Lost Rent

So we got the following e-mail from one of our Property Managers.  It's been edited to provide privacy and remove any personal information, but the content wasn't changed.  This e-mail was received on the 12th of the month.  Rent is due on the first with the last day of "non-late" rent being the 5th:

Hi,

Just wanted to give you an update. There is an issue with this months rent. Tenant has a receipt from two money orders purchased totaling this months rent. Tenant claims to have dropped it off per usual except office was closed at the time so they put it in our outdoor drop box. No one in my office has it. Which means I do not have it. Tenant has put a trace on it. It will take up to 30 days for that to happen then up to 90 days to re issue them the new money order. They do not have the money to pay rent a second time this month (per the tenant). I do have the office manager still checking every nook and cranny.  Will keep you posted on this issue. 

Before I get into my points below, I will say that 24 hours after this e-mail was sent the money was found.

So it's our first case of (potentially) lost rent.  I have several points to make here.
-- It's always the responsibility of the tenant to ensure receipt of rent.  Rent is not paid until the Property Manager or landlord has it.  How and when the tenant wants to pay is completely up to them but until it's in our hands, it's not paid.  So that means using a money order (which is like cash) can be dangerous and using a drop box is at the tenants own risk.  Long ago, when I was a renter, every time I paid rent, I drove 15 minutes to the property management office and got a receipt.  I understand sometimes hand delivery isn't possible but the tenant must understand that AND if not hand delivered it takes 30 seconds to call and verify the PM or landlord received it the next business day.  No one can say they don't have time to do at least that.  That's what I did anytime hand delivery wasn't possible.  It's not the owner or PM's responsibility to reach out and confirm receipt of rent when not hand delivered.
Here is an excerpt from our standard lease that covers this point.  Make sure it's in yours.  It's in our late fees section:

If any amounts due under the Lease are more than 5 days late, Tenant agrees to pay a late fee of $25 per day.  Rent is deemed to be late if Landlord has not received rent by 5pm on the 5^th day.  A postmark date does constitute rent paid on that day.  Any payments lost prior to being received are the responsibility of the tenant.  This includes, but is not limited to, renter’s own negligence, payment put in a drop box that was not received, rent lost in the mail, etc.

-- We were confused that we received this notification on the 12th of the month.  We've informed our property management company that if rent is not received that we'd like to get a notification on the 6th of the month.  We've also requested that they then send us a notification when it is received (if it was late).  As owners we need to be aware of late payers.  This can be a serious red flag.  If a renter is constantly late, it almost never gets better.  If anything, it slowly slips and before you know it they are a month behind.  Knowing this can allow you to have your PM find another tenant at the end of the lease.  Habitual late payers are very dangerous to a real estate business.  Just because we have a PM, doesn't mean we aren't diligent in tracking our business.  Our PM is very good, but insisting on these notifications is just part of the relationship.

-- A word about empathy.  While it's true that the renter has a receipt for the money order, that doesn't mean anything to us.  Sure, I believe you got a money order, but I have no idea what you did with it.  It's important to treat your business as a business.  With that being said, on the first offense, we'll definitely do things like waive a late fee, which I think our PM did in this case since it was found behind the drop box, but for all we know they put it there after getting called on late rent and made it look like it was there the whole time.  I'm not saying this is what happened, but it's definitely possible.  My thought is, everybody gets one (the Spiderman mantra if you will).  If something like this happens again, there is no relief.  Late fees will be assessed according to the lease.  Again, our properties are a business.  We need to treat them that way.  We feel we don't have any other choice or we will be taken advantage of.  If we decided to pay our mortgage on the property in the same way and the bank never received it, that would be on us.  The bank wouldn't care.  In this case, it's like we are the bank and we have to treat rent collection the same way a bank treats mortgage collection.

-- Let's assume the money order was not found.  What would we have done?  Fortunately, I have an answer to this question.  We all met and decided what to tell the PM to do before she notified us she found it.
           -- Asses a late fee according to the lease
           -- Inform the tenant that they are still responsible for rent regardless of what happened
           -- After 30 days begin the eviction process and let the PM handle getting back rent as appropriate.
This may seem harsh to some, but the comment about 30 days for a trace and 90 days for a re-issue didn't sit well with us.  That may be the case on a money order, but we just don't care. As we said again, a renter's negligence is not our problem.  There are many ways to get a hold of money.  A temporary bank loan, short term family or friend loan (they will be empathic to your situation), etc.  We don't care how the renter comes up with the money, only that they do.  The dangerous part would be to set a precedent of allowing extremely late rent in that case.

With all that being said, our situation turned out fine (found rent), but I'm just hoping the tenant learned a valuable lesson.  We sure did and I hope by reading this you did too.  I'm curious to know how others would handle it.  Please let me know your comments.

Please Read - Lesson Learned

Part 1 (11/7/13)
Now that we have houses, we're running into all kinds of interesting situations.  Let me tell you about the latest one.  My father has known someone for about 15 years.  He works at a local garage and has always helped out my Dad.  He told my Dad that he's looking for a place to rent.  Based on this information, we started to look for a place to buy that he could rent.

We purchased a place in late August (the aforementioned House #5).  He was going to move in at $1,100/month rent making it a very profitable house for us.  He was set to move in October 1st.  Well, October 1st gets close and he tells us he's splitting with his wife.  He then says he wants to still move in but needs some help.  We work a deal to give him a break on the deposit and the rent for the first 6 months to help him out.  I'm already feeing uneasy at this point and I've let everyone know.  He now has a set move in date of November 1st.

When October 15th comes around he's still not ready to move in (something about his current landlord).  Is it true?  No idea, but it doesn't really matter.  It's looking like he won't move in at all.  We cut an even better deal for him and he's set to move in Nov 1st.  Nov 1st gets close and he still can't move in due to the landlord not letting him our of his lease until Dec 1st (or something along those lines).

Shortly after that we're told he's reconciling with his wife and they are back together.  We tell him that we have to go back to the original deal of $1,100/month.  His move in date is now Dec 1st at $1,100/month again.  We've pushed back 2 months (losing 2 month's of potential rent) and he's still not moved in and still no lease signed.  I have been vocal about being against this from the first time the move in day was postponed.  Everything I've ever read said don't rent to family, friends, or anyone you know.  I am seeing this through so hopefully we can all learn a lesson from this.  I'll keep everyone posted on this.

We've all already agreed NEVER to rent to family, friends, or people we know ever again.  I will make sure we hold true to this.  In fact, I'm thinking about bringing a new edict that every property we buy uses a property manager so we don't have to worry about any of this.  Had we turned this over to a property manager and they would have rented in by October 1st (giving them 45 days to find a tenant which is plenty) it would have save us approximately $1500 which, for all intents and purposes, is lost revenue to us.

Another lesson here is don't let anything deter you.  If this was our only (or first) house it would be enough to make most people want to give up on real estate.  We have 4 other houses rented which is providing us a profit even though House #5 is empty.  As much as I hate the situation, the more we own, the less something like this hurts us.  It's very nice to continue to see the bank account increase even though we'd made this mistake.  Please take this post seriously and I hope you learn a lesson too.  It's VERY easy to rent to someone you know (VERY EASY, TRUST ME) but with this being our only (first) experience, it's a great lesson to learn.  Hopefully because of this post you will never have to learn it!

Part 2 (11/28/13)
Ok, so we've finally wrapped this up.  As it turns out the guy kept stalling and kept wanting us to fix stuff and wanted to push out the move in time again.  So we said, enough is enough.  We are no longer renting to this guy and we're moving on.  We've seen more than enough to know he most likely would not be a good tenant.  So it's back to the drawing board on getting a new tenant.  We've lost at least 2 months and probably over $3,000 by the time it's said and done.  It's unfortunate but hey, we will learn from this mistake and hopefully you can learn through us.  If we make the mistake again, shame on us.  Just remember, it's your mistakes and how you learn from them that will make you stronger, not your successes.

Part 3 (12/23/13)
We decided to put the house on Craig's List and are renting it starting Jan 1st at $1,000/month ($100/month less than we wanted).  BUT, it's rented and the bleeding will stop on Jan 1st.  If only we would have done this the first time.  Again, a big lesson learned here.

To Fix or Not to Fix!

That's always the question :)

We got a call today from a renter (a very good renter) in one of our properties.  His lease is up in a few weeks and he wants to resign for 2 years.  He mentioned that there was an issue with the heater and the garage door (the door to the house in the garage, not the actual garage door itself).

Obviously as a landlord we have no choice but to fix any AC/Heating issues, but it will be a few hundred bucks to fix the door.  To save you the details, it's not a real problem but it bothers the renter.  That's basically all it boils down to.  It's definitely something we don't have to fix.  So do we fix it?

It depends.  In our case, we chose yes.  Why?  We have a very good renter and he always pays on time and he wants to sign a new 2-year lease at $1,100/month.  If we don't fix it will he leave?  No idea.  He didn't say either way (and I doubt he would leave but he might not be happy with us and that could lead to property neglect or destruction), but one thing I know for sure.  If we throw a little money at it, he is definitely signing a 2-year lease and potentially staying longer than that.  If we decide not to fix it, there is no telling what might happen.  If it was an unnecessary $5,000 repair I would be posting something very different :).  But it's just a few hundred dollars (probably unnecessary) to fix and ensure a total of $26,400 comes our way over the next 2 years.

We obviously have other options:
-- We say we'll fix it *if* he re-signs the lease
-- We fix it later on
-- We don't fix it at all and just say "learn to live with it"
-- etc, etc, we could get creative

My point of this post is ALWAYS evaluate your decision as a business.  We didn't make the decision to fix because he's a nice guy.  We made the decision to fix because it guarantees a continued cash flow.  He pays on time and doesn't hurt the property.  It was strictly a business decision.  Not having this property rented for just a few months can destroy cash flow for the next 2 years.  If he was a horrible renter and we wanted him out, we may have chosen a different course.

5 houses

It didn't seem so long ago when we started this journey and we now have 5 houses that will be fully rented on October 1st.  With the cash flow + our contributions monthly we're starting to see a real noticeable surge in the bank account each month.  It's nice to be able to see the fruits of your labor come to fruition.  Obviously we still have a long way to go if we want this to be our main source of income but 5 houses is a great start!

A network out of thin air

So I've read many books on real estate.  A common theme I've read is that as you start to invest in real estate a network starts to establish our of thin air.  Let me explain.

Since we started to purchase real estate the following things have happened. Also in italics is  a benefit from each:
-- Real estate agents are calling us now with deals that meet our criteria.  We don't have to spend as much time on base research.
-- The bank is asking us when we're going to buy our next one. If this doesn't guarantee financing I don't know what does.
-- Renters come to us.  For house #5, we had a renter BEFORE we even put in an offer on the house.  Through the "network" we came across a person who asked if we had houses for rent because he was looking to move.  When we found house #5, we showed it to him.  He said he would move in, signed a commitment letter, and we offered, purchased, and he moves in October 1st, 2013.  If this isn't a motivator to keep going in real estate I don't know what is.  I NEVER thought we would find the renter FIRST!

I'm excited to see what other "network" items pop up without us even having to try.....

House #4 and #5 update

So house #4 is now rented.  The renter moved in September 1st.  The management company did a great job finding a renter.

The renter for house #5 is moving in October 1st.  Everything is in place and it's ready for the renter.  We spent about $1,500 getting it in shape (new carpet and such) and we're getting $1,100/month rent for about $350/month cash flow.  We even asked the bank if we could do a 5% down on this property and they agreed.  This time last year I would have thought that was impossible.  Is it a sign of changing times?  I think it's too early to tell but I can guarantee we couldn't have gotten that 1-2 years ago.

So the tally so far will be 5 houses owned and all will be rented as of October 1st, 2013.  We are looking to get 1 more house in 2013 before we're done and re-evaluate our strategy for 2014 (if we change anything at all).

No longer selling House #1

Ok, I said I'd keep you posted.  Guess what.  We've decided not to sell house #1.  I'll recap the whole story for you here.  We originally decided to sell house #1 for several reasons:
-- It's the only house in that market and we don't plan on buying any other houses in that market.
-- It was only cash flowing about $150/month and the normal houses we're buying are averaging $300/month or more.
-- We have a lot of equity in the house and could easily buy another house (maybe 2) that cash flow $300/each.  Probably one at $300/month and half the down payment for the second house essentially converting $150/month into $450/month with no extra cash out of pocket.  It's a no brainer.

We tried to see if the renter who's in it wanted to purchase it to keep fees down and she did not.  We then listed it.  We told the management company that we were selling it because in order to make enough money monthly to justify not selling it we'd have to rent it for $950/month (It was renting for $825).  We had just raised the rent from $750 to $825 nine months earlier.

We got the notice on August 1st that the renter was giving her 30 days notice.  So we were staring at probably a month or 2 of no rent before we sold it.  It's a risk you take when you sell the house.  I guess she didn't want to take chance that the new owners would let her stay.  she never did really say why.  Maybe she didn't want people coming in the house when she wasn't home.

Well today (August 26th), we got a call from our management company.  They didn't say why, but the renter has asked if she signed a lease would we take it off the market and continue renting to her.  We said yes.  She's signing the lease and we'll be taking it off the market.

It's just funny how things work out sometimes.  Now it's worth us keeping the house as it cash flows like the other houses we have.  As of October 1st, we will have 5 properties fully rented and cash flowing about $1,500/monthly.

House #4 and #5

So we've officially turned over House #4 to the management company and they are currently trying to place a renter.  I know they've turned down a couple but hopefully we will have someone in there soon.

We've identified House #5 and put in an offer and it's accepted.  This one is in the Jackson area.  We bought it for $93,500 and already have a renter for $1,100.  I'll let you guys do the math on the cash flow of that one.  It's very nice.  These are the kind of deals we're still finding.  We're always on the lookout for these types of houses.  I'll keep you updated as we go through the process.   This will be the 5th house which is a significant milestone for us.  After we sell House #1 and purchase House #5 we'll have 4 houses on the books all making around great cash flow.  We'll then have enough money in the bank for at least 2 more houses immediately. so we'll be back in the hunt again!

Selling House #1 - Update

So I've mentioned in previous posts that we are selling House #1.  It was a great property and a great starter house but the cash flow is just not there and it's in a market/area that we don't want to be in anymore.  Unfortunately, we just got notice that the tenant is moving out.  They gave their 30-day notice.  It may be because there is an MLS key that allows people access to the home while she isn't there.  She may not want to wait around to see if the new owner's want the house or will continue to be investor's.  Either way, we've got 30 days and she's gone.

This is our first time selling an investment property and it's a great learning experience.  After this we should know what to expect which will weigh in our decisions to sell.  So far, nothing has happened that makes us think it's a bad decision.  The house is in an area that we are not and don't know well.  I'm a big advocate of farming where you have a presence, at least in the beginning which is why we're buying where my Dad and Brother live.  Stay tuned for more updates.

Our First Big Mistake

So I mentioned in the past that my brother moved to Tennessee and we started looking at buying properties in the Memphis area.  We bought our first property in TN in Feb 2013 and our second property in June 2013.  We went to turn on the utilities until we can get a renter in the house and the utility company said they can't because they couldn't find us on the TN Secretary of State website.  We found out that we had to register with the SoS in TN when we started doing business even though we were formed in MS.

Some of you might be thinking, "Well yea, you have to register with the SoS in every state you do business in."  Looking back it seems pretty obvious that we should have done that, but no one thought of it at the time.  Turns out there is a $600 penalty if you don't file in time.  We should have filed in Feb of 2013.  So we had to pay $600 more than we would have when we filed in July.  $600 may not seem like a big mistake but it is to us.  We're kicking ourselves for making it.

But, we have definitely learned from it.  If we had a CPA on staff or an attorney, maybe we wouldn't have made that mistake.  Unfortunately having someone like that on staff would have cost a lot more than $600.  We just don't have the funds yet to have a fully staffed team (even on a temporary basis) yet so we have to do the best with what we have.  One of the constant things I've read is to surround yourself with a good team.  At the time, we can't afford a good team unfortunately.  We have to rely on ourselves for a lot. Keep in mind, we bring in others when necessary.  For example, we use a title company when closing on a house instead of doing it ourselves.  We do what we can, when we can, and try to keep our cash flow as high as possible.

Fortunately because we are 100% family owned, we are exempt from the TN Franchise and Excise tax or that would be more tax of which we weren't aware.  We're pretty sure we've got everything in line now for doing business in TN.  But we have learned the lesson that we need some assistance if we move into another state.

Selling House #1

So we've decided to aggressively sell house #1.  Our monthly income on the house is only $142.50/month.  The problem is, for refinancing, the bank requires about 75% equity (which we have but that's all we have), so we can't take anything out or that would be our choice.  If we sell we stand to make about $20k in cash that we can put towards 2 other homes we've identified that have the potential to cash flow $400+/month.

So with no new dollars (or very few new dollars) we can essentially turn $142.50/month cash flow into $800+/month cash flow.  Our adjusted basis in the house is only $64k (we bought for $70k), so when we sell we have at least $10k of pure tax-free profit.  We only have to pay capital gains tax on the remaining, which when split between the 3 of us is pretty easy to do.  That's only $1,500 on the other $10k we're expecting to make on the house.

Wonder why real estate is a great investment?  We're going to sell a house and make $20k on it and only have to pay $1,500 in taxes.  For those of you who don't want to do the math, that's a tax rate on the sale of 7.5%.  Try and find that in any other medium besides real estate!

Stay tuned, I'll let you know how it goes.

Closing on house #4 and selling #1

We closed on house #4 on Friday.  All went smooth.  We are turning it over to the property management company to rent for us since we all have full time jobs.  It does cut into cash flow a little but it's what we need to do.

The first house we ever bought is currently cash flowing $142.50/month.  We've been getting an average of $300+ with no member loans considered.  We currently only owe $54k and it's probably worth $78k.  if we can figure out a way to get $75k net from it, then we're looking at $21k in cash (tax free).  This means we can buy roughly 2 houses that cash flow at least $300/month.  We're potentially looking at cash flowing $600/month with 2 houses instead of $150/month with one.  There is no reason why we wouldn't do it.

Our business is based off cash flow.  We don't care about equity or appreciation near as much.  The max we'll hold a house for is 5-6 years and then we're cashing out all the equity and appreciation and rolling it into another house.  Our goal is to sell 1 house and buy 2 that cash flow just as much as the first house.

I'll keep you posted but the idea is to turn $150/month into $600/month without any cash investment on our part.  I'll let you know how it turns out.

House #5 - An Experiment

So, my brother is in a position where they are expecting and the house they are currently renting isn't going to cut it anymore.  He doesn't have the cash to buy yet so he's going to rent.  We decided to look for a house for the company to purchase and him to rent.  There are many different schools of though on doing stuff like this with family and friends, so we'll see how it goes.  We all agreed to the following approaches to ensure there are no surprises and it goes smoothly.

-- The company has certain criteria so it must meet them.  We agreed that the house must cash flow $300/month for it to be worth it to the company.  We agreed that rent would be whatever it needs to be to make that happen.  This ensures that the following is met.
-- Emotion would come out of it.  This is easier said than done.  My brother would find the house and it will be the sole discretion of myself and my father as to whether or not we would purchase.  This takes his emotions out of it.  Again, if we turn down a house he really wants that could cause contention but we have a relationship level that transcends that in my opinion.

With that being said, we identified a house.  Turns out the realtor refused to pay the referral fee to my Father's appraisal company (which is a requirement of every deal we do).  This caused my father and I to say no to the deal.  My brother whole heartedly agreed and we walked away.

We've identified a second house (which is a short sale) that meets our requirements.  We've made the offer.  However, short sales are different animals and this is a new venture for us.  We've been told it can take up to 90 days to close.  None of us have ever bought on a short sale before so we're researching it and I'm sure the process will be full of lessons (hopefully none that we have to learn the hard way).  We don't even know if we're past the point where someone can come in and offer more.  With that being said, every thing we do in this process will be run by all 3 of us before a decision is made so we can reduce the chance of mistakes.  I'll keep everyone posted.  Should be an interesting experience!

UPDATE (9/1/13):
We had a timeline and we never did get an acceptance back from the bank so instead of looking for another house, my brother decided to just rent from someone else.  Probably a good decision in the grand scheme of things.  So now, no matter what happens, where he lives is separate from our company and no harm can come out of it.

House #4 - A New First And New Lessons!

I had told you previously that we had identified House #4.  We had offered $79k on it.  Again, we based this off our financial calculations but as you may or may not know, most (if not all) residential appraisals are based off the comparison approach, not the income approach that we use.  So, the appraisal came back at $75k.

We then called the agent and said based on our contract, we now had to reduce our offer to $75k since that's what the appraisal is.  So, could we have still paid $79k?  Of course, but as I've mentioned before, the bank only loans based on either appraisal or the purchase price (whichever is LOWER).  The seller did accept our new offer but they didn't have to.  I'd venture to say 90% of the time, the seller (if they need to sell) will do this.  The reason is, the appraisal is an independent appraisal provided by someone the bank chose who has no vested interest in the deal (he gets paid regardless of whether the deal goes through or not).

So, with that being said, a smart seller will realize that unless they wait a year, no other appraiser in their right mind would change the value of a previous appraisal.  So they are stuck at a value of $75k for a little while.  Almost no buyer would offer more than the appraisal value.  Had we purchased at $79k, that extra $4k is money out of our pocket.  That brings our cash on cash return down lower as well as brings our cash itself lower meaning it extends the next house we purchase out even further.  The market is too good to be doing that.

There are 2 lessons we learned here:
-- We ordered an inspection before the appraisal came back.  Our lesson is don't order the inspection until the appraisal comes back and you have a final accepted purchase price.
-- Had the sellers turned down the reduced offer, we're still out the appraisal price too.  Moving forward, all of our contracts will say that "If the appraisal value comes in below the asking price and the seller refuses to sell at the appraisal value, the seller will be responsible for the appraisal fee.

With those 2 lessons enacted, we can go from potentially being out $500 or $600 if the deal falls through to nearly nothing.  With the market as good as it is right now, this is absolutely something that we can get away with.  It may not be the case in the future or with different types of properties.  These houses are available as fast as we want them so sellers are willing to do these things.

As a side note, I want this type of stuff to happen now and with these sub-$100k properties, not later on the multi-million dollar deals :).  Again, our worst case, we were out $600.  \these lessons happening now are VERY valuable.  Fortunately for us, we didn't have to learn this lesson the hard/expensive way, but it doesn't make it any less visible!

You're all caught up!

So, if you're reading this blog, you'll notice that up until now, every post was pretty much on the same day.  It's not an error, it's me not getting around to this blog until now.  I really wish I had started earlier as there would be much more detail on the initial days.  Who knows, maybe I'll come back to all these posts and update them with more information as I get time.

So here we are in-between Contract and closing on house #4 (house #2 for 2013).  From here on out, posts will be real-time and dates will reflect.

House #4 identified

Using the same strategy we did for house #3, we have identified house #4.  We located 2 houses we were ok buying and went after one.  If it falls through, we move on to the other house.  We currently have a contract on the first house for $79k so no need for house 2 at this time.  We close sometime in June.  We'll set the date after we've done our inspection and the appraisal comes back.

For this property (and all purchases going forward in Memphis) we will be using property management.  We've found a property manager at a really great rate.  My brother has a full-time job now in Memphis and while 1 house is ok, he can't be managing multiple properties.

We're also using a member loan for the down payment.  We're using a $9k member loan to cover the down payment and most (if not all) of the closing costs.  Why?  Because we don't quite yet have the funds to purchase a house without dropping below $5k.  It would be close but why risk it.  Our next house should be able to be purchased with 100% company funds.  Our target for that is July to keep on our timeframe.

So what does this equate to?  The company is purchasing a house and basically not spending a dime.  AND we're still cash flowing about $125/month after all expenses, management, and member loan costs.  You may be thinking that's awesome, and you'd be right!  You may also be saying "Why don't you open it up to others and then you can buy as many of these as you get your hands on?"  I'd say you have a great point, BUT......we're not quite ready to go down that road yet.  When you involve non-members (personnel outside of the LLC), you run into other situations that I'm not clear on yet.  There are potential SEC issues, etc.  So one of my goals for 2014 will be to find out as much information as I can on the ramifications, which will most like require some consulting fees and such that we're not ready to bear yet to make sure whatever we do is 100% legal.  That will be a big talking point in 2014.

Addition to our overall strategy - a new approach

We've always been good with our money and we currently have other investments (mostly stock and such).  Some do well, some do ok, and some lose.  After running some numbers, we've determined that 5-6% in other mediums is a really nice gain.  But I don't want to retire at 65.  I want to retire at 45.  This company is how that will happen.  But how can we get to 5 houses in 2013.  It's obvious that with our cash influx, 2 more is as good as we can do so something has to change.

So something is changing.  We call them member loans.  It's where one of us loans the company money.  You can do this a bunch of different ways but we're doing it as a unsecured loan at 10% interest.  They are interest only loans.  What does that boil down to?  It boils down to a place we can park our money and get a 10% return and the company can use the cash to purchase properties.  Maybe one day I'll post a more detailed description of how it works. but please do your research.  There are debt to equity ratio's you need to be mindful of so the IRS don't re-classify them as contributions and the payments as dividends or distributions.  This could throw all your taxes into whack if this happens.

Probably the most important thing I can tell you is NEVER take shortcuts.  There is so much money to be had doing everything legally.  There are so many ways to be creative and still be 100% legal.  It's important to have people you can turn to for questions.  I know in the beginning it's not feasible (and it's still not for us) to have a team of people, but again, get creative.  For example, I have a friend I went to college with that's a CPA and I hit him up with some questions.  I recently sent him $100 gift card to his favorite restaurant to say thanks.  Just remember, always do research first to learn as much as you can and hit these type of resources up when you're stumped or need an extra brain on it.  I've learned that people are much more willing to help (without reward) when they know you've studied up on something and are asking the right questions and not just some idiot without a clue.

Visit to Memphis

After the huge success of house #3, I decided to fly down to TN.  I actually flew into central MS first and we all 3 met to discuss things.  Also, during that time we met with our banker and took him to lunch.  We laid out our company and our strategy, and asked for what we wanted.  In doing our number crunching we wanted to make sure 10% down at 5.75% were doable going forward (barring no major change in the economy) or at least figure out what would be.  They said based on our history and our balance sheet and P&L's (which we brought with us), they were comfortable doing that.

So now we're in a position where we are all but guaranteed a loan with 10% down and 5.75% interest on future properties.  That's a good spot to be in.  It's taken 3 years to get here, but we're here.  I then trekked up to Memphis with my brother where we spent 3 days driving around and analyzing the area.  We further defined our farm area and where we did and did not want to be.  We drew a map of where we're interested in properties and divided it into sections so we can keep history on those sections and then in the future further weight them as to where we REALLY want to be as we start to buy property in those areas.  That was the most valuable thing we've done since we started this company.

I have to say I can definitely see myself doing this for the rest of my life.  Real estate is a real passion of mine and I can't wait until we can afford to do this full time.  It helps to love real estate and love even the tedious stuff that most people don't (like financials and taxes).  Even the most mundane tasks, you have to love doing or this might not be the path for you.

New 2013 Strategy - The year of 5 houses!

After the success of this last house, we discussed 2013.  We decided to keep a minimum balance of $5k in our account at all times.  $5k became our new zero.  This recent house had brought us down to $5k (our zero).  With $1,950/month coming into the account we figured we could buy 2 more $70k houses before the end of 2013.  I decided to set our goal at 5 total properties (around $70k each) in 2013.  My Dad and my brother don't think it's possible but I wanted something to strive for!

So all in all, our 2013 strategy looks like this:
5 units
3 bed, 2 bath houses in either Memphis or central MS
~$70k each

We have no idea how we're going to do it, but it's our goal!

Property #1 in 2013

We closed on the house in January of 2013.  This post is about that house from closing to rented.

The story of how it rented:  We posted on Craig's List again for our house prior to closing.  We got permission to show the house 2 weeks before closing.  We negotiated this at the contract signing.  Our first post yielded several individuals.  One who filled out the application.  We checked him out and a court case came up where he was sued for non payment of rent.  It was a few years back and he seemed like he had a good story about why it happened.  We told him we would rent to him on a month to month basis.  That means at non-payment in the state of TN we can evict within 30 days.  We also said we would require first and last's month rent and a full month's rent in deposit up front and he could rent it.  The beauty behind this strategy is he can only apply the last month's rent to his last month.  Before you start poking holes in my strategy, let me explain the fundamentals behind it.

The idea was to sign a month lease that goes month to month after that.  The lease laid out the items above.  $950 would be held in reserve for the last month only and could not be applied to any other month.  Once the lease was over (1 month), all month to month terms would follow the rules of the lease until they moved out.  This way if he failed to pay rent, we could evict and apply the last month's rent to the month he did not pay after eviction.  This does not violate any laws of TN.

Yes, that strategy is heavily weighted in our favor but someone with the history he had (we found out later he had 2 prior events of eviction) we had no choice.  He verbally accepted the terms.  We didn't hear back from him for almost a week after repeated attempts to reach him so we decided to move on.  We don't know what happened but our strategy there most likely kept us from a bad situation.

Again we posted on Craig's List and found another renter.  She had just moved from another area where she was a victim of the 2007 housing crash.  She had just purchase a home and had to short sale when she moved to Memphis for a job.  She explained this all up front and that's exactly what showed up on the background check.  We told her he would rent month to month for 6 months and if she paid on time, we would do a year lease.  We told her rent would be $1,000 for our risk.  She agreed and not only paid her first month's rent + deposit, but her second month's rent up front for a total of $2,950 before she ever moved in.  She even paid her third month's rent 45 days EARLY!

The lesson here is this.  Always do background and credit checks on renters and don't be afraid to put things in your favor if they come back as a risk.  This strategy saved us from renting to a bad person and finding a good renter.

The financial story: We closed on the property and since it's right across the street from my brother, we decided not to use a management company.  After expenses, it cash flows $460/month.  Yes, you are reading that right.  This is not normal and in case your crunching numbers in your head, that's roughly 70% cash-on-cash return.  Try getting that in any other normal investment vehicle!  the 5-year and 10-year IRR's were over 80%!

After property #3 we're now sitting at $950/month plus our $1,000 month contributions for a total of $1,950/month cash influx every month.

UPDATE (12/23/13):
A couple of months ago we got notice the tenant was moving out.  It was kind of sudden because she had a loss in the family and was moving somewhere else to handle that situation.  We wound up using her security deposit (with her permission of course) to handle the pro-rated last month's rent and a few items that needed to be fixed.  Turns out she had smoked in the house and we had to have the air purified to get rid of the smell.  So as of this update it's unrented but has been turned over to the property management company that rented house #4 to get a renter in it.  As of Jan 1st, it will be the only property we have not rented.  Hopefully that will be rectified soon.

2013 kicks off

At the end of 2012, we had identified a property we wanted but alas it was in a pending state, however we kept a close eye on it.  One day during our weekly updates to our spreadsheet, we noticed it was active again.  We immediately called the realtor and asked to see it.  It was listed at $69,500.  Our research had told us it was priced right for the market.  We didn't know the status of the house, so we went with 2 offers in hand.  An offer for $65,000 and an offer for $69,500 (full price).  We look at what others houses were renting for and knew we could list it for $950/month and at worse get $900/month.  At $900/month it met our cash flow demands by almost 2X.  We saw it and it only need carpet cleaning, new locks, and a good full cleaning.  We estimated it would take about $500 to get it ready for rent.  We offered $69,500 right there and then.  We were told there were multiple offers on the property and he would let us know.

We were called back the next day and said if we could provide a pre-approval letter from our bank, they would accept our offer.  They gave us a week to get this together.  It took us 3 days and we provided it.  On the back end we went to our bank and asked for 10% down and 5.75% interest based on our perfect payment history with our other 2 properties.  They agreed.  We presented the pre-approval letter and our offer was accepted.

The Memphis Market and our 2013 strategy

With my brother now in Memphis, we decided to explore the Memphis market.  He started to learn the areas and figure out the good and bad.  We started doing several things.  We refined our strategy to specify the type of house we would look for.  We found a popular realtor site that listed all houses on the MLS.  This is important because without a realtor or an appraisal license (which no one had in TN), you cannot view the MLS.  We did a quick search for houses within 2 miles of my brother and hundreds of results popped up.  We started a spreadsheet which tracked properties in the area from listing all the way through sold.  We started refining our parameters until we got ~50.  Our parameters became the following:
-- 3 bedroom
-- 2 bath
-- $50k - $85 list price
-- 3 miles radius around the center of my brother's zip code.

With between 40 and 50 results to pick through, we had our farm area.  Out of the 50 listings, ~30 were active and 20 were in some state of pending.  Pending in this sense just meant that there was a contract but the purchase had not yet closed.  Why care about pending?  You'll find out later.

Our strategy became this.  We would go through the list and by looking at pictures we would pick 5 properties to go see (regardless of status).  Then after looking at them, we would rank them in order to go after them (we figured 2 or 3 would be suitable).  Part of our strategy was to get them as turnkey as possible since we all had full-time jobs.  We just did not have time to doing any work ourselves or manage a big renovation.  We decided if we had to dump more than $1,000 to get it rent ready, it wasn't for us.

After doing this for about 2 months, we decided to put it into action.  More on that in future posts.

Shakeup in 2012

In 2012, my brother and father lived in Central MS.  I live in the Washington DC area.  We had decided to pursue properties in MS because it was much easier (and cheaper) with both of them down there and with them both being appraisers and us having lived there all our lives, we knew the market the best.  We decided to farm MS as best we could.

However, in late 2012, my brother's wife got a once in a lifetime job in Memphis, TN.  They decided to move.  My brother left appraising and started to look for a job in Memphis.  He eventually found one as I explained in an earlier post.  So at the end of 2012, we were now in 3 very different places.  Some might see this as a challenge, but we saw it as an opportunity.

We decided that we would explore the Memphis market as best we could and farm in Memphis and Central MS.

Our 2012 strategy

In 2012, we decided we would purchase another property.  We had our eyes on a couple.  One was a family member who needed to sell.  We made an offer and landed on $95,000.  The bank required 15% down and gave us an interest rate of 5.75%.  Again, this took all our cash but this time we had a winner!

We put an ad on Craig's List immediately for rent and had it rented within a week at $1,100/month.  For anyone who has purchased property in the price range, I can see you salivating already.  After all expenses were paid, we were looking at $350/month in cash flow.  Add to that the $200/month we had already and we were sitting at $500/month + our $1,000 contribution for a total of $1,500/month in cash influx.  Things were starting to look up.

We now had 2 properties in Central MS.  The first property is huge, but when you purchase that second property, you get a great feeling of accomplishment that this might actually work.  Ahead we plunge!

First Major Setback

In August of 2010, 3 months after we bought our first property, the air conditioning went out.  On top of that it was out for almost a month.  MS = 100 degree weather with an average of 90+% humidity.  No air conditioner = an oven.  We worked quickly but there were some parts that needed to be ordered and they took over 2 weeks to come in.  Long story short, it was about 3.5 weeks in total from the day it went out until the day it came back on.  We also credited rent back for the days our tenant was misplaced.  All things considered it costs us about $3,800.  Cash flowing $100/month at the time, this was devastating to cash flow.  At the time, that costs us almost 6 months of contributions and earnings.  I'm sure some people would have put it up for sale, cashed out, and said "oh well, I tried, time to move on" and given up.  Not us!

So this setback occurred toward the end of 2010, wiped out almost all cash and it took us until 2012 before we were able to save up enough to purchase our second house.  Our 2011 strategy wasn't anything more than float and build back up cash reserves.  Out of the 3 of us, I make the most money in my day job so I increased my monthly contribution enough to make the total contribution influx to be $1,000/month.

Our 2010 strategy

Before we purchased our first property in 2010, we decided to come up with a strategy.  We re-evaluate our strategy every year.  Our strategy was to purchase 1 property in 2010.  We also determined that we would stay below $100,000 on our purchases for now.  This is not hard to do in MS, but can be in other areas.  We weren't exactly sure how to go about purchasing our first property.

So we decided to let some people know we were in the market for our first property.  It didn't take too long.  The father of one of my father's friends was looking to get rid of a house he owned.  I don't remember why he owned it, but he was retired an didn't want the "hassle" of a property anymore and since it was paid off would rather have the cash.  They were nice enough to give us 6 months interest free while we lined up appropriate financing.  They sold us the house (with a renter already in it) for $70k.  We paid 10% up front ($7,000).  We paid $450/month (all towards principal) for about 6 months.  When we went to finance we were given a loan for what we owed.  The house appraised for $77k, but banks don't care about appraisal value for purchases (if it's higher than the purchase price).  Let that be a lesson for you.  Appraisal value does NOT matter for a purchase if it's above the purchase price.  Banks lend money based on the purchase price.  They will however lean on the appraisal if it's lower than the purchase price.  The days of lending on appraisal value ended in 2007 (at least it's still that way in 2013).  Also, the days of 100% financing (especially for investment properties) is gone as well.

Once we had the property financed, it wound up being a 15% down payment and finance on 85%.  We received 6.5% on the interest rate.  After all expenses we cash flowed about $100/month.  It was a pretty good property.  It rented for $750 month.  In 2011, we raised the rent to $825 and are about to raise it again.  $75 was a big bump but it hadn't been raised in 6 years.  So now in May 2013, we're cash flowing around $200/month.  Pretty good for our first house.

So that's how our first real year wrapped up.  1 property purchased which used most of our cash.  Our contributions at this point were $600 month in 2010.  Please view our company overview for a quick status on where we stood at the end of each year.

How it all began

The purpose of this blog is to detail my endeavors into real estate from the beginning.  When I entered into the world of real estate, I did not have anyone to talk to with experience in buying and selling real estate.  I didn't have a mentor.  I didn't have any experience in real estate buying and selling.  My parents were not rich, they were average.  I always had a roof over my head and food on the table, but we did not live a life of luxury.  I would say my childhood was very average with no special advantages.  I went to college and got a good job that pays decent money.  All of this happened before I even thought about real estate.  I wish I had known when I was 18 what I know now.  But hey, it's never too late!

So how did this all start?  As with many individuals like myself, it all really started with Rich Dad, Poor Dad by Robert Kiyosaki.  Someone recommended this book to me.  I read this book in 2004 and I really wish I had read it sooner.  If you have read this book, good for you, if you haven't, please go buy it now or borrow it from someone!  It was written in 1999 but the message applies today.  I won't elaborate here, but if you have read it, you're off to a great start.

So after reading that book, I was hooked.  I immediately started reading as many books as I could.  Please visit my Book's I've Read page to see all the books I've read.  I'm constantly adding to it.  I didn't really have a lot of cash to begin investing in anything so I decided to start with the same thing everyone who wants to embark into a career in real estate investing should do.  Increase my financial intelligence.  I don't care what anyone says, until you have a solid level of financial intelligence, you won't be as successful as you can be.  Most likely you won't be successful at all.  A solid financial intelligence includes knowing how money works, understanding basic accounting, understanding real estate terminology, and understanding how to analyze any deal (real estate or otherwise).

So when I read this book in 2004, I changed my entire outlook on money.  I immediately started saving what I could so when I was ready to invest I would have some capital.  There are other ways to get capital but I wanted to start this venture with my own money, but whatever method you choose, everything I talk about still applies.  I spent the next 2 years reading books, studying financial websites, and learning general accounting practices.  I have a full time job so my time was limited to pretty much the evening and weekends.  I also have a family which limited my time even more.

I want to make sure the record is clear.  I did have some small advantages that others most likely do not.  My father is a real estate appraiser.  But before you think that was a big advantage, he was just an appraiser.  He has never bought nor sold real estate with his own money.  My brother went to college and then worked for my father for a few years as an appraiser before deciding appraising wasn't for him.  He recently (2013) took a job working for another real estate company that buys and sells hotels in Memphis.

Wait, did he say OUR holdings?  Yes, I did.  In 2006, I had a long talk with my father and brother.  I told them what I wanted to do and my father was also thinking along the same lines.  He was consistently running across great deals and was tired of watching others snatch them up.  My brother was still in college but is very intelligent so I wanted to make sure he was involved.  We decided to go into business together and form an LLC for the purpose of real estate investing.  First, we had to build up capital. Since I had already started to build up capital, I had a decent chunk to begin funding.  My father and I both put in $2,500 and my brother put in $2,500 later once he was able.  At first, since real estate was expensive (pre-2007), we decided to invest our capital in the stock market to see if it would grow (it did not).

So we open opened up a stock account and put most of our money into it.  We also each contributed money monthly to the account.  Long story short, after about 1.5 years, we lost a little money (thanks to the crash of 2007-2008.  In 2009, we took all the money we had out and decided to buy our first property.  And that's pretty much the story of how our company began.  The point to note here is we built up capital from 2006 to 2009 before we made out first purchase in 2010.  I also kept reading and researching and increasing my financial education (which I never plan on stopping) at the same time.