Chandler Properties Blog

Rent Down, Vacancies up in Tennessee

In the last year, rental rates have plummeted in the Chattanooga, Tennessee area. I have 5 rental units and just about every one of them is renting for less than it did two years ago. A property that I used to rent for $625 a month just rented out for $550 a month. The economic downturn has really hit the landlord in the wallet.

When the housing crisis first happened I figured it would be a boon for landlords. After all, with family homes being foreclosed on and credit being tightened, people would have to live somewhere. This has not played out how I thought it would. I have talked to several other landlords in my area and they are all experiencing the same results. The conclusion that I have come to is that people are moving back in with their families. A lot of newly graduated students, recent divorcees, and singles must be moving in with friends and family members.

Last November, when the financial crisis first happened I held firm to my guns and did not drop rent for 6 months on my $425 unit. I had been getting $465 for two years and did not want to take a hit. In April 09’ I finally gave in and rented to a strong tenant for $415. I was reluctant to rent at the lower rates and it cost me 6 months of rent.

Anybody else experiencing the same kind of results?

Refinanced my Duplex

Overview of Bank Loans

With interest rates at record lows I finally decided to refinance my Sharon Drive property. This will not only cut down my monthly payment, but it will also lock in my 5.5% rate for the next 30 years. My old loan was an in-house 5-year balloon at 6% with a 20-year amortization. My new loan is a 5.5%, 30-year loan with no balloon. What this means for those new to the game is the following:

Key Terms

20 Year Amortization – The loan payments are set up for the loan to pay off over a 20 year time period.
5.5% Interest Rate – This is the interest rate I am paying on the loan.
5 Year Balloon – After 5 years the loan matures and the remaining balance will be due to the bank. Most all of the time the bank will refinance you and allow you to set up a new loan with the current interest rate. The main reason banks do this is because of interest rate risk. With rates at close to 5% today if they locked your rate in at 5% for the next 20 years and interest rates went up to 19% like they did in the late 1980’s they would be dead. The bank would be paying more to depositors than they are collecting on loans. Banks generally limit this risk by ballooning the loan after 3 to 5 years and just resetting the interest rate at current rates.
In-House Loan – There are generally two types of loans that real estate investors will use; In-house loans and secondary market loans. An in-house loan is set up at your local bank and held by that bank. You will make all payments to them and if you don’t pay they will feel the pain. A secondary market loan is made at your local bank, but is immediately sold to a private investor like Fannie Mae or Freddie Mac.

Why I Refinanced with a Secondary Market Loan

The reason I decided to get a secondary market loan locked in for 30 years was two-fold. One, I wanted to get an amortization period of 30 years versus the 20 year amortization that my in-house loan made at the local bank would give me. This reduces my monthly payment and makes the property cash flow out a little better. Second reason is that I want to lock in the current low 5.5% interest rate for the next 30 years. If I stay with the in-house loan I run the risk that when my loan balloons in two years that interest rates will be much higher.

My general feeling is that interest rates will be higher in the next 2 to 5 years. The government has taken unprecedented measures to make money cheap over the last 12 months. At some point they will have to pull back in order to stop rampant inflation. The way they will do this is by pulling money out of the system and raising interest rates. The 30-year lock in hedges me against this risk. If you are currently in a loan that will reset in the next few years, I recommend you review your options and consider a secondary market loan.

Warren Buffett Interview

Here's a link to an interview Becky Quick of CNBC did with Warren Buffett today. The video is about 10 minutes and covers his view on the current economy, what he was doing the weekend that Lehman Brothers failed, and what key economic indicators he looks at to determine the health of the economy.

A couple interesting points I got from the interview were as follows:

1. Becky asked him what he looked at to determine how the economy was doing. He responded that he looks at the daily results of a lot of the businesses that Berkshire owns. He also looks at the Fed's balance sheet, etc. When Becky followed up and asked him what one report he would want to get if he were stranded on a desert island and had to gauge the economy. I thought he gave an insightful answer. He said train freight car loadings and truck tonnage moved. That's pretty interesting. I guess that gives him a good understanding of how much goods are getting sold/produced at any given time.

2. He also spoke about the economy. He basically said things had leveled out, but there had been no bounce. He seemed to be somewhat lukewarm on his answer. He felt things were much better than a year ago, but not back to normal.

I always enjoy hearing Buffett's take on financial matters. If you want to watch the full interview, here is the link.

http://www.cnbc.com/id/32873440/

Book Review: "The Millionaire Real Estate Investor"

About the Author
The Millionaire Real Estate Investor is authored by Gary Keller of Keller Williams Realty International. Gary has over 25 years of real estate investing and industry experience. In this book, he uses that experience to explain how to layout a framework to becoming a successful real estate investor.

Why I Like this Book
I like this book because it is not a “get rich quick” program that promises to make you rich with no money down tactics. On the contrary, it explains a method that is a lifelong approach to investing in real estate. His method focuses on always being “out looking” at properties and buying every 1 or 2 years when a great deal comes along. He hits home the message of: learn your market, look for properties that are selling at a 20% discount to fair market value, putting 20% down on the mortgage, and becoming a master of your niche. This is a very similar mindset to Warren Buffett. Buffett teaches us that we don’t have to understand every kind of investment, but we need to define a circle of competency and stick with it. Gary Keller does a good job of carrying this thinking into real estate investing.

Living Below Your Means
During the book, he talks about budgeting personal expenses, living within you means, and tracking your net worth. The idea of living below your means and saving for down payments on properties is something I have never heard from a Robert Kiyosaki book or a “Get Rich” program, but is so important to building wealth.

Profiles of Successful Real Estate Investors
At the end of the book, Gary profiles 21 real estate investor success stories. These stories are encouraging for real estate newbies and all include the same common theme of doing something you love and working very hard at it. I found these stories entertaining and inspirational.

Conclusion
Overall, I think this is a really good book for a new to intermediate investor. It provides very practical advice on how to get started in the business as well as some inspiration. So if you are looking for a good read, I definitely recommend “The Millionaire Real Estate Investor” by Gary Keller.

Typical Property Management Day

Today has been a typical property management day for me. I do most of my work on my rental properties on the weekends. I'll field phone calls and set up appointments during the week, but most of my meetings and work projects are done on the weekend. Today, I mowed grass and signed a new lease.

My dad and I got up and mowed the triplex, duplex, and the vacant lot this morning. This took a couple hours. While I was at the duplex mowing a prospective renter stopped by to look at the property. I told him I was supposed to sign a lease tomorrow with another prospect, but I was willing to talk to him since the person scheduled for tomorrow's lease signing had cancelled last week and I wasn't 100% sure he'd make it tomorrow since he cancelled last week. The new prospect sounded very good and was willing to put a deposit down today so I told him I'd think about it. Anyway, I called the original lease prospect and convinced him to move the lease signing from Sunday to Saturday. This made me feel better. I didn't want to risk losing both tenants. So now I sit waiting to sign the lease with the original prospect in about 30 minutes.

It's amazing how good prospects come in groups. I will sit with a property open for weeks with no good prospects. Then in the course of a day or two I'll get 2 or 3 that are excellent prospects and all want the property. I don't know why this happens?

Apartment Rented

I got a renter for the Sharon Drive Duplex today! It worked out great, because he is the brother of one of my previous tenants. She was a great tenant for the past three years. She just recently moved out and bought a house. However, she was so happy with her rental experience that she recommended her brother contact me.

Anyway, to make a long story short I am meeting with them tomorrow to rent out Sharon Drive. She is even going to co-sign with him. This is great. The last time Sharon Drive was empty it took 6 months to rent it out. This time, it only took 4 weeks. That is mostly due to all the repairs I had to do when the elderly tenant moved out last month. (replace water heater, drain pipe, paint interior, paint exterior, clean, remove all of her possessions, replace the kitchen floor, replace carpet.) It is so nice to have this property producing money again as opposed to eating it. I'm feeling good tonight!