Refinance Almost Done

The refinance of Rental #1 is almost done. As usual, there has been a flurry of last minute activity. I received the docs via FedEx today and was planning on having them notarized today and sent back. Turns out, I can't do that. The lender wrote up the paperwork as if I will sign them tomorrow. Since these are notarized, I can't just sign a different date, so I have to wait until tomorrow to get all the papers notarized. Pretty silly if you ask me. I know there are interest charges involved, which is why the date is important, but I don't know why I can't get everything signed and the escrow company can just hold off on dispersing the money for a day. Since I wouldn't have the money a day early, I shouldn't be charged interest on it and everything should work out OK. I guess the lender doesn't want to do that.

And tomorrow, I'm leaving for Laughlin for a couple days, so now I've got one more thing to get done before I go.

I will be wiring my funds to the escrow company today though. At least I can get that done today.

Tenant Late With Rent (Updated)

I spoke with my property manager yesterday and discovered my tenant is still late with his rent. Last week, he paid $550 of the $750 and said he'd pay it all by the end of the week. Since then, we've received $100 from his church to go towards the rent. While my PM was checking her computer system, she saw one screen that said he was all paid up and another showed he still owed money, so she was going to research that some more and find out the real status. However, she did sent out a nasty letter and spoke with the tenant and told him we need to stop this late payment habit. His cell phone is occasionally disconnected, so he's obviously got problems paying his bills.

The tenant's lease clearly states that, in addition to the late charges he has to pay, if he has not paid the rent by the 15th of the month, he is to move out or he will be evicted. I told the PM to enforce that rule next month. I am also faxing that directive to her so she's got it in writing.

Update: In my fax to my PM, I also said that I was concerned that in some states, accepting partial rent makes it legally more difficult to evict someone and, if that was the case in Oklahoma, to stop accepting partial rent payments. I just got an email from her saying the current small claims judge doesn't discriminate on eviction based on partial payment and that she has personally evicted several people who paid paid rent only. So that's a bit of good news for me...

Real Estate Investment Profit Calculator

There is no shortage of real estate and mortgage calculators on the web. Almost all are pretty simple, but they do a decent job of giving you a general estimate of what to expect given a certain set of assumptions. Some time ago, I came across the most comprehensive real estate investment calculator I have ever seen. I think I found it via Clifford of Changing My Direction, but I'm not 100% sure.

This calculator not only takes into account standard data such as purchase price, down payment, loan interest rate and length, taxes, and insurance, but is also figures out the effect the investment will have on your taxes, including depreciation, income, etc. The calculator outputs data for the first 10 years of your investment. It's pretty impressive.

As with any analysis tool, the results are only as good as the data you put in. I put in what I think are fairly conservative values for an analysis of my Rental #1 property. Some of the data I used were: 3% annual income increase (default is 5%), and 3% annual appreciation rate (5% is default). I used a maintenance rate of 5% of income - my previous calculations used a fixed dollar amount which worked out to about 2.7% of income. I also said I'd put in $5,000 of capital improvements above and beyond the maintenance amount.

According to the calculator, my return on my initial equity (down payment plus capital improvements) is 21.50% my first year, 22.55% my second year, and increasing to 32.22% by year 10.

The calculator also shows your return on total equity, which takes into account appreciation and your decreasing loan balance. This is really nice because this value will actually decline each year since your equity is rising faster than your investment income increases. My return on total equity starts out at 21.50% and by year 10 drops to 12.54%. This is a great piece of information to have. You can see very easily where the property drops belong your minimum ROI you want an investment to have. At that point, you can sell the property or refinance the loan to take more money out.

Analysis: Why Did Rental #1 Appraise Lower?

Since it's a lazy Friday afternoon, I decided to investigate why my appraisal of Rental #1 came back lower than one made less than 1 year ago. So I started looking over the two side by side and doing a point by point comparison. Here are the major highlights of what I found. NA refers to the new, lower appraisal I had done. OA refers to the original appraisal done in September, 2006.

Housing trends:
NA: sell time 3-6 months
OA: sell time less than 3 months

Driveway:
NA: No driveway
OA: driveway

Fireplace:
NA: 1 fireplace
OA: no fireplace

Patio:
NA: no patio
OA: patio / deck cover

Fence:
NA: cyclone fence
OA: no fence

Carpet:
NA: Carpet needs to be replaced in near future
OA: No repairs needed

Physical details:
NA: 7 rooms, 3 bedrooms, 2 baths, 1,585 square feet
OA: 8 rooms, 3 bedrooms, 2 baths, 1,640 square feet

Comps:
NA: 3 comps currently for sale from $74K to $79K
OA: 2 comps currently for sale from $77K to $88K

NA: 5 comps sold in prior 12 months from $47K to $79K
OA: 5 comps sold in prior 12 months from $75K to $90K

NA: Comps had inferior heat, air, superior car storage
OA: All comps truly comparable

Cost approach to value:
NA: Reproduction
OA: Replacement Cost New

NA: Site value $10K
OA: Site value $15K

The new appraisal rates the property at $62 per square foot. Since it also says the square footage is 55 square feet less than the original appraisal, this translates to a $3,410 drop in value. That alone accounts for one-third of the valuation difference!


So it's obvious appraisals are very subject to human error. I mean how hard is it to determine if a property has a fireplace or a driveway? Or to count the number of rooms in a house? And yet the two appraisers looking at this property differed on such seemingly cut and dried items as these. Now I will grant that comps sales have been lower, the market slower, and it is possible the tenants have destroyed the carpet in the 7+ months they've been there. However, I think the other errors can easily account for at least 50% of the difference between the two appraised values.

And yes, I did check to make sure they were actually appraising the same house :-) Pictures were included and all the other identifying details match. I am curious to see what the tax records state the square footage of the house is. I don't believe Oklahoma has that information available on-line, and I don't have the paperwork to look it up with me right now.

Rental #2 Deal Is Dead

I got word last night that the tenant's housing assistance contract with Section 8 has been canceled, so Rental #2 is no longer a Section 8 house. It also means the tenant will likely have to move out, since she probably will no longer be able to afford the rent.

The seller thinks the problem lies with letting the old property managers continue to manage the property for so long. They had told Section 8, they were the property owners and apparently also were slow to respond to Section 8's repair requests. So by the time the seller started moving the property to a new management company and discovered all the problems, there was not enough time to fix everything and get the house re-inspected.

The seller will be refunding my earnest money deposit. Hopefully, my mortgage broker has not yet had the appraisal done on this property, so I can get that money back as well. If not, I'll be out the $350 or so for the appraisal.

The lesson here is, even though you have a property manager, it still pays to keep a close eye on your investments.

Partial Rent Received

I spoke with my PM today and she tells me that on Monday, my tenant paid $550 of the $750 rent due and he promises to pay the remainder by the end of the week. She told him he better or she will be at the courthouse on Monday starting eviction procedures. I agreed that I want him evicted if he hasn't paid by then. From everything I've heard, it's bad practice to accept a partial rent payment and, if it were me, I wouldn't have accepted it. However, I am going to defer to her judgment, since she does this for a living and I don't.

I also found out the repairs the tenant asked for are relatively minor: caulking around a sink, once of the electric stove burners doesn't work, etc. Nothing too major.

Rental #1 Apraises Lower Than Expected

My mortgage broker got the appraisal back today and it was lower than expected. I think the original appraisal I got when I bought the place was for $90,000. This one came back at $81,000. I guess that explains why the original appraiser was not willing to re-certify his previous appraisal. What this means to me is my refi loan cannot be as much as I wanted. (Well, if I wanted to exceed the 80% LTV ratio and pay PMI, I could still get my original amount, but I don't want to do that.) So I need to come up with an extra $2,000 at closing. Not a big deal, but not something I'm too happy about. I've re-run the numbers based on this new data and this is what I come up with now:

Purchase price: $77,250.00

Taxes: $82.42 ($989 a year)
Prop. Mgt: $75.00
Insurance: $34.92 ($419 a year)
Maintenance: $0 ($250 first year, pre-paid)
Mortgage: $403.75 (30 year, 6.75%)

Rent: $750.00
Monthly profit: $153.91
ROI: 12.31%

Let me explain the maintenance figure a bit. When I signed up with the property management company, I had to establish a maintenance deposit of $250 with them. Any repairs will be taken out of that amount. Since I had budgeted $20 a month for maintenance, this is pretty much the amount for one year I planned on, but since I had to pay it in advance, I'd added that $250 in to the purchase price for the calculations. I believe this more accurately reflects the situation.

The ROI figure is based on a $15,000 down payment, which includes all the closing costs. The interest rate has already been locked in, so I know that's a valid number.

Also, while pulling some past numbers for this analysis, I went and applied labels to some of my old blog posts that didn't have them. For some reason, this caused those posts to show up again at the top of my RSS feed. Sorry about that, but I don't think there is a way around that with Blogger..

Appraisal Done, Rent Late

I got an email from my property manager this weekend saying the tenant in Rental #1 had not yet paid his rent. She sent him a letter and also spoke with him and he claimed he would drop the rent off in the PM company's night drop over the weekend. No word yet on if he did or not. I asked if the PM told him he'd also have to include the late fees in his payment and haven't gotten a response to that email. I checked the lease and the late fees are $35 if not paid by the 5th of the month and $3 a day after that, so I figure he owes about $56 in late fees so far.

Those are pretty weak fees, if you ask me. Three dollars a day is not a deterrent at all. Unless there is some Oklahoma law I don't know about, I'll be increasing those fees when this lease is up in November.

I did get confirmation that the appraiser was able to get in and appraise the property, so the refi should be moving forward again. The PM also told me the tenant had some maintenance requests. I feel no obligation to do them until he's current on the rent, but there is probably some law about that.. Anyway, the PM felt they seemed like valid requests that an owner should be responsible for and not the tenant. She's getting quotes for repairs and will get back to me when she has them. I don't even know what the requests are yet...

Stop The Insanity!

After I tagged him yesterday, Kenric tagged me back. Bastard :-)

Five Reasons I Blog

1. Motivation. Back when I started blogging in July, 2004, I viewed the blog as motivation for me to follow through on my plans. I had a habit of starting things and not finishing them or only doing something once. I had just sold my first investment property and wanted something to drive me to keep up investing in real estate. The need for more blog fodder proved to be a good incentive for keeping me moving forward. I'd like to think I don't need that incentive anymore...
   
2. Education. Really, REI isn't that hard. The biggest hurdle I had to get over was taking that first step of buying a property - I was intimidated by the thought of being responsible for another mortgage. I want to show others that finding and buying investment property is not that hard, not scary, and provides great wealth potential. All you need to do is conquer your fears. Many of the books I read were great on motivational-type messages, but there was nothing that gave step-by-step instructions or details on the process of buying, renting, and selling properties. (And since every real estate deal is different, there really can't be a book that does this.) Being analytical by nature, I craved these details when I was starting out. My thought was, by blogging about every minute detail of my experiences, I might be able to help those like me who were motivated but still a bit scared. As I said, every deal is different (not to mention, each state has different laws), but there are similarities and hopefully my experiences can help others.
   
3. Networking. By nature, I'm a shy person. It's difficult for me to go out and meet others in a social setting. Since networking is an important part of real estate investing, the blog helps me find other investors in a way that is more comfortable to me.
4. Money. I don't make lots of money from this blog (on a good month, I'll get close to $50 from the Google ads), but it's extra money for me and I budget it towards things I would never spend my W2 income on - like my ludicrously expensive ice cream maker and my next frivolous purchase - a MAME cabinet. Truthfully though, I do make some good money indirectly from here - it's through this blog that I got some properties in Oklahoma.
   
5. Fun / To Kill Time. When I started the blog, I was working at a day job that wasn't very challenging. I had about 6 hours of free time a day. I needed something to fill up that time and I filled it by reading the message forums at richdad.com. From there, I started reading other blogs and decided to start one of my own, writing entries during the free time I had at work. Now, I have much less free time, but I still blog because I enjoy it.

The other meme I was tagged for was five things I obsess about. This is really tough for me because I don't think I obsess about anything. In fact, I've often felt I am not even totally committed to the hobbies I enjoy and if I was forced to give them up, I wouldn't lose any sleep over it. I'm a stereotypical Southern California native - laid-back about pretty much everything. I guess if I had to say I obsess about anything, it's cashflow. I want positive, passive cashflow every month and I look for investments that will provide that. Other than that, I sort of coast through life, enjoying a little of this and a little of that, finding joy in whatever comes my way.

Now that I think about it, I should ask my wife what I obsess about. I'm sure she could come up with a list!

And now, I will take it upon myself to stop the insanity and I will not tag any others for this meme :-)

Rental #1 and Rental #2 Updates

Trisha called me today and updated me on the status of my various Oklahoma properties.

My property manager is set to meet with the appraiser at Rental #1 on Thursday. That should be the final step needed to get the refinance rolling. Well, then all the paperwork needs to be signed, but that's just mailing things back and forth.

Rental #2 still has some work that needs to be done to get it up to spec for the Section 8 inspection. However, the tenants are all sick with the stomach flu, so no work can be done until they are better. The Section 8 inspection was scheduled for this week, but that will need to be rescheduled. It also turns out the fax to Section 8 to raise the rent to $460 from the current $439 did not go through. Trisha re-faxed the request, only this time asking for an increase to $500 a month. She says the property was rented for that in the past, so hopefully, it will be accepted. If it is, it'll really boost my ROI.

I must say that, apart from the issues I was having last month, I am feeling more comfortable with my property management company. It seems the PM is helping nicely with getting the appraisal done. Additionally, even though Rental #2 is still in escrow and not technically mine yet, I'm being kept up to date on the repairs and Section 8 re-inspection process. Further, the repairs were started without my asking and are being paid for by the seller. I'm starting to reach a good comfort level where I can just tell them what needs to be done and they take care of it and I don't need to worry about it anymore. To be perfectly honest, I attribute a large part of this to Trisha joining the PM company, an event I like to think I help play a small part in :-)

Tagged: Magazine Meme

Trisha has taken a break from building her empire and tagged me to find out what magazines I read on a regular basis.

This one's easy. I read exactly one magazine regularly: Cook's Illustrated. I love to cook and what I like about this magazine is they don't just give recipes. They explain what different ingredients and techniques they tried, the results, and discuss how they came to settle on the ingredients and methods they present. The engineer in me loves this stuff. The magazine also only comes out every other month and is fairly thin, which means I can find time to read it all.

Occasionally, I'll pick up an issue of Personal Real Estate Investor Magazine, which is a nice Phoenix-based REI mag, but I don't subscribe and only read it sporadically. I get it more for the ads than anything else.


I'll tag:

Kenric at Live Learn Invest (Cliff also tagged you.)

Molly at My Madeleine (who will probably never see this, since I am a lurker on her blog)

At Last! A Realistic Retirement Outlook From Major Media

My monthly Schwab statements include a financial newsletter. I usually toss these in the trash after scanning them because, quite frankly, they don't have much information that I don't already know. However, the April issue pleasantly surprised me. Although it still doesn't have much info that is new to me, it does feature an article that caught my eye titled "Five Retirement Myths To Ignore." What struck me was that this is the first article I've seen from a major financial source or major media source that states what I feel to be the major problems with current retirement advice. It's about time someone started telling it like it is. Below are their five myths. They commented on each one in the article, but I'll just give you my comments.

1. You'll only need 70% to 80% of your pre-retirement income. Health care expenses are going through the roof and, once retired, it's a good bet you will no longer be covered by employer health insurance. This alone is enough reason to ignore this advice. If you plan to travel more or buy nicer things, you'll definitely need more than 80% of your old income. Personally, I want my standard of living to rise when I retire, not stay the same or go down, so I plan to make more during retirement.
   
2. You'll be in a lower tax bracket. Federal deficits are going through the roof. At some point, taxes will have to be raised. And remember that withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income - the most heavily taxed income there is. Thank goodness for the Roth IRA!
   
3. You'll keep working. Who thinks this? Retirement means you are no longer working!
4. The stock market will save you. By the time you retire, you will not have a long enough time horizon to ride out market fluctuations.
5. There's always Social Security. Haha!! Yeah, right!

Schwab Annouces Global Real Estate Mutual Fund

My monthly Schwab statement included a newsletter that featured an announcement about a new mutual fund Schwab is starting. It's called the Schwab Global Real Estate Fund and it will invest in REITs and REOCs (real estate operating companies). The initial subscription period is May 1, 2007 through May 30, 2007 and the initial price is $10.00 per share, with a $2,500 minimum ($1,000 minimum for retirement accounts and $100 minimum for custodian accounts). More information can be found here. The expenses are 1.36%, but they have agreed to limit them to 1.20% through 6/30/09.

As always, this is not a solicitation to buy or sell any security. Do your own due diligence.

Rental #1 Refi Update

On Saturday, I got an email from my escrow agent regarding the refi of Rental #1. It was the Quit Claim deed transferring the title from my LLC to my wife and I personally. This needs to be done because the lender will not mortgage to an LLC. As soon as the mortgage is recorded, I'll transfer the title back to the LLC. I again reminded the escrow agent that I plan to do this. She said no problem. I need to watch this, because I just know it's a step that will be forgotten.

Anyway, I had the Quit Claim notarized today and dropped it in the mail. I haven't heard if the appraisal of the property has finally been done or not. Last week, my mortgage broker called and asked for the name and contact number for the tenant, so he could schedule the appraisal. The number I had turned out to be out of service, which must have happened recently since it was a working number a while ago. I gave the broker the names of the other people living there in case he wanted to try to look up their numbers. I also gave him the phone number and name of my property manager. He said he would put the appraiser in touch with the property manager and let them work it out.

Spoke With Property Manager

I got a call this morning from my property manager. She said she was following up and wanted to make sure I got my rent check. Well, it's a bit late to be returning the voicemail I left over a week ago, but at least she did return the call. I told her I got the check on the 24th and that I know she said her accounting department was running behind last month, but I hoped it wasn't always going to be that late. She said the checks normally go out between the 10th and the 15th, but agreed that the 24th was a bit late. Then she added "...although it was only 10 days late." I pointed out that 10 days is a third of a month! She said "Yes." and then there was silence. I think she got the picture that I didn't think 10 days late was acceptable.

The request for a rent increase for Rental #2 was submitted to Section 8. We're going to see if we can get $460 a month for it, up from $439. There are some repairs that need to be done to the property (paid for by the seller) and Section 8 needs to reinspect it to make sure it still qualifies for the Section 8 program. Some of the repairs had to be delayed because the tenant didn't pay her water bill and water was shut off. The property manager told her she needed to pay the bill or she would be evicted. The bill was paid by the next day. Once the repairs are done and the property has been reapproved for Section 8, we should be able to close escrow. We were originally scheduled to close at the end of this month, but that may get pushed back, depending on the Section 8 work.

Refi of Rental #1 Delayed

I got a call from my mortgage broker today. Apparently, the appraisal of Rental #1 hasn't been done yet! I had an appraisal from late last year, so we were trying to use the same appraiser to do the new appraisal, figuring it would be less work for him and it could be done quickly. That turned out not to be the case. My mortgage broker says the appraiser is not returning his calls and is just blowing him off, so we're going to use a different appraiser who should be able to get the job done in about 72 hours. I hope this whole refi can be wrapped up by the 15th of the month.

Another Louisiana Update

A month ago, I reported that payments on my investment in commercial property in Louisiana were close to resuming. I got word today that the lawyer who was drafting the second mortgage has been swamped for the past 2 weeks, but he promised to get a draft of the mortgage out today. The second mortgage holders have the funds ready to pay the first mortgage holders (including me) and we're just waiting for the paperwork to be finalized. The loan is about 4 months past due now and when payments resume, they will include past interest and late fees.

I also got the word that part of my investment will be repaid. My total investment was split over a couple buildings: $120,00 on two main office buildings and $30,000 on a parking garage. My portion of the parking garage note has been bought out, so I'll get that part of my investment back plus interest and late fees. I just sent over my bank wiring information, so I expect to receive the funds by the end of the week.