Update on My Real Estate Efforts

It's been a while since I have updated you on my real estate ventures. But never fear -- my silence doesn't mean there hasn't been a lot going on, because there has. Here's a quick update of all the activity:

• We finished the updates on the first property we bought and I finally stopped writing check after check on it. I'm still sorting through (for taxes) what were my capital expenses (which will add to the value of the homes and be depreciated over many years) versus start-up and operating expenses (which I can deduct for tax year 2012). Once I get those finalized, I'll post them for you so you can see the complete financials.
• The good news is that we rented out both of the homes on the first property! The main house went for $1,100 per month and the second place went for $900. This is $100 more per month than I estimated in my financials (I had the first place at $1,100 and the second at $800), so that's a nice surprise. These places went quickly once I put my new management company in charge of marketing them (see below).
• We finished remodeling two of the units on property #2. The final costs are coming in, and they are going to be higher than what I thought they would be. Hopefully, the rents will be higher as well. Once I get both costs and rents, I'll report back. I'll also snag some pictures because the places look GREAT!!!
• January was the first month that I got a deposit. I was so excited to see $2,700 (from property #2) deposited automatically into my account. I can't wait until this happens more frequently and with higher amounts! :)
• Remember when I bought appliances for property #1 at Lowe's and saved a bundle by stacking offer upon offer? Well, I did it again (plus 1) with the appliances for my second place. I called the Lowe's manager and asked if she'd give me the same sales prices as last time (which were their Black Friday prices). She said they would. I added on a 10% coupon from my realtor (I get those each time I buy a place) as well as 6% cash back because I paid in Lowe's cards I bought with my Amex Blue Cash Preferred card. This is the deal I got last time as well -- which added to a 40% savings off retail. But this time, Lowe's had a rebate going so I got another $400 in Lowe's credit! That's like getting a range for free!
• If you recall, my real estate advisor, Bob, was going to manage the properties for me. Well, he backed out of that offer. But when I purchased property #2, it had been managed by a leading property management firm in our area. I did some research and they seem well liked and recommended among the real estate people I talked to. In addition, my personal contact at the firm is awesome -- very attentive, professional, and responsive. So I signed up with them as my management company (giving them both properties). They cost me the same as Bob (8%), but offer a lot more services (their accounting/reporting/bill paying is GREAT) They've already saved me a ton of money (snow plowing I would have paid $900 for cost me $500 because they bid out all their 500 units for one low price) and made me money (rented the two places at property 1 that Bob had been trying to get rented for a month. I will let you know how this relationship progresses as I know many of you are skeptical of property management companies.

Well, that's it for now. Over the next couple of months I am planning to get place #1 on auto pilot, rent the two new units in property #2, then make some added repairs/changes in property #2. I'm hoping that by spring I should be ready to get place #3! Stay tuned. :)

Comments

[My Financial Independence Journey]

Great job. I love reading these real estate updates of yours. I learn something new every time which I will make use of should I ever take the plunge into real estate.

[Mrs. Pop @ Planting Our Pennies]

Good luck with the repairs vs. capital expenditures calculations. The first year after we had our rental I made a solid effort at making those judgements (and choosing the number of years to depreciate, etc), but then decided I really needed a professional to make those decisions. We handed off our taxes to a trusted pro (seriously - this guy is great!) and have not regretted it a bit.

[Ross]

Congrats on the sweet Lowes deal! I really appreciate the insight into you real estate investing tricks. It'll help me run down the learning curve once I'm able to get started.

[doug]

I own one unit in a highrise condo project. I have had it for 16 years and in the early years it was managed by a company that I contracted to do this work. One of my tenants was leaving the unit and I asked her to let the management company know so that a exit inspection, etc could be completed. Her response to me was "there is a managment company???" Needless to say, I decided to manage it on my own going forward. I save the fees (10% of the rent) and pass some of that saving to my tennant. I tell my tenant they are getting a deal on the rent and that small repairs can be managed by them and that I will reimburse costs for supplies and services (same as with a management company). By offering a small discount to market rent, which is a net zero cost to me, my tenants typically stay a long time which is very nice as a landlord. My last tenant stayed seven years.

Every case is different, but I thought I would share my perspective of management companies. You may need to manage the management company more than you need to actually manage your rental unit to get good value.

Cheers

[Apex]

Why did Bob back out?

[FMF]

Apex --

I'm not sure. My guess is that he's just too busy. He's had a rental of his own that he's been working on for months and needs to get finished.

He was moving slow prior to that (which wascosting me money in lost rent), so I'm thinking it may all work out for the better. We'll see...

[BH]

We have purchased quite a lot of distressed homes over the past three years (over 40 units). We've recently switched to owner financing instead. We are in the real estate industry, which helps (I'm an attorney and my husband is a broker). We charge 17% interest and require anywhere for 20-40% downpayment on the purchase price, which is always at least 20% higher than the price we paid for the property (we acquire them through short sales). We take a risk on lending to people who have a recent foreclosures on their credit because we live in a "anti-difficiency" state and we know that many reliable, smart people let their homes go because they could with little repurcussion. And if we have to foreclose, no biggie - we feel comfortable that the underlying asset is worth much more than we lended. There are more hoops to jump through now, but we are getting a way better return and never have to deal with repairs - we are so much happier being a lender than a landlord.

[retirebyforty]

It sounds like you are doing great so far. It's the right time to get into the business and I'm sure it will pay off in the long run. Keep us updated after you're done crunching the numbers. My tax is going to be a huge PITA this year. There are too many things to keep track of.

[Apex]

Sounds like he bit off more than he could chew when he offered to manage them for you. You are probably correct that it's likely for the best. It will be interesting to hear how well your management company performs.

You appear to be doing everything very well by the way.

[FMF]

Apex --

Thanks, I appreciate that! It means a lot coming from you.

[Apex]

@BH,

You require a larger down payment than a bank and interest rates that are 4 times higher than a bank? Who on earth agrees to terms such as these. Someone who has 40% for a down payment can likely qualify for a home loan. I just can't see how you find anyone who is able to put down 40% and then also willing to pay 17% interest.

Can you elaborate on who these borrowers are?

[BH]

Absolutely. They are low income. We bought all these houses are purchased for under $100k. Many in the "ghetto" when everyone said that was too risky. But we are cash flow buyers. Because our state is an anti-deficiency state, meaning if you let the bank foreclose on your home, under most circumstances, the bank cannot pursue a personal judgment against you, most smart people who were over-leveraged on their home, including a partner at my former firm making $500k+ per year, just walked away. So there are all kinds of examples of really savy peole and just ordinary people with cash and good jobs who want to buy a home here but the banks won't even consider lending to them. We have been focusing on lower income people because that's just what we could afford when we got started and we've developed a niche, I guess. There are plenty of people with 20-30k to put down on a home who are also willing to pay 17% interest. My husband owns his brokerage so that's how he gets leads - he has two agents that are really tied in to that market.

[jim]

FMF, sounds like you're doing great so far. I'm assuming the $2700 is first, last and deposit? or do you have a large deposit? I believe you already use an accountant for taxes right? As Ms. Pop pointed out some of the details can get tricky.

@BH, Apex, 17% is seems like robbery. I assume those buyers are people with trashed credit who are desperate and ignorant of math.

[FMF]

Jim --

The deposit was from rents on my second place. Of the 8 units, 6 are filled. I will receive first payment on place #1 by the end of this month.

Yes, I use a CPA and met with him before I ever started investing in rental real estate. The tax process should be VERY interesting this year. :)

[BH]

@Jim - 17% is not usurious in my state and these people will probably refinance in a few years when their credit is repaired. Most of them are not ignorant. They just want to own a home and no one else will lend. The "hard money lenders" I've represented in my practice
charge similar interest/terms.

[jim]

FMF, I must have misread. I was thinking you meant house #2 on property #1.

BH, doesn't make it OK.

[r g]

FMF, I am looking at adding some real estate and am in the west mi area as well, would you mind sharing the mgmt company with me. appreciate the updates on the project.

rg

[FMF]

RG -

Send me an email and I will give you all the details.