Blog

It’s that time of the month again.

No not like that… the first week of the month, time to provide an update on how little work I did on my portfolio.

I felt silly calling it a portfolio when I had just two properties. Three? Totes legit.

    See: How I Locked Up My Third Rental Property Investment

First Some Thoughts

I was previously hesitant to give monthly updates because usually nothing much happens and it is too zoomed in to get any feel for how the numbers work out long term.

I finally caved. My goal is to show you how little time I typically spend with my passive approach to rental property investing.

And hopefully the numbers are compelling, but I don’t really worry about them too much. I have a decades-long approach to rental property investing, so any individual month isn’t that vital.

Not to mention the cash flow numbers are just one part of the overall return. Twice a year I go through all the numbers: appreciation, tax benefits, mortgage pay down, and more.

    See my latest deep dive into the numbers: 6 Months, $9596 More Dollars – Rental Property Portfolio Update

Atlanta

3 bed 2.5 bath, 2050 square feet
Purchased in 2011 for $81.5k, cash out refi in 2017, rent $1000 (goes to $1050 in 2018)

The tenant has been in the property for over 6 years, as long as I have owned it. That’s the good news. The bad news is they are typically 2-6 weeks behind on rent at any given time.

This month they are getting caught back up – moving from 6 weeks behind to around 2. Let’s see if they get all the way caught up.

I received deposits in my checking account of $810 and $500. That’s after the expense of $90 for property management. And before $760 PITI (so high because I did a cash out refinance). So this month my cash flow was $550 on this rental property.

How long did it take to earn this money? 10 minutes. I made a quick phone call to the property manager between the deposits to find out the payment plan they worked out (paying $600 every 2 weeks until caught up).

Memphis #1

3 bed 2 bath, 1450 square feet
Purchased in 2014 for $93k, rent $1020

The rent of $1020 was collected. Property management is 10%, so $102. The plumber had to come out to replace the flapper on a leaking toilet, which came to $103. Then $560 goes to PITI. So in September cash flow was $255.

I spent about 20 minutes on this property because a new lease was signed and I went through the paperwork to find out the details.

This tenant started a 2 year lease in March 2016. It really did not start out well with the new tenant. After 10 months, we were averaging $225 a month in repairs. Ouch. It seemed like this tenant called about any minor thing.

    See: My Roller Coaster Cash Flow on a Rental Property Investment

It has been 10 months since then with minimal repairs. I won’t go through now and add it up, but just a few hundred total including this month’s toilet fix.

Replacing a tenant is expensive. On this property the 2016 tenant turnover cost $2400 between fees and the property being vacant for a little while.

    See: Tenant Turnover From Thousands of Miles Away

So considering this tenant stabilized with fewer maintenance calls, I wanted her to stay. This property management company is on top of it – they already approached the tenant to sign a new lease before it is up in March 2018.

The tenant signed a new 2 year lease with modest rent increases of $1035 the first year and $1045 the second year. For re-upping for 2 years the tenant receives $150 off their March 2018 rent.

The rent increase is nice, but the big win here is avoiding the need to find a new tenant, which costs $1.5-2.5k and gives back a huge chunk of your hard earned cash flow.

Memphis #2

5 bed 2 bath, 2200 square feet
Purchased in 2017 for $105k, rent $1100 (pending)

This is the latest property – I closed on September 22nd.

    See: The Surprising 95 Day Closing of Rental Property #3

How much time did I spent on the closing in September? Maybe 2 and a half hours. I received the appraisal and went through it to understand the comps used. I received the closing package by email and read through all the documents before the notary came over to have me sign.

Since the closing I have spent maybe 15 minutes. I called a few times to get an update on the placement of the tenant. They outsource it to someone else, which once again makes communication tricky.

Things are in motion, but honestly not off to a great start with this new property management company. My phone calls typically go to voicemail and my messages typically aren’t returned. I’m beginning to think email will work best with them.

How about the cash flow? Nothing yet. It will hopefully rent at $1100 soon with 8% going to the property manager and $598 for PITI. The first mortgage payment isn’t due until November 1st though, so no expenses yet.

$805 in 3 hours and 15 Minutes

Total cash flow in September was $805 against 3 hours and 15 minutes spent.

Obvious caveats apply like setting aside money for maintenance, repairs, tenant turnover, etc. There will be negative months.

Most of the time was spent on the closing. Once property #3 is rented, I should hopefully spend only about an hour a month keeping an eye on all three.

The Snowball is Gaining Mass

On my email list I discuss how I think of my portfolio as a snowball rolling down the hill.

With each turn the snowball gathers more mass – the bigger it is, the more it gains – exponential growth. It starts slowly at first though, barely noticeable.

After the refi on property #1 and purchase of property #3, I feel like I have turned a corner on the exponential growth of my rental portfolio.

By reinvesting the cash flow, my properties can feed the buying of more properties, which increases the cash flow and speeds up the ability to buy the next property.

I still have some proceeds from the cash out refinance and I just cashflowed $805 in one month. Pretty soon I’ll have enough for the next rental property!

It’s official – I’m the proud owner of my third rental property!

A mobile notary came over to my house last Friday with a huge stack of papers for me to sign. That drew to an end a surprisingly long 95 days since my verbal commitment to the seller.

No, the slow part wasn’t the notary…

Recapping the Deets

It is a big 5 bed, 2 bath in a Memphis suburb. Purchased for $105k should rent for $1100.

    Details on finding the property: How I Locked Up My Third Rental Property Investment

Here is the after rehab video:

What Took So Long?

The appraisal.

It started with a request from me in late July that the lender hold on ordering the appraisal. I wanted to make sure the rehab work was finalized, but I made a couple mistakes.

I thought I was delaying the appraisal and inspection, but the inspection had already been ordered. Ooops.

The rehab was almost finished, so I just wanted to wait another few days. I thought there was still plenty of time before our original target closing date of mid-August.

I wasn’t exactly on top of things though. My wife and I went from a Flagstaff family reunion, to Chicago to celebrate my mom’s 60th birthday, to Bigfork Montana for a wedding. During the two week trip, real estate wasn’t always top of mind.

A week and a half went by before the bank reached out and said “can we order the appraisal?” I said “oops, go ahead”.

The Appraisal Process

Turns out I shouldn’t have delayed anyways because appraisals are slow going these days. I assumed it would have been like the last purchase I made in 2014. Given the tons of home sales in 2017, it wasn’t.

    I should have read:Turnkey Rentals in 2017: Why You Need to Adjust Your Approach

One of the issues that led to the financial crisis was appraisers weren’t exactly independent. Banks could choose who they used, going with appraisers who would do whatever the banks wanted – essentially always quickly giving back a good valuation.

Now there is an intermediary. The lender puts in a request to a separate appraisal scheduling company (who I will refer to as “the appraisal desk”). This company has a pool of appraisers they use, and assign someone without the bank being involved.

That’s great and all, but boy did it slow things down! My lender’s communication with this outsourced appraisal desk was like a game of telephone: slow and unreliable.

Here’s what happened:

• I delayed the start 1.5 weeks accidentally
• Appraisal is ordered and it takes 1 week for appraiser #1 to call the seller to schedule
• The seller rejected the appraiser after he supposedly said he doesn’t use rentals as comps, so he requested it be reassigned to a new appraiser
• Another week goes by before appraiser #2 reaches out
• Appraiser #2 calls the seller and leaves a voicemail. Then he tells the appraisal desk he is too busy for the job, so turns it down.
• That same day the seller calls appraiser #2 back and he agrees to take the job. They schedule a date and just have to let the appraisal desk know it’s back on.
• The appraisal desk never gets back to him before the scheduled appraisal date, so appraiser #2 cancels the appointment
• Meanwhile it has been assigned to appraiser #3, but it took another week for him to call and schedule for a week out
• Appraiser #3 turns in the report to the appraisal desk, but there are unknown delays. Maybe they wanted to replace a comp or two?
• Two weeks after the initial appraisal was submitted, I get a copy
• Closing is scheduled for 1 week later

What a mess!

It would have been so much easier if the appraisal desk had simply kept with appraiser #2 and replied to his emails. It seems like there was a 1 week delay any time someone contacted the appraisal desk. Maybe emails are printed and delivered by pony express?

Throughout this I was talking to my two contacts (seller and lender), trying to facilitate communication between two other people (appraisal desk and appraiser).

When the mess with appraiser #2 was happening, my lender said: “You are way more involved at this point that 99% of buyers.”

To which I replied: “That’s because I’ve lost confidence in your chain of communication and ability to get this done.”

In the end, the appraisal came back as expected ($105k) and everything was a go.

What Did I Learn?

Sometimes things don’t go as planned…

Just like working with a property manager, I found myself working the lender to instill a sense of urgency. If they had a task to take care of, I was making daily phone calls.

One of my take-aways is that the lender isn’t the only person I needed to worry about – whoever they outsource the appraisals to is important as well. I’m not sure I could have known this ahead of time, but I sure didn’t feel there was a good enough channel of communication between them. Or that the lender was on my side and hustling enough.

So next time I’ll probably go back to the lender (#1) I used on my first two properties (the refi was also through lender #2). It was a tiny more expensive, but worth it.

I also learned that I shouldn’t assume I know everything just because this is my 3rd rental property. It wasn’t exactly the same as last time and I made a small mistake because of it (while distracted with my personal life).

Fresh eyes with a beginner’s mindset next time.

All Good Now

The seller could have backed out and found another buyer since it was beyond our initially agreed upon window. Or the appraisal could have finally come back too low.

Even though it took a while, everything worked out in the end. So all things considered, waiting a bit longer is no big deal!

I want to hear from you – have you had any surprises during a rental property closing process? Did it work out in the end?