Someone Has Questions - Part III

FC said - I just read your entire blog backwards ... in sequence from newest to oldest. I would love to hear more about your background as far as being able to attain such a high net worth ... it seems like you both earn a relatively high income from your jobs/careers but also what else goes into it. I'm hoping that you can provide advice on landlording ... including how long you've owned the properties, how far apart you bought them, how did financing investment properties differ from financing primary home, what were some positive things that you've done versus some things that you would have done differently now that you are wiser, is it ever overwhelming having so much mortgage debt as a liability, how is the actual cash flow now versus a year or two ago versus what you initially planned/expected?

Wrapping this up -

The negatives of investing in real estate. Yes our cash flow is down a bit from last year but the real problem is that the value of our properties is down significantly. We hope to sell these properties to fund the construction of our vacation/retirement home. While we had planned to hold these properties for a longer period of time than the typical "flipper," we had plans, which are now on hold, to sell at a certain point.

What would I have done differently - I would have sold Rental #1 in 2007 and we would have made a super profit. I would not have bought Rental #3 in 2005. Basically, I would have been scared when others were greedy and as such, during the run up of real estate values in South Florida, I would have sold when everyone was buying (Rental #1) and I certainly would not have bought when everyone was buying (Rental #3). Of course hind-sight is 20/20 and if we had sold Rental #1 in 2007 we would have likely plowed that profit into another real estate investment.

Is it overwhelming having so much mortgage debt - sometimes. The real estate debt was more overwhelming when we were also carrying $50,000+ in other non-secured debt. But, on the other hand, when our property values were higher the real estate debt felt better on a psychological level.

Most of the time, I believe the positive of investing in real estate outweigh the negatives. As far as I know, real estate is the only investment in which someone else pays the monthly costs. The other positive for us relate to taxes and the tax benefits we receive from our real estate investments (although I am not one to invest in something to get a tax benefit, but I do appreciate the perk).

Credit Card Debt

We are not a credit card family, at least not for the last two years since we paid off all our non-mortgage debt via Dave Ramsey's Total Money Makeover, and therefore we do not use credit cards except for travel (car rental and airplane tickets) or for business expenses.

Our real estate investments are a business and, accordingly, we sometimes, as much as it pains us, use credit to finance repairs and or upgrades and then we pay off that debt with rental income. I am sure you can see where this is going . . .

We presently have $1472 sitting on our Home Depot credit card incurred during this past month as Mr. Sam did some upgrades on Rental #1. The good news, this debt is interest free assuming we pay it off by July 20, 2010 and that we keep up with the 0% rules (we make our minimum payments of $10 a month on time). I hate, hate, hate having credit card debt but it made sense to finance these upgrades using Home Depot's 0% credit card deal.

So now I will also be tracking our credit card debt on this site until it is paid off:
Home Depot: $1472 (0%).

Dog Days of August

(1) Max out 401ks - $33,000
(2) Max out 2009 IRAs - $10,000
(3) House project and furniture - $6,000
(4) Add to baby fund - $5,000
(5) Add to emergency fund - $10,000
Total - $64,000

(1) $21,433 (63%)
(2) $10,000 (100%) [completed]
(3) $966 (15%)
(4) $576 (12%) ($5576 in our ING baby account)
(5) $1,770 (18%) ($23,651 in our ING e/r account)
Total - $34,745 (54%)

Slow progress, but happy to actually have some forward progress this month.

Rental Questions

FG asked: Just curious... do you prefer "groups" because they have more than one breadwinner (so there's always backup in case someone loses their job) and/or because it's more "stable" (where they're likely to treat the place better and/or ultimately stay longer) and/or some other reason(s)? Although obviously it is illegal to discriminate, I am personally more wary of renting to a group because I'm afraid of what might happen if they have a falling out... although I only have a 1/1 condo so it isn't really an issue in my situation.
How will the decision be made between the two good applicants? What criteria and method will you use to evaluate? How do you then break it to the applicant that wasn't chosen, and do you let them know that you will be in touch if something doesn't pan out with the applicant you did choose? Do you immediately sign a rental agreement and obtain a deposit etc with the chosen applicant to firm up the commitment?

First, no we do not discriminate. We take applications from everyone who wants to fill out an application. We only consider potential tenants that give us a full application. We run credit and background checks (which costs us money and we pay for it, we do not ask the applicants to pay) on the first group (roommate group or family group) and if the first group has the ability to pay we generally rent to that group. Besides ability to pay we have a point system that looks at the number of persons in the rental group, number of cars, number of pets, kind of pets. Our goal is to rent to a group that will pay us on time, keep the wear and tear to a minimum and not cause any problems with the neighbors.

We keep taking applications until we have a signed lease and a deposit and the deposit is not refundable (the deposit goes directly to pay for the classified listing in our local paper if the tenants decide not to move in for some reason). As soon as we have a signed lease we will communicate to the other groups, that have given us a full application, and we let them know that we will keep their application and will contact them if the property quickly comes available for some reason.

Regarding the perfect tenants, Mr. Sam (who generally gets the last say on tenants since he acts as landlord) prefers roommate groups because if one roommate decides to move out the other can keep renting the property and get new roommates. Rental #1 has been passed down for the last five years in this manner from roommate group to roommate group. As a result, this is the first time we have had to go out to the market and find new tenants. I prefer families with school age children because once a family has their children settled into a school they are less likely to want to move.

Good News

Good news to report, we have a signed 12 month lease and a $500 deposit for Rental #1. Hooray, hooray!

The new tenants will be moving in September 1, 2009 which means we only lost one month of rent turning around this property. Of course we also spent money on cleaning, painting and upgrades to the property. Cleaning and painting are the cost of doing business, the upgrades that we do each time a property is empty will, hopefully, help us when we eventually sell these homes.

Mr. Sam is very happy that he will have a mostly free weekend to recover from the non-stop couple of weeks of work.

Working Hard for the Money

Mr. Sam worked all weekend on Rental #1 and the results are great.

First, the house looks wonderful with clean, bright, spacious rooms. The yard and landscaping are also looking good (as they should be since we pay a yard service).

Second, we had two good applications submitted this weekend. A good application, in our opinion, is a group (family or roommates or couple) with income that is well in line with the guidelines on housing expenses (30-35% of net income). Both applicant groups are very interested, as they should be since Rental #1 is a great bargain, and both communicated to Mr. Sam that Rental #1 is the best rental property they have seen in their price range (Mr. Sam was happy to hear that after all is hard work).

So today we will be running credit and background checks on both applicants and we hope to make a decision and get a deposit this week. Wish us luck.

Looking for Good News

Since our financial house is in disorder this month with departure of our tenants from Rental #1 and the costs associated with repairs, improvements and re-rental I have been enjoying watching my 401k and other investments improve.

My year to date 401k performance is a healthy +24% which, of course, ignores the fact that for the prior 12 months the return was -19%. We have stocks, that we hold in our IRA accounts, that are up 90% and 100%+ since we purchased them.

To Vacation or Not To Vacation

To go on vacation or not go on vacation, that is the question.

We both work very hard. We both regularly clock 60-70 hours in the office per week and we also spend time working on and managing our rental investments each week or month. The fact is that we need time away from work and projects (at our home or the rentals) which means that we need to get away from Florida. A staycation does not really allow us to recharge as we will keep working on home repair or other projects.

So, we have plans to take an out of state vacation this month but now the debate is whether we ought to move forward with vacation because (1) I just took a 10% pay cut (2) we have one rental empty that we plan to list this week and would probably need to be showing over the next few weeks (3) we likely will have another empty rental next month (4) we have been spending money on upgrades and repairs and rental #1 and we probably should not be spending money to travel. I have already blocked the week at work and it will be hard, but not impossible, to change my vacation plans to a later time. Mr. Sam has also already had the week approved.

What to do? What would you do?

Someone Has Questions Part II - Continued

FC said - I just read your entire blog backwards ... in sequence from newest to oldest. I would love to hear more about your background as far as being able to attain such a high net worth ... it seems like you both earn a relatively high income from your jobs/careers but also what else goes into it. I'm hoping that you can provide advice on landlording ... including how long you've owned the properties, how far apart you bought them, how did financing investment properties differ from financing primary home, what were some positive things that you've done versus some things that you would have done differently now that you are wiser, is it ever overwhelming having so much mortgage debt as a liability, how is the actual cash flow now versus a year or two ago versus what you initially planned/expected?

Investment property #4 is not a rental property as it is just land. The property was purchased by me in 2003, individually, and it is still titled just in my name. I put down 13% and the mortgage is a fixed 15 year mortgage.

This is a property that we plan to build on in the future. We would like to build a home in the next 10 years, use it as a vacation home for us/family/friends in the off season and a vacation rental during season. This would be our retirement home in 20-25 years.

The hope is that our rental properties, which would all be sold before we build, will finance a good chunk of the cost to design and build the home. This is the primary reason we invested in real estate.

Someone Has Questions - Part II

FC said - I just read your entire blog backwards ... in sequence from newest to oldest. I would love to hear more about your background as far as being able to attain such a high net worth ... it seems like you both earn a relatively high income from your jobs/careers but also what else goes into it. I'm hoping that you can provide advice on landlording ... including how long you've owned the properties, how far apart you bought them, how did financing investment properties differ from financing primary home, what were some positive things that you've done versus some things that you would have done differently now that you are wiser, is it ever overwhelming having so much mortgage debt as a liability, how is the actual cash flow now versus a year or two ago versus what you initially planned/expected?

Rental properties:
Rental #1 was purchased in 2002 as Mr. Sam's primary home. This was Mr. Sam's first home and he purchased it with 20% down, 30 year conventional mortgage. Mr. Sam lived there from 2002-2004 when we purchased our current home together. We have been renting out this home ever since and its been our best rental property, as it has always been rented and we have always made a profit.

Rental #2 was purchased in 2004. Again we put down 20%, 30 year conventional mortgage. Rental #2 is our second best rental property. Rental #2 rents very easily but it is a tiny property so our profit is small as it is really a one person rental.

Rental #3 was purchased in 2005. Again we put down 20%, the mortgage is in my name only as Mr. Sam did not qualify to take on a third mortgage (this was before we got married and before we paid off all our non-mortgage debt in 2007). Rental #3 is our worst investment property as we bought at the height of the South Florida real estate bubble in what was an up and coming neighborhood and is now a stagnated neighborhood in disrepair (we have a foreclosure to the south and we had a foreclosure to the north which recently sold for almost nothing). Right now we are losing money on rental #3 by about $100 a month.

If I had it to do over again, I would not have bought Rental #3. We totally got sucked into the So.Fla. real estate bubble and we were greedy when we should have been scared ("Be greedy when people are scared, be scared when people are greedy").