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Property Management Update – The Good, The Bad, The Lazy

July 14, 2016

On a typical day, I don’t give my rental properties any thought. There is a property manager to collect the rent and handle any repair phone calls.

When the property has a tenant in place, it is pretty typical to just have one email or phone call with the property manager per month. Or zero. Hardly any work at all.

But when I look back at the last 6 months, some trends start to emerge – this analysis is a great chance for me to realize what I need to do.

My goal is to show potential investors the two sides of the coin. It’s not that hard and it’s a pain. Somehow both are true.

Managing Your Manager

The goal of the investor is to make sure their property manager is doing their job. This is the case when you look into their hoa compliance, and when you consider what their work means. The rent is collected and deposited into your account. They handle all tenant calls and minor repairs without discussing with the investor. Instead, there is a short month summary sent.

Most of these details were pulled directly from the monthly summary email. Then I sometimes follow up by email or phone for additional information – what was the repair in more detail? Are there before and after pictures?

I also double check the money was deposited and matches up with the report – just generally keeping an eye on things.

The Bad – Late Payments

The Atlanta tenant has been in the property 5 years now. This really helps cash flow because as we saw with the Memphis property, tenant turnover is very costly.

But slowly over the course of 2015 the tenant fell behind on payments. Rent is due on the 1st of the month and she paid a week late. Then the next month it slipped another week, compounding the problem. Some months were on time, but the issue peaked at nearly 2 months late on payments.

We were perhaps a little more lenient than we normally would have been since this tenant had a four year history of paying on time. But we weren’t push overs.

Twice when she said she would have a payment by a certain time, we filed the eviction paperwork. Both times she caught up enough and paid the paperwork fee on top to keep the game going.

The Good – All Caught Up!

After an entire year various levels of behind on rent, then tenant is now caught up. So rather than exactly 6 payments of $950 for 2016, the tenant has paid much more – $7,665 towards rent, plus a little more for late fees and the eviction paperwork expense!

This is really going to help the cash flow numbers for 2016. It balances out the disappointing cash flow numbers from last year.

Rent payments the last several months have been on time and we won’t let that happen again. But I’m glad it worked out!

The Bad – Repairs

I already covered the process of placing a new tenant in the Memphis property through January and February. There were several repairs that were done to get the property ready for a new tenant, but let’s cover what has happened since then.

Even though a lot was done in January, there were still quite a few repairs that weren’t all that cheap:

Replaced fill valve in master bath and hall bathroom. Repaired broken commode collar. $373
Repaired closet shelves and re-secured fan. $111
Water heater T-and-P valve. $99

In Atlanta there were some storms that damaged shingles and vinyl siding, but this could easily be repaired by looking for siding replacement alpharetta has to offer (if I were closer to this area). But as this is Atlanta, I’m going to have to find a service closer by!

The property manager pushed off making these cosmetic repairs until they were completely caught up on rent, which was a great move. She finally sent someone out to do the repairs and the total came to $245.

The total repairs for the last 6 months, excluding the expensive tenant turnover, were $828. Ouch!

My rough budget for repairs is $70 per month per property, which comes to $840 for the half-year. I went well over including the repairs not billed to the previous tenant during the tenant turnover. However, it is lucky that the valves for the water heater were found, otherwise, I’d have had to look into websites similar to bouldenbrothers.com/water-heater-replacement/ for a full water heater replacement, and that would have increased the total bill significantly! Then again, if a problem with a water heater cannot be resolved then a replacement may be necessary – it’s either that or no hot water! However, most problems can be rectified with some assistance from plumbing experts – navigate here to learn about some of the problems they can help with.

The Lazy

I believe I am paying too much for property management and repair mark-ups in Memphis. But I haven’t shopped around for a new property manager or decided to try self-managing yet.

I discussed raising the rents with the Atlanta property manager a couple months ago. It still hasn’t happened. I guess I haven’t followed up frequently enough to make it happen.

The insurance costs have gone up from roughly $600 to $850 a year on the Atlanta property over the course of 5 years. I know I should shop around for new rates, but haven’t done anything yet.

Part of this laziness is not wanting to rock the boat during a busy time in my personal life – the last thing I want to do on my honeymoon is deal with any issues that could come out of raising the rent (like a vacancy) or changing property managers.

As a result, I’m leaving a little bit of money on the table each month.

Overall: Pretty Solid

Extra rent money, more repairs than expected. I still come out ahead over the last six months.

What do you think? Was this a good first half of the year or would you be disappointed by this?

Portfolio Update – How Rentals Added $10k to My Net Worth the Last 6 Months

July 7, 2016

It is mind blowing how any given second you can know the price of a share of stock.

Actually, that understates it – milliseconds. The price changes fractions of a penny every millisecond.

High frequency traders jostle for the best position in line. Each mile of fiber-optic cable adds a .001 millisecond delay, so they want to be as close as possible to the action.

The cables aren’t always a straight shot, sometimes they wind around 15 miles to travel just 1 mile as the crow flies. Which actually affects real estate prices – firms are willing to pay millions more for the optimal locations.

Prices move much slower with real estate. Transactions take time and effort, which gives an advantage to small time investors like myself, otherwise Wall Street firms would dominate the market.

Six Month Check In

Twice a year I run the numbers on my rental portfolio, which consists of just two properties right now. Lest you think I’m some sophisticated professional investor, let me point out I spent more time on this analysis and write up than I have managing my portfolio the last several months combined!

I feel every six months is the right interval for this analysis. I have a multi-decade outlook, so don’t need to constantly know how I’m doing. Sometimes too frequently monitoring can take your eye off the long-term goal.

But it is important to keep an eye on things in order to adjust if necessary. So how are things going?

Checking the Estimated Prices

My method isn’t exactly scientific, but it’s just an estimate anyway – a house is worth what someone will pay for it, comparables only go so far.

I look up the Zillow price estimate and adjust down if I feel it is necessary. For my Atlanta property the last couple years I have used 90% of the Zillow price and will continue to do so.

The Memphis property shot up $7k on Zillow in the last 6 months, which is awesome, but probably not too accurate. So this is the first time I will adjust the estimate, taking 95% of it as my value.

In the future, I might average the estimates across multiple sites: Zillow, Trulia, Redfin, etc. At first glance, the estimates are all of the map, so perhaps the average will be more accurate than my current method.

The Numbers

First the Atlanta property, which I have owned 5 years now:

The Memphis property I have only owned 2 years:

And the portfolio overall:

Things Are Going Well!

The strong appreciation greatly increased the overall earnings my the portfolio. In 2016 dollars, I have made $43k through rental properties. Just in the last 6 months, my net worth has increased $10k with no effort from me!

The yearly rate of return stayed at 29%, which is a relief because I didn’t want to have to change it everywhere I have it posted on Rental Mindset, Twitter, and Facebook.

This is also better than expected. I would think the yearly rate of return would decline a little between purchases, with the snowball effect of the entire portfolio boosting it back up. In other words, when I double down later this year to refinance the equity of property 1 to purchase another rental, that equity will be put to work. Right now there is a lot of lazy equity in property 1.

Next I’ll provide a recap of the property management over the last 6 months. Is there anything specific you would like to hear?

Download the full spreadsheet and link to the online version

How Would You Approach Paying Off These Loans?

June 30, 2016

The internet is a dangerous place to ask for advice.

There are a lot of haters our there – trolls – who spew negativity because their life is miserable.

Yet everyone I’ve encountered on personal finance blogs is very accepting and the comment sections are full of positivity. There are people who offer help if you need help and it can be a weight off your shoulders knowing that you’re not alone with particular problems. My guess is anyone who takes the time to better themselves by reading stuff like this is just a little more awesome.

Curious about what I’m reading? Cash Flow Diaries is another dude in his early 30s doing a similar turnkey real estate approach. Gen Y Finance Guy has an excellent all-round financial plan and is crushing it.

So I’m seeking your opinion on a not too hypothetical situation.

Imagine This…

These aren’t my numbers, but let’s go through this as a thought exercise. You have:

$20k car loan, 5 years at 3%
$50k student loan, 15 years at 6%
$100k rental property mortgage, 25 years at 5%

After a fitful night of sleep, you wake up grumpy and blame it on your lumpy mattress. Why is it so lumpy? In an uncharacteristic fit of anger you punch the mattress. To your surprise, it feels like something is inside …

Not wanting a dead animal in there, you decide to cut it open with the best tool you have in your apartment: a kitchen knife.

The battle is long and messy, but eventually you make a hole big enough to peer in. It’s too dark to see anything and you are scared to just reach in. So you take out your iPhone, turn on the flash light, and finally get a glimpse.

Bills, bills, bills.

$20k in cash is all yours.

What do you do with it?

Oh the Possibilities

Let’s quickly rule out blowing the money on an extended vacation. You want to use this to get ahead financially.

What a coincidence, your car loan balance is exactly $20k. Maybe you should just pay that off in full?

But the student loan is the highest interest rate – maybe the $20k should be put towards that?

You are also a rental property investor and that is exactly the down payment for another single family home. With a 20 year time horizon, you are confident you can make a 20% yearly return.

What is the right move?

People Face a Similar Decision all the Time

Many people with student loans are also contributing to retirement accounts. They are facing a similar decision with every paycheck – should I pay down my loan that is at 6% or contribute to my 401k with a tax advantaged projected 8% return?

If you run the math, it says to use low rate loans to your advantage. Rather than paying off a 3% car loan, you are better off putting that money to use anywhere else.

Obvious side note – that doesn’t mean it is a good idea to go get as expensive a car as possible to have a large loan. Let’s say the example above was actually two dependable $10k used cars, not one brand new car. You want a car that will get the job done and also to put your money to work.

Borrowing Money is Not Inherently Evil

Credit card debt is absolutely horrible. However, it is something that people can find help to get out of; the services of CreditAssociates are an example of the forms of debt relief that are available to people in such situations. About a third of Americans carry a balance and pay an extreme 20% interest on their borrowing. To make it worse, too often the money is used with very little thought to buy crap they don’t need. However, others are genuinely in need of money to help them out of a rut and that could require some flexible borrowing. A solution to this could be using a title loan (https://www.thenetlender.com) to help them acquire the necessary funds they need to get by – it involves utilizing the money tied up in your existing vehicle.

Credit card debt can seriously affect someone’s credit score and they may find that they can’t lend money when they need to as they have numerous debts against there name. There are specifically designed credit cards for no credit so if someone desperately needs a credit card, they do have a lifeline.

This hatred of credit card debt is extended to other areas as well. Rather than evaluating each situation on its merits, many are lazy and extend this belief too far, not realizing the power of leverage through rental property investing – loans your tenant pays off for you.

So I Have a Car Loan…

Car loans are in fact bad debt. You are paying for something that is worth less as time passes. Compare that to a rental property, where you are paying for an asset that keeps going up in value. Obviously one is better than the other.

Despite know this, I just purchased a used car and took out 100% financing! Shocking right? What was I thinking?

First, I am capable of purchasing without taking the financing into account. Too many people purchase the nicest car their monthly payment will allow.

I also know I have the discipline to pay it off early if it is the best path. In fact, I can treat it as a 4 month loan and pay it off completely in one lump sum. I decided to pay a little bit for this option with wedding and honeymoon expenses these next couple months.

But I’m interested in hearing your thoughts.

What Do You Think?

1) How should the person who found $20k in the mattress use the money?

2) Should someone who is purchasing a car and has a student loan at 6% – pay in cash OR take out a 3% car loan to pay down the student loan faster?

3) Should someone who has a student loan at 6% and is able to save $1k per month – pay down their student loan OR contribute to a 401k.

Do You Avoid Talking on the Phone?

June 22, 2016

“I’m not scared, I just don’t want to do it” says the kid at the top of the water slide. Ya sure …

Do you pull the same thing now as an adult?

“I don’t have a fear of public speaking, I’d just rather not do it.” Uh huh. What other things are you avoiding because of a hidden fear?

Believe it or not, talking on the phone is a common fear that is key to overcome for passive rental property investing.

Why Would Anyone Be Scared of the Phone?

According to Cell Phone Deal statistics, 47 percent of Americans say that they can’t live without their phones. In spite of these statistics, many people are still afraid when it comes to attending phone calls. Some of these people might have a telephone phobia or something similar, but what about the others?

When it comes to phone calls, how do we all react? We don’t do it enough. The few phone calls we have are with our mothers and conference calls at work. Who wants more of those? (Mom, of course I want to talk more often I’m just making a point that other people don’t want to…)

We would much rather text for personal communication or email for work communication.

This might be because we are afraid of sounding dumb. The live aspect of the phone call with an immediate response includes more pressure – what if I say something stupid? What if I don’t know how to reply? What if I forget my next question?

Can’t I Just Send an Email and Get the Same Results?

Phone calls have several advantages. First, you can tailor the conversation specific to your situation. Phone calls are called synchronous communication, where emails (more on that below) are called asynchronous communication, both give you a result but they are different outcomes. To understand this better, websites like Loom can offer further insight into the pros and cons of these communicative devices in a more detailed way.

If you send an email with multiple paragraphs including the complete background of your unique situation, do you think anyone is going to read it, or just skim it? Are they going to craft a reply specific for you, or copy and paste from a template?

On the phone, there is a greater bandwidth. You can provide background information and address your concerns much faster, with the guarantee that someone is paying attention.

It is also much better for tough conversations, like interviewing or negotiating. Can you effectively interview someone over email and decide to trust them with your business? If you ask for a better price over email, how easy is it for them to just send a perfectly crafted reply turning you down?

What Does This Have to Do With Rental Property Investing?

Our goal is passive income, which means others do a lot of the work for you. There will be many people on your team: lenders, turnkey rehab companies, property managers, insurance providers, and more.

There is a lot to know and asking experts your specific questions is the fastest way to learn.

There are several difficult conversations, like interviewing property managers to decide who you trust. Or negotiating the repair work with the turnkey company. It’s not effective to have these conversations over email, you will have to get on the phone!

Examine Your Behavior

Often the only way you know if you are scared of something is to observe your behavior. Most likely talking on the phone doesn’t give you an anxiety attack, but notice your actions. If it does give you an anxiety attack, you may want to research into ways that can help reduce that worry. Resources such as Mankind Dispensary may be the right pathway to take, but as always, discussing this with your primary healthcare physician before doing anything is paramount.

Do you put off a phone call you need to make for days or weeks? When you do finally make the call, are you as short as possible, often realizing after you hang up you had another thing you wanted to discuss?

Have you asked tough questions over the phone? Are you comfortable with silence or do you just keep rambling on?

This is a skill that will improve with practice. You don’t even have to apply it to rental property investing immediately – Ramit Sethi has a bunch of word for word scripts you can use to negotiate your phone bill and car insurance.

Ultimately, there is no denying that switching your telephone service provider can save you a significant amount of money. For example, a friend of mine recently switched to a satellite internet bundle that includes both telephone and internet services. Quite often these types of packages are more affordable than opting for services from different providers. Moreover, with satellite telephone and internet bundles rising in popularity, it is well worth researching whether making the switch could help you to secure a more affordable deal.

Start with the Right Mindset

First realize how irrational this fear is and commit to facing it head on. Set the goal of improving through practice, not perfection on day one.

With rental property investing, you can start with “throw away” leads so don’t worry about sounding dumb. If you mess up you never have to talk to them again. For example, how many hundreds or thousands of lenders are out there that work with investors? Practice first with one you aren’t likely to go with anyways.

It might help to write out the exact questions you want to ask ahead of time. Add to your script as you learn new questions to ask.

If you really don’t know where to start, talk with one of the national marketers of turnkey properties who have investment counselors. They are more than willing to talk about the entire investing process in the hopes you will purchase through them. I asked so many beginner questions in 2011, I am amazed how much time they spent with me. If you want to connect with the same counselors I work with, let me know.

With a little effort you will quickly improve. You’ll no longer procrastinate your phone calls and be able to learn much faster by asking experts your exact questions. You’ll be able to evaluate the differences between multiple providers and pick the best one for you.

Have you noticed you are hesitant to pick up the phone now that email and texting are our primary digital communication? What real estate phone calls have you learned from the most?

Photo: Ant & Carrie Coleman