Mike's Week - An Inside look at being an Investor (7/13/15)

Interestingly enough someone at BP keeps changing the title of my blog. Apparently, its not selling the blog enough????  But I keep changing it to something simple and they keep changing it back.  Oh well.

I liked Mike's Week of Investing but got tired of changing it back to that so I'll leave the title whatever they want....

Mike's Week of Investing (ending 7/13/15)

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. 
Here in Illinois we had some major storms come through. Had a couple of houses with some uprooted trees. And one had a shed that was picked up and thrown over the fence and into a neighbor's yard.  But no damage to the houses.

Finally got a tree service out to the houses this weekend. $600 for the trees at one houses and $250 for a couple of smaller trees and shed haul away. The size of the trees at the Bevan house were crazy. They initially quoted me $1,200 but I said that was too much. So then they came up with $600 but limited haul away. Tenant actually wanted it for firewood so the crew stacked it all up in the back of the yard and I saved $600.

Sometimes it doesn't hurt to just tell a contractor thats too much money. Then see if they can get creative.

Also had another house that got water inside the house. Its a slab house that I like to call my "money pit" house. I converted it from a 2/1, 900 sq ft to a 4/2, 1,700 sq ft and I'm renting it out to an assisted living place for a nice premium.   Got water twice actually during the run of storms. So I walked the house and came up with a plan to keep the water away.  Trenched some things, added some drain tile and gravel, and repoured a front stoop.  1,500 bucks later and the thing seems to be good to go again. We've had some major rains and not a drop near the house now.

It was an expensive run of storms though. 1,500 for that house and 850 for the other two. That money pit house was supposed to be the lesson of never buying a slab house. Its the only one I own. But I just closed on one last month. Sure enough, it got water in the house too. Luckily no flooring was there though as its all being replaced. I was planning on doing tile that looks like hardwood in a few rooms. Now the whole house is getting it.

I did steal that house though so its not a money pit issue. But now I have to pull some budget money I was going to use for sodding the entire back and use it for doing some more grading and drainage work.  Water is the enemy.

Dearborn and Drummond.

Had a couple of tenants move out. Dearborn and Drummond. Drummond is rented for August 1 so its the standard 1 month of vacancy I typically plan for. Dearborn is not. I've had calls but have not been very good about setting up the showings. It needs a paint job and some clean up and I guess I don't want to show it again until I get that done. Kinda slacking on that house. Its one of the lowest rents of the bunch though so thats why i think i'm slacking so much.

Sometimes its hard to stay motivated on a particular house. You just don't want to deal with it. I went on a run like that with a house in crete. Just couldn't get a good tenant in there for long. So I eventually dropped my price about 200 below market and that tenant is in their third year.  I may do the same with this dearborn rental. One more try...... :-)

I spent yesterday doing a complete repaint of the drummond house. I'll be at dearborn next weekend doing the same. Drummond is a 3/1.5 1350 sq ft house. Built in the 50's. Smaller bedrooms and tiny kitchen area but the kitchen/dining/living room are all open.

Luckily the paint held up pretty well in terms of color match which is one of the main reasons I haven't changed paint colors since about Year 2 of investing. I was able to paint the entire house in about 5 hours. I didn't have to edge anything though and thats why. I was able to go to the ceilings and trim within about 2 inches. After it dried, you couldn't tell.

Normally we can get by with a touch up. But sometimes, it just makes sense to give it a refresh.

I also added some pvc to the sump ejection thing. It had originally had one of those 1.5 inch drain tile pieces attached to it. But the last renter must have broken it off and thrown it away. The sump was ejecting water out and then half of it was coming right back to the house because the pvc piece, by itself, wasn't long enough.

I have zero skills but even I can do pvc. Its like a jigsaw puzzle. Bought a couple of elbows and then another piece of pvc and some pvc cement and we were all good.

Gonna put a new vanity top and faucet fixture in as well. Went to buy a vanity top for the contractor to install (I don't have those skills) but the vanity had an odd size 37x18 (21 is typical depth). So I had to order and wait. Could have bought a new vanity but buying the top saved me 250.

I told the new tenants I was replacing it AFTER they had already agreed to rent it. So they liked that. They'll just have to wait a week or two after moving in to get those installed.

But that house was one of the last ones I did before upping my finish. So it needed an updated to those.

Yale. 
The tenant moved out of Yale on the 30th and the new tenant moved in on the 1st. It needed some touch up paint and a little cleaning but the tenant wanted to move in on the first so bad that they agreed to take care of it. I gave them our paint and they did the rest. It was a beautiful thing. :-)

I told them that I really don't like the idea of having someone move in without us doing a make ready but they were so happy to get the house and get out of the one they were in (mold problems, roof was leaking in several places), that they were actually great with it. It was a huge step up for them.  They gained a lot more space and far better condition and updates, that they were thrilled they were only paying an additional $100 a month more. 

They actually took that house sight unseen. They had gotten an idea from the before and after videos I post on youtube.  But they had personally never been in it. The first time we could get in, they were even happier. And they love the block they're on. 

Amhurst.  This is the tenant that had given notice for a July 6 move out because they were supposed to be closing on the purchase of a home. Then the deal fell through because their lender couldn't get the financing in place in time so they wanted to stay. Then a week later, they said the seller changed their mind and agreed to an extension til the 26th. We'll see. 

I had a ton of calls for that house as well and could have easily had it rented. We'll see if a month changes that. But its a 3/2, 1,400 sq ft house built in 2002 with a partially finished basement. People love the new construction so I know it'll rent fast. But not knowing the actual move out date is tough.

I know this much, given the run around this tenant is kind of giving me on the move out date, if they aren't out by the 31st of July, I'm going to charge them an entire month's rent. I won't prorate the rent by the day.

Outside of those, nothing really new. I just listed the Stratford house for rent as the rehab is getting closer. And I'm curious to see what kind of response I get on that house. Its in one of the nicer subdivision in the town its in. But its really pushing the envelope for me on the rent. As a 3/2, 2,000 sq ft house, I'm asking 1675.  I think the market probably suggests I could ask 1,800 for the rent for that area. But thats just not a price point I'm comfortable going. I think its limiting the tenant pool too much. And I'm really hoping to find someone that sees what a deal that is and stays a long long time. 

I'm having real good luck with turnover the past few years and thats really my model so I can grow and manage all the houses and a full time job.   Its easy to manage repairs for 40 plus houses. But managing turnover is where you're going to take the hit. Showings, make ready, etc. Those are much bigger time vacuums.

Lincoln.
 Braidwood - Lincoln moved in and no issues from them at all. In fact, that tenant was the one that gave me their brother in law's contact info to do the tree removals. 

Other.

No other notices for move outs either and collections are going pretty good. Have a couple of late payers. And the manteno renter shorted me 400 last month and said this month would be late too. The wife there has been fighting cancer so they've done this a few times now. But they always catch up and I'm willing to risk it with them. 

Got a couple other tenants that are still short on some rent but, again, not too bad. And they always seem to catch up eventually. I tend to have an internal check that occurs when I start to get too many of these partial payments outstanding. Once it hits 4 or 5, then I get ugly with them and send out the ultimatums.  That usually gets everybody to catch up or at least to get me down to that one or 2 number of tenants that are short some of their rent.

2) REHAB

Stratford. Still moving along. Plumbing passed the inspection on the first try which is actually pretty impressive. Carpet measurement is today. Electrical is done. Bathrooms are being closed up. Got all the tile for the bathrooms and fireplace. And the contractor already did the tile floor in the entry way thru the kitchen.

And got the drainage work all done as well. Had to negotiate a bit on the drainage work. Number came in higher than expected. And then got the price for the tile work in the two bathrooms. Had to renegotiate that a bit as well. 

But I'm really doing some more intricate designs on the tile work in the bathrooms so we'll see how this plays out. Normally I just do a basic tile and then an inlay. For the main bathroom, I'm doing tile with an inlay and then I'm framing  the shower head and fixtures on the one side wall.

And in the standup shower in the master bath (which I expanded as part of the rehab), I'm doing two frame-ins and an inset soap dish.  Found some really neat inlay for the frameins on the master shower. Hexagon shape.  It was $15 a square foot for the stuff though. Came to almost $400 just for the frame in pieces. Normally, I can do a whole shower surround of tile for that price in materials....  But the stuff should really pop.

Jordan. Moving kinda a slow on this one. I had pulled this crew off to work on all the drainage stuff so thats part of it. Electrician did put in the new service and ran some electrical to the kitchen and bathroom too.   

This house is a 3/1, 1,000 sq ft house. Smallest house I've ever bought. But I got it for dirt cheap and the numbers should work out really nice. But my goal on this one was to use the budget to really make it above neighborhood finish. Opened up the wall between the kitchen and family room. Putting granite in the kitchen. Tiling in the shower/tub surround. But I'm also going to tile up half the wall in the bathroom all the way around as well. Want it to be as spa-like a bathroom as possible. Even took out the hallway closet to make the bathroom bigger.

Thankfully, these two are the only two houses I'm on right now. And its getting really close to getting Stratford (money pit 2 as I like to refer to it as) so close to being done. And the finishes are really starting to show up now.   Can't wait to see the fireplace and bathrooms once they're done this week. Painting almost done. Carpeting coming in. All the ceilings were painted. New light fixtures. All new trim and doors throughout. New windows as well.

Its not going to look like new construction exactly given there are still some things I had to leave. But its going to have some really nice features and a majority of new construction stuff done to make it feel pretty close. Even adding a paver sidewalk (I had to tear out the existing one because it was sloped directly to the house so I figured I might as well put in a pave sidewalk as it was about the same price as concrete and figured it would add to the entry).

3) ACQUISITION

Astor Dr - Monee.
Been so long I forgot when I got this under contract. But I did. its a 3/2.5, 1,800 sq ft trilevel. Needs very little work.  Closing should be coming up in another week or two. 

A simple rehab. Not much of anything. No painting. No flooring. Just need some work in the half bath down below. And then I want to do some drainage work there as well.  But that one should rent quick. Gonna come out of pocket a little more than normal on that one. But its worth it on a house that needs so little work.

Typically I figure 4 to 5k for the points/closing costs on a good deal. This one I'm having to throw in an additional 5k to make the numbers.

But I should be all in at 110k on a house that should appraise out for about 155k and the rehab is all of about a week tops.  I'll take that all day long. And its just a great rental. Good room sizes. Good space. Corner lot. Nice size garage. 

West Dr - Peotone.
Got a new house under contract last week. It was a bit tricky too because I had to deal with the contract stuff with my realtor's broker as she was on vacation. 

This is a 3/1.5 bath 2,200 sq ft, 2 story home in a really nice area. The downside is this is a much older home than I normally consider. It was built in the early 1900s'. But it actually wasn't bad. Someone had done a bunch of work on the outside. New siding, newer roof, trim. And the detached garage is actually fairly new as well. Really good size. 

But Peotone is a town I've been trying to get into for awhile. Its close to home (6 or 7 mins) and its a great town for rentals because great schools and very few rentals ever come up so when they do, plenty of demand.

Got my first one this year actually. Had it rented almost about the same time I started the rehab. Great renters.

As far as my plans for this one. The house definitely needs some updates on the inside but isn't in terrible shape in terms of things falling down. Furnace looks newer but the a/c kinda old. Replace the a/c. Add a master bath in the upstairs master bedroom (which is really nice size room). Convert the sitting room in the front downstairs into a bedroom. The only thing I'll need to do is frame in the front door and add a closet. Its already set up perfect.

Then we'll have to re-do both the main bathroom and half bath downstairs. And get creative with the kitchen.

But when its done, it will be a 4/2.5, 2,200 sq ft house with a master suite and all new bathrooms, flooring, paint, etc.

Interesting on the offer process on this one.  I went to see it the first day it came out on MLS. It was listed at 93k and nothing in peotone usually can be had for under 100k so I wanted to take a look.  Needed about 25k to 30k on the rehab though. And I figured it would appraise out at about 130k to 145k without digging too deep into the appraisals.

So the numbers just didn't work for me. And I had to wait like 2 or 3 weeks for the bank to allow investors to offer. When it came I threw out a number of something like 68k or 70k which they responded with a quick no, don't bother us again.

Didn't think much of it. And then about 3 or 4 weeks later, they dropped the price from 93k to 68k.  This was after a bunch of storms out here. I asked the realtor to ask the listing agent why such a big price cut. Banks don't usually drop it that much that fast.  I figured it either got a bunch of water in the basement or a tree fell on top of it. :-)

Listing agent said that was the initial BPO she had given the bank so thats why the dropped it. They realized it needed a lot of work and no owner occupant would likely buy it.  Still, I wasn't as interested in it given I had just gotten that monee house above under contract and was still rehabbing these two. The age was really the biggest detractor to me. 

But I threw out an offer nonetheless. One of those "If I can steal it, I'll take it" offers. I came in at 60k which they responded quickly with a 66k final offer. Thanks but no thanks was my response. If they change their mind on the 60k though I'll do it. 

Well, about a week later, as my realtor is on vacation in cabo, they came back and accepted. Had to work with her broker to get all the paperwork and EM done. But we took it. I checked it one more time before I was willing to hand over the EM though. Nothing changed. And when I ran the numbers, I was even more tickled pink about the deal.

Now given the age, this house probably isn't going to appreciate as much over time. But the cash flow should really be incredible. And I know i'm banking quite a bit of equity. 60k purchase, 30k rehab. All in at 90k.  PITI should end up somewhere around 850/mo.  Rents should be about 1450/mo.

So for 3 to 4k out of pocket, I should be making about 600/mo gross profit and banking about 45k to 50k in equity.  I'll take that.

Now, I wouldn't want to have an entire portfolio of homes built in this era - regardless of how good a condition they look. But one or two out of 40 isn't bad. And technically this will be house #43.

Other Offers. Still working on some more offers on houses. There's on one hubzu I think I might be very close on. We'll see. Outside of that though, there isn't a whole lot even remotely close to my price point/model. So if that one (and maybe one or two more) don't pan out, we might be taking a bit of a break on the acquisition mode.  It seems prices have really come up these days but the appraisals haven't popped up enough to support the ltv's I need to be at.

4) FINANCING.

Couple of refi's I'm working on are getting close. Doing 3 houses with one bank. They came in pretty good but there were two of the three appraisals that I felt were low. Won't affect the loans but sometimes its the principle. The comps this appraiser used just didn't add up. I called em out to the bank and they agreed. So they're having him review again and seeing what we can do.  The better the ltv, the better the terms this bank sometimes gives me so it matters. 

But more important to me than that is that I want to hit the estimates of the appraisals I gave to the bank and my hard money lender. So its not good enough that the appraisals will work for the loan. I want the appraisals to be right so my lenders will trust my estimates. And when you look at the comps this guy used, its clear he was either clueless or had just come up with a number he wanted to give and found sales that helped him hit it. 

And that does happen. Sometimes appraisers don't really believe you can get the discounts on houses that you do. So even if the house will appraise out at that number, they don't want it to. Makes no sense why they don't just appraise it out as if it were a regular sale and forget about what I actually paid for it. But some of them are gun shy too about giving too much equity to an investor in such a short period of time. They don't want it coming back on them.

In this case, its a commercial loan though so the bank, while not asking them to increase the appraisal, can question comps that are used if they're simply incorrect.

The one appraisal is for diversatech. House was built in 2002. The guy used a comp from a house built in 1909.  This house is a 3/2.5, 1900 sq ft home. Another comp he used was a 3/1.5, 1,300 sq ft home.  This house is not in the country so there are plenty of comps in town. Just made no sense.

Oddly enough there was a comp on the same block and it was the same model. It was a bit older (over 6 mos old) but so was another one he used. For some reason, he didn't use that comp at all. Was very odd.

REFI #2. Working on the refi of another two houses with another bank. That one should be going thru sometime this month. No surprises on this one.

REFI- Existing loans. The other thing I'm working on is a capital boost by refinancing a handful of existing houses (5) plus the stratford home. Looks like I'm very close to getting the term sheet for the refi. Should allow me to pull out about 50k or so and still end up with lower payments than what I have on them already. 

It works that way because some of the homes I picked were amortized over 20 and had some really high rates (6).  This blanket loan is amortized over 30 with about the same rate if not a bit lower.

So thats how I'm able to pull money out and pay less. Now that will mean I'm giving up some of the principal paydown (400/mo or so). But to me, its worth it to have more cash right now. Ultimately, I view it as a portfolio. And taking that money out can only help further my growth.

If I end up 5 or 6k off a deal in the future, I can use that money to pay down the deal and make up the difference so I can take that house down. Might mean the difference in adding another 6 or 7 houses in the future.  Thats another 200 to 250/mo in net income per house plus 40k to 50k equity capture per house plus 2% appreciation on 6 to 7 houses plus 700 to 1k a month in principal paydown.

All told, that 40k to 50k I pull out today and I lose about 450/mo or so in principal paydown should generate an additional 1,500/mo in rental profits, 300k in net worth, 1k a month in appreciation and 850/mo in principal paydown.

I'll take those numbers for a return any day of the week. :-)

We'll see how that goes though. These blanket loans are always a roller coaster.