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rental property

real estate

My Rental Real Estate Plan

by Evan September 8, 2019

There are two huge benefits of this blog (actually the two reasons that keep me coming back and I haven’t sold the site for good).  The first is that I can think through an issue while I write it out.  Sometimes that just leads to a garbled mess and other times it allows for clarity to present itself.  The second is that I get to read my mindset years and years later.  For example, it is always funny to me when I look back and review my first thoughts on starting an investment club (which is still active by the way), and then all the subsequent updates.

Well this feels like one of those pivotal moments in my financial life that could change the trajectory of my finances so I might as well sit down and right down some thoughts!!  I have been talking about owning rental property for years (and years).  For a variety of reasons nothing ever came to fruition, until last month!

Why I Want to Own Rental Real Estate

As part of my main job, I have looked at a lot of balance sheets and have run a lot of retirement runs over the past 12 years, and real estate does something pretty amazing to both of those reports.  Almost every high net worth balance sheet that I have seen has one or two (if not both) line items – Real Estate and a Business.  Trading your time for money is a very slow way to retirement nevertheless building intergenerational wealth.  Since there is no larger than average business in my future real estate is where it is at!

I have always wanted to build multiple streams of uncorrelated income, and rental income seems to be a fantastic addition.  One day I’ll be able to turn on that income which is likely uncorrelated (or a very low correlation) to whether I have a job, or whether the market takes a 2008 like hit.  Similarly, I look at my dividend stream of income as uncorrelated to whether the rental market in my area undergoes a correction.

How I Came to Own my Current Rental Property

When we decided to move, The Wife and I had a very specific semi-lateral move in mind that would keep my housing costs in check.  Keeping our housing costs near what we had was important to both of us as neither of us wanted to be “house poor.”  We enjoy the flexibility in our discretionary spending.  FIRE is not, nor has it ever been, a goal of mine (or more specifically the RE part).

Well as the saying goes, “Men Plan and God Laughs.”  I did not get the number I wanted for my home, but while we were realizing that fact The Wife fell in love with the new house.  As such, my “waiting it out” period became significantly shorter.  Knowing that I always wanted to own rental property, The Wife came up with the idea of leveraging the new house in favor of keeping the old house up and running as a rental.  Whenever rental properties came up she was a little apprehensive, so for her to push it was exciting to me.  Deep down I think she pushed it so I wouldn’t completely freak out on her about the move, rather than her actually loving the idea.  Regardless, I was all in!

How I am Going to Run OUR Rental Real Estate Property

First thing I did was put the idea out to about 8 buddies.  I gave all the facts:

  • Monthly nut was about $3,100 – $3,200 (Mortgage, Taxes, HELOC and Insurance);
  • I already found a renter (newly/nasty divorcee that wanted to keep herself in the school district);
  • Since I was 6.5 years into the mortgage every time a mortgage payment was made there is about $800 or so in equity build up;
  • Roof may go inside the next few years;
  • I am not negotiating on price; and
  • I was willing to sell up to 49%.

These particular buddies showed an interest in investing in real estate and are local.  While I plan on being the face of the operation there may be times where I need someone to lean on.

There were two in particular (JT&Jx2 – put here for my purposes) that I thought would jump at the opportunity, they did not for their own reasons. JT, wanted a bigger project/better cap rate.  In my opinion he is more of a high risk high reward, hit the home run kind of guy rather than slow and steady.  Jx2 is going to have a liquidity need (new, bigger main residence purchase) in the next 4 to 6 years and I obviously couldn’t guarantee a buy out before that.  The two that jumped in were one of my siblings and a life long friend.  I put these two on the deed, so they are true owners (10% each).  We had a joint venture agreement drafted and executed so common speed bumps that may occur have predefined outcomes prior to said speed bump (i.e. a minority partner passes, someone wants out, I want to sell, expense occurs, etc.).

Since I have 2 partners it becomes very important to keep good records.  When discussing how to run the operation for the foreseeable future this is what we came up with is using all current positive cash flow to pay down the HELOC.  This provides two benefits.  The HELOC is going to serve as our “emergency fund” it has a cap that we are near.  The quicker we pay that down the quicker we build that cushion should anything go wrong.  Second, the quicker we pay it down the faster we are growing our equity (with less money going towards interest).

I am not exactly sure where this whole adventure leads us but I am excited to find out!

September 8, 2019 0 comment
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real estate

Another Housing Update – I am Now a Landlord!

by Evan July 8, 2019

Things have taken a very interesting turn in my world with regards to my home sale.  However, prior to getting into all the numbers, I think it may be prudent to go over what has occurred in the past year or two with regard to my primary residence and then my search for the perfect rental home.

The Wife and I saw some very interesting things happening in our tiny real estate market on Long Island back in the beginning of 2018. Our first inclination was to put it on Zillow’s “Make me Move.”  We didn’t get the traction or responses we thought.  Side note: I don’t think the market is there yet, but realtors hear me now, this service and others like it are your future.  Being a real estate agent in 2028 years is going to be the equivalent of a taxi driver in 2018, but I digress.  The Wife and I decided at that point to put the hold on the sale side until we found something we loved.

It took a lot, and I mean a lot, of open houses and even a few failed negotiations to end up with a house we finally wanted to move forward with, and even after finding said house the negotiations thereof didn’t exactly go as planned (like they ever do).

Sometime between that first and second post we decided to move forward with the sale of our home.  Despite having 3 different brokers tell me that the sale price of my home wasn’t going to be a problem, it was a problem.  The Wife and I reduced it $20,000 before both partners at my firm said something to me, independent of each other, that really resonated with me:

  • Partner No. 1 – “At some point your broker becomes worthless.  If you believe you can sell your home for $X without her, then save the 4%.”
  • Partner No. 2 – “Just put it out to the world that you’d rent the home, and make the rent a big enough cash flow positive gap versus cost that you are covering at least some of your new home’s increased cost.”

Both were absolutely correct.

To the first partner’s point, I was going to pay the broker 4% which would be somewhere in the neighborhood of $24,000 (4% of $600k).  That is a shit ton of money anyway you slice it and after being on the market for 45+ days she honestly just did not do her job.  Maybe it was a case of over-promising and under delivering, but it left me with very angry feelings.  At some point I could sell my house for $585k instead of $600k and still net more without her ridiculous fee.

To the second partner’s point, I have talked about owning rental real estate, both on this blog and in real life conversations for a long, long, long, long time.  Maybe this could be my chance if the numbers work (and they obviously do given the title of the post).

Finding a Tenant for my Long Island Home

Just to test the water I put the home on a few sites including apartment.com and Craig’s list, the emails started to flood in!  Some were not a right fit at all including a mother/daughter duo that came to see the home and in broken English actually asked me, “how many people can fit in the home?”  My response was “1 family, how many people are in your family?” The Wife immediately shut that down as she wasn’t comfortable doing that to our neighbors and community.

Our luck changed once we put it out to the community.  We were immediately contacted by a woman that The Wife has had a few interactions with.  She shared with us that she is getting divorced and needs out of her house.  She has 3 kids and wants to keep them in the school district.  I told her the price (numbers discussed below) and insisted on first month’s rent, last month’s rent and security thinking it may dissuade her.  It did not.  We gave our broker one more weekend to figure her shit out.  She did not. I then had to “break up” with my broker and she was not happy, but it is what it is.

Running the Numbers on Renting my Old Primary Residence

Between mortgage, insurance, taxes and a HELOC payment I am looking at about $3,100/mo of operating costs. I am currently charging $3,500/mo providing me a little bit of a cushion which will help with the new home costs since I will still have a large part of my net worth still locked up in the walls so it can’t be put down.

In addition, and as important, I am 6.5 years into a 30 year fixed mortgage.  This means every month more and more of my payment is going to principal rather than interest.  Last month for example of the $2,800 I sent to my primary insurance mortgagee about $800 went to principal.

In addition, I came up with this plan that I have since offered a few of my buddies that I have talked about getting into real estate.  I offered them an opportunity to buy into the equity of the home.  There are a few major pros and cons with doing so that I explained in full as to avoid any confusion later.  To date, I have not solidified any deals, so we’ll see if this goes anywhere.  Whether it does or does not this plan has way too much steam behind it for anything to change at this point (nor do I really want it to).

Running the Numbers on the New Home

Originally, I shared my plan,

  • $485,000 home with an original $385,000 mortgage at 3.375% for 30 years (fixed);
  • Taxes of about $12,500
  • HELOC has about $100 of interest owed monthly

All in I am looking at about $3,100 a month for housing.  The way I figured it is if I found a home for about $700,000 and I sold my house for $600,000 (net of broker’s fees) my life wouldn’t change all that much!

  • Current house, verbal accepted offer is at $685,000
  • I currently have $240,000 of equity in my home ($600,000 minus $330,000 left on the mortgage and $30,000 for my HELOC).
  • If I put $200,000 as a down payment and I get a 4% 30 yr fixed I am looking at a payment of $2,400/mo (assuming $40,000 went to waste, taxes, attorney’s fees, and some upgrades).
  • My Taxes are about $15,000 (up from $12,500)
  • So my monthly nut changes from $3,100 (P&I and Taxes + HELOC interest) a month to $3,650

Well, as the saying goes, man plans and God laughs.  As I sit here today, I have put 5% down from my HELOC on the new home, and I can’t come up with anywhere near $200,000 down as the equity is still tied up in the rental.  Right now I am getting approved for only 10% down which is obviously way less than the 30%+ I had planned.  Notwithstanding, I think it may be premature to share the home numbers because I am not exactly sure what, if anything, I am going to liquidate to bring up my down payment beyond 10%.  When I get my final numbers I’ll share them, but for purposes of an example:

  • $685,000 house with 10% down gets us to about a $615,000 mortgage
  • I have been approved at 3.875% which gives me a P&I cost of about $2,800
  • Add in taxes of $15k/12 ($1,260) – and I am at about $4k!
  • Now we add in PMI, Homeowner’s Insurance, and I am looking at about $4,400
  • Minus the $400 or so I’ll receive on the other property and I am at $4,000 (vs $3,650 originally estimated).

Not terrible, since I’d be building equity paid by someone else.  Again, this could all change by the end of the month depending if I plan on putting more down to get me closer to my original estimates.

Phew! To say it has been a stressful past 30 days or so would be an understatement! 

July 8, 2019 0 comment
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real estate

…And Just Like That ANOTHER Real Estate Deal is Dead!

by Evan October 16, 2018

I think the major difference (for me) between buying equities versus buying real estate is the complexity of the deal.  I was very excited about my recent possible real estate deal, it felt perfect! Financing was done, the home had equity built in and I even had a tenant that cared about the home…and then I had an inspection done on the home.  Given the title of the post, I am sure it is evident that this particular deal didn’t work out (again).

Not only is real estate local with regard to understanding value, market, etc., the customs when it comes to closing and contracts is also very different from State to State.  In New York, when you are buying a residential property from another owner you don’t get any warranties from that owner.  I know this sounds completely foreign to people in other States or Countries.  It used to be caveat emptor and then in the early 2000s the law changed to make disclosures mandatory, or,

pay a credit of $500 to the buyer at closing. While the PCDA requires you to complete a standardized disclosure statement and deliver it to the buyer before the buyer signs the final purchase contract, in practice, most home sellers in New York opt not to complete the statement and instead pay the credit.

Well, who wouldn’t just credit $500 instead of opening yourself up to litigation? It is the best insurance one could buy! I can tell you one person who didn’t, my mother in law when she sold her mother’s property upon her death.  I pleaded with her that a $500 was well worth the price of admission. She didn’t listen.

This little nuance in NY law didn’t really matter much as the home I was going to purchase was a short sale. A short sale is a,

a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property. In this case, if all lien holders agree to accept less than the amount owed on the debt, a sale of the property can be accomplished. A Short Sale is not to be confused with a Short Settlement.

A short sale has two intrinsic and inseverable components. A Short Sale is successful when (1) The Lien holder(s) (a.k.a. Mortgage Company) is agreeable to net less than the amount owed on the note (debt) as the result of (2) an arm’s length sale at or below the Appraised Value for that property. The agreeable selling price is intrinsically defined to be at or less than the appraised value allowing the process to be attainable. A prudent buyer will not pay greater than the appraised value, and a Bank or Finance company will not provide a mortgage for greater than the appraised value, thus limiting the Short Sale proceeds to a maximum gross yield of the property’s Appraised Value.

Basically the bank is trying to avoid the long, costly process of a foreclosure and kicking people out on the street. So, they will take a lower sales price and usually pay the occupant to get the hell out.  A short sale never comes with any warranties so the inspection was extremely important, and mine did not go well at all.  Just some of the problems the inspector came across:

  • Brick work problems that most people could live with, but a tenant or a tenant’s guest may trip on;
  • Water damage in almost every single room – one was so bad that I put my finger into the hole and felt dampness;
  • An extension not built to code;
  • 3 layers of roofing already laid and there is still warping in the 3rd layer;
  • Almost every windowsill had rotting from the outside;
  • Skylights looked like they were original from the 50’s and did not look like they were great shape; and
  • These are the problems that I saw! Who the hell knew what was behind the walls that was already patched up!?

I just imagined the moment ownership was in my possession getting a phone call about all the water problems that the current owner/new tenant has had for the past however many years he has been living there! All of a sudden I open up a wall to fix it correctly and I find a wall of black mold that is now my responsibility to fix.

The Future of this Particular Deal

Given the terrible inspection, at the current asking/bottom line for the bank, the deal didn’t feel like a first time landlord’s rental.  To be honest, and a bit frustrating, the deal feels like a pretty good flip for someone who can control costs and fix things pretty cheaply.  There is a lot of work to be done on the house, and I just don’t feel like a bring a lot of value when it comes to that area of real estate.

Notwithstanding all these problems, I came back with a counter offer of $50,000 less than what the bank agreed upon already.  I figured what the hell, at another $50k less I can deal with some headaches! In the end this will be another dead deal, but I’d rather 22 dead deals than 1 shit deal that gives me headaches for the next 10 years.

October 16, 2018 2 comments
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real estate

Once Again, I may be Getting into the Real Estate Game!

by Evan October 9, 2018

I have wanted to own a rental property for a long, long time.  If there is a “cool” thing about having a blog is that I can actually look up moments like, when I first brought up owning real estate (6 years ago) or when it actually came up as a business plan, I actually looked at a house or two (or when that second possible deal failed).

Why it is important for me to own a Rental Real Estate Property?

I have discussed the idea of multiple streams of income, and why they are important to me since almost the beginning of this blog.  I was able to reinvigorate my feelings on the topic when talk to my older brother this past weekend when I was telling him about this deal.

He asked me, point blank, why I wanted to get involved with real estate.  We both saw our father go through hell with some of his tenants over the past couple of decades.  My father owns a mixed use property (2 units and commercial space) that my grandparents bought when they came to America from Greece, as well as his first property that is also 2 units (he used the equity from that home to purchase their main residence that they have owned for the past 30 years or so).  Both properties are in the boroughs of New York City which are notoriously anti-landlord.

Notwithstanding my father’s experiences, creating a real estate portfolio is extremely important to me.  My brother is a lieutenant in the FDNY and his wife is a NYC teacher.  One day they will wake up and have an income stream for the rest of their life.  It is my goal to create those streams of income that is not predicated on the selling of principal for future Evan.  I can’t see any path I would take at the age of 37 that would take me to a stream of income like that other than real estate and my dividend portfolio.  He seemed to completely understand as soon as I explained it that way – so that may help someone else out there.

The Possible Real Estate Deal

About a week or so ago my friend, boss, and what I would consider a mentor (although I don’t think he’d appreciate the title) came to me with a deal.  A banker’s broker he has worked with a few times before on short sales brought a deal to his attention.  The deal was too small for him to deal with all the inherent headaches (described below), but he thought if there could be a deal for both of us where he would be the moneyed partner and I would handle all the day to day headaches.  To say I was appreciative would be an understatement. We spent the next two weeks or so ironing out details.

It was at the end of that second week that he sat me down and said that he had an alternative arrangement.  He would fund the entire deal but it would be all mine.  He would be my very generous bank but a bank nonetheless with all the rights thereto.  After talking to a few people I said I was in!

Estimated Costs and Income of the Home

The home is a short sale and with the help of the aforementioned friend is at the rock bottom price of $350,000.00 – all cash deal.  From what I researched I would estimate there is probably an estimated $50,000 to $100,000 of equity in the home (i.e. there aren’t many homes in this town that sell for less than $400,000).

The current occupants are the soon to be ex-homeowners.  This is great and terrible at the same time.  First the bad news, they were obviously not able to pay their mortgage, so who is to say they are able to pay me! The good news, they have indicated to parties involved they want to stay and that they have kids in the school district.  Interestingly, when I did a creepy drive by they had newly planted plants and the sprinklers going.  I thought this was a really good thing – it shows they care about this house.

As of this post, I have not had the opportunity to sit down with them.  Hopefully that is happening in the next day or two.  My plan is to sit down with them, have a background check done (knowing the credit report is going to come up terrible) and discuss how much they plan on paying me.  These numbers are estimates as this post is in the middle of a lot of balls up in the air.

Income from Property – $3,000/mo (Going to try and negotiate $3,250)

Interest Only Monthly Payment – $1,666/mo ($20k/yr on $400k borrowed)

Taxes – $600/mo (approx)

Homeowners Insurance – $150/mo (approx)

Leaves me with working capital of about $500 – $600/mo of positive cash flow.  I am not going on with blinders this deal is unlikely to be a lottery ticket to an early retirement, however, I am looking at it as a very low risk way to get my feet wet into real estate as an asset class for my family.  If I absolutely hate it, then lesson learned, I sell the property, payback my friend and walk hopefully with a few dollars for my troubles. If I love it, then I slowly eat into my unbelievably low hard money borrowing rate and continue to be thankful that I have met amazing people in my life that allowed me this opportunity.

What Could Still go Wrong with the Deal?

I could have held this post off until closing, but I have been doing that too much lately and then never getting around to writing something when it doesn’t work out.  For example, last week The Wife and I put an offer on a new main residence! By the time the dust settled we were outbid, and as such, I lost all motivation to write a post.  I know for anyone reading this blog still it doesn’t matter, but now, that deal will be completely lost from my memory.  While that one will be gone from my memory, fighting with The Wife about what we offered, how much we got out bid, etc., this rental property will be memorialized even if it doesn’t work out…and this is far from a lock!

First thing that could derail this deal are the tenants.  As alluded to earlier in the post, there are just no guarantees that we are going to ‘vibe.’ The bank has made it clear that for a deal to go through they are my problem meaning they aren’t dealing with the foreclosure which leaves me to an eviction process  Evicting an individual in my county is much easier than in NYC but it is still a process nonetheless.  I don’t think I want my first 6 months as a landlord to be spent in court trying to evict a family (with children) from the home they thought was going to be their forever home.  To minimize this risk, I am going to have a sit down with them to try and figure out how this is all going to work out! That meeting hasn’t happened yet, but if there is no way they can afford $2,000 nevertheless the $3,000 that is my final offer, I am not sure where that leaves me.

The second thing that could kill the deal is the inspection report.  Similar to evicting a tenant, I don’t want my first 6 months (or even year) as a landlord to be dealing with major problems.  If there is a roof issue, boiler, etc., I just would rather hold off till the next one! To minimize this risk I need to set up an inspection from an agent that has absolutely no relationship with the broker or bank, and as such, does not care if the deal closes.

Looking into the Future

I obviously does not know where this one is going to end up! I am hoping in 60 to 90 days I’ll be able to say that I am a landlord with great tenants! Could the deal fall through? 100%. Could I be stuck with terrible tenants? 100%. Could this be a terrible mistake? 100%, however, there seems to be such little downfall risk that I have to at least try it out! Even if shit completely hits the fan I really believe that this could be a quick flip after I work on evicting the tenants.

October 9, 2018 0 comment
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