Renters

When it comes to our first real estate investment, we are relying solely on rental income as the only source of income. There are no coin-op washersand dryers on site or anything else that could bring in extra income. In away we feel that we are at the mercy of our tenets. We have not raised the rent on them We are considering a moderate increase once the repairs are all done. We realize that our tenets are below the national poverty line, and we do not want to put any extra pressure on them to pay us more money.The problem is that they do not pay their rent on time. It is not just one or two tenants that have this problem, but most of them have this problem. I think that it is not a problem of discipline, but a problem of the lack of money. So, we have been trying to think of a solution. We have discussed payment plans with our property manager, but she did not sound too hopeful.

I have made no secrets of my plans to be a philanthropist, and I genuinely want to help people like our tenants who are at the bottom of the financial barrel, so I have been trying to think outside the box for a solution. I have thought about starting a business where employees could work for me from home, so that I cannot only have these people as tenants, but as employees. The major problem I have with this is that my tenants do not have access to computers, and most if the jobs like this require internetaccess. I plan on doing more research for opportunities for people in these situations to see what sort of solutions area already out there. I had an idea, before we even closed on this property, to give everyone of our tenants, regardless of their payment history, a break at Christmas time. I was thinking of either a discount for the month of Dec, or a freemonth of rent depending on how well we were doing for the year. At this rate I do not know if we can pull it off for this year, but I still want to do something for these people. So, we are considering sending them gift cars to the nearest grocery store.

We closed on our first apartment building.

There were times when I wasn’t sure that we were ever going to make it to the closing table. Even the last few days were a little hairy at times. But we did, as a matter of fact, close the transaction. We are now officially Real Estate Investors!!!!!!!

There are a lot of steps to the whole transaction that I have not yet written about, but I plan to go over the whole thing in future entries. For now I am looking ahead to what we are going to do next. First we need to do is make sure that all of the terms are clear between the management company and us. They were employed by the seller, and we have decided to keep them on, and we want the transition to be smooth. Then we are going to go over the estimates that we have already received for replacing the roof and the siding, and arrange to actually have the work done this summer. I have no idea how long the work will actually take to get done, or how soon anyone can start the work, but we are hoping that the actual cost remains within 20% of the estimates. We were fortunate that the appraised value came in higher than the amount that we paid. So, we have $25,000 instant equity, plus the amount of cash that we put down. Once the work on the roof and siding is done, (and maybe a few other minor repairs) we are going to try to get secondary financing on the property and pull some of our money out for the next investment. I have no idea how much of a difference the work that we are doing will make on the appraised value of the property. The hope is that the value will increase more than the amount that the repairs cost.

Until then, I am waiting for the feeling of being a new real estate investor set in. It still does not quite feel real yet. Maybe it will feel more real when we lose on our second investment.

Dallas Contract Revisions

I just wanted to add in a quick update on the progress of the property in Dallas that we are under contract for. When we had the inspection done, it turned up more than we expected. The seller had already told us that the exterior siding and stucco needed to be replaced and that he would be giving us a credit for it at closing. It turns out that the roof also needed to be replaced. There were a number of other minor things that could be fixed also. So, we wrote up an amendment to the contract asking for these minor repairs and for the credit at closing to also include replacing the roof. I had a nervous couple of days. and then the seller agreed to everything that we had asked for. I expected a little bit more of a debate, but I am pleased with the way things turned out. The seller is now getting more estimates for repairs, so we do not yet know how much the credit will be for.

I have also been busy trying to find a good mortgage. At first I went to a broker, but I have not been please with the lack of information and the amount of points and fees. There have to be better deals out there and I am trying to find them. Loans are expensive enough already without all of the additional fees that are added on. What is the purpose of points anyway?

This week I will also be securing insurance for the property. The company that we currently use for our home and automobiles also covers Texas. Someone recently recommended an umbrella policy as a extra method of protection from litigation, so I will be inquiring about the detaisl for that.

Lots of work, so little time.

To Become Wealthy: The Next Step

Our closing is not until Feb 2nd. Of course this is dependent on everything working out between now and then. There are all sorts of details in the contract that give both parties an out. But I have no doubts at this time that we will purchase this property.

I have a lot of work to do to prepare for the purchase of this property, but my mind keeps wandering to the time after we purchase this property and are looking for the next one. I think back to a previous blog where I mentioned that the profoundly successful people are the ones that did not diversify but rather took big risks in one area that paid off. So, do we continue to look in Dallas or concentrate in other areas? Should we look at non-residential real estate investments? The difficult thing is realizing that there are no answers to these questions. So, I will just continue to look at everything until something, somewhere looks good to me.

Until then, I need to review the details of our current contract better to see what I can learn from it.

To Become Wealthy: The Counter Offer

Today we received a counter offer. It was simply stated. They will sell for our offered price of $360,000 but then will not give us a credit to re-do the exterior. If we want the credit, we will have to pay $385,000. Does anything think it will cost $25,000 to redo siding and stucco for 2 buildings? I honestly have no idea.

So, now I am going to desperately call several siding businesses in Dallas tomorrow to try to get a rough idea of how much this is really going to cost us. Hopefully I can convince someone to give me a free estimate and actually drive over to the property to tell me how much work it really needs.

I am thinking of countering with $370- $375 including the credit. But what I an not believe is that this property was first listed at $450,000 and here he is willing to take $90,000 less. That is a 20% mark down. From now on I am going to grossly underbid all properties.

To Become Wealthy: We Placed a Bid

On Friday we placed a bid on the 15 unit property in Dallas. Having looked over all of the property info several times, we decided to bid $360,000. To place the bid was an entirely daunting process itself.

First, the realtor required us to have a pre-approval letter from a lender. This was a quick and easy process that took all of 5 minutes to complete when we were going to purchase the house that we currently live in. The process for buying a commercial property is completely different. It took most of the week, with several back and forth phone calls for more information. Basically the bank wants to make sure that the property will make money and does not care too much about our personal info outside of our credit scores.

They finally approved us and we were sent the letter off to our realtor. In turn she sent us a 17 page legal document that would serve as our bid. We wanted to get the bid in by Friday as a nice way to round off the week. Of course now that we were sure that we really wanted to place the fear of someone beating us to the bid grew and grew. I am still working on getting a lawyer, although I did play a bit of phone tag with one on Thursday and Friday.

We spent one very late night reviewing the bid documents and we only added one part about a credit amount that was yet to be determined for work to be done on the exterior. And off to FedEx I went with signed documents and a 1% earnest money check.

Then we waited…..

To Become Wealthy: A Better Property in Dallas

I have spent the last two weeks looking over one very good property. We are about to bid on it. I have gone over all sort of numbers and asked all sorts of questions and learned all sorts of info about it.

It is a 15 unit building that has had some work done to it over the past year to each unit. I am not-so-secretly proud of myself for finding it. Now I just hope that all of the details of the bidding process and purchase go thru.

Here are some numbers:
Gross Scheduled Income: $82,200
10% estimated vacancy : $8,220
(only one unit is currently vacant)
Insurance: $4,500
(based on current coverage)
Taxes : $6,630
(based on current year)
Utilities : $4,620
(elec for common areas, water/sewer, garbage)
10% for property manager: $8220
NET OPERATING INCOME: $50,010

The current asking price is $425,000. At that price, with 15% down and a 30yr fixed mortgage at 7.5%, we would pay $30,310.92 for the year, leaving us with approx $19,700 pre-tax profit for the year. We have no plan on bidding that much, but it is the amount that I use for my calculations.

Our wonderful realtor has sent me some background info on the property. The current owner bought the property in Sept. of 2005. He purchased it for $204,000. Since that time he has put in $66,000 to redo each unit. From what I can estimate, he did make some money off of rents collected thru the year. From the rent roll I can see that most of the units were vacant until they were redone. So vacancy has increased steadily throughout the course of the year.

I think $425,000 is a bit much to be expecting from this property, even though it is still a money maker at that price.

Here is what I am estimating his thought process to be for the money he might want to make off of this sale.
$204,000 initial purchase price
$10,000 in possible closing costs for initial purchase
$66,000 in improvements
$5-10,000 loss from vacancies
$5,000 loss due to bad property manager who can off with some money. (We heard this from the previous property management company.)

So that is a minimum of $295,000. Add in a generous $50,000 profit and we get almost $350,000. That is probably going to be what we will bid. I may even go as high as $375,000. There is also an offer from the seller for a credit to redo the outside stucco and siding.

So at the price of $375,000 and NOI $50,000, that cap rate is 13% which is pretty good. I do not yet know how to calculate the prevailing cap rate in the area, but it seems that most places use 10-12% as the average.

How does this deal sound? Much better than the last one, right?

To Become Wealthy: To Bid or Not To Bid

I have learned to break down the numbers to evaluate any given property from two books by the same author, Frank Gallinelli. The first one is called “What Every Real Estate Investor Needs to Know about Cash Flow.” This is the main one that I am using this week to decided to bid or not to bid on a quad-plex in Dallas, TX.

These are the numbers that are given on the MLS listing:
Asking price $174,900
Gross Rent $1975/mo or $23,700/yr
Taxes $2717
Insurance:$2200
Owner pays Water/Sewer/Trash:$175/mo or $2100/yr

These are estimates of other expenses that we will have:
Property Management: $1896/yr
Repairs and Maintenance: $1200/yr

This gives me a Net Operating Income of $13587.

I have not added in a vacancy rate because I have been told that all tenants are long term tenants. Of course I will verify this once I get the opportunity to see the leases.

So far the numbers look pretty good to me, until I calculate the mortgage costs. My knowledge of mortgages comes solely from the purchase of my primary residence last year.

First I looked at a 30yr fixed at 7.5% with 10% down payment and no PMI. (I am assuming that we can do an 80:10:10 piggy back loan.) In this case, my mortgage payment for the year would be $13.207.56.

This will only leave me with $380 pretax cash flow for the entire year. This is a whopping 2% return on our initial investment of the down payment.

Then I thought about an interest only loan at the same rate for the same amount. Then the payments for the year would be $11805.72.
This leaves me with $1781 pretax cash flow.

Now, I have done a lot more numbers with the mortgages, since that is the biggest expense by far for the whole property. If we put down 20% instead of 10% then we increase our yearly cash flow to $1847 and that increases our cash on cash return to 5%. This is the bare minimum cash-on-cash return that we want for our money. However, we do not want to put that much money into any one property unless it has a lot more units in it.

Our best bet will be to take shorter terms for a much lower rate. If we could get an ARM with a 6% rate. With only 10% down, the yearly payments would be $11,325, leaving us with a positive cash flow of $2262. A 13% cash on cash return would result. If you add in an estimated $10,000 other up front costs (lawyer, etc), the return on investment is 8%.

So, is this property worth my while? I still need to evaluate the taxes and depreciation, and then do another analysis to figure out how low I should bid.

To Become Wealthy: A Property in Dallas

We have been working with a wonderful realtor in Dallas. We found her thru a Google search. She has put us on an automatic list that sends us newly listed properties each day that fit our criteria. We had further inquired about several properties so far, but none has worked out. This week we are very excited by a Quadplex that has just gone on the market for $174,000. Each unit has 2 beds and 2 baths. We are waiting to hear back from the seller with more details before we can decide if we want to bid and how much we are going to bid.

Let me go back a step and explain how we became connected with different realtors. We are currently working with two, one in Dallas and another in Tulsa.We basically did some Google searches and then sent them a pre-written email asking for their assistance. We stated that we were out of state investors and what our criteria are. The only question we really asked was if they had experience working with other investors. We initially contacted about 3 or 4 realtors in each area and just went with the ones that we got the best feeling from. There are tons of realtors out there, so if we get to a point where one is not working very well for us, we can always switch to another.

These are the criteria we use for our search. The purchase price is based on the amount of money that we have to put down on any one property.
1- purchase price up to $200,000
2- minimum of a two family house/duplex
3- minimum of 2 bedrooms per unit
4- currently used as a rental property
5- the property does not need a lot of work

I am keeping my fingers crossed for the Quadplex.