January 5, 2015
I was reviewing the Investment House paperwork, vaguely remembering that I’ve got an old home warranty on the place and that it’d be good to make sure I renew that in time.
Good darn thing I did!
Old Warranty was expiring in a month’s time. Meanwhile, looking at a quote for the New Warranty company (the one my property manager works with and recommends as being reliable payers), I discovered that a new policy with them would only come into force 2 weeks after they received payment.
The timing on that would have been really annoying if something broke down that would have been covered and I’d missed that crucial detail.
Aside from that, though – there were things from the home inspection that were noted as being broken. Nothing was critical but the tenants were so balky about the inspection and walk-throughs that it completely slipped my mind that I’d wanted to fix those items.
I’m going to have some of the repairs arranged before the warranty is up. I’m sure it’s going to be a bit of an inconvenience to the tenants, but it makes more sense to me to have everything in good working order when it’ll still be covered for a base service fee. Otherwise, the new warranty won’t cover it and then the whole cost may be coming out of their security deposit because it was broken during their tenancy, they never reported or fixed it themselves, and tried to keep us from seeing it during the inspection.
Some of the items may have to anyway, but I don’t feel the need to wait and keep their whole deposit if I can deal with the problem now.
Would you find that unreasonable? As a previous tenant myself, I can certainly understand being annoyed by some scheduling inconveniences, but I’d prefer that over having to pay for the cost myself.
December 1, 2014
Our 2013 taxes were finally stowed, just ahead of the October filing deadline, and I’m staring down the barrel of prepping for 2014’s filing in just a few months.
I thought this might be super boring but Anne asked so I’m sharing!
I like to think I’ll have my paperwork in order for the CPA but this whole new investing thing introduces a whole other tangle so, lest I lose my ever-loving mind trying to figure it out as deadlines loom, the spreadsheets and IRS.gov have been cracked open. Feels somewhat like being a junior in high school, prepping for the SATs, again!
There’s a ton of documents to wade through but these were the highlights for both immediate and long-term planning:
I had to decide what reporting method to use between Cash Method or the Accrual method. Reading up on the two, it’s not clear whether there’s any benefit to do one over the other, tax-wise, but the cash method seems most straightforward.
Cash method. You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. You constructively receive income when it is made available to you, for example, by being credited to your bank account.
Expenses paid by tenant. If your tenant pays any of your expenses, those payments are rental income. I don’t expect to see any of this crop up but it’s good to know. I’d hate to accidentally under-report income for not knowing it was considered income!
Long Term Income: Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year.
There are a myriad of expenses I’m recording on my spreadsheet: maintenance, insurance, taxes, interest, commissions, management fees, legal and other professional fees, repairs.
The value of the rental property is depreciated based on the date it is ready and available for rent, this is called the date it was “placed in service.”
Next Steps and Final Numbers
The CPA and I will need to put our heads together and sort out how it looks once we run the actual numbers.
November 3, 2014
While we were traveling, a few somewhat unexpected bills came in the mail for the Investment House: utilities!
I tend to operate a little bit on autopilot when it comes to bills, I check the amounts and dates, then I go straight to paying them, particularly when a due date is in the past. I’m a bit allergic to paying after the due date, it gives me flashbacks to writing checks for Mom when I was a kid, not understanding why we didn’t pay on time, and then later to my late teens when I could only JUST pay bills on time after working hundreds of overtime hours.
My bottom line was about to take a beating when I took a minute to whine at my RE friend and he pointed out that the property manager should be able to bill the tenant for these – well!
I blame the heat, pregnancy brain, and totally being a rookie for not remembering that tenants almost always cover all the utilities unless it’s explicitly covered by the rental agreement. Heck, I was a tenant for years, my Dad still is and I pay his bills, so why it totally slipped my mind that we have always paid our own trash, sewer, water and electricity bills, I couldn’t even say!
Luckily, it was as easy as emailing the scanned documents off to get that sorted. Whew. Saved myself $200+. Never mind the slightly horrified lurking sense that if I nearly messed that up, what else have I done wrong? Ach. Live and learn.
Paula from Afford Anything posted about being off for a month and how well that worked for her; she shared a story from a single income family that has been working away at this real estate thing as well and it was a bit heartening. Randy’s also following the same general thought process that I was: save enough cash to cover the first purchase, with some extra to cover unexpected expenses, and keep reinvesting any income to build up to the next purchase. If I have a good cash cushion that I can dip into, of course I will, but Little Bean potentially changes that landscape for the moment.
October 6, 2014
This month was mostly uneventful.
The rent came in late, which racked up a minimal late fee. Since I rely on the rent to cover the mortgage, I wondered if it’d be worth bumping up the late fee a bit to motivate the renters to pay on time more often. Perhaps on the next lease. Nothing punitive but something more annoying than the equivalent of a monetary flea bite.
They also managed to run afoul of the HOA so that was a fun bit of paperwork to get in the mail. It seemed to be a minor thing so as long as they toe the line, we should be fine there. This reminded me, of course, why I prefer to have the management company deal with the day to day: I just had to send off an email and ask for them to deal with it.
***
Just for kicks, I ran a projection of income and expenses for the rest of the year; I was curious to see what result we could expect after a partial year of rent with regard to cash flow.
Barring any interruptions of rent payment, assuming we retain the same renter this year, and any repair costs that might come up (most will be covered by the supplementary insurance): ~$300
Note: This excluded the actual cost of the purchase (the down payment, the fees and the closing costs) since I assume, for the moment, that will be recouped if and when I sell. Otherwise it’ll likely take about thirty years to break even by rent alone.
Whoever said this rental property thing was a sure moneymaker can bite me. 😉 But I wasn’t looking to get rich overnight – if there was a great way to do that I think we’d all be there – so patience is the name of this game.
August 25, 2014
Part Three of the Real Estate Chronicle
The property manager has already well earned the first fee.
The property came with legacy renters. At first it was a bonus to buy into a property with existing rent coming in and they seemed like decent people at the first meeting. It also meant that I didn’t have to go out of pocket to make sure the place was move in ready: no cleaning crew, no equipment purchases or replacements.
Later, we discovered they were … well, kind of jerks.
Apparently the sale came as a surprise to them, but rather than discussing any concerns with me or my representatives during the sale and closing process, they shut them out and then became unreasonable when it was time to sign a new contract and pay the rent.
It seems that they felt entitled to having their alleged agreement with the previous owner honored (nothing existed in writing, mind you) without having discussed it with us at any point. They insisted that the previous owner was about to let them out of the lease and go month to month instead. Aside from how unlikely that is, their belligerence and rudeness destroyed any initial goodwill they might have traded on. Since they decided to insult the staff, I decided that if I had to abide by their existing lease as a term of the purchase, so do they.
The property manager gets to deal with their jerkitude each month until the lease runs out and I suspect we’ll be plenty happy to look for new renters at that point. We’ll do full background checks, and of course the lease policy will be quite clear.
At this point, I’m thrilled that I spent the money to have management services; it means I won’t be dealing with sullen faces, nasty attitudes, and having to personally chase them for rent each month.
Aside from that, the last thing I need to be adding to my plate is any version of the 3 am “there’s a leak and the pipes burst” sort of calls, so I made sure to hire management that takes care of everything, 24 hours.
So far…
I’ll have my hands full handling the financial aspects of this new venture, and I’m feeling a lot better about the whole thing now that we’ve weathered the first few bumps in the road.
I should probably wait at least six to twelve months before diving into more investments, but if this continues to work out pretty well, there may be another one on the horizon. This whole thing DID go much more smoothly than expected though, so I am tempering my enthusiasm. Just in case.
August 4, 2014
Part Two of the Real Estate Chronicle
The rush to get all the paperwork submitted for the loan approval kept me too busy to think much. There was all the checking of the fine print (hundreds of pages’ worth!), running the numbers, and signing document after document, but there was a moment right around the time I’d done all the paperwork and signed all the closing docs. A looooong moment, as I sat at my desk wondering if I was getting in over my head, taking on the responsibility of a loan and a property and renters and and and ….
Don’t get me wrong, I am absolutely hiring a property manager.
I can just about keep and maintain my own home, I also have Dad’s home to maintain and worry about long distance. Forget being a hands-on, DIY, LandLady! While the point of this is to make money, it’s also to make money in case my ability to hold my current 60+ hours/week job falls through. Killing myself on a semi-risky side gig would just be dirt stupid.
The fees involved in a real estate transaction are boggling, by the by. Having been around the PF block a few times, most fees weren’t a total surprise but they still seemed to add up ridiculously quickly. I’m reminded of all the times, in my 20s, I vowed to buy my first house in cash. Ah, youth!
Of the people working for me, I paid my real estate guy a fee ($400) upon completion of the purchase and the property manager is, of course, paid for services rendered. The mortgage guy was paid by the lender so I saw that fee, but that didn’t technically come out of my pocket.
Transactionally, there was: the appraisal ($575), the rate lock fee (aka origination charge), the title and title insurance charges, recording fees, and transfer taxes. Just to give you a SHORT list. Of course, the interest rate was higher as this was an investment purchase.
My monthly commitment to this property now includes: mortgage, insurance, property taxes, HOA and the property management fees.
There’s just something unsettling about making this big (for me) leap. Luckily, I had the support from my friend, as he answered all my questions and guided me through the process. The number of “is this normal” texts doesn’t even bear thinking on.
There was a bit of a lull between completing all the docs and arranging the down payment til we closed escrow and we got there in the end: I’m the proud owner of an investment property!
To be continued ….
July 21, 2014
Brace yourself, it’s hot stuff!
In my ~ 4 good days this year, my friend and I put our heads together in a massive information dump. He taught me everything he could about his investing plans which we’d been discussing on and off for a few years. Once I felt on relatively firm footing, he put me in touch with the people he’s done business with and if you ever doubt the value of a great referral, well, don’t. I was well taken care of and due in large part, I’m sure, to the email that said I was his “VERY good friend, so take care of her.”
The strategy was basic:
1. Find a property in a good neighborhood with good amenities at a decent price;
2. Rent only to the best possible tenants [steady income, good references];
3. Maintain the property well, and if the value steadily increases, eventually sell it.
4. Result: Rake in the income. [Hahah… no, not really, as you’ll see.]
My loan preapproval only hinted at the paperwork nightmare to come. I’d asked about what sort of documentation would be needed so that I could prepare it ahead of time but irritatingly, the broker didn’t tell me until he needed everything yesterday. Nevertheless, the preapproval was completed really quickly and we were off to the races.
We vetted more than a couple dozen possibilities and I was prepared to take several more weeks in trying to find the right fit but in surprisingly short order, much much more quickly than I expected considering we had to raise my initial ceiling on how much I wanted to spend, we were able to place several bids.
[See what I mean about the value of energy? If I had a few months of that stuff, I’d be flying high!]
The “favorite” of the four, ideally located and best-priced, required a bit of back and forth, but nothing critical. The property wasn’t perfect, what ever is? but it was fine for the purpose: renting it out for income.
I then spent the next week digging out every piece of possible paperwork they could demand going back two, sometimes three, years and discovering that my records weren’t actually as good as I thought they were – it’s both humbling and frustrating to realize how much better my recordkeeping needs to be.
Another humbling realization: Buying outside the hotbed of Bay Area real estate is a huge eye opener. Properties elsewhere look ridiculously affordable in comparison. I had the down payment sitting in my bank account! Now we’re neither rich nor poor, we’re somewhere in the middle. But if I were to try and buy here? I’d need ten or twelve more years of savings, roughly.
To be continued ….