Making it Happen: Mad Money Monster

Mad Money Monster Bio

 

Mr. & Mrs. MMM
Mr. & Mrs. Mad Money Monster

Mad Money Monster is a personal finance blog chronicling one family’s journey from doing money all wrong to doing it all right. Lisa, also known as Mrs. Mad Money Monster, is the creator and resident blogger. They pride themselves as being Gen-Xers who have turned it all around and are now charting a course towards financial independence. Their traditional path to wealth consists of frugal living, index fund investing, and rental property ownership. They love inspiring others just like them to take control of their financial future and realize it’s not too late!

Getting Started

 

I always knew I wanted to own rental properties. Interestingly, I started by accident. The year was 2007, yes, the height of the real estate bubble, and my mom and dad were living in an apartment with their dog – a cute little Boston Terrier named Ace. Unfortunately, Ace wasn’t as nice as it was cute.

One morning my mom had him out for a walk and he ended up biting someone’s sneaker. He put a hole through the top of the sneaker. As luck would have it, he bit the manager of the apartment. Despite there not being any injury or real damage, he was evicted.

I was unable to take him at the time, so the next best thing to do was to buy my parents a house where they could live with Ace. Did I mention Ace was actually my dog? That’s true. So, I obviously had a vested interest in keeping him in the family.

Fortunately, I had always wanted to get into rental properties, and this seemed like as good of an excuse as any. So, I started scouring Realtor.com. Inventory was sparse and prices were high; unfortunately I didn’t have the luxury of time. I ultimately ended up settling on a house that needed upgrades. At the time, I wasn’t aware that real estate investors make their money in real estate at the time of purchase. I bought the house for close to list price in 2007. That says it all.

Related: One House, Two House, Red House, Blue House

Why Real Estate And How Many Properties?

 

rental house
Our rental property

For me, I’ve always been enamored with real estate. I grew up poor and we lived in a trailer. As a kid, all I ever wanted was a real house. After reaching adulthood, I decided real estate investing would be a perfect fit for me. I really enjoy transforming a property into a shining gem.

So far, Mr. Mad Money Monster and I have only one property. We are currently charting a path towards total debt elimination on our way to financial independence. In our world, total debt elimination means eliminating our mortgage debt, including our rental mortgage debt. That is currently the last debt we have on our plates. After that, our plan is to acquire more properties, paying cash.

Of course we know the power of leveraged money. It’s a personal preference for us to be cash only real estate investors. That being said, as long as the numbers work, there certainly isn’t anything wrong with financing a property that will cash flow.

Related: How I Almost Committed Financial Suicide

Positive Impact

 

As noted earlier, I love transforming a home into something spectacular. Something called sweat equity has definitely paid off with our property. We also love driving by our tangible asset – something you don’t get to do when you only invest in the market. Stocks go up and stocks go down, but people will always need a place to live.

It has also been a great lesson for our daughter. She knows we have another house that people pay us money to live in. She also knows that we take care of that house just like our own, because people pay us money to live there.

Related: How We Almost Committed Financial Suicide – Again

Lessons Learned

 

Being that I purchased my property at the height of the real estate bubble, near list price, means I did NOT make my money on the front end of the deal. Thankfully, I have no intention of selling the property anytime soon, so hopefully, I’ll make my money through passive income and on the back end when I eventually do sell it.

Goals

 

Our ultimate goal for real estate rentals is passive income generation and diversification. We prefer having fewer paid off properties over more leveraged properties yielding the same income. Fewer properties = fewer problems. Period.

Advice For The Virgin Investor

 

Do your up front homework, make connections within the field by attending local REIA (Real Estate Investors Association) meetings, and avoid analysis paralysis. All the upfront work, planning, and saving for a property won’t do any good if you’re too scared to pull the trigger.

Decide the type of property you want to invest in. Single family homes typically have lower vacancy rates and are easier to sell if you decide the life of a landlord isn’t up your alley. On the other hand, multi-family properties have multiple income streams; thereby, lessening the blow of a vacancy. You also have multiple tenants sharing one building. And that equals less overall maintenance.

Analyze what type of neighborhood you want to invest in. Go too expensive and you might have a hard time making money. Go too cheap and you might find yourself in a dangerous neighborhood.

I would also caution a virgin investor against not using a property manager. Yes, I know the argument for not using one – everyone wants to keep more of their profits. But, one must consider how involved they want to be with their property. A good property manager means you’ll be able to relax a bit knowing the legal aspects of your real estate venture are handled. A property manager can take care of everything or very little, depending on the preferences of the property owner. But make no mistake, a good manager is worth his or her weight in gold! Besides, you’re getting into real estate to earn passive income, not to give yourself a second job.

Oftentimes, professional investors calculate property management fees into the deal when they’re determining whether or not a property is worth purchasing.

Property managers can take care of things like…

  • Leases
  • Tenant Background Checks
  • Borough/City/Township Requirements
  • Inspections
  • Routine Maintenance
  • Unexpected Repairs
  • Difficult Tenants
  • Evictions
  • Court Hearings

Lastly, make sure you have a good umbrella liability policy. They’re cheap and they can cover your butt in the event a tenant decides to sue you for that cracked sidewalk they tripped over last week. It’s not probable, but it is possible. Cover your bases and your experience as a landlord will be a positive one that also puts cash in your pocket. Everybody Win.

Are you thinking of getting into real estate investing? What’s holding you back? If you’re already an investor, what is your #1 piece of advice for a newbie?

Making it Happen: Gwen from Fiery Millennials

My name is Gwen, and I run the Fiery Millennials blog. I’m 26, live in the Midwest, and am the proud slave owner of an adorable kitty cat. When I’m not working or creating content for my blog, I like to participate in a number of activities and hobbies like stained glass, softball, quilting, soccer, knitting, and disc golf.

I got started in real estate when I found Paula Pant’s blog Afford Anything. I thought real estate sounded like an awesome way to accelerate my path to FI. I didn’t actually think about doing anything though until I went to my first Chautauqua and actually got to sit down and talk real estate with Paula herself. Events conspired against me so I had to wait almost 18 months to be able to buy a property.

Real estate is one of the rare investment opportunities around that offer double digit returns regularly. Higher risk, higher reward. For just a few thousand dollars of my own money, I can start bringing in money immediately. I’ve been putting money in the stock market for years and still haven’t seen the kind of returns like I’m getting out of real estate. Investing in the stock market is more like a marathon, whereas real estate is like running a Tough Mudder. Still hard work but of a different variety.

I own one property so far and would like to buy a few more before I’m done. I bought my first property earlier this Spring. It’s a beautiful historic home that was converted into a triplex some years back. Since I live in a pretty low cost of living area, I was able to buy this property for $85,000 and put down 10%. I live in one unit and inherited tenants in the other two units that bring in $1,100 a month in rent.

Since I’m still so new to investing in real estate, I haven’t really seen much of an impact either negatively or positively so far. I mean, I really love the fact I can point to this patch of land and say, “See that beautiful big house right there? I own that!” I also really appreciate having a roof over my head and fewer neighbors. On the other side of the coin, though, is all the stress that comes with owning a home. It was slightly neglected by the previous owner, so I have some work to do around the house. This is the first house I’ve ever owned (only the third I’ve ever lived in) so I’m a bit new to the concept of calling people and getting bids. I don’t want to mess anything up but am aware I have a lot to learn!

I’ve gone through one and a half deals. How does one go through a half deal you ask? Easy. It’s called find a property, make an offer, have it accepted, and then get it derailed by a silly issue. In my case, that was a little thing called zoning. The zoning had reverted to single family housing, so I couldn’t buy the property and rent it out without going through a ton of hassle which is also not what I wanted for my first property.

Both times, though, I used the same process. Keep an eye on the market until I was ready to buy, find a realtor, look at tons of properties and make an offer on one I liked. I like multi-family properties that exceed the 1% rule. I do not look at anything else (with one notable exception but that’s because I drove past it everyday and was the cutest little house ever).

I haven’t made any mistakes to learn from yet that I’m aware of. I slightly regret getting a property that needs so much work right off that bat, but until that’s all wrapped up I won’t really know how that’s going to impact the numbers. It will all pay off later this year when the house is sealed up tight and looking beautiful.

I hope to achieve Financial Independence even earlier with real estate. If I did nothing but worked, I would be done by the time I’m 35. While that is amazing to the average Joe, I am not average. I want to be done with my career in IT as quickly as I can. I have a lot more to do in this world than have my life revolve around work. Having this alternative revenue stream will allow me to do things I find more interesting and fulfilling than my current job. I would love to be able to devote more brain power to crafty things and do things I can’t do right now. What might that be? Something like working at a youth camp over the summer. I did that as a teen and really loved it. I want to pass some of that magic on to the next generation. I would also like to go skiing more often than I do now and think being a ski instructor would be a ton of fun. Get paid (a little) to ski!

My version of FI is not one where I completely stop working. Instead, I want to do fun things that just so happen to pay me. Even if it is only $1400 for a summer’s worth of work.

To someone who may be mulling over dipping their toes in the murky world of real estate, I have one piece of advice. Save way more money than just a down payment. I saved up enough for a down payment and bought a house…… only to discover things had to be taken care of urgently and I needed to have cash on hand. I had to replace both an oven and fridge in the first week of ownership. Fortunately I did have the cash, but I’m running low now. The next property I buy will be with a much larger cash cushion behind me. Rule of thumb is 20% for a downpayment – and I would have at least an extra 5% or $10,000 on hand (which ever is higher). It’s better to save too much, than too little.

Making It Happen: Brian from Rental Mindset

Brian internet picture

My name is Brian and I don’t have the usual characteristics of a real estate investor.

People usually think investors are older. I’m 31 now, but purchased my first rental at 25.

They think you have to be wealthy. My net worth must be under $100k.

Do I live in an area great for rentals? No, I live in San Francisco and own rentals on the other side of the country.

Maybe there is some skill I have that others don’t? Nope, I am fairly passive with my investments. I let others do the work for me and still get a great return.

Why Real Estate?

The returns are worth the hassle.

With the most conservative rental properties and projections, 15% annual return is extremely doable.

You might think, “who cares, not worth my time. Look at this chart:”

Real estate is all about playing the long game. It is a mistake to only think about a 1 year return or a 5 year return. What does it look like over 20 years?

How much work would you do for $400k? A whole heck of a lot! With my passive approach to rental properties, this decision is a no-brainer.

For the biggest reason this is possible, check out my article The Thing Most Investors Don’t Understand about Leverage.

My Current Portfolio

I own two properties, one in Atlanta and one in Memphis.

Both were purchased turnkey, which means a flipper purchased the property specifically to sell to rental property investors. They do the complete rehab, put a tenant in place, and all I have to do is verify.

To this day I haven’t even seen my properties!

The returns are still great paying for others to do the work. With the current upswing in the market, my portfolio is up 31% a year. I expect this to come down to 20-25% yearly return through a complete real estate cycle.

Right now I’m doing a cash out refinance on my original property. I’m pulling out some of the equity and going to use it as a down payment on a new rental. The rental property is cloning itself!

My Typical Deal

Both of my properties were purchased through a national investor network who recommends turnkey providers in specific markets. They provide some hand-holding along the way, which is a great help for a new investor.

Later this year I will look for a new property, here is what I expect:

  • 3 bed, 2 bath
  • Memphis suburb 15 minute drive to downtown
  • B+ neighborhood
  • $100k purchase price
  • With 20% down and closing costs, roughly a $24k investment
  • $1k a month in rent
  • $100 in cash flow a month, after accounting for vacancies, repairs, and saving for big items like HVAC or new roof
  • 20+% yearly return with cash flow, leveraged appreciation, the tenant paying down the mortgage for me, and tax benefits

It’s not a crazy deal that takes a lot of hassle to find. I’m not sending mailers or scrounging the MLS daily.

In fact, I know there are better deals out there if I want to put in more work myself. But right now I’m good with this.

I recommend other first timers keep it simple to start, you can always take on more responsibility later!

You Can Do It Too

It is all about having the right mindset.

Check out my website Rental Mindset for more, including the complete numbers for my properties.

I want to hear from you, what are your objections to this approach? What excuse do you have for why you can’t do it yourself? What is holding you back?

Making it Happen in Series: Coming Tomorrow

Thats right folks… The Making it Happen: Jr Real Estate Investors series will finally launch tomorrow. Life has been very busy getting rental property #3 under control. I also lost a bidding war for rental property #4 in the past two weeks (bummer). Combined these items with the typical headaches of a 9-5 job and a side business, well… I have not had time to blog.

But! We have 5 great guests lined up and will be releasing one guest post a day starting on MONDAY. MONDAY MONDAY MONDAY (just like the monster car rallies).

Our first guest post will focus on a gentleman that lives in a high cost of living city. He will share his experience as a real estate investor that buys rental properties out of state. In fact, he has never even seen his rental properties! But he has great property managers who take care of all of his dirty work. His post will also share that real estate investing and leverage is in fact WORTH your time. He takes a long term approach to his investing and will provide great insight

Our second guest post will focus on a young lady who recently bought her first property. She is house hacking in a multi unit apartment building AND getting paid to live there. She has a fascinating story and start to her real estate investing. Her plans do not stop with one property as she plans to grow her rental property portfolio over the next few years.

Our third guest always wanted to own real estate and kind of lucked into her first property. Her husband and her plan to pay down all of their debt in the next few years. Moving forward, they will look to buy a few more properties in ALL CASH as apart of the financial independence plan.

Our Fourth started in real estate as a teenager learning to fix up properties with his father. This experience gave him the itch and he quickly caught the real estate bug. He currently owns a rental property and plans to use the cash flow for his early retirement in a few years.

Our final guest invests in both residential AND commercial properties. He shares his struggles with debt in his early years. This battle with debt motivated him to find ways to build income. His story shows that you do not need a lot of cash to start in real estate.

We hope that you will read along this week with our guest posts. Please ask questions; these guests a wealth of knowledge when it comes to real estate.

Also, moving forward, we will continue to share others real estate investors stories. If you would like to be featured, please email me at guyonfire.us@gmail.com

Landlord Report – April 2017

Hello there – welcome to another “Landlord Report”. This monthly report will share my experiences as a landlord. The report will show EVERYTHING related to my rental properties and life as a landlord….

I will discuss the rents that I collected, mortgage payments, and other ‘landlord items’. Other topics may include repairs, finding new tenants and any other items that might randomly pop up. The report will also share how much money I made and the amount of time (hours) it took. I want to show the world being a landlord is a wonderful thing.

I also manage ~50 properties for other people, but this report will not share information on my clients or their properties.

Throughout this process I aim to be as transparent as possible. Being a landlord and owning rental property is a wonderful way to earn (mostly) passive income. Please feel free to contact me with any questions – happy to provide insight.

The Landlord Report – April 2017

landlord

This past month was boring, ABSOLUTELY boring. Any you know what? That is awesome! Being a landlord comes with the occasional headache, a repair request from a tenant or the occasional ‘oops’. But most months are usually stress free. A typical month owning a rental property (or multiple) usually consists of just collecting the rent check.

Well, this month was simple. All I had to do was collect the rent for rental property #1 and rental property #2.

In March (yes, I know this report is for April), I closed on my new rental property and I spent minimal time this month getting the place ready for renters. I promise, there will be a post providing an update on this property in the near future. There were unexpected items prolonging the update and ‘completion of this rental property’.

But I digress – Let’s dive into this month on a property by property basis.

My property portfolio had a great and what I like to call a ‘perfect month’.

But… Guy – what is the perfect month?

Great question! A perfect month as a landlord and owner of rental property is when you only need to collect the rent. No repairs, no nagging tenants or headaches. Does life get any better?

Rental Property #1

The Starter Home

The table below outlines all the revenues and expenses for property #1. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $2,300.00
1st Mortgage $1,786.09*
2nd Mortgage $237.17*
Total: $2,300.00 $2,023.26
Profit $276.74

The tenants paid their rent of $2,300 (a $25 increase from last month) in full and on time. I stopped by on my way home from work to collect to the rent which took about 20 minutes of my time. While I was at the house, I spent a few minutes to catch up with my tenants. They expressed that they were content with the house and had no items that needed to be addressed.

[pro tip: Keep eyes or pay someone (property manager) to keep eyes on your rental property. These are living and breathing investments unlike an index fund. As such, a bit of attention is required. You will likely notice something is broken before a tenant will.

Take a gutter for example. A tenant will likely only notify you once something is a problem for them. Being a present and proactive landlord can save time and money down the road. It may also help preserve your rental property]

Management Items

Remember how I said it was a perfect month? Well yea…. No management items to speak of. #Winning

Repair Items

Lucky for me, there were no repairs for my rental property. Gotta love a hassle free paycheck.

Hint: Next month I will have a repair or two to talk about. I just received a call from one of my tenants this morning.

Rental Property #1 Summary

In summary,  rental property #1 – total income was $276.74 and I spent 20 minutes of my time on this rental property for April 2017. Not too shabby; thats $830/hour. Does that beat your day job?

*My total monthly mortgage payment is ~$2,023.00 (dropping by $100/month next now that my escrow account is funded). I am paying down additional principal every month. This is the only property I pay more than the minimum. Sometime over the next year or two, I will start aggressively paying this home off as I plan to live here when I start FIRE.

Rental Property #2

The Fixer-Upper

The table below outlines all the revenues and expenses for property #2. This was a very quiet month and I spent less than an 10 minutes managing this property.

Income Expense
Rent $4,000.00
Mortgage $2,408.57
Total: $4,000.00 $2,408.57
Profit $1,591.43**

The tenants/roommates paid their rent of $4,000 in full and on time. Since the tenants of rental property #2 live with me, collecting rent is easy. Everyone leaves their rent on one of the counters and I mobile deposit their checks. No trip to the bank required. The money literally comes to me…. Cannot beat that.

Management Items

Like rental property #1, not a damn thing to report. Gotta love being a landlord and the passive income that a rental property can provide.

Repair Items

Guess what? I had no repair items this month. This is ACTUALLY very common for a landlord. Remember, this was a perfect month for me as a landlord.

Rental Property #2 Summary

In summary, rental property #2 – total income was $1,591.43**. I spent maybe 10 minutes of my time depositing the checks with my smart phone. As a result, I earned $1,591.43 for 10 MINUTES OF EFFORT!!! On an hourly basis, this was $9,566/hour. April 2017 was a great month for rental property #2. Does that beat your day job?

**I also live in the house and get paid to live here. Pretty sweet right? House Hacking is awesome.

Rental Property #3

Rental Property #3 is STILL under construction. I will have an update about the renovation process SOON.

landlord

Portfolio Summary

To sum up this Landlord Report, I spent about 30 minutes of my time on existing rental properties. Rental property #3 is being renovated and that did eat up some of my free time (not included in calculations). However, I am comfortable with the upfront time and costs since the rental property will provide great passive income in the future.

This month, my rental property provided me $1,868.17 with ONLY 30 minutes of effort ($3,736.34 on an hourly basis). My renters also paid down $1,298.45 of my debt. That brings my monthly gain to $3,166.62 and it only cost me 30 minutes of my time. Not bad for a half hour, right? What is your excuse for not being a landlord and not owning rental property?

Update to My FIRE Journey

Lately, I have been pondering a lot about what FIRE (financial independence; retire early) really means to me. Not just, “hey I do not need to work anymore.” – My views have changed a bit since I originally announced my journey.

I am not financially independent…. yet! However, the subject seems to cross my mind more and more as the days go by.

I feel like I am in a tunnel and way far off in the distance I finally see the fainted bit of light. Why? Well, my plan is solidifying and a more definitive timeline is starting to form.

Why do I want FIRE?

I notice that going to work every day is not exciting. In fact, its feels like a chore. Really, its the exact opposite from exiting. I hate working for the man and meaningless work. Anyone enjoy filling out expense reports? Mandatory quarterly compliance training? NO THANKS!

Oh, and I absolutely loath wearing a tie everyday. I now refer to my tie as my ‘corporate noose’  and it feels like I am suffocated a bit more each day. 

Sure, work pays my bills and allows me to save, and invest in real estate or dividend stocks. However, my work does not provide a source of fulfillment.

Now, I am not looking for work to provide satisfaction and meaning to my life, but its really draining when I do not give a damn about the work I am doing. Funny though, somehow I am on pace to be the top producer at my company this year.

Honestly, I am fed up with being forced to sit in pointless meetings where nothing is accomplished. Being confined to a cubical and having to sit all day is starting to take a toll on my body. Hell, I even read that sitting is the new (worse than) smoking… There is nothing worse than being forced to be somewhere from 9-5, especially when those are not even my best hours for productivity.

And don’t even get me started on some of my co-workers….

So not the 9-5, then what?

Spending 8+ hours a day on anything seems crazy. I rather divided those 8 hour days into 4 separate blocks of time.

I would love to spend 2 hours on my health and fitness (not just working out).

Another 2 hours would go towards volunteering and improving society or the local community.

I would also commit two hours to self-improvement (reading, learning, developing skills etc.).

Lastly, I would spend two hours devoted to developing and maintaining meaningful relationships with family and friends.

Early retirement does not mean sitting on the beach doing nothing all day. Though, there is nothing wrong with that. The beauty of FIRE? You can do what you want when you want.

Blinded by the Light?

As I mentioned earlier, I am started to see the light at the end of the tunnel. Cue Manfred Mann’s Earth Band’s – Blinded by the light. The light that is approaching quickly approaching has me distracted and dreaming about the other side.

A life with an abundance of free time comes to mind. Financial independence would provide such a thing. No need for an alarm clock if I retire early…unless I wanted to wake up early to go fishing or run before the heat. A life where I have time to regularly make it to the grocery store and cook (one of my favorite past times).

Plenty of time to travel and explore. I was tempted to turn in my two week notice earlier this month so that I could start hiking the Appalachian Trail. Unfortunately, this was not feasible. One day soon…

Less overall stress and better health sounds wonderful. No more worrying about deadlines or meeting performance goals. More time to workout and take care of myself.

This also means more free time to spend with friends and loved ones. Not just more time but better quality time. Sometimes, I feel that work bogs me down and I am not ‘fully there’ when I am with my family or friends – this is because work has me stressed or distracted.

How are you going to retire early?

Once my newest property leases up in the next month or two, it will increase my passive income to a level that is much closer to my FIRE number. However, this will not be enough to hit financial independence.

Ideally, I would like to buy one more rental property that provides strong monthly cash flow. After that, I would like to pay off my my first property (starter home).

This could be accomplished with three years (or less) of aggressively paying down my mortgage. I plan to use this property as my FIRE ‘home base’. I am fairly tired of house hacking and living with roommates.

No complaints though – house hacking has done wonders during my journey to financial independence and sped up my time to FIRE.

Not having a mortgage will help keep my cost of living down and at a level that I am use to spending.

Lastly, I would like to increase my cash reserves and non-retirement investment account income. This will provide a great buffer when I retire early. As such, I will not have to withdraw from my stock portfolio and can let the balance grow over time. Thanks compound interest!

the temptation

Well…. what is life without temptation? I am tempted to resign (retire early?) from my job next year after I collect my bonus check. Sure, this would be before paying off my home and I may or may not have achieved financial independence by then.

What I do know – the cash flow from my rental properties would (likely) be enough to support my life style and allow me to travel for 6-12 months without touching my savings/investments. Heck, my net worth might even go up during this hypothetical sabbatical depending on the stock market.

I also know that I would have adequate cash reserves during this FIRE test run to cover any potential major repairs. Absolute worst case, I could sell a few stocks in my taxable account if a doomsday scenario happened.

Would you be tempted to retire early or take a sabbatical at 27 (28 next year) knowing that you have a strong safety net to fall back on? Worst case, I can decompress for 6 months to a year. After all, I am truly burnt out after years of 80+ hour work weeks. After that, I could find another job and work for a few more years until I truly hit financial independence. Perhaps, I already acheived earned financial independence but need more of a buffer for peace of mind?

 

Announcing a New Guest Post Series

I love real estate and guess what? I am very excited to announce our new guest series “Making it Happen: Jr. Real Estate Investors” that will start next month. The series will share the stories of junior real estate investors who own 1 to 5 properties and we have some great AMAZING guests lined up.

The Mission

Our goal is to show the benefits of being a landlord. We hope our guests’ stories will inspire you and that you will see how real estate can positively impact your life. Real estate provides great passive income and is one of the best vehicles to achieving financial independence.

You will learn how our guests got their start in real estate. These investors will share their story and how real estate is positively impacting their lives.

These are real people with real stories. We hope that you will be able to relate to someone who just bought their first property and hope that you see yourself doing something similar.

Also, our guest will share some of the headaches that they may have encountered as a landlord. As you know, we will always aim for transparency. Real estate is not all sunshine and rainbows…. BUT its pretty damn awesome most of the time.

We hope you will follow our series over the next few weeks. Lastly, please feel free to contact me if you are interested in participating. We have a spot or two still open.

The Fixer-Upper

The tale of the rundown row home that turned into a gold mine.

Flash back to the spring of 2015. I was still working at MegaCorp and house hacking in my starter home. At this point in my life I was saving every penny I could find. This meant biking to work (which was awesome) and making all of my meals at home.

One afternoon, I was sitting on the couch updating my budget and net worth, which is is something I always do at the end of the month. My net worth was nothing impressive at the time and definitely less than $100k.

Curiosity got the better of me and I was wondering what it would take to become a millionaire by age 30. Running some random scenarios, I realized that I would need a miracle to join the two comma club by thirty.

First, I ran a scenario of what if I saved and invested $20k/year? Not even close.

Ok… What about $40/k a year? Still short….

How about $50k/ a year? Nope.

$70k/ year? Fuck! Still short

This caused me to to jump into action. I wanted to find a way to increase the gap between my income and my expenses. My spending was minimal and could not go much lower since I was playing strong defense. So, I decided to focus on growing my income.

By increasing the gap, individuals are able to save/invest more. As such, this creates a snowball effect and the funds being saved/invested start to grow exponentially.

[Side note: Now, just to be clear, I currently do not believe I will need $1 million dollars to retire. Back then I was less educated about Financial Independence; Retire Early (FIRE). I also thought I wanted to live a ‘baller’ lifestyle.]

The Plan

Having tons of free time, limited cash and being comfortable with leverage (debt) led me down one path… You guessed it, MORE REAL ESTATE. Oh, and a side hustle as a property manager learning from someone with almost two decades of management and investing experience. But let’s focus on the real estate part today.

I wanted to find a multiunit (2-4 unit) or single family home that was worthy of its own HGTV show. This type of property would provide me:

  • Better value for my money
  • Increase my purchasing power
  • Allow me to build equity through my renovations (sweat equity)
  • House hack and have positive cash flow while living at the property.

Often, these properties allow for the owner to live in one unit for free while the rents from other units cover the mortgage. The owner can even make a profit while living in the building.  This is one of the best forms of house hacking.

This lead me to look at 2-4 unit apartment buildings which have many benefits. One of the biggest advantages is that you can buy a building with 4 units or less with a 30 year mortgage and only a 3.50% downpayment (FHA loan).

My first property taught me many lessons. These growing pains laid the foundation to make my future investments better. For example, renting to your friends and charging below market rents is a nice thing to do but its not a savvy business decision. I wanted my next property to provide STRONG cash flow regardless if I lived in the property or not.

The Search

Unfortunately, developers in Washington, D.C. also love 2-4 unit buildings. Why? Well, the condo market is hot and developers convert these apartment buildings into condos to make BIG BUCKS.

As you might expect, I lost out on a few multi unit buildings. I had a higher offer one property but lost to lower all cash offer. Many properties sold for  more than $50k above the list price.

My 3.50% down, FHA financing offer was not attractive to many sellers; especially when there were all cash offers with no contingencies.

As a result, this lead me to expand my search to single family homes. This type of property can also provide options for house hacking and great investment returns.

The Rundown Row Home

Throughout my search, I also kept an eye on single family homes. There was an old rundown row home (in DC we call a townhouse a ‘row home’) in an up and coming neighborhood that was way extremely overpriced.

The property had been listed for sale for several months. The seller also reduced the price three times and still could not sell the house.

Light bulbs and alarms were going off! I called my realtor to check out the house.

We went by the house the next day. And… well… the house did not show well. Four generations of a family were living in the house, there was junk EVERYWHERE and the property was not well maintained. Mold was clearly visible in the basement. There was no central air. The list goes on and on but I am not going to bore you with all the details… You get the idea…

Most people were scared away by such things.  Which was… AWESOME! At least, for me it was awesome. The house was down right disgusting and I understood why no one wanted to buy it.

This was my diamond in the rough. Where others saw disgust, I saw beauty and opportunity. Also, I saw a seller with limited options and decided to make a lowball offer. The offer was accepted.

The Rehab Loan

The house was barely ‘livable’ and I planned to completely gut the entire place. Remember, I did not have a lot of cash so I needed to get creative.

Thankfully, I had a good mortgage broker (very important member to have on your real estate team). We used an FHA 203K loan which allowed me to use loan dollars (debt) to buy AND fix up the house. The best part? I only had to put 3.50% down.

This type of loan required a licensed general contractor (GC) and a budget for the renovations. The approved loan budget was $66,615.00 and there was a $9,992.00 contingency reserve fund for cost overruns. In total, the loan would provide up to $76,607.00 towards renovating the property.

The actual project would cost north of $100,000.00 which means I had needed to get creative and find a way to fund the difference. As a result, I opened three credit cards that provided zero interest for the first 12-18 months.

The renovation would take 3-4 months and I knew the house would provide strong cash flow once my future roommates moved in. The balance of the three credit cards peaked at around $25,000 in total. This debt was daunting to look at every month it essentially was an interest free loan; a loan that I paid back in  8 months without having to pay a single penny of interest.

Scope of Work

So… What kind of work did was needed? And you are probably wondering about the numbers (hang tight). Everything was from the 1970s (if not older). The house was originally 4 bedrooms and 1.5 bathrooms and I converted the place to 5 bedrooms and 2.5 bathrooms.

A few of the renovations include:

  • All new electric (wiring, switches, lighting, outlets etc.) and a heavy up
  • All new plumbing
  • Installing an HVAC system
  • Brand new kitchen, cabinets, countertops, and appliances
  • New floors for all three levels
  • 2.5 brand new bathrooms
  • Removing all interior walls on the main floor to create an open floor plan
  • All new windows
  • Treating the basement for mold
  • Creating an awesome fenced in back yard patio

The Hustle To Get It Done

I interviewed a half dozen general contractors. Most of the GCs gave me extremely highball offers and thought I was just ‘some dumb kid’ they could take advantage of.

Little did they know, I spent several years working/volunteering with Habitat for Humanity (amazing organization). I knew their pricing was unreasonable and at one point even told a guy to go fuck himself.

Some say, all is fair in love and war. I say, “all is fair in love and business is a war.”

Anyway, I about had it with GCs but my loan required that I have one. Thankfully, I found one guy who would GC the project, let me sub out the work to my guys and do some of the work myself. The kicker was he got to collect a fee for doing almost nothing and had to sign off on the work.

Managing the rehab felt like bit of a full-time job in its self. Many mornings I was waking up at 5:00am, grabbing my cup of coffee and hitting the road so I could make it to Home Depot when they opened. I was constantly selecting or picking up materials for the house. Frequent phone calls and in-person meetings with contractors were necessary to manage the workflow.

The Numbers

So, the part y’all been waiting for.

Drum roll please…… Here are the numbers for Property #2.

My lowball of $400,000 was enough for me to get the property under contract. Additionally, this was almost $100,000 less than the list price at the time and about $200,000 less than the original price.

Purchase Price: $400,000.00

Total Loan: $469,500.00

Down payment: $17,028.49

Additional equity for rehab & carrying costs: ~$32,700.00

Total Equity Contributed: ~$49,750.00 (let’s call it $50,000.00 for analysis sake)

Monthly Rent: $4,000 (plus I live here for free. The place would easily rent for $4,500-$4,700 if I moved out).

My total investment costs of  $50,000.00. The house easily rents for $4,500/month and my carrying costs are $2,408.57/month (my mortgage payment after I refinanced the construction loan). This means I will have $2,091.43/month ($25,097.16 annually; $19,097.16 while I live in the house) in cash flow after paying for principal, interest, taxes and insurance (PITI).

A basic return on investment (ROI) calculation:

$25,097 / $50,000 = 50.19% Return on Investment

This means I will recoup my cash invested in 1.99 years ($50,000 / $25,097)

This analysis is a bit simplistic. I self manage and do not have to pay a property manager (maybe one day once I hit FIRE). There were will be minor repairs and expenses overtime. Over the next 30 years I will have larger expenses as well. All repairs and maintenance items will be supported by the property’s cash flow. Thankfully, everything in the house is BRAND NEW…. Literally.

Summary

Buying a fixer-upper can be a lot of work, but it can also be very rewarding. My second property provided much stronger cash flow than my first home. I also found a way to eliminate my housing costs while getting PAID to live here. The property appraised for significantly more than what it cost to buy and fix up. A few months of hard work for a life time of cash flow seems well worth it.

What is your experience with renovating properties?  Do you have a success story of your own? Or, perhaps you want to start rehabbing homes? Please comment.

Q1-2017 Dividends – The Dividend Report

As many of my readers may know, I love dividend stocks and believe dividends provide a great source of passive income. I provide quarterly updates regarding my dividend income. Utilizing ‘The Dividend Report’ section of my blog, I will share my progress towards my dividend goals. I will also share dividend growth stock ideas and thoughts. Additionally, I will share the rational behind any future purchases or sales. Dividends are truly a wonderful thing.

The Goal

The current goal is to average $1,500/month in dividend checks. I would like dividends to provide between 25-33% of my monthly retirement income. However, this goal may be revised upwards over time.

Q1-2017 Dividends

My Q1-2017 dividend income was $334.60, which left me scratching my head. Last quarter (Q4-2016), my dividend income was $1507.92; I fully expected this quarter to be lower since many of my funds have larger distributions in December. I even anticipated this in Q4-2016 Dividends – The Dividend Report. BUT, this was just crazy.

My Q1-2016 Dividend income was $344.93 which means year over year my quarterly dividend income DROPED $10.33. This still made no sense as I had five figures more invested in the market compared to last year. So I had to do some digging to find the answer.

I switched jobs late last year. The funds in my new company’s 401k plan are a bit different when it comes to dividend distributions. I still receive 4 distributions a year. However, the distributions are in April, July, October and December.

Ahhhh! So there is the answer to my problem. My new 401k plan will not provide any dividend income in Q1, however, I will have two rounds of dividends in Q4. This is odd but explains a lot.

To summarize – my last year’s first quarter dividend income was $344.93. This equates to a $10.33 or 2.99% decrease from the same quarter last year.

I would have increased my dividend income over 50% year over year if my 401k funds paid a dividend this quarter. I fully expect Q2-2017 to bounce back and be well above the Q2-2016.

The graph below outlines my quarterly dividend income dating back to Q1-2013:

dividend

The table below outlines my quarterly dividend income dating back to Q1-2013:

dividend

New Purchases

No individual stock purchases in Q1-2017.

Landlord Report – March 2017

Hello there – welcome to the first Landlord Report. This monthly report will share my experiences as a landlord. The report will show EVERYTHING related to my rental properties….

I will discuss the rents that I collected, mortgage payments, and other ‘landlord items’. Other topics may include repairs, finding new tenants and any other items that might randomly pop up. The report will also share how much money I made and the amount of time (hours) it took. I want to show the world being a landlord is a wonderful thing.

I also manage ~50 properties for other people, but this report will not share information on my clients or their properties.

Throughout this process I aim to be as transparent as possible. Being a landlord is a wonderful way to earn (mostly) passive income. Please feel free to contact me with any questions – happy to provide insight.

Landlord Report – March 2017

landlord

This past month was much busier than a normal month. Never the less, the work load was very manageable. I closed on my new rental property and managed multiple contractors in preparation of renters (hint: this is the big reason why it was a busy month).

Let’s dive into this month on a property by property basis.

My property portfolio (2 now 3 – and not sure that counts as a portfolio… but hey! its growing) had a great month.

Rental Property #1

The Starter Home

The table below outlines all the revenues and expenses for property #1. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $2,275.00
Sublease fee $350.00
1st Mortgage $1,800.00*
2nd Mortgage $350.00*
Total: $2,625.00 $2,150.00
Profit $475.00

The tenants paid their rent of $2,275 (increasing $25/month next month) in full and on time. I stopped by on my way home from work to collect to the rent which took about 20 minutes of my time.

I typically collect the rent in person and will chit chat with the tenant(s) for a moment if they are home. This also provides a great time to see if there is anything wrong with the house or make minor repairs.

[pro tip: You will likely notice something is broken before a tenant will. Take a gutter for example. A tenant will likely only notify you once something is a problem for them. Being a present and proactive landlord can save time and money down the road]

Management Items

The young lady who lived in the basement room subleased her room for the next three months. She was required to pay a $350.00 sublease/assignment fee and this process took less than a half hour.

What was involved? The new tenant applied via my online application. I spent five minutes inputting his information into my vendor’s credit/background check website.

The guy had strong credit and a respectable rental history (verified by his previous landlord). I cannot stress this enough… Always ALWAYS require previous landlord references. Ask several questions and make sure its not their uncle or friend.

After that, I considered him ‘acceptable’ by my tenant rental standards (future blog post). Both of the other tenants also approved of their new roommate (requirement of the lease).

Next, I prepared a brief sublease agreement for electronic signature via Docusign. This process took about 10 minutes of my time. The new tenant sent me his first month’s rent and security deposit ($825 + $825 = $1,650) via paypal and moved in the next day. Moving forward, rent will be paid by check, cashiers check or money order.

Repair Items

One of the guys who lived at the house sent me a note about the front door on a Saturday night. The deadbolt had “become a pain in the ass. Like u gotta put your whole back into it to unlock”

Before you panic and think being a landlord is a nightmare (its not)… This is a VERY easy fix. I stopped by the house the next morning to look at the deadbolt. A little WD-40 and 5 minutes of my time, and the lock was working like brand new.

While I was at the house, I noticed the door knob/lock for the front door was sticking a bit as well. I figured I am already at the property and might as well save a future trip. Being proactive, I spent another 5 minutes taking the knob off, applying WD-40 and putting the knob back on the door.

This repair trip was the best possible outcome. All in all, the solution required 10 minutes of my time, a little WD-40 and no money (already had the can of WD-40. This is an essential for landlords/property managers).

The worst case doomsday scenario for this repair would have been a trip to Home Depot. And guess what? It would not be THAT bad. All I would need is a new lockset which costs less than $30.00

Rental Property #1 Summary

In summary,  property #1 – total income $475.00 and one hour of time. As a result, I earned $475.00/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

*My total monthly mortgage payment is ~$2,013.00 (dropping by $100/month in May now that my escrow account is properly funded… long story & will share more another time) and I am paying down additional principal every month. This is the only property I pay more than the minimum. Sometime over the next year or two, I will start aggressively paying this home off as I plan to live here when I start FIRE.

Rental Property #2

The Fixer-upper

The table below outlines all the revenues and expenses for rental property #2. This was a very quiet month and I spent less than an hour managing this property.

Income Expense
Rent $4,000.00
Mortgage $2,408.57
Total: $4,000.00 $2,408.57
Profit $1,591.43**

The tenants/roommates paid their rent of $4,000 in full and on time. Since the tenants of rental property #2 live with me, collecting rent is easy. Everyone leaves their rent on one of the counters and I mobile deposit their checks. No trip to the bank required. The money literally comes to me…. Cannot beat that.

Management Items

One of my roommates’ leases expired at the end of February. As such, we were graced with a new roommate who moved in during the first week of March. This also means I did not have any vacancies at the property.

Finding a replacement was relatively easy. We put an ad up on Craigslist and circulated the information to our various social networks. We were fortunate to be ‘one and done’ since the first guy that showed up was awesome.

Like rental property #1, the new roommate/tenant had to go through my on-line application. He checked all the boxes as expected; most people with a government security clearance are pretty boring on paper.

Repair Items

Guess what? No, the answer is not chicken butt…. BUT! I had no repair items this month. This is ACTUALLY very common for a landlord. Real Estate is truly a great form of passive income and I will keep shouting this from the mountains.

Rental Property #2 Summary

In summary,  rental property #2 – total income $1,591.43** and one hour of time. As a result, I earned $1,591.43/hour spent on this property for March 2017. Not too shabby. Does that beat your day job?

**I also live in the house and get paid to live here. Pretty sweet right? House Hacking is awesome.

 

Rental Property #3

Rental property #3 is under construction. I will have an update later this week about the renovation process.

landlord

 

Portfolio Summary

To sum up this entire report, I spent about 2 hours of my time on existing rental properties. Property #3 is being renovated and that did eat up some of my free time (not included in calculations). However, I am comfortable with the upfront time and costs since the property will provide a nice passive income in the future.

This month I pocketed $2,066.43 or $1,033.21/hour. My renters also paid down $1,318.78 of my debt. That brings my monthly gain to $3,385.21 (or $1,692.60/hour). Not bad for a few hours of time? What is your excuse for not being a landlord?