​Mike's Month - An Inside Look at Being an Investor (8/20/15)

Mike's Month of Investing (8/20/15)

Ha. So much for updating this every week. Dropped down to every 2 and now its been a month. Just been crazy busy these days trying to wrap up some lingering rehabs and re-lease a couple of houses that turned over.

We have some stories to share though.

Feel free to check out the link in my profile for the Youtube channel to see my before and after videos.

1) TENANTS

Here are some updates on my tenant stuff.

Lets see. We had three people move out recently.

Meghan Ct moved out because the husband got hit with a huge boost to child support. No notice and they were only there for 5 months so they were breaking the lease to boot.

I kept half the security deposit for breaking the lease but we had it rented after a month of vacancy so not too bad. Tenant moving in on the first.

Bradley Dearborn. New tenant moved in. The neighbor actually put me together with them. They were their former neighbors. Seem like they could be long time tenants so thats always a plus.

Finally, Amhurst tenants closed on the purchase of their house and moved out. They were smokers and they also snuck ferrets in there. Well, needless to say the house was awful. Its a relatively new house and was in near new construction conditionw when they moved in.

But the entire house had to be repainted. Carpets cleaned. Vents cleaned (the ferrets had gotten into the ductwork somehow). I'm actually super lucky these guys moved out when they did. Another couple of years and that place would have been expensive to do the make ready on.

As it is, we had to paint the entire house. And we replaced some older laminate in the living room and a kitchen faucet. But we got some really good renters in there now. Daughter is going to college nearby so the mom is moving in with her as the family sells their home up north.

They plan on staying thru the college years and then probably moving on.

But everything is currently leased up except for Jordan - and we're just wrapping up the rehab on that one this week. I'm not counting peotone really as I just closed on that one a little bit ago and haven't started the rehab yet.

Stratford is rented to an insurance company for 2,100 a month. I was only asking for 1,650 but they wanted a short term lease so I told thats the number it would take for me to do that.

The Monee house (astor ln) is also spoken for. waiting on the village final occupancy inspection on monday and the tenant is ready to move in.

Just got two notices for moveouts for next month too. One is a bourbonnais house. They said they were moving one town over to get a lower rent (the town over has lesser schools so rents are cheaper there).

Nice thing about that one is that I had a showing at stratford and they really liked it but needed 4 bedrooms. They told me they'd be searching for months to find something in bourbonnais with 4 bedrooms and haven't had any luck. But to let them know if I had something come up. This applicant tried the drummond house too but that was way too small.

So I emailed them and they were thrilled. They looked at the after rehab video of the house that I post on youtube and I'm showing it to them tomorrow. Pretty sure they'll take it though.

Great house. Rent is reasonable for the area/schools (1375 - which is actually a $25 bump from the 1350 I'm getting today). 4 bedrooms, 2full baths, 1650 sq ft. I opened up a wall between the living room and kitchen to give it more space. And then I converted a back addition into a master bedroom with a walk in closet and master bath. Full bath was also completely updated.

Pretty confident I'll get that one rented fairly easily.

The other notice was for a smaller brick house in sauk village. That one had a family sharing the rents. The mom had two kids and one of the kids had kids. Some kind of issue between the mom's teenage son and the daughters little kids so they're having to split up and are moving out.

That one is going to be a pain because its one of our earlier houses and is further away. And sauk village is not the best of areas. On a brighter side is that house is a lower rent (1100) so if I have to eat a month of rent on one, that would be the one I would pick to do it. Much easier than eating a month of rent on the 1,400 to 1,500 houses. :-)

As for repairs. We had a couple of roof repairs that were done recently with some critters that were getting in. Had a drain that had to be dug out and replaced (850). And had a couple of minor hvac issues and some garage door problems but that was about it.

Nothing major. No new roofs. No new hvacs. So its shaping up to be a really good year. Granted most of the houses I have get a new hvac these days unless they look really good. So that helps.... But still.

Tenants all appear to be happy and I'm having pretty good luck getting contractors out to deal with the issues lately which is refreshing. I think some people think that landlords biggest issue with doing repairs is the cost. Thats not it. Its finding a contractor that will get out to a house to do minor repairs. Thats the part I dread the most.

Can't tell you how many no shows I've dealt with over the years. Thats a tough thing to explain to a tenant that has taken time off work to be home.

2) REHAB

Stratford. The stratford rehab is a combination of the movie "the money pit" and willy wonka's everlasting gobstopper. This house just won't go away.

But we're finally wrapping everything up this week. Its taken a toll. Plumbing done. Electrical done. Carpet is in. Trim, doors, cabinets, garage door. Paver walkway to the front door. New front door. If its an object in a house, this crazy house had to have a new one.

And, of course, the Stratford curse as all the contractors have been referring to it as, hit me again. I completely messed up the bathroom vanities. No idea what I was thinking.

Got em in and they didn't work. Both of them were simply the wrong size. I had to buy new ones for both bathrooms that were smaller. And had to move them over too.

The plumber was livid. Finally, after listening to him try to convince me otherwise, I told him. Listen. I made a mistake. I have to fix it. If you can't do it, I'll find someone that will. Otherwise, give me a price and move the connections.

In the main bath, the vanity and toilet were on opposite ends of the walls and there was hardly any room to walk between em. It was embarrasing. Not only did I mess up one bathroom, but I messed up two. No idea.

Lesson learned there. Tape stuff off. But REMEMBER to tape off the width AND the depth of the items. My widths were fine. Not so much the depths. :-)

And then, the curse continued again. I ordered all new lowers. Got the wrong size on one of them. So I had the contractor pick up another cabinet at menars because he said it was a match. I got to the house that night and the thing was all wrong. Doors were completely off. So i went and found another cabinet that worked.

Didn't cost me anything there. But what a fiasco. :-)

The tenant is moving in on the 26th and I think I'm going to take the day off work just to celebrate getting that one finished. Its killing me.

Jordan. That house has taken longer than I had hoped given how small it is. But its pretty much done as well. Had a bit of an issue on the granite countertops though. Waited 3 weeks for the granite. Finally came and the guy calls me and says the cabinets won't support it.

I'm like what? You guys went out there to measure 4 weeks ago. Why didn't you catch that then? He says it wasn't him. I said, I don't care. And I told him there's no way I'm getting stuck paying for these countertops. Then he hesitated as if I was going to have to pay for them anyway. And then I went nuts.

My contractor, who was at the house, ended up taking the phone. I told him in no uncertain terms and with some 4 letter choice words as well that they better hope they don't think I'm getting stuck paying 1,500 for countertops that they can't install. It was quite the rage.

I know some people who think its best to try to remain cordial at all times in business. But I'm not really someone that subscribes to that theory. :-)

I tend to be very understanding when someone hoses me but has a very good reason. But at some point, you're not going to get away with pure nonsense.

At the end of the day, the contractor and installer worked something out to get the countertops in. He did some bracing and everybody was happy and they went it.

But there are some of these moments that are going to occur where if you're nice all the time, these contractors/companies will walk all over you. I think I try to balance things out a bit when I can. But sometimes, it really is the squeaky wheel that gets the grease. And sometimes a little bit of venom helps get a point across with these people.

I don't know that I do that with my own contractors. But with vendors - definitely. And villages too.

Good example of that is this monee/astor ln house. Finished the work the village required. My wife went in to schedule the final occupancy. The village told her they no longer had an inspector and she'd have to get some guidance as to what she could do. I called in and asked to speak to them. Got vmail. Left vmail. Called in the next day and left another vmail with the head building dept guy. No response.

At some point, you just need to share some of the frustration so they jump a little. Called the village again and just wanted to get to a voice. Shared my frustration and let them know they better do something with this inspection issue (I proposed a temp occupancy until they hire one) or I was moving the tenant in the next day no matter what.

Got a call the next day that they would have someone there.

Again, sometimes, thats just what it takes to get things done with these people. As an investor, you get used to having to overcome problems and figuring out solutions. But most of these other people have no clue. And they're more than happy to just let things lie and do nothing.

3) ACQUISITION

Got another one under contract. That will make 44!

This new one is not much a cash flow deal. Its more about a big equity capture play. The house is a 4bdrm, 2.5 bath, 3,200 sq ft with a full basement (unfinished). Great subdivision. Built in 78. Its definitely dated but great structure. Roof, foundation, windows, etc all good.

Room sizes are enormous. All 4 bedrooms have large walk in closets. But one bedroom is super small. Its not even big enough for a bed.

I'm going to reconfigure some of the upstairs and double the size of the bedroom. Tons of dead space up there that we can fix.

It was listed at 125, then they dropped it to 115k and then I went to take a look. I knew they were about to drop it again soon so I wanted to be ready. Sure enough they dropped it to 105k and I put my offer in. 95k. They countered at 102k. I countered back at 96k - highest and last offer.

They sat on that for a couple of days and then agreed. Probably needs about 40k in rehab so I should be all in at 136. Should appraise out for about 210k or more.

Cash flow wise, not so good. I think I can get 2k a month in rent. But I also know that my vacancy rate will be higher because thats a heft rent amount so the house will likely sit longer between turnovers as not many people are looking to rent in that price range.

And taxes are crazy high. This house last sold for 280k and the taxes are over 8k. Insurance will likely be 80/mo as well. So 850/mo taxes and insurance. Mortgage on 136k loan? 850? Only 300 a month in gross profit. With repairs, vacancy, etc, I'll be lucky to net $50 or $100/mo.

However, I should have some great principal paydown (250 to 300/mo). But the real value to me is the equity capture. Even if I break even, I'll be happy. In 10 years, this should be a 300k to 350k house and I should only owe about 90k by then.

These types of houses just don't come along that often at a price that the numbers can come close enough to working. I also think this goes back to just the overall portfolio of homes you have. I wouldn't want 50 of these types of deals on the books. There would be no real profits or very little. But when you have 40+ homes that do turn in a nice profit, you can afford to take on one of these types of deals to grab that equtiy.

But even with that deal, the acquisition phase has slowed down quite a bit. Thats basically going to be about a 2 month gap in purchases which is longer than any other gap we've had in the last 9 or 10 mos.

Prices have definitely gone up in my areas so I'm expanding my deal criteria a little lately. Jordan was a 1,000 sq ft home which is much smaller than I normally consider. Peotone was an older home than I normally consider. And now this beecher home was a much larger and lower cash flow home than I normally consider.

But as a whole these houses are all really great pickups for me. And they were all picked up for very little out of pocket as I was able to pick up each one of them where the purchase plus the rehab came in under the 70% ARV number.

Still. I have some other offers out there. I have a best and highest situation on a house in braidwood thats right next door to my other really big home (5bdrm, 2.5 bath, 2,500 sq ft). The homes were built in the late 90's or early 2000's so they're relatively new and very nice.

Hoping to get this one because I thought it would be neat to own two houses next to each other in that nice of a subdivision. And I'm only about 5k off list which is usually pretty likely to be accepted. But the list price is just so crazy low and the house is in such good condition that I have to believe there is an owner occupant out there putting in a bid. And I never win these best and highest situations. I'm just too much of a bottom feeder I guess. :-)

4) FINANCING.

Several refi's have gone through. Had one where the appraisal came in so much lower than I thought was reasonable that I paid to have another one done - even though the bank was actually still going to do the loan. I just wasn't happy with the number and quite honestly the comps that were used just made no sense.

I even filed a complaint with the state on the appraiser. I initially asked the bank to have the appraiser review the appraisal. He wouldn't budge.

I then emailed my realtor that he would never be allowed in any of my homes again. So while you may not be able to pick your appraiser, you do have the right to pick someone you refuse to let do the appraisal.

He's on the list - of 1. And, apparently, he talked to my realtor as well. He claims that when my wife showed him the house, he asked her what work had been done and he said that she told him nothing. And that was the real reason he couldn't come up on his crazy number.

And, of course, I called Nonsense to that explanation. I know my wife didn't tell him we did nothing. She was there when both bathrooms were being gutted and also when all the paneling was being removed and the countertops were going in and the tile backsplash went up.

I was livid. Even better was that I had a friend do a rehab just a block over with almost the exact same specs. He shared his appraisal with me and his came in at 165k. Mine was 141k.

The biggest kicker was that both appraisals had used a couple of the same comps. But my guy used a couple of crazy comps for the other ones that really brought the numbers down.

I can't wait to see what this new appraisal comes in at. If it comes in at anything over 150k, I might send the first appraiser a copy. :-)

Also on the refi front, one of the local banks was bought out by a regional bank and is ramping up their investment property loans. The director of the title company I use took a job as the president of the bank as part of the purchase. And he was very familiar with my deals.

They've got some real nice loan products (75% Ltv, 4.5% rates, 5yr ARMs - rate is locked for first five years and then resets based on prime - so no renewal necessary).

Working on getting a couple of refi's done with them as we speak.

Lastly, I'm working on a blanket loan to pull some cash out and reset my finances. Tried a mortgage broker but really had no luck there. Just couldn't get them to do 75% LTV. And I didn't see the purpose in doing 70% as that would not be enough cash out to make it worth my time/effort/costs.

Then I found a lender that shared with me some of the methods they used to determining what they had to have to hit that 75% LTV. I reconfigured the homes I was including in the loan and "voila". I was approved for blanket loan at 75% LTV. 30 amortization. 5 year ballon. 6% interest rate.

I'm including 7 houses into the loan and should be able to pull out about 100k based on my estimated values of the homes.

However, we have received 5 appraisals out of the 7 homes back and so far, I'm about 50k over my initial estimates (I tend to estimate my values on the low end just to be conservative).

So even if these last two homes come in at my numbers, I could actually pull out an additional 37k or so.

Its still going to require some changes on my side though so its not as easy as it makes it sound. The blanket loan requires me to create a new entity and manage those properties in that one entity. So I needed to create a new corporation, I'll need a new bank account, will need to do tax returns, etc, etc, etc.

But thats just what it takes these days to get these blanket loans from these institutional investors. And because I'm refinancing some of these previous deals where the rates were a little higher and the amort a little shorter, it looks like I'll be able to pull out about 120k to 130k and my payments will only go up about 200/mo or so.

Not bad. What I am losing, though, is principal paydown. I think I'll be losing about $600/mo in principal paydown.

And thats one thing that I don't see mentioned often enough when it comes to profit/loan terms on a deal. Your profit in net cash flow is important but your principal paydown is also something that adds to your true bottom line as well.

So giving that up has a definite cost.

This 120k is really costing me 800/month when you look at from that side.

But I look at it that my typical out of pocket on a deal is 7 to 8k. So if I take half of that 120k and use to buy 7 or 8 more houses, my net income and principal paydownn from those new houses should be around 4k to 5k a month.

So I look at it as trading 800/mo in losses for 4k to 5k a month in profits. Thats a no brainer to me. Not to mention the fact that the 7 or 8 additional houses will give me appreciation of 20k a year as well (even at using 2% for appreciation).

Better still is that I'm only giving up $200 or 250/mo in cash flow but I should be making 1,500 a month or more in net cash flow from the additional houses.

So no matter how you cut it (immediate cash flow trade off - or long term principal paydown/appreciation trade off), I still think this is a worthwhile tradeoff for me and where I'm at and where I want to be in terms of boosting my capital and yet still boosting all the other bottom line numbers at the same time.

So thats my month in review.

Some other funny stories I'll share.

1) Drummond. Tenant moved in back at the end of july. About 2 weeks in, they said that the basement was getting nonstop water running into it. Made no sense to me though. We hadn't had rain in weeks. No other tenants had ever had water issues there. Just had no clue.

But they were irate - as if I had pawned off a bad house on them.

So a couple of days later I went out there. The first thing he wanted to do was show me how much water was coming into the basement. Wasn't flooding it. But it was coming in, going into the sump pit and then getting shot back out every 20 or 30 minutes.

Instead, I told him I needed to walk around the house to see if there was any kind of drainage issue (i.e. pitch) or gutter/downspout problem that might be causing the problem. I knew it hadn't rained so I wasn't sure that mattered. But I wanted to see anyway. I actually assumed there was likely some sort of water line break somewhere in the yard to be honest and wanted to see if I could find out where.

Anyway, as we were completing the walk around, we got to the back yard in the corner. Very last place we looked. Noticed the hose was about 10 feet from the house and the grass seemed a bit soppy.

Sure enough the tenant (they had 3 kids) had left the hose running for several days. And some of the water was working its way back to the house.

Part of me wanted to stick it to him a little bit for being so accusational in his messages. But the other part of me was so relieved it was something so simple that I let him off the hook. I suggested to him that he might want to take the hose off the spigot with kids so that if they accidentally do it again, it would make it easier for him to notice. :-)

You could see the look of embarassment in his face. It was tough. And then when we went inside and told his wife, the reaction was even better.

2)  Amhurst.

As a starter, this crazy tenant moved out and damaged the garage door. They told me about it a little so I wasn't completely blindsided. But the one panel had come off the track on the side.

But I had a showing setup the day after they were to have moved out. I figured I would just tell the tenant it would be fixed so wasn't in any hurry. And this tenant had told me they were having a professional cleaning service come in and carpet cleaning service, etc, etc.

This tenant was coming down from up north. About a 90 minute drive. Their daughter was going to start college nearby so that was why they wanted the house. And the tenant had paid the hold deposit on the house two weeks prior - sight unseen - outside of the videos we do.

So I pull up a bit early. Go to open the door with my key. Doesn't work. Great. Tenant changed the locks on me. You've got to be kidding. And its sunday. So I know I'm not getting a contractor out here.

Applicant pulls up about 10 mins later. I tell her the issue and that we're going to have postpone the showing. She says she drove 2 hours (I know it wasn't that long) and is going to get in. She sees the garage door panel and the gap and says her daughter (college kid) can get thru there.

I'm like, no, I'm not comfortable with that. If that door comes down, there's no way we're getting it up off her.

She insists. So I get some paver blocks to prop up the door as high as I can. And then I kick the door a few times to see if there is any movement. Seems ok. But I still think this is the dumbest idea I've ever seen and I can't take the thought of the liability on this one. I don't normally get nervous but I was a little scared.

Sure enough. She goes under. Sure enough. The stupid door from the garage to the house is locked. They changed that one too. Her boyfriend jumps under. No deadbolt so he's able to jimmy the lock and they get in.

3) A bit of a scare. And one last non tenant one. At the monee astor lane house, the village required me to have the side deck removed. Contractor did it and then stuck all the wood in the garage. I told him to demo and remove it but he only got the demo part.

Dumpster was delivered that night and I needed to get the wood out of the garage that night to get the electrical done the next morning. Contractor couldn't do it. So I did it myself. And just as I'm finsihing up, I got to grab a couple of the last pieces of wood and something jumps straight up and out at me. It was near dark so it was a little spooky to begin with. And when that thing jumped out at me, I about fell over.

Turned out to be a big frog. You don't see many frogs these days and this one was kinda big. But it did create quite the rush when it jumped at me..... And I had no problem having enough energy to get the rest of that stuff done. Kinda getting the equivalent of about 10 power drinks at once. :-)

And that is the kind of stuff we get to see/deal with on a monthly basis. I know there were several more funny ones that I can't remember any more. But it really can be quite entertaining when you start investing.