of which were patched poorly and never repainted. There were five or six electrical issues that needed to be addressed immediately because they were a fire hazard. There were signs of water damage in the ceilings, as well as in the bathrooms where the peel and stick tiles were ‘floating’ and warped.
As if that wasn’t enough, the straw that broke the camels back for me was the head room given for the upstairs unit entrance. The required head space by code is apparently 6’6”, and we only had 5’6”. This seemed to be a big problem because an average man is 5’9”, and the average height of women at 5’4” doesn’t exactly give much wiggle room.
I was worried about all the work that needed to be put into this house. The tenants weren’t taking good care of the house, so it wasn’t worth putting a lot of money into it, just for them to destroy it. They had been there for a while, so it wasn’t like they were going to leave voluntarily any time soon. The neighborhood wasn’t in great condition, so a fully renovated house wasn’t called for when it came to resale or the type of client looking for a rental there.
It was a difficult balance, but the house had way too much deferred maintenance, way too many things poorly fixed/maintained when there was an attempt, several unfinished projects, and too many code violations to move forward. Mr. ODA really wanted to buy a house in this area before the summer was up, and he was pushing for the cash flow side of it since it had two separate units bringing in income. But that cash flow is non-existent if you’re having to put it back into the house.
These are the three main stories that have stuck with me. We learned a lot about houses through the process, and we feel we made the right decision on each of them to walk away. Through these experiences, we solidified our decision-making to focus only on houses that have been properly maintained and require little work to get rented. Having a unit already rented with long-term tenants isn’t always the “diamond in the rough” that you think it is.
The inspection is buying you information. Once you find out that information, the money is a sunk cost, and you should use it to now choose if the house is still worth owning or not. While inspections aren’t exactly cheap and aren’t tax deductible if we don’t buy the property (if you have a legal strategy, drop it in the comments please!), that information gained is important. That $500 “lost” is better off because you’re not buying a money pit that will cost a lot more in the long run. Remember, this is a business, and it’s best to keep your emotions out of it. Don’t pinch pennies and end up costing yourself big dollars later on.
Most times you’ll do an inspection, find some things to fix or negotiate down on the purchase price, and even find yourself in a situation where the inspection “pays for itself.” Other times, it doesn’t work like that. Life lessons can cost money, and inspections can help point out duds so that those lessons don’t end up costing a lot more.
The common goal in the FI/RE (Financial Independence, Retire Early) community is to reach a point where your net worth is 25x your annual spending, meaning your expenses are 4% of your net worth. This is an extreme oversimplification of things because of the number of variables associated with where your net worth might be, and how to access it. For example, retirement accounts have requirements to be met before drawing funds; while you may have hit the 4% expense to net worth ratio, it may not mean that you have that money liquid to cover your spending.
When the ODAs started down the path of FI/RE, we did it with a real estate rental portfolio. This path of net worth growth really doesn’t fit the traditional mold. It provides regular cash flow, rather than an account with a balance that’s drawn down.
As mentioned in previous posts, there are numerous ways to make money in real estate. The path we have taken is probably one of the simplest and most repeatable for anyone. We own a portfolio of single family rental houses, most of which were bought straight from the MLS. These basic properties are in basic neighborhoods with regular tenants. Nothing special. We acquired these properties by focusing on the 1% rule in real estate – try to secure 1% of the property’s purchase price in monthly rent. Another oversimplification of how things really go, but if we were able to find a $100k property that rents for $1,000 a month, we know we’re going to make money long term.
For these properties, we typically put 20%-25% down and finance the rest through a conventional mortgage. We find a tenant, and then the 4 ways to make money in real estate go to work for us: appreciation, tenant mortgage pay-down, tax advantages, and most importantly for our situation and FI/RE – cash flow.
I want to talk about how we can reach a FI/RE number through real estate cash flow differently and more quickly than using traditional stock market investing.
The $100k house had a 20% down payment and mortgage rate at 5% interest, which brings the monthly principal and interest payment to $429. Add another $121 for taxes and insurance (using round numbers here!), $100 for maintenance and capital expenditures savings, and $100 for a property manager; this comes to $750 worth of monthly expenses. At $1,000 per month of income, you have $250 per month of cash flow in your pocket. $250 per month equates to $3,000 per year of cash flow. With the $20,000 down payment and about $5K in closing costs, it means that our $25k investment nets us $3k per year in cash flow.
Circling back to the 4% rule for stock market investments, $3k in cash flow requires a savings of $75k. But we only had to invest $25k! We’re banking on the monthly cash flow, rather than a “stagnant” savings.
We took that math and ran with it. Our rental portfolio has 12 houses in it. While we’ve shown in prior posts that each house’s numbers aren’t as clean and simple as this example (some better, some worse), if we take that $3k annually and multiply by the 12 properties, we have $36k in annual cashflow for only $300k invested.
What would you rather need to produce $36k income – $300k or $900k?
Can you scale a rental portfolio to reach enough annual cashflow such that you can live off the cash flow?
Rental property investing is not completely passive. We have tenants to manage, properties to maintain, property managers to manage, income and expenses to track for taxes, lending efficiencies to explore, and the list goes on. But if you’re willing to put in a little work to reach financial independence (the FI part), you can do it substantially faster by finding strong properties to provide significant cash flow than if you were to take the totally passive route of simple stock market (index fund) investing.
Note, there’s nothing wrong with that – we have a substantial position in the stock market due to the tax free growth benefits of retirement accounts. The power of real estate investing saw our net worth grow faster than we’d have ever dreamed since we bought our first rental in 2016. The proof is in the pudding and we advocate to anyone to just get started!
We’re continuing our spring/summer of travel and activity, which is why there are fewer posts and lots more spending.
The stock market has increased, which has been the main factor in our net worth change. We paid $2,000 towards the mortgage we’re paying down, leaving a balance of $3,300. This mortgage will be paid off once all our rent is collected for July; it was pushed back a little bit because of the flooring replacement that occurred in one of our rentals, which is why our credit card balance is much lower than last month. We’re also still waiting for half of one property’s rent, which is the norm these days.
Utilities: $250. This includes internet, cell phones, water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant.
Groceries: $518
Gas: $268
Restaurants: $165. Our credit card reimburses for many of these expenses; we received credits totaling $120.13 in the last month.
Entertainment/Medical: $1,093
Investment: $1,100
Insurance Costs (personal and rentals): $845
VIGILANCE ON CREDIT CARD REWARDS
Mr. ODA discovered that our PNC credit card rewards balance was decreasing, despite earning new rewards this cycle. He investigated further and noticed that we had been losing rewards for a few months now. PNC has a policy that they don’t issue their rewards until you hit $100 worth of rewards. Once we hit $100, PNC sends us a check in the mail. Since they send a check, we still receive paper statements, even though we regularly check our financial accounts online. Over the past few months, both of us checked the balance to see “ok, we’re nearing $100,” but didn’t put any more effort into knowing the details of the balance. Mr. ODA happened to notice that the statement didn’t make sense.
$89+3 somehow equals $82. There isn’t a single section on our statement or via our online account that identifies the loss of rewards Mr. ODA called PNC to ask for more details and learned that our rewards expire after 2 years, despite their policy of not issuing a check until you hit $100. They basically said, it doesn’t matter that your account is over 10 years old, or that credit has been used less in the last year due to the pandemic, or that they don’t clearly identify the expiration of rewards and just identify a lower balance. As a comparison, and I keep going back to Chase, but Chase changed up their reward categories to allow the consumer to earn more rewards during the pandemic (e.g., in addition to giving rewards in the travel category, since consumers weren’t traveling, they added grocery and home improvement stores as major reward categories).
The PNC customer service representative reinstated 60 days worth of lost rewards and issued a statement credit. We don’t want a statement credit because we no longer want to use this credit card, earning rewards that we’ll never be able to capture. If we use this credit card to use up the statement credit, that’s rewards that could be earned on a different credit card. Now Mr. ODA is fighting for the credit to be applied to our checking account or to have a check sent to us (which is the preference on our profile) and fighting for the reinstatement of the rest of the rewards lost.
Without PNC, we’re down to 4 credit cards in our regular rotation. We have 3 cards that we use for categories (gas, grocery, restaurants, travel, home improvement stores), and then we have the Citi Double Cash card that is for “everyday purchases.”
We paid $2,850 in extra principal towards the main mortgage we’re paying down, leaving that mortgage with a balance of $5,500. We had a $4k flooring purchase on another house that has set our pay off timeline a few weeks back, but we’ll still have that mortgage paid off in the next couple of months. We have a rental property that we purchased in 2016 that has flooring that’s at least that old. The carpet has long passed its useful life, and the linoleum in the kitchen and laundry room has started to peel up at the seam. Typically, we wouldn’t want to replace flooring while a tenant still lives there, but they’ve lived with this for almost a year, and they’ve been our tenants since we purchased the house. As a means of keeping the tenant happy, we agreed to replace the flooring in all the rooms except the bathrooms.
We had two of our tenants not pay rent by the 5th, as required by the lease. They’re the two that are typically late, and they’re typically not up front with telling us about it. We’ve said several times that we’re really flexible landlords, but we can’t be flexible if we’re not told what is happening. With one tenant, who had just recently irked us with a plumbing issue and being incommunicado, we didn’t even reach out for information. We’ve had enough of their antics and having to chase them for rent. So I simply sent them their notice of default letter, outlining all their rights as tenants as now required under COVID-related procedures. I received an email letting me know that they’d pay on the 7th. I love their nonchalant response, like they hold the power and will pay whenever they feel like it (hmm). For the other tenant that was late, she texted to say she’d be late with the payment on the 7th, and then on the 7th only paid part of the rent due. She said she was in a car accident and there was an issue with her sick leave pay out, but she’d get it to us when it got fixed. She resolved it on the 12th, although still without the late fee.
We were able to get the invoice on the HVAC replacement for one property, which meant we paid our partner the $3,288 we owed him, on top of his usual $2,167 that we pay out for him to pay the mortgages and then his share of the profits (since I manage all the rent collections).
OUR SPENDING
Our credit card balances are high for several reasons. The $4k flooring purchase; as well as the insurance for one of our properties that isn’t escrowed because we paid off that mortgage, which was $436; an expensive gift purchase that isn’t transparent in the cash and credit line items because that cost was split 3 ways (i.e., we received 2/3 of that cost back in cash, but it’s still reflect in the credit line); and our travel.
We booked a camp site for the end of the month that required payment up front. We just got back from a trip, which increased our spending. But I’ll note that when we travel, we’re not eating expensive meals. Our interest is in the experiences and activities, rather than exploring sit down local restaurants. Our food for 5 days cost us $161 as a family of 4. We also ended up only paying for 2 of the 4 nights in the hotel because the air conditioning was broken, even after they came to ‘fix’ it, and then, when I was checking under the bed to see if any toys or socks got left behind as we were leaving, I found a large, dead roach. We didn’t ask for any comps; one was automatically reflected in my final invoice without my prompting, and then when the manager was speaking to Mr. ODA about his stay, he volunteered removing another night.
We opened a new credit card to take advantage of the bonuses since we knew we’d have this travel and the flooring cost to meet the $4,000 spending threshold for their bonus. This credit card has an annual fee of $95 and no 0% interest period, which goes against our norm when looking to open a new credit card. However, the bonus can be transferred to our Chase Rewards Portal, where we can use it to book travel at 50% the cost. We also received a $50 grocery credit.
ROUTINE UPDATES
My husband and I cashed in the last of his savings bonds that we got as children, so that was an extra $735 that we brought it that wasn’t planned.
We paid about $6,074 for our regular mortgage payments. Several of our properties had mortgage increases due to escrow shortages. I haven’t figured out which I dislike more: planning for tax and insurance payments, or the large escrow increases that seem to happen year after year. I think it’s the escrow though.
Every month, $1100 is automatically invested between each of our Roth IRAs and each child’s investment accounts. I should also note that I don’t speak to other investments because they happen before take-home pay, but my husband maxes out his TSP (401k) each year as well, which I had also done when I was employed.
Our grocery shopping cost us $700. Honestly, I don’t even know how to explain that cost jump. I think it’s because my husband shopped some deals at Kroger and Costco, so we stocked up on some things that aren’t part of our routine purchasing.
We spent $200 on gas. Two trips to Cincinnati, our trip to Atlanta, and then more-than-usual trips around town.
$400 went towards utilities. It’s higher than last month because we paid 3 months of our cell phones, which gets us back on quarterly billing as a family. Utilities include internet, cell phones, water, sewer, trash, electric, and investment property sewer charges that are billed to the owner and not the tenant. We still haven’t sought reimbursement from the builder on our electric bill, but this month’s bill was even less than the last month’s.
Our entertainment costs included baseball game tickets for our trip as well as two games later this summer, parking for the games this past weekend, a new shirt for our son, activities for the kids, and the hotel. This past month, we spent $650 on things I’d classify as entertainment related. I also included boarding for our dog ($100) in this total.
Speaking of our dog, he had his annual appointment (shots and the year’s worth of preventative medicines), and that cost us $500.
We spent $292 eating at restaurants and ordering take out. We utilized a Door Dash credit on one of our Chase credit cards, which was about $30.
But! I killed it with running errands this month and actually returning things that needed to be returned. I returned $150 worth of items one day!
We paid our State taxes during this period too. Between two states, that was $954. Also, anecdotally, I’ll share that we spent $6.40 to mail our Virginia tax return. We processed our taxes through Credit Karma, as we had done last year. We got through the federal e-file and moved onto the state filing, only to find out that if you’re filing partial states, Credit Karma doesn’t support it. I had to print 70 pages of our federal return, sign it, and ship it off to Virginia.
SUMMARY
Our net worth actually dipped this month. The stock market is the main factor in that, but the house valuation estimates are starting to level off and look more realistic as well.
Between our personal lives and our business life with these rental properties, we were sure kept busy. We expect the Spring months to be a busy time of year, and honestly it feels good to be active again. While we’ve loosened the purse strings for the summer months, especially after having done hardly anything for the last year, it was still a shock to see just how much we spent in these categories. But that’s the benefit of looking at your finances regularly. We can either choose to remain on course with our summer plans, or we can dial it back if we feel this was more than we expected.
Since we know we’re on top of our finances and have set up a healthy mentality when it comes to spending, we’re comfortable looking at this information once a month. If you’re currently developing these money habits, you may want to do these types of check-ins more frequently.
This little house has been made home by two families. It’s a 2 bedroom, 1 bath that is 719 square feet. While there have been a few issues with the house, it’s been pretty easy to manage because of the tenants taking great care of it.
I feel like the bathroom’s blue tile, patterned floor, and that peek at the door knob exemplifies the age of the house.
The first thing we did was remove this prison-like wall mounted sink and install a new vanity from Ikea. During my installation of the vanity, I had a good scare. The house’s orientation yields to using the back door more than the front door (and the fact that the gate at the front of the yard was padlocked and there’s no concrete walk to get to the front door). Someone knocked on the back door, but I ignored it. Then that person went to the front door (through a side gate) and knocked there. That’s incredibly persistent of someone who shouldn’t know anyone’s here. Then he went to the back door and knocked again. I panicked. I called the non-emergency police line, and two officers came out. The man had left by the time they got there, but the officers knew exactly who it was. There is a man who lives around the block that has suffered multiple strokes, but he likes to mow everyone’s grass, so he was looking to see if he could mow ours. While innocent, I still won’t be answering any doors while I’m working on a house alone though.
LOAN
We locked the loan at 4.95% and 0 points. We also received a $200 credit in closing costs due to closing on several houses in a short period of time. Our attorney also lowered their fee from $395 to $350 due to several closings. It never hurts to ask if there’s a discount, especially when we’re a multi-repeat customer!
We closed on the house in June 2017. The purchase price was $63,500, and we put 20% down. We paid off this loan in January 2019.
TENANT SEARCH
We listed the house for rent through HotPads, Zillow, and Trulia. We received a lot of interest. After setting up showings for another house, we learned to do more of an “open house” style showing. It’s amazing how many people confirm a showing time and then don’t show up. I first sent everyone who contacted me an “Initial Interest Form.” It was used as a first-pass look at their income, credit, and whether they disclosed a felony and/or eviction. I still told them about the open house schedule, but the future use of this form will be to weed out non-qualified people before we set up showings.
On the form, we list our standards.
I shared in the email when I sent the form that I would be at the house from 3-5pm on a Saturday for them to come see it. If they told me they couldn’t make it, I responded that I would make another time available pending the results of this open house.
Based on the interest forms received and being one of 3 couples to show up, we selected a couple that was most qualified. They requested to move forward with an application. We utilize SmartMove, a tool we found through Bigger Pockets, to screen our tenants. This process allows the tenant to provide personal information directly to the website, pay the entity directly, and eliminates us as a middle man. We also share that the application fee is non-refundable, and that’s why we give an Initial Interest Form to be filled out first, which is their opportunity to disclose any information that would disqualify them, causing them to ‘waste’ their application fee.
In our case, the background and credit check revealed that one of the individuals filed Chapter 13 bankruptcy. Upon further research, Chapter 13 is used to restructure debt. It wasn’t that she had delinquent accounts, and it appeared after asking her to explain, that this was a proactive approach to managing her debt from a divorce than an inability to pay debts. Since they had already paid their two application fees, we felt we’d take on this risk and rented to them. To mitigate our risk, we required 2 months of rent as the security deposit.
They lived in the house for a year before he graduated grad school and moved out of the area. However, at the same time, she had a family friend looking for her own place. We ran her background and credit check, and we were able to approve her easily. She took over their lease term in the Spring of 2018 and has been there ever since. We haven’t raised her rent since lease inception because at $795, it’s over the 1% Rule, and it’s full cash flow since the mortgage was paid off 2 years ago.
Even better, the couple that moved away from the area came back recently. They reached out to us for a bigger house to rent, saying they had such a terrible experience with their last landlord and would only rent from us again. We were actually able to accommodate exactly what they needed, and now they’re in House 7. While at this time I haven’t discussed our 7th house, I did mention their story in the Tenant Satisfaction post.
Treat your tenants fairly, and even give a little where you may not want, and it’ll make your life much easier.
MAINTENANCE AND REPAIRS
The house has a stackable washer and dryer, but it’s actually on the exterior of the main building in a little closet-type addition. It is unfortunate that an individual needs to go outside the house to do their laundry, but I suppose it’s better than having no hookups and going to the laundromat. Remember, the house is only 719 SF! Well, that little closet wasn’t well insulated, and in February 2019, we had a very cold two weeks where we endured several pipes bursting or freezing across our rental portfolio. The washer line froze. The fix was just to wait for the thaw, but we did add insulation to the closet to help prevent it in the future. Later that summer, the washer actually stopped agitating, and we replaced the whole stackable unit. The frustrating thing about stackable units – even though the dryer was perfectly fine, it’s all one unit so we had to replace the whole thing.
The furnace drain line was frozen in January 2018, so we had a plumber thaw it. It happened two weeks later again, and so the plumber installed heat tape around the drain line and sealed it.
We dumped new gravel in the driveway area. The gravel had become muddy, and we saw it as an easy fix to make the tenant happy and improve her experience. Plus, she said she was going to do it, but we felt it was our expense to incur, not hers.
We’ve had long term plans to replace the bathroom, but the contractor we met with in October still hasn’t given us an estimate. It’d also be tricky since the house only has 1 bathroom and she has a toddler living there too. The tub was painted before we purchased the house, and it hasn’t held up to the last 4 years of use, so we see the benefit in fixing up the bathroom, but we just haven’t been able to tackle the logistics yet.
Our tenant pays us every month and doesn’t ask for much. She’s made it her home, which is a good sign from a tenant. Our cash flow being $795 every month (minus semi-annual taxes) with very little repairs and no mortgage is a great scenario.
One Dollar Allowance 