How I Became an Accidental Landlord

landlordinsurance

We wanted to become many things when we were young. But unless we were Donald Trump, most of us didn’t dream of becoming landlords. Maybe a doctor, or a Princess-Astronaut. If we knew enough about housing, we might have wanted to be engineers, architects or even interior designers. But not landlords. I know I certainly didn’t think I’d be interested. Landlords are not always portrayed in the most favorable light. It’s either a faceless management company or a chain smoking slumlord who provides few services and is always waiting outside your door to collect rent. As a result, acquiring my first tenant was more of an emotional decision than a rational business one.

After many years of saving and sacrificing, I was able to purchase my first home. That property meant a lot to me. It was a nice spacious townhouse with great amenities conveniently located near a major city with great access to public transportation. Initially, that property was my second choice. The house that I really wanted, a small single family in a different town did not pass inspection. As a result, I “settled” for this one. That back up choice turned out to be a great option. After we got married, I struggled with the idea of giving up my first home. It was a symbol of what I was able to accomplished for myself as a single woman of modest background. I was not comfortable giving it up. However, I guess I was meant to go into real estate investment.

When it came time to get pre-approved for a mortgage. To both mine and my husband’s surprise, the bank approved us to purchase in the price range we desired even though I had the mortgage on my record. However, they approved us with the expectation that we would be able to rent the property since we certainly could not afford to carry both mortgages. We went ahead with an offer on a property my husband fell in love with, and as soon as we were under agreement, I began aggressively advertising the property for rent. A few things about the unit made it an ideal rental. It was small enough for the average tenant demographic (young families/couples, roommates, YUPPIE who earns enough to not need a roommate) but spacious enough to be comfortable. Also, living in snowy New England, having a dedicated parking spot with an attached garage and included snow removal are extremely valuable. Having a desirable property gave me the opportunity to be selective and move in a qualified tenant who I assessed as someone who would not be too problematic and have the means of paying the rent. When I set the rental price, I took a shot in the dark, but it worked. I ended up with rental income that was several hundred dollars above all of my expenses.

Not long after the tenant moved in, I saw how effortless it was to collect rent. It’s not that being a landlord involves zero work. It was that I had to sprint in the beginning but once I had a signed lease with a quality tenant, I was in cruise control. All the bills for the property are paid online, some are automatic. I send quarterly bank statements for the escrow deposit along with rent receipts by mail, I answer occasional emails about the property (sending out the plumber, reminding them to clear out the AC condensation hose every summer, etc.) and I do an annual inspection to make sure everything is in good working order before I draft up a new lease. While I am always available, I managed to select a tenant who just would not need me. So most of my work as a landlord involves collecting the rent, paying the bills, and sending out invoices. All of this work is primarily concentrated in the first few days of the month. For all that heavy lifting, I’m rewarded with thousands of dollars monthly and even more money annually in the form tax deductible depreciation. I saw the light that brightened the path of financial freedom: real estate.

A few months into doing that, I was bit by the real estate bug as I saw the true potential of for financial freedom in being a good property manager. I nagged my husband relentlessly about getting a 3rd property which would be the first one we would buy with the intent of not residing in it. We got lucky and snapped up a beat up foreclosure that we spent a pretty penny restoring. Now, we have 2 tenants, each bringing us healthy margins of profit. As soon as we catch our breath and create some room on our credit report, we will be ready to buy property #3. Although there is a point where we will have to chose between managing our properties and keeping our full-time jobs, we aren’t there yet. In the mean time, we are saving as much as we can, paying down our debts and enjoying the fruits of our labor.

Advertisements

No Rest for Dead Presidents: My Dollars aren’t Lazy Bastards

What an awful headline. But I’m not feeling particularly creative today so it will have to do.

money

In an introductory investment post, I liken dollars to employees who must work to make my life better. Money has a significant advantage over us when it comes to working and earning potential. We get tired, we need sleep, our loved ones want our attention. Money has none of those conflicts so what reason is there for it to not be working tirelessly to free you from the rat race? In my case, my little dead presidents’ only duty is to slave away to improve my quality of life. Here are some of the ways I make sure they aren’t being lazy little bastards.

I structure my bank accounts deliberately: Some days I can’t even keep track of how many accounts I have. But the complexities of both life and banking regulations do not allow me to simply have a checking and a savings. While I have a checking account for my every day use, that is the lowest yielding account there is. I can’t keep all my money in a checking account. However, the highest yielding bank account is a CD (learn more about CD’s here and here) and there are penalties for early withdrawals. Since emergencies do not wait for CDs to mature, I also have a money market account which provides me with quick access to cash at a much higher rate than a checking but without the potential for a penalty.

I only use cash back credit cards: Your bank is making money off your use of the card, shouldn’t you do the same? My credit card gives me 1.5% cash back on everything I buy and on a monthly basis, the bank runs some specials at various merchants where I get an additional 5-15% cash back. For example, my tail lights went out a few weeks ago. We have both an Auto Zone and an Advanced Auto Parts in our area. However, our credit card company was running a 10% cash back special at Advanced Auto Parts. When it was time for my husband to replace the tail lights, I told him to make sure he went there. He spent $40 and we ended up getting $4.60 back (10% special + the 1.5% we would normally get). Of course, since there is no annual fee and we pay the balance in full every month to avoid interest, we are being paid to use our card.

I get educated: It’s hard to make or save money when you don’t know what benefits or features are available to you. I’ve discussed my solar adventures in the past. We got thousands of dollars in rebates courtesy of the U.S. Government for our investment in solar panels (if you pay taxes, thank you!). Although we would have eventually taken the plunge, we might have missed the opportunity for our big tax credit if we waited too long. There is no guarantee that the program will be available indefinitely or even beyond 2020. We also learned about the energy credits which we are on track to receive quarterly for 10 years. While they are small amounts, they will be offsetting nearly half of the cost of the system. So not only did we get a 30% subsidy, we are also selling some of the credits we produce over a period of time to offset the remaining 70% of the cost. That does not include our actual energy savings which have been pretty substantial (my March 2017 electric bill was $38. I live in a 3,100 square foot house in New England).

I pay debt aggressively: Debt is slavery. It’s crippling because it’s expensive. The best way to handle debt is to get rid of it as quickly as possible. My student loan interest is 5.16%. It makes no sense for me to carry that balance for 10 years (standard repayment) if it’s costing me as much as a moderate investment portfolio would cost. So when I graduated from an MBA program with a balance of $47k and change, I was determine to get rid of it by any means necessary. Two years later, my balance is  $11,600. I have saved myself thousands in interest and the amount that I did have to pay, I have able to deduct it from my taxes. So I have used the money I have in the bank and the money I earned working both my regular job and real estate to cut my balance and reduce my interest.

I keep cash to a minimum: ‘Minimum’ is relative.  It doesn’t mean I only have $1,500 in the bank. I keep a fat emergency fund which correlates with my low risk appetite. The more risk adverse you are, the more money you want available to weather unpleasant unforeseen events. For me that number is a year’s worth of living expenses. Before the recession, the recommended amount was 3 months. After 2008, financial experts were recommending 6 months. I like to be cautious, maybe overly so, thus, I choose 12 months. Anything above that number is invested in various types of projects (or debt payments) that are meant to increase cash flow (or cut my interest expense).

Think of the ways you can make your money work for you. Idle funds are being eaten away by inflation and are not doing anything to improve your bottom line and get you closer to financial freedom. This is the value equivalent of throwing your money away.

Introduction to Investing

Investing

I often talk about the importance of financial independence; at least to me. However you can’t achieve that through working only. Your earning potential is limited as a wage earner and only the most exceptional and/or connected will ever get to a salary level where their earnings alone will make them independently wealthy. So the rest of us turn to investments.

The approach that I take to investment is to look at every dollar I have as an employee. They are supposed to work and be productive. If they aren’t working they are costing me and I need to find an activity for them. But the drawback is finding the right “work site”. I believe that diversification is extremely important. Some of my dollars are doing heavy lifting in the real estate market, some are doing lazy work in CDs and savings and others are doing risky work in the stock market. That is my way of diversifying.

Diversification is an old and basic investment concept. It is a tool used to spread out your risk to ensure that you don’t have all your eggs in one basket. In my case, I use real estate as a mechanism to provide me with guaranteed cash flow since people will always need a place to live. I use my CD and savings accounts to provide me with flexibility and liquidity. Meanwhile, I use my stock market investments as a tax tool since they are work sponsored retirement plans.

My husband finds humor in me saying that investing is fun. But the truth is, the fun doesn’t stem from the process of learning to navigate the market or feeling my stomach drop every time a bad political move causes the DOW to fluctuate or mortgage rates to spike. The fun comes in knowing that even when I sleep, I’m still earning money. When I’m working, I’m earning my wage was well as money from all of my investments. I don’t have to work as hard but I can make more money than the person sitting next to me for the same amount of work.

However, as much fun as it is when you’re performing well, investing can be tricky. A lot of investments, particularly stock market investments are volatile. Not only that, they are also not backed by the full faith of the U.S. government. My CDs are in a banking institution that carries insurance on my deposit up to $250,000. If I put that same amount in the stock market today, I could wake up tomorrow and have it disappear with no recourse. In a best case scenario, I will retire at 62 or 67 with a million dollar portfolio that will give me enough dividends to live on until I die. The goal is to not outlive my investments. But there are no guarantees. And even when I get my way, I’m still going to be subject to both emotional and financial roller coaster rides over the next 30 years.

None of this means that the industry is unregulated. The Securities and Exchange Commission is the agency that oversees investment advisers and enforces securities laws. But they are just there to make sure that the companies don’t get away with committing fraud, not to guarantee your investments. And even with the regulations in place, even the law enforcement safeguards in place do not guarantee safety as you know by Bernie Madoff’s actions. So it is best to know what you are doing and how to protect yourself by being informed. There is a plethora of resources available and I hope to share them with you here.

Selecting the Right Investment Property

reversemortgage

I’ve brought up real estate a number of times. It is a great tax saving tool, appreciating asset and source of income. I’ve also brought up the role that real estate plays in my life, whether it’s through me getting a good deal on my primary residence, helping clients with their real estate transactions or being on a quest to find a good rental property that will increase my household income without requiring too much more of my time. However, knowing that real estate is a wealth building tool is only the first step. To be successful, you must know how and when to select the best property to maximize your dollars. I will give you some of my tips for choosing the best investment properties. It doesn’t mean that’s all you’ll have to do. Buying real estate is an important step. But these are going to be some of the most basic things to consider to avoid what could certainly be a disastrous choice.

Location – Location for the house you’ll rent out is not going to mean the same as location for the house you intend to rent out for income. You need to determine what will work for most people because it’s a numbers game. You don’t want to reduce your pool of potential tenants because your location is too restrictive. Buy in an area that is convenient to accessing the biggest city or town in your area. Whether it’s quick highway access, availability of public transportation or a walkable neighborhood, you need to make sure that your tenants can go to work and get their errands done with ease. Safety also makes a difference. A questionable tenant who is up to no good himself or a police officer might not mind a bad part of town, but young professionals, particularly women, and young family will cross you off the list.

Size – You want to pay attention to what is renting in the general area. You also want to be careful with the price. Personally I think 2-3 bedrooms are best. Those sizes make it easy for a wide variety of tenants to afford the rent: young working roommates who want to split a 2 bedroom, a couple with no children who want a guest room and/or office space. A young family who might want to rent a 3-bedroom. If you go with a 1-bed or a studio, you may inadvertently reduce your pool because you’re pricing people out of the apartment. For example, a 1-bed in the most affordable part of Boston can cost $1,500. However, a 2-bed will run between $1,800-2,000. A pair of roommates can split the 2-bed and pay $900-1,000 each, $500 less than each would in a 2-bed. Once you start going any larger than that, you run the risk of not having a large pool of tenants because most people who need to live in a 4-bed are usually looking to buy by the time they get to that point. At least in my area, that’s how it is. Large rental homes (4-beds+) usually perform better in the parts of town that are walking distance to a university. Anything of that size further away will struggle.

Price – Being a landlord is a business. Your goal is to maximize profits. While you set your rent price, the most realistic rent is mostly dictated by the market. That means, you can only ever charge so much. The only other way of increasing your margin is by controlling your expenses. You need to make sure you are at least breaking even on your monthly expenses (including variable and estimated incidentals) with the lowest possible rent in the area. Don’t let your mortgage be equal to or greater than average rent, let alone more with the expectation that you’ll get top of the market rent; because, if that doesn’t happen, you could be in serious trouble.

Maintenance Needs – Know what you will need to meet your city or town’s habitability standards and to provide adequate service to your tenants. Some properties are cheap for a reason. If you save $15k but it will cost $25k to make it an adequate residence, the property might not be such a good deal.

Quality – One of the worst things you can do is price yourself out of the rental market. The way to make that mistake would be to either buy the best house in the worst neighborhood, or to spend an great deal of money turning a property into the best house in a bad neighborhood. Your potential for rent will be limited although you need a certain amount of money to recoup your costs. The quality of the property should be reflective of quality of the neighborhood.

Applying for a Mortgage: The 5 Cs

20150622231001-for-sale-real-estate-home-house

I talk a lot about real estate, but we all know real estate is expensive. There are few, if any, of us with the capabilities of buying real property with cash. Even some of the people who are in a position to do it, choose to leverage their net worth and maximize their purchasing power using borrowings. In a consumer-driven society, lending is king and that is why something as minor as a 25 basis point shift in interest rates is a news headline and a stock market mover. We hear about rates, banks and borrowers. Everyone talks about how you have to have a good credit score and some type of down payment. However the discussion usually does not expand beyond these points.

I have put a little guide together that might give you a better understanding of why they request the documents they do. But most importantly, it helps you prepare your finances so you present yourself as the type of borrower they wish to lend to.

Credit: The first thing the lender will do is look at your credit history to determine if you are “credit worthy”. In the simplest of terms, they will look at your credit score and history. These 2 things will tell them whether or not you pay your bills on time, every time. This will help them decide if they even want to move forward without or if the risk is too great that you will turn out to be a problem borrower and will default, leaving them holding the bag.

Capacity: This evaluates your ability to take on any additional debt and pay on time. This is what they mean by “debt-to-income ratio”. You may be very good at paying all your bills, but if you are breaking even every month, you are likely not able to continue meeting all your financial obligations should you take on more debt.

Collateral: Also known as “protection”, collateral is something that you own but a lender puts a claim on it, as a way of protecting their investment. The law allows them to take possession of that asset to offset any loss from you not paying your debt. In real estate, the asset used as collateral is the very property you’re buying. In rare cases where the loan is more than what the purchased property is worth, you can use another property as a second piece of collateral.

Capital: That is usually liquid assets that you may have. Primarily they want to see that you have the ability to give a down payment or at the very least pay your closing costs. If the purpose is to get an investment property, they want to see a few months worth of reserves should you have vacancies. It’s also a way to evaluate whether or not you have other sources to tap and make payments if you were to ever lose your job.

Condition: This is the purpose of the loan. Some loans are higher risk than others depending on their purpose. Not all real estate loans are created equal. A loan for a residential building will have a better interest rate than a loan for a strip mall because of the risk involved. A used car loan will also be more expensive than a new car loan. Whether it’s an equity line or a purchase or refinance will also matter.

I hope this will give you a better understanding and some of the information you need to prepare for a successful mortgage application.

Path to a Million: 2016 Q4

This is the first installment in my “Path to a Million” series. I will use these posts to track my family’s net worth over time to record the progress we try to make in reducing expenses, eliminating debt, increasing our income and saving as much as possible to retire early and in style.

I have chosen a quarterly format which will give me enough time between updates to make leaps, recover from setbacks and fine tune anything that might not work as well as I would have wanted to. But it’s frequent enough to make it consistent, keep it interesting and prevent me from being complacent. I will also schedule it for the last Monday of the quarter, making it a “Monday Motivation” post both for myself and for those who might stumble upon it.

With that said, I am a bit apprehensive about posting this. For starters, it feels a little like financial exhibitionism. Telling people how  much you are worth in detail is like being naked, in part because of the stigma we attach to money. We tend to tie our self-worth to our net worth, in part due to a capitalist society built on poverty exploitation that has turned us into money-worshiping cult followers. In fact, even rich people have been known to inflate how rich they are, with some resulting to threats of litigation when the overinflation of their wealth is brought into question. (I don’t want to get sued so I won’t say his name, but you know who he is…)

But I’ve decided that I have nothing to be ashamed of. If anything, my story is one of inspiration. What do I have to lose by telling it? Either a bunch of people are going to see the details and be inspired or no one will even see it. I can’t lose and scenario 2 is more likely to happen anyway.

I am a 31-year old first generation American woman of color who started out with $5,000 almost 10 years ago in May of 2007 when I finished my bachelors. That $5,000 was composed of $1,000 I had saved after working part time all 4 years of college, $1,000 my dad gave me as a graduation present and $3,000 I got in monetary gifts from various guests at a surprise party my cousin threw for me. My first experience at “investing” was putting that  $5k in a long-term CD at Bank of America  where I was getting 5% at the time. That CD, my clothes and a 2000 Honda Accord was all I had in my name. No inheritance, no stocks, no homes. While I know I’m more fortunate than many others, I still have to point out that this was as close to starting from scratch as you could get. But I’m on a path to a million and I want to take you with me one quarter at a time. Your first insight is how  things have changed 9.5 years later.

Without further ado…

 

The Difference between winning and losing

Will you be crafty or will you complain? Which one you decide to do could very well be the determining factor between whether you win or lose.

The presidential campaign exposed the underbelly of  hatred and division that runs deep in this country. Some of us in the real world always knew they existed. Others were in denial and some might have known but tend to not concern themselves with things that don’t negatively impact them. But the election is over, now what? Whether you candidate won or lost, you have to get up and show up. Life goes on.

We still have to live with each other, but nost importantly, we still have to live in this country (unless you’re one of those people who caused the Canada immigration website to crash). Which means we need to find a way to make this upcoming economy work for us. If you are starting now, you are very late in the game. Not too late, but late enough to be severely delayed and you can’t afford any more lost time. That is why foresight is important. There is no such thing as certainty. Many people are afraid of what is to come and some of that fear comes from a lack of preparation. My goal is to write about adequate preparation extensively as a guide to positioning ourselves in a way to become one of those people for whom the economy is supposed to work.

I will do so by continuing to cover debt management, advanced savings initiatives, investment opportunities, adequate budgeting, and wealth-building through passive income.

This will not improve your mental health, heal our country, or eliminate bigotry, but it will at least give you the resources you need to become more financially secure.

You can complain or you can plan. I choose to be crafty so I will take control of my future like I’ve been doing since college. Will you join me?