Welcome back! Episode No. 2! So, I didn’t scare you away last week, or are you finding me for the first time this week? Either way, thank you for listening to the …and Landlord podcast. I want to help you secure your financial freedom through residential rental real-estate. In other words, being a landlord. If you are already a landlord, I want to help you do it at your highest level, so that it increases your wealth without decreasing your day-to-day enjoyment of life because of the feared problems with tenants, toilets, termites and other troubles such as rent not being paid on time that can become all too real if you’re not running your rental properties as a business. And that’s what I’m all about; the business of being a landlord.
So, before we get started, how did you like that shorter intro? It was a little bit too long, so I cut it down from last week. It’s about a third of the length that it was before.
So, last week, I mentioned briefly the story of how I became involved in real-estate, and I wanted to elaborate a little more on that story this week. As I said before, I was on a cruise ship. It was a seven day cruise. I was with some great friends and family members, and I was having a great time, and I brought along the book ‘Rich Dad Poor Dad’, something I was going to read in my spare time. And prior to that, I had been interested in real-estate off and on for years, but I always had some reason that I didn’t do it. Some excuse that I made, and to an extent, it had to do with the landlord horror stories that other people I said had vomited all over me. That’s how it felt. And so, when I was on this cruise, I was reading that book. Each chapter was building a fire within me. And by the time I got done with that book, I could not wait for the cruise to be over, so that I could get off that boat and start looking for my first rental property, because at that point, I had made up my mind that real-estate was going to be my future.
The book ‘Rich Dad Poor Dad’ is a must-read for anyone who is wanting to increase their financial intelligence. And the book is not specifically about real-estate. It’s not necessarily a mindset book. It’s not really a motivational book. I wouldn’t even say it’s the best written book, but it put a voice to something that I had been looking for. If you know something isn’t right, but you can’t quite explain it, can’t quite get the words together to explain what it is that’s not right, and then you come across a book that, basically, lays it out for you, and makes you say “yes, that’s it”, that’s what ‘Rich Dad Poor Dad’ did for me.
It basically put a voice to the feeling that I had all along that my understanding of finances wasn’t what it really needed to be to benefit myself and my family. That book put it into words what I had been feeling all along. So, it’s completely possible that you could read ‘Rich Dad Poor Dad’, and think “huh, nothing really to it.” It has to hit you at the time in your life where you are looking for that thing that you can’t quite put into words, and then you read the right book at the right time, and that’s it. Well, that book, for me, was ‘Rich Dad Poor Dad’, and for a lot of investors, it’s ‘Rich Dad Poor Dad’, but I’ve met many people who have read the book and they didn’t do anything with the information.
So, I hope that that’s not you, because I suspect that you wouldn’t be listening to a podcast like this if you weren’t seeking that kind of information. So, it’s probably exactly what you need to read. But in full disclosure, I have met many people who read the book, and literally were like, “huh, nothing much to it.” And they moved on, and their life didn’t change at all. Whereas me, and countless other people, read it and they were never the same from that moment forward because they completely changed their mindset on how they looked at money and investing. So, if you’ve read ‘Rich Dad Poor Dad’, and it really didn’t do anything for you, there was no spark, it didn’t ignite anything new, it didn’t drive you to do anything different, you didn’t find it to be all that special, try it again. Maybe on a second look, it will do something that it did not the first.
For me, it was a transformational book. I count that as one of the best things that I did, especially for me because I never really read books in that manner before.
Prior to ‘Rich Dad Poor Dad’, I had really never read a mindset book, a self-help book, any of the, basically, business how-to books. I was a computer programmer. I would go out and read a book on how to program PEARL, or how to program PHP or ColdFusion. I would go out and get a book that specifically taught me how to do one thing, and did so quickly.
But the idea of getting a book that was going to teach me how to think, I had never even considered doing that, and I kind of thought it was beneath me a little bit at one point. But when I became less egotistical, got over myself a little bit and realized that there was something out there for me to pick up from the writing of people who are doing already, at a high level, what I want to do, it changed my life.
So, try it. If you’ve already, try it again. I think it’s a critical book for any real-estate investor to read. And really not just even a real-estate investor, anyone who wants to have a better understanding of money, they want to increase their financial intelligence, it’s a book that you should read. After I read it, and I got off that boat, I immediately started looking for my first rental property.
So, that was the end of March, the beginning of April, 2015, and I got with the realtor, and told him the criteria of what I was looking for; basically a rental property that was under $100,000.
He came back with the listings of what was available then, and set me up on a search, and eventually around May, we came across a townhouse that was for sale for $64,900, and I put in an offer. The offer I put in was $60,900, so $4000 below what they were asking, and they accepted it. Now, the history of this townhouse was that it was originally listed back in January of 2014 for $74,900 as a short sale. And then it dropped to $69,900 in February. It dropped again to $59,900, in April, and it went contingent in June, but didn’t sell. Then it went contingent again in October, but again, it didn’t sell. Then, it was cancelled in December, 2014, after having spent 136 days on market. but that was a short sale, and so, it apparently got foreclosed upon after that because it was re-listed in January of 2015 as an REO, as a foreclosure, for $69,900. It went contingent with someone in March of 2015, but didn’t sell. So, right when I was on that boat, or getting off, somebody had this property under contract. But for whatever reason, didn’t buy it. Then it dropped to $64,900 in May. Days later, I came along.
I looked up the history of the property. I knew that not a few months before, it had been listed for $59,900, so I gave them an offer of $1000 over, and they accepted it. And so, I closed on that property at that price of $69,900, basically $61,000, on July 13th, of 2015. It had spent an additional 124 days on market for a total of 260 days on market. And it was a two-bedroom, one and a half bath, townhouse, just over 1300 sq. feet, so, pretty large. It did have an HOA fee of $144 a month, so that’s a pretty steep HOA fee. And there are many reasons why you want to be cautious of investing in properties that have HOA’s, the condos in townhouse communities. There are several things with the HOA communities where you can come back to be bitten. I’ll go over that in more detail some other time.
The critical thing to note here is that the very first property that I got, the property that started it all for me, and was a great investment, it sat between 2014 and 2015 for 260 days. That would not likely happen today. And in all likelihood, if the same property were to go on market today, even at $120,000, it would probably sell within a week.
That’s just the difference in the market right now. So, just be aware of that. 2015 was a special time, but don’t let that scare you away, because times like that always come again. There will be another time where you can buy properties significantly below its value.
At the time of that purchase, the tax value of this property was something like $89,000, and it was going for far less than that. Now, this property is probably valued at around $125,000, but like I said, don’t let that discourage you. The HOA fee has gone up a little bit. I think it’s $155, or $157 a month now. But when I originally bought it, and got it rented out for $880 a month, it’s now renting for $920 a month. But I could actually go higher. I have two identical units at the same location that are rented for $960 a month. But the reason I have this one rented for $920 a month is my very first tenant ever, who was the person that I put into this property, she’s still there today, and she’s a great lady. No problems with her whatsoever. I picked a perfect tenant on my first outing, and because of the fact that I’ve had no vacancy and no issues all this time, it’s a no-brainer that I should give her a good deal, so that she has every reason to stay for years to come.
Now, when I got this property, even before purchasing it, I had estimated that it was going to cost about $3000 to get it rental ready. I was wrong. It actually cost three times that amount. I spent about $9000 getting this property rental ready. Just the cleaning and painting and landscaping cost a certain amount, but also ended up re-tiling the floors in the lower and upper bathrooms, putting new vanity tops in both. And then there were plumbing issues that were not anticipated.
Now, in hindsight being 20/20, I probably could have gotten all of this done for closer to $6000, but I made a few mistakes trying to build out my team, paid a little more than I should have for a few things, didn’t have the ideal team members in a few cases, and I caused some of my own problems.
For instance, I was trying to tighten a loose toilet, and I cracked it. Who knew you could only put so much force on porcelain before it cracks? Evidently, everyone except me, so now I’m paying to put in a new toilet, when the old toilet was fine. It was just a little loose. But I got through it. In the end, everything worked out. My wife was even there, helping me to some of the cleaning on this first property. And just for the record, she hasn’t helped me do any cleaning on any property since the first one, which isn’t a bad thing because as I progressed in my knowledge, I realized that there are just certain things that I did not want to be doing myself. And so, I outsourced it. Not to mention, the property that I bought right after this one, was disgusting, and there was no way that she was going in there to clean that one.
So, I bought this property in July of 2015, started the rehab of it doing some things myself, and trying to build team members for others. I thought it was going to be $3000 a rehab, it ended up being $9000. And I got it listed as a rental as soon as it was in a condition suitable enough to take pictures. I took them myself with my cell phone. It turned out pretty nice. And it took a little longer than I thought it would to get the property rented.
The tenant did not actually take occupancy until October of 2015. And like I said, she’s still there today, but it took a little longer to get it rented than I thought it would, even though it got lots of attention. And that initial rent was $880 a month, and it was a cash-flow positive property even with the $9000 additional, because I bought it for basically $61,000, put in another $9000 in rehab. So, I essentially had $70,000 in the property, but it was rented for $880 a month. Even when accounting for the $144 a month HOA fee, I was still above the 1 % rule.
And the 1 % rule is basically that you should be able to rent a property out for 1 % or more if your all-in cost for that property. So, it might all in-cost for this property being $70,000, it’s probably a good deal if I can rent it for $700. Well, I had it rented for $880. And even when you subtract the $144 HOA fee, that’s still $736 a month of rental income from this property, not counting other expenses. But you’re not really looking at other expenses when you’re calculating the 1 % rule.
So, this was a good buy. It met the criteria of what you’re typically looking for as a cash-flow positive rental. And even though, I was three times over on my rehab budget, the number still worked. Everything came out perfectly, and I was able to find a great tenant, even really before I knew how to find a great tenant. I didn’t have my tenant screening procedures and policies, and my lease wasn’t where I really it to be. I’ve come a long way from where I was then and that first tenant still worked out, and I’ll tell you more later in a different episode about the second property, and my tenant in that second property is still there as well.
So, if you’d like to see the before and after pictures and a more detailed write-up of this first deal of mine, I will create a link to it on the show-notes, so you’ll be able to go into a little bit more detail. But, it didn’t kill me, and what doesn’t kill you makes you stronger. It worked out to my benefit in every way, and it didn’t extinguish the fire that had been set in to me originally by reading that book, ‘Rich Dad Poor Dad’.
Now, in between that book and this property, I did read other books, and I came across the website www.biggerpockets.com. And so, that was an invaluable resource, and reading Brandon Turner’s book, the book on investing in real-estate with low and no-money down, it was very helpful because one of the things that occurred when I was trying to buy this property, is that even though I had the money set aside for my 20 % down on this property, it wasn’t seen as properly sourced funds by the lender, because as I said, I’m self-employed. So, the lender was concerned that I was using business funds to fund this real-estate purchase. And for whatever reason, they don’t allow that.
So, what I ended up actually having to do, is something that was suggested in that book from Brandon Turner, which was to use other sources of funds like a home equity line of credit. Or in this case, I used retirement savings. I took out a loan from my wife’s Thrift Savings Plan, TSP, and they will allow you to take out a loan for the purpose of purchasing a home. And so, I used those funds, which the lender would consider properly sourced, and I bought the house using those funds for the 20 % down. And then I was able to use my own funds after the deal had been done to pay off the TSP loan.
So, it’s a bit of creative financing, and I’ll talk more in later episodes of how I used other forms of creative financing, whether it’d be the TSP loan again, a home equity line of credit, lease options. There are several things that I’ve done, including using private lenders, in order to initially fund the purchase and then refilling them out with long-term funding at a later date.
So, that’s just a rundown of what was my first real-estate investment deal. Everything worked out well, and I got a good deal, probably a great deal, on the property. Now, it may be a little bit more difficult than then to get that type of a deal. It is certainly harder here in my area of Durham, North Carolina, but where you live, it may be different. And even if it’s not, that does not mean that great deals can’t still be had.
I purchased a property just in November that I’ll relate at some point, and it also was a great deal, and so, that’s November of 2018. We’re a few months out of that now, but they’re out there. And so, there are systems and procedures and processes that you can put in place so that those deals come to you. And there’s some information that you’ll have to have, and you’ll have to educate yourself on the different methods of creative financing. You’ll have to be able to negotiate, and so there are some techniques and some books that you’ll want to read related to that. But I’ll cover all these things.
This episode is about as long as I wanted it to be. So, I’m going to go ahead and wrap it up now, but we will go into more about all of my deals on future episodes. But I don’t want this podcast to just be about the deals that I’ve done. I want it to be about the deals that you can do, and so I’ll go into different aspects of systems, processes, procedures and things that you’ll need to know and be aware off in order to take advantage of that perfect deal when it comes your way. You won’t find it if you’re not looking. So, you need to be looking. And so, I will do an episode, probably the next episode, about making the initial connections that you’ll have to have with realtors, and the cites and systems that you’ll need to put in place to be able to capture that deal when it comes your way.
I’m also going to be doing an interview next week, and that will be coming soon as well, of an investor who started his journey not too long ago, and has met with great success thus far. And so, I’ll bring those stories to you as frequently as I can, because they’re out there. Lots of people are doing great things in real-estate investing, and I want that to be you as well.
And lastly, the website is done. So, check out www.andlandlord.com. It’s not perfect, and I will be making a few changes and adding a lot of content over the days and weeks to come. But check that out, it also has links to all of the places that you could listen. You may not need that since obviously you’re already listening. But it’s there, and if you’re not listening to this podcast on one of the major platforms, I would really appreciate it if you did. Listen to it on iTunes, or Stitcher, and make sure that you rate, five stars would be great, and provide your feedback.
This is where I talk about my first rental property. It was March / April of 2015 and I was on a 7-day cruise to Bonaire, Grand Turk (and other destinations) with my wife and son (at the time age 7), along with two other couples who are close friends, each with their two young children (11 of us in all).
To read, I brought along the book Rich Dad Poor Dad... It changed my life! Despite having a great time with my family and great friends, this book had me really wanting the cruise to be over sooner than later, so that I could get off the boat and start looking for my first rental property - as the book (along with my prior interest in being a Landlord) had me passionately wanting to do.
Finally, I had found something that put into words what I had somehow felt all along - that going to school, getting a job and working for someone else (to make them rich), buying stocks / mutual funds and saving for retirement in a IRA / 401K was NOT going to give me the life (or retirement) I desired.
You see, I had been self-employed by my own Web Hosting business (also offering Domain Names & SSL Certificates) for almost 13 years (since 2002) when I came across this book. And while I first had the mind to do so, I had long since decided that I was not meant for college, instead getting a degree in Electronic Engineering Technology from ITT Tech. It seemed the cheapest and fastest way of getting a decent job that I would only need for long enough to start my own business and quit - which is exactly what I ended up doing.
So this episode of the [... and Landlord] Podcast tells the story of me being on that cruise, reading the book Rich Dad Poor Dad, and finding that first property a few months later, to add... and Landlord! - to my other titles of Husband, Father and Entrepreneur (Realtor would come later that same year).
Once I got off the boat, I hit the ground running, fresh with a new mindset about money and finances that has been clarified, refined, and enlightened by my cruise ship read of Rich Dad Poor Dad. And as I relate in this episode (#2) of the [... and Landlord] Podcast, this is not the best written book, but it doesn't need to be if it finds you at the right point in your search for the truth about money. For me, the timing could not have been more perfect - so forgive me if you've read this book and got nothing from it. I suggest you try it again, as this time you may have a different result - possibly being at a different place in your life.
My first action upon getting home was to contact a Realtor to get notified of properties meeting my criteria, which was a 2BR or 3BR, less than $100K, greater than 1,000 SqFt, in a location that "I'd be willing to live" (rather subjective, but I did not want a property somewhere I'd be worried about going at night). A few months later, we found that property in a Townhouse Community named Peppertree off Guess Road in Durham (about 20 minutes from where I live in NC). My Realtor was able to aid me in getting my offer to purchase of $60,900 accepted on May 19th 2015, for a July 13th closing (I had no idea how long it took to close an investment property purchase, so I gave myself plenty of time).
Doing my research into this property, I noted that it had originally been listed as a Short-Sale, back in January 2014 @ $74,900, then dropped to $69,900 in February, and dropped again to $59,900 in April 2014. It went contingent in June 2014 with someone, but failed to close for some reason. It was then cancelled in December 2014, failing to sell after 136 days on market.
The following month, in January 2015, it was relisted as an REO / Foreclosure @ $69,900, but again failed to sell. So it was then dropped to $64,900 in May, right as I came along. Knowing that it was previously listed at $59,900, I decided to offer just above that amount (by $1K), but still $4K below the current asking price @ $60,900 - and my offer was accepted... I was in the game!
Now to get this property closed... At the time, not knowing anything about investment property financing, I went to Lending Tree's Website, which referred me to Quicken Loans. I filled out an app with QL, provided all the requested docs, jumped through all the presented hoops, etc... and was able to get a 30-year loan in my personal name along with my wife (I use LLC's now), at 4.75% interest + 3 points with 25% down. And even this presented a problem, because $60,900 - 25% = $45,675 (which is below the $50K minimum for many lenders, including QL). I got around that because the significant points, fees and other closing costs more than covered the gap. And those additional points, taxes, insurance, fees and closing costs from QL and others involved in the closing were very significant, totaling just over $6K. My out of pocket amount due at closing was just over $18K, with anything else being rolled into the loan or paid in advance of closing. And I decided paid 25% down on this property to get a lower rate, but I could have also gone with 20% down.
Now I had more than enough to cover this amount in my personal checking account; however, most of it had gotten there from the month before, when I transferred $25K from my business account to my personal account in repayment of funds I had previously loaned to the business in prior years. And while this was all fully documented in my QuickBooks and on both my business and personal tax returns, the underwriter from QL would not allow it, saying the funds had not been properly sourced. Apparently only a certain total percentage of down-payment funds can come from a business (I forget what the exact stated amount was) - if not W2 payroll income. Thus, I had to come up with an alternate (acceptable) source for the $18K.
Now technically my wife is in the Military... Previously in the Army, but now a Lieutenant-Commander in an often unknown (and unarmed) branch of the Military, named U.S. Public Health Service (PHS). You'll often find PHS Officers stationed at places like the CDC, Federal Prisons and other places with Federal Medical Facilities. And so being a Military Officer, she has a Thrift Savings Plan (TSP), which is like a 401K for persons in the Military. And since I have business income, we put a significant amount of her salary into the TSP. So to get around this business funds sourcing issue, we took out a $20K TSP loan to cover the $18K needed out of pocket to make this purchase. Then once everything had closed, we simply paid off the TSP loan with those same business funds - since QL fully accepted the TSP funds as being properly sourced to be used to make this investment property purchase.
So this was my first use of alternate or "creative financing". I could have also elected to use funds from my Home Equity Line of Credit (HELOC), as that would have also been considered properly sourced funds by QL. However, I feared that doing so might be reflected on my credit prior to the closing, and QL might have pulled another credit report thus affecting the credit to debt ratio upon which we qualified; whereas the TSP loan does not show up on credit.
So with all things considered and when factoring in expenses (except for Property Management, as I self-manage) - this investment property purchase yielded a Cash-on-Cash Return on Investment (CoC-ROI) of ~11% over the first two years, and then ~15% post-refi after holding for 24 months (interest rate when up to 4.875% upon refi @ 25-years). Total annualized return (which takes more into consideration than just CoC-ROI, like tax benefits) - was ~36% over the first two years, and then jumped to ~60% post-refi, at which I was also able to pull out cash. With less cash remaining in the property, ROI goes up. But also monthly positive cash-flow went down a bit upon refi due to the slightly higher interest rate, 5-year shorter term and increased loan balance - all resulting in a higher monthly payment.
— Come back for more on this property in a subsequent post, including what I learned about marketing a rental and my first Landlord experience.
— Get Rich Dad Poor Dad for FREE - (if its your first Audible Book); also available in Paperback, for Kindle, MP3, etc...