Wrapping Up The Loose Ends (Updated)

While driving this morning, a thought occurred to me: I don't think the refi of Rental #1 officially released the lien on the property held by my private money lender. Although the loan was paid off through the refinance, I also need to publically record a document from my company that lent me the money that states the mortgage obligation has been fulfilled. I wasn't sure that document was included in all the papers we signed the other day. Truthfully, the papers were signed in such a rush on our way out of town for the weekend, I didn't even look closely at what I was signing. I do have copies of everything, but I didn't want to wait until I got home to check, so I emailed my escrow agent. Sure enough, we did forget to include a mortgage release, so she will be sending me one today and we'll get that filed.

From a public records standpoint, the only remaining open issue on Rental #1 is the conclusion of the quiet title suit. I was originally told that would take 60 to 90 days, but later was told it could take as long as 6 months. We're around the 3 month mark now, so I'll wait a bit before asking the escrow officer for an update on that process.

Actually, there is one more issue. When I got the loan for the refi, I had to change the title of the property from being in the name of my LLC to being in the name of my wife and I personally because that was what the lender required. Once the lender's mortgage was recorded, the plan was to move the title back into the name of the LLC. I'm pretty sure I saw the paperwork for this because I was on the lookout for it but, as I said, the signing was done in a rush, so I need to go back and verify it actually was one of the papers I signed. And just to be absolutely sure everything was done correctly, when I get the recorded docs back from the county recorder, I need to make sure that quit claim deed transferring title back to the LLC was the last thing recorded.

I also finally got my $500 earnest money deposit back from the canceled purchase of Rental #2. It turns out, my mortgage broker already had the appraisal of that property done before the sale was canceled, so I am out the $350 I paid for that. Oh well.

Update: My title agency has just informed me that the attorney was able to contact the correct people to clear up the old title issues on Rental #1 and a quiet title suit is no longer necessary!

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.

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 :-)

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.

Slow Week

Not much progress will be made this week on the purchase on Rental #2 or the refi of Rental #1. The mortgage broker I am using for both is on vacation. I did mail back the paperwork on Monday, and he said his assistant would be working on it, but it's been my experience that the paperwork just sits around until the main person gets back from vacation.

I did get a call from the escrow agent asking for a payoff amount on the mortgage for Rental #1. I faxed that to her this morning.

Other than those things, I don't think any progress will be made this week. I hate that.

Loan Doc Errors

Last night, I got the loan docs for the refi of Rental #1 and the purchase of Rental #2. There were errors galore:

• In both packages, the last digit of my wife's social security number was wrong.
• In both packages, the Rate Lock Agreement does not list a lock-in start or expiration date.
• In the package for Rental #2, my wife's last name is spelled incorrectly on every page. (Since she has the same last name as me, I don't see how mine could be right and hers wrong.)

I spoke with the mortgage broker this morning and he said his originals are correct but the copies made by his assistant and sent to me are incorrect. I find this doubtful, but whatever... He said to go ahead and manually correct the errors and sign and send the papers backs. I'll go ahead and do that. Since these are just applications and not actual recorded documents, I'm fine with that. However, if these errors show up on future paperwork, there is no way I will sign them until they are corrected.

Things Are Progressing

Things are moving forward on both the purchase of Rental #2 and refinance of Rental #1. I got the good faith estimates from the mortgage broker and, as some had suggested, the interest rates were a tad higher than I planned. The rate on the loan for Rental #2 is 7.25%, not the 6% I had used in my projections. I'm not too concerned with this however. Based on the existing $439 a month rent, the higher interest rate drops my ROI down to 10.9%. However, the lease is up June 1, at which time, my property manager believes I can easily raise the rent to $460 or more. At $460 a month, the ROI goes back to 13.4%, close to the 13.8% I estimated originally. Escrow is scheduled to close on June 1 or sooner, so I may be able to get the higher ROI from the start.

The rate on the refi of Rental #1 is 6.75%. The figure I used for my calculations was 6.25% and the difference is less than $25 a month, something I can live with easily.

Both loans are standard 30 year, fixed rate mortgages. I asked the mortgage broker to look for 5/1 ARMs, since he thought some could be found with interest rates a quarter point or so lower, but with the small loan amounts, no one was interested.

Rental #2 Purchase Moving Forward

I had a nice, long discussion with my property manager this afternoon and was impressed with what I heard. I first confirmed that she had spoken with the tenants in Rental #1 and told them they now need to send payments to them. She said she both sent them a letter and spoke with them in person. They were still processing the rents checks for this month, so she couldn't tell me if they had paid yet or not, but I think they probably have.

I mentioned that my lease specifies that the tenant is responsible for pest control and minor plumbing leaks. I told her I already had sent people out to spray for bugs and to fix the leaky toilet, so I would pay for those, but I wanted to make sure she knew that in the future the tenant would be responsible. She said I could send her the bills and she would go after the tenants for reimbursement! Well, assuming it was their fault. She said she wouldn't make a tenant pay for a leaking toilet if the problem was a 30 year old wax ring that needed to be replaced, but if it was leaking because they were abusing the toilet or something, she would. I am torn though as to if I should bother with it this time. The former owner told me she thought the tenants might move out if they were forced to pay. Maybe if it was closer to the expiration of their lease, I wouldn't have second thoughts about this.

As part of the above discussion, the property manager told me a story about how she went after someone to collect what they owed. I guess one of their renters moved out while still owing them $60. To collect, the PM wrote a fake letter to a collection agency and cc'ed the old tenant. The letter gave the tenant's information and asked what else was needed to move forward with garnishing their paycheck. She said the day after the old tenant received the letter, she came in and paid the bill :-) Now in this case, the PM didn't actually mail the letter to a collection agency, but she did say she has a relationship with one in case it comes to that.

I also mentioned Rental #2, which the current owner is just moving to their management company. I told them I had that property under contract and hope to close on it soon. It is a Section 8 rental and the lease is up on July 1. I told her I'd like to raise the rent from $439 to $460, which is about a 5% increase. I spoke with the Section 8 agency in Oklahoma yesterday and found out the procedure to raise rents. First, you must give 60 days notice to the agency. The 60 days must commence on the first of a month, which means I'll need to get the request in by May 1. Once the request is received, the Section 8 worker assigned to your property will do an evaluation of neighborhood rents and see if your new rent is comparable to what other properties in the area are going for. The management company deals with Section 8 all the time and my PM said there is a fixed percentage increase that is allowable that does not trigger a new comp study and she usually raises rents one percentage point less than that. She didn't know the exact amount off hand, but thought that it was more than 5%. So it looks like I'll get a rent increase shortly after buying the property, which will help my ROI.

The PM also mentioned that she had four properties for sale right now and asked if I was interested. I'm close to tapped out right now with the purchase of these two properties, but I will keep them in mind. I'd like to get to up to 4 properties to get the discount they offer on management services.

I also (see, I told you it was a nice, long chat with her) spoke briefly with her about a mutual acquaintance...

Another Rental Property Purchased

I picked up another rental property over the weekend, again in Tulsa. Here are the details: 3 bed / 1 bath, 908 square feet with a carport. The tenant is a Section 8 renter with the rent 100% paid by the state of Oklahoma. The lease is up in July and I'm investigating if the state will pay a higher rent at that time. An older appraisal valued the place at $48,000. I'm getting it for $40,000. I've got a 60 day escrow on this one and will be putting down about $10,000. Numbers below are monthly.

Rent:	$439.00
Taxes:	$43.42 ($521 / year)
Prop. Mgt:	$60.00 (10% of rent, but a $60 minimum)
Insurance:	$20.33 ($244 year)
Maintenance:	$20.00 (approx. 5% of rent)
Est. Mortage Pmt:	$179.87
Profit:	$115.38
Annualized ROI:	13.85%

The mortgage payment amount is estimated and depends on what interest rate I'll be able to get. I used a 6%, 30 year loan for these calculations. I've run the numbers with interest rates from 5.875% to 6.125% and with a $10,000 and $15,000 down payment and all results are acceptable to me. (The ROIs range from 11.47% to 14.13%.) With these down payment amounts, I won't be paying PMI, so I don't have to worry about that cost.

I like this deal because the property is already in the Section 8 program, so I don't need to go through all the headache of getting it approved. The rent is 100% paid by Section 8, so I don't have to worry about late payments from the tenant. The drawback is that I am limited as to how much I can charge for rent because Section 8 will only pay the prevailing rate for a similar property in the neighborhood. But then, that's pretty much how all rents are determined. The difference is that with Section 8, I'll have to wait for neighborhood rents to increase and then follow suit rather then be the one leading the rent increase :-) Another plus is that Section 8 inspects the property every 6 months and makes sure the tenant is keeping it in good condition.

The property management company charges 10% of the monthly rent with a $60 month minimum. I'll be paying the minimum and you can look at this two ways: On the one hand, right now I'm paying more than 10% in management fees each month. On the other hand, 100% of any future rent increases go directly into my pocket and nothing goes to the management company - at least until the rent reaches $600 a month. I also inquired about volume discounts with the PM company. In order to get a discount, you need to have at least 4 properties with them. At that point, their monthly fee drops from 10% to 9% and the new tenant fee drops from 75% to 65% of one month's rent. I told them I only had two properties so far and she mentioned that they have some older owners who may be looking to sell their properties. I told them I'd be interested and to let me know if anything comes up.