My wife is REALLY awesome

IMG_20140303_193340384

 

It seems that wherever I go, I leave a trail of houses-under-construction in my wake.  The picture above, was taken in my ‘wood stove room’ (ie: the room that has our heating source).  Because the picture is so well laid out, you probably didn’t notice the bare wood studs on the wall in the background, or the lack of baseboard trim.  If we panned the camera up, you couldn’t help but notice the missing trim around the kitchen window.  Continuing up the wall to the ceiling, the stalactites of foam insulation would convince you you had ended up in a Star Wars movie set on some alien planet.

My house is perpetually under construction.

My wife is awesome because she puts up with a half-finished house, however, my wife is REALLY awesome because of the object in the middle of the picture.  That object sat in our wood stove room for about two weeks.  As you can see, there is some drywall and some 2×4 lumber.  Kind of an odd object.

Well, if you have followed the saga of my flip, you’ll know that my first contractor is/was a magician.  The wall has been replaced, but with the new plan, the wall shifted about 3″ to the left, away from the bathroom.

IMG_20140216_150048112

 

What you can’t see in the picture above are the two radiators, one in the [former] bathroom (to the right) and one in the master bedroom (to the left).  When we decided on the layout for the entire bathroom, we needed slightly more room, about 3″ to be exact.  The problem was the radiator in the master bedroom, the radiator was tight to the wall.  When the wall shifted, the master bedroom side of the wall ran through the radiator.

We did some head scratching, some measuring, more head scratching, a little more measuring and finally decided to inset the radiator into the wall.  The only problem with doing this was painting the wall behind the radiator with the radiator in place.

Our solution was to build the radiator alcove before we built the wall.  We built the alcove at the flip, tested to make sure the alcove would fit around the radiator.  Once we were sure our plan would work, I took the alcove home and it sat in my wood stove room as I worked to get it finished.  I had to mud the corners and screws, sand the mud, mud again, then finally paint the alcove.

Even though I had this random part of a wall sitting in my living room, my wife never complained. I knew she was awesome before.  She’s proven she’s REALLY awesome.

The flip’s landing on it’s feet

Assuming you’ve been following the progress on my flip, you know that I started off with high hopes, which were quickly squashed by my first contractor, only to be revived by my second contractor.  The second contractor is awesome.  He has totally taken charge of this project; he calls daily with updates, asks questions, provides intelligent feedback and works incredibly quickly.  In less than one week, he had finished gutting what needed to be gutted, removed broken radiators, located new radiators (and had them delivered), rewired all the rooms that needed to be rewired, reframed what needed to be reframed and replumbed most of what needed to be replumbed.  I was blown away (in a good way this time).  He’s actually taking time off this week to finish another job, but I suspect it’s to allow me to catch up to him.

Assuming he comes in around the budget numbers, he’s my go to guy for my next project (yes, there is one on the horizon).

My contractor gave me some budget numbers: $1.50/sf for tile, $150/bath fan & light and approximately $500 for electrical odds and ends.  I was able to locate some tile for $0.50/sf, a bath fan & light for $20 and I had some 12/2 wire and other electrical odds and ends available.  My goal is to shave approximately $1,000 off the budget.

Some other finds:

From Left to right, top to bottom: Some additional tile for $1.00/sf from the local Habitat ReStore; Prefinished hardwood for $0.40/sf from ReStore; Both toilets from ReStore for $1.00 and $53.00 respectively; More tile for $1.00/sf; and a pocket door kit.

The pocket door kit is a story unto itself.  If you notice, there is a sticker on the door kit for $65, but on the rail above it is listed at $74.  When we brought it up to the counter to be purchased, it rang into the register at $74.  I asked the cashier to double check it and she replied (nicely) “I sell what the SKU is”.  I (nicely) replied “I pay what it says to pay, which is $65”.  She (nicely) agreed and took $9 off of our final bill for ‘customer satisfaction’.  I don’t think I’m becoming a cheap skate, but I realize that too many times in life I allow money to be ‘lost’, such as on this door.

Updated Analysis of a Flip

Earlier I presented my numbers for the house flip that is currently under construction.  Those were my original numbers.  Here are some more up to date numbers as the project has progressed.  Some very experienced flippers would probably tell me that my original scope of work (SOW) was no good to begin with.  I’m actually operating under that notion anyway.  However, just because the scope of work was bad doesn’t mean the numbers were wrong.  Here are some updated numbers:

Original Estimate: Updated Projections
Item Cost
Property Purchase  $                 25,000 Property Purchase  $                 25,302
Kitchen Cabinets  $                    1,725 Credit for boiler  $                 (5,050)
Counter Tops  $                    6,480 Insurance Pmt  $                          88
Appliances  $                    1,350 Clean and prep of house  $                    2,542
Electrical repairs  $                    1,000 Kitchen Cabinets  $                       696
1st Floor refinish  $                    3,600 2 Bathroom and kit. Install  $                 11,380
2nd floor carpeting  $                    1,500 Add Alt: Roof Repair  $                    2,800
Bathroom update  $                    1,500 Interior paint  $                       750
Painting  $                       750 1st floor flooring repair  $                    3,600
Heating system  $                    1,000 2nd floor carpeting  $                    1,500
labor  $                    6,720 Boiler replacement  $                    4,000 No fuel switch
Contingency  $                    2,563 Appliances  $                    1,350
Add Alt: Exterior Paint  $                       500
Total:  $                 53,188 Contingency:  $                    2,500
Total:  $                 51,958

You’ll notice that the categories don’t quite line up.  For instance, the price for the two bathrooms does not really coincide with anything on my original estimate as we decided to add a 2nd bathroom into the project AFTER having closed on the house (not the best flipping strategy).  However, I believe I was conservative enough in my original estimates that I was able to bury the 2nd bathroom costs in the rest of the job.

A few things to note:

1) There were no associated costs for demolition in the original estimate.  I had assumed the clean out would take two days.  I was wrong.  Apparently, to make a bathroom disappear takes approximately two weeks.
2) The boiler cost looks like a loss ($1,000 in original, $4,000 in the new projection).  However, if we factor in the credit for the boiler ($5,050) plus the original $1,000, I actually had $6,050 for a boiler and I am projecting $4,000, which is a $2,050 benefit to my budget.  The only problem is this: with the intense cold we had here, the boiler tripped off, the system refroze and instead of one cracked radiator, I have six cracked radiators.  Ouch.
3) I forgot to include counter top in my updated projections.  I had originally spec’d out 16 running feet at a cost of $40/SF for a total of $6,400.  I had assumed some high end solid counter material.  After talking with some other house flippers, who told me I could make a counter top of gold leaf for $6,400, I decided to look around.  I thought, “Hell, what’s granite cost?”  Well, actually not as much as I originally thought.  I can buy slabs of granite for $145/slab (72″ x 25.5″ x 1.25″) – the only catch is I have to buy four.  So, purchasing four granite slabs including shipping is about $900, I only need two slabs, so for this flip, the cost is $450 (do you have a need for two granite slabs?).  I then have to cut the slabs and round over the edges.  I have a plan for how to cut the slabs so it looks good.  Stay tuned for a future post.
4) As with any project, we’re beginning to experience project creep, meaning small items are beginning to pop up which add to the cost of the project.  For example: Because of the disappearing bathroom, the existing waste line is now at a really bad height.  So bad in fact that we have to cut the waste line in the BASEMENT and install an entirely new line up through the house.  It’s so easy to think “Well, it’s only an additional $25, let’s go ahead and do it.”  Well, if you do that six times over the course of 30 minutes (which is easy), you’ve blown $150 (I don’t make $300/hr, do you?).
5) I’ve taken the project creep mentality and applied it to materials.  The fart fan*/light combo allowance: $150/light.  I found a matching set on eBay for $20/ea.  This would represent a savings of $260 over my contractor’s allowance.

The last, but most import observation between my original numbers and the updated numbers is this, as my business partner pointed out when we finish with this house, there will not be one thing the homeowners will have to do after they buy the house.  Everything will have been addressed.  Two brand new bathrooms; a brand new kitchen; a new master suite; new flooring; new roofs; freshly painted.  What’s not to like?  Based on my projections, we will have accomplished all of that with the same original budget, meaning my profit margins are still intact.

Lessons during a Flip

The house

The house

If you’ve been following my blog, you know that I’m in the middle of a house flip.  It’s my first flip, so I’m trying to run a very tight ship.  So far, I’ve posted about the good and the ugly.  On the good side, I have the potential to make my investors close to $7,000 and I have a chance to split $7,000 with my partner, which is awesome considering I only have to put in some time on the project.  How’s that song go — “Money for nothing and chicks for free”?  (On the really cool side, I might even have to buy a pneumatic paint sprayer…how cool would that be?)

Beyond the financial aspect of this project, this flip presents an incredible growth experience if I’m willing to grow with the project.  I will have to deal with other contractors (one has already been fired…not the best start), time constraints, financial constraints, outside investors, a partner, and the real estate market to name just a few potential issues.  Given these constraints it is easy to see how some business owners can become micromanagers.

I can easily see how people simply get fed up with seeming incompetence and insist on having their hands in every aspect of a project.  The fear of screwing up can be so great that only the original brains behind the project is capable of making the correct decisions.  It’s very easy to fall into this management trap.  Since working with my first contractor, I feel the micromanagement tug almost daily.

On this flip, I wanted to give my contractor friend a shot at the project.  I needed him to keep on task and execute the plan as given, not to think about other plans that may or may not be reasonable.  After my experience with my original contractor, there is a large part of me that simply wants to shut the door and keep my opportunities for myself.  Say “To hell with the world, I can do it better”.

If I were to do that, how much would I actually accomplish?  Probably not too much.

I work at least 40 hours per week, manage a few rentals, have an extremely active 16 month old, a couple of dogs (cats, one rabbit and multiple chickens) and a wife at home.  There isn’t too much time available to manage the project, let alone work on the project.  I need to be able to delegate responsibilities to others so I can get this project executed.

Since working with the first contractor, I want to turn off the phone and simply muscle through the work, completing it all on my own.  But I’ve done that already.  I know how that goes.  It’s not bad, actually kind of fun, but there are other things I want and need to do.  I have to grow to be able to happily delegate a significant portion of the work on this project.

I didn’t expect this flip to present me with the opportunity to learn some new leadership/management skills.  Part of me feels burned by the first contractor, though part of me also knew that firing the contractor was a distinct possibility when I hired him.  I was taking a risk by hiring the contractor, but I wanted to give him a shot.  My risk didn’t pan out, so I need to move on.  However, I need to move on while still remaining open to sharing this awesome opportunity (the flip).

Disappearing Act

Bathroom (Before)

Bathroom (Before)

Sunday marks the official end to the third week of the Philipsburg Phlip project.  During the second week of work, my contractor did a few things which caused me to question if he should remain on the job.  Over on BiggerPockets, some more knowledgeable people suggested I fire the contractor after the first infraction.  I still wanted to give the contractor the benefit-of-the-doubt, so I let him continue working this week.

(Note to self: Should have listened to the sages over on BP and fired the contractor after the first infraction)

However, I didn’t. I figured the contractor simply needed some more direction with more defined parameters from which to work.

I was wrong.

On Monday of this week, I had a discussion with the contractor regarding the bathroom on the 2nd floor.  My contractor has wanted to almost gut the entire room; I only wanted to remove and replace most of the major components.  Close to the end of our conversation, I said “Do not touch the plumbing or flooring until we’ve reviewed everything with my partner.  We’ll talk Tuesday evening about this issue.  Do not touch the plumbing.”  The contractor acknowledged this request.

Tuesday morning, I received a phone call from my contractor.  He had a few questions regarding some of the other work occurring this week.  At some point in the conversation, he let slip “well, you’ve got all the flexibility you want in that bathroom.”  To which I replied: “John*, I said we’re not touching that plumbing.”

He replied “Well, I figured it would be easier to replace it with plastic and people would rather plastic than cast [iron]. It only took me four or five hours yesterday [Monday] to remove the plumbing and flooring.”

Me: “John, you’re kidding right?”

John: “No, it was relatively easy, and its only going to take like two or three hours to put it all back and about $100 in materials.  It’ll add like $3,000 to the value of the house.”

Me: “No, it won’t add anything to the value of the house because no one really cares what is under the floor.  It will subtract from this flip’s profitability.  Don’t do anything else to the 2nd floor, finish the framing on the first floor and don’t plan on any more days this week until I get a chance to review the work.”  At this point, the room was nearly spinning around me.

So I was hemming and hawing about what I should do, and finally decided to fire the contractor and not pay him for the removal work and reduce his final check by the estimated amount of the repairs (time and materials).  This morning, I met with him to square up our accounts (I hadn’t seen the bathroom yet).  Strangely enough, John apologized for the ‘miscommunication’ regarding the bathroom.  Fair enough, but still not good enough to sway my mind.

A few other red-flags rose during our squaring of the books this morning.  Twice, John said “Well, I didn’t bill you for that tool.”  The second time, I finally replied, “John, you’re a contractor, you’re supposed to have tools.”  I was also accused of not knowing the price of gasoline because I refused to pay mileage to and from the job site each day.  I would have considered mileage if John had put in a good solid 4×10’s weeks for a minimum of 120 billable hours.  John only has about 80 billed hours over three weeks.  I reminded John that if he didn’t show up on site, he wouldn’t have work.

At the end of the meeting, John began to discuss work this coming week.  I stopped him and forced myself to look him in the eye and say “John, I’ve given this a lot of thought and I need to terminate this project.  This project is stressful enough for me that I don’t need to worry if you’re going to follow the plan.  I need to know you’re going to follow the plan and I am just unable to do so now.”

John vented at me for a while and I let him.  I know he’s in a very tight spot right now and I feel badly about that, but I need to protect 1) my investor’s money and 2) my own sanity.  John was, and I’m sure is, very upset.

After leaving my meeting with John, I headed up to assess the damage with my partner and formulate a new plan forward. When I got to the house, my partner asked me “How much did you ask John to remove?” I said “just the tile and backer board, why?  I know he removed all the drywall, but you already saw the bathroom since then.”  This is what I was expecting to see:

IMG_20140216_150048112

My partner replied: “Well, the bathroom is gone.”  I didn’t believe my partner, but this is what I saw:

My brother is a magician and I don’t think he could have done a better job at making something disappear.  (The pictures above are taken from almost the same position as the photo at the top of this post)

My partner and I are both contractors, so we were able to quickly formulate a new plan.  A little sweat equity on our parts will right this ship, but jeeze-oh-man, this is not how I wanted to start this flip.  I figured better to quickly cut ties with John then let the problems persist any longer.

As a learning experience, I should have 1) visited the site BEFORE I cut ties with John.  That would have allowed me to make a determination as to the extent of the damage, therefore how much to reduce the final paycheck to compensate for the damages and  2) Followed my gut on John’s abilities.  I wanted to believe he was capable of handling this project, but my gut was telling me to be VERY cautious.  My gut was right.

*not his real name

The New Cell Phone Plan

Moto X

 

As my wife and I continue on our path to Financial Freedom, we wanted find some ways to increase our available income for saving/investing.  To find ways to increase available income for saving/investing, we could focus on either increasing income or reducing expenses.

The easy answer is focus on ‘income’ rather than expenses.  How many times do you ask yourself “How can I make more money!”?  Asking yourself that question misses the obvious question “Why do I need that much more money?”  You should only need money to pay for expenses, not for ‘luxuries’.  Most people forget that expenses are generally flexible and are dictated by our choices while our income is usually outside our personal control.

Yesterday I stumbled across “Choosing the Cheapest Cell Phone Plan is a Headache” on CNN.  The article discusses the big four carriers: Verizon, AT&T, T-Mobile and Sprint.  The article describes the tactics each of the carriers is using to lure clients to use their services.  Verizon lets you get discounted smart phones; AT&T allows all minutes, texts and data to be shared within the family; T-Mobile doesn’t require a signed contract; and Sprint has a Framily Plan, which allows Friends/Family to split a bill and have separate bills mailed to different addresses.

At first, these choices seem great.  Who wouldn’t want to choose lower cost smart phones vs. sharing 10GB of data with your family?  The article assumes you need to have 10GB of data or unlimited texts.  Do we really need all that data?  If you could order a 10lb cheeseburger, is it worth it?

We were paying $140/month for 250 texts, unlimited data and 700 cell phone minutes on Verizon’s network.  That was for two smart phones with upgrades every two years.  I checked my email every 10 minutes, every time I heard a ‘ding’ from my phone.  I knew it was rude to check email while at lunch in Portland, Maine with my wife, but I did it anyway.  The ‘ding’ was addictive.  I never stopped to ask myself if I really needed to get email 24/7.

In late 2013, we decided to go on an aggressive campaign to reduce our expenses in order to increase our income available for saving/investing.  One really expensive item we decided we could change was our phone service.  Did we need to check email while driving at 65mph down the highway to or from work?  When watching an episode of The Office, did I need to know how my investments faired?  Honestly, was my life better because of 24/7 email contact?  (Hint: actually I was a lot more depressed)

After reading this article on Mr. Money Mustache, I decided to pay for the Moto X smart phone on Republic Wireless’s network.  Republic Wireless operates it’s network through free wifi access points when available.  When I’m at home and I make a phone call, my call gets routed for free through my internet.  When I’m at work, the same thing (through my work’s wifi network).  For those times I’m away from wireless networks, Republic Wireless partnered with Sprint and rents space from Sprint’s cell towers.

Sprint coverage isn’t as great as Verizon’s, but does everyone really need to drive an Aston Martin?  I decided that while Verizon’s coverage and network were awesome, I didn’t need to spend $140/month for that service.

My new service gives me data while I’m on a wifi network (there are a TON of free networks around, just look for them…Home Depot, Starbucks, Barnes and Noble, local coffee shops, etc).  I get unlimited talk minutes and unlimited texts on cell networks.  The best part of the new plan: the cost.  Now, instead of having to set aside almost 10% of one of my paychecks, I set aside $12.50 per paycheck (that’s not a typo).  Yes, my wife and I now spend $25/month for our smart phones rather than $140/month.  That’s a savings of $115/month.

I do sacrifice some call quality with the Republic plan, but honestly, for $115/month, or  $1,380/year, the small cut to quality is worth it.  My current investments are returning between 15-20%, so at the low end, that $1,380 will be worth $1,587 next year.  Over 10 years, that $1,380 will become $28,019.  That’s almost 8 months of work for me.  (I do invest in the stock market, however I’m saving for real estate investments right now).  If you were to invest that $1,380 in the stock market, over 10 years, at 7% gain per year, you would have almost $19,000.

Is all that data worth 8 months of work?  I’d rather be home asking my daughter “What noise does the chicken make?”  (Her reply: “bock bock bock”…not bad for a 1 year old, but then again, I’m her dad).

Chicken

Life of a Landlord – Part 1

Frozen Pipe

 

You never really know how residents will react when something goes awry in one of your properties.  This morning, I received a panicked phone call from a resident in one of my duplexes.  A pipe had frozen and there was no water in their unit.

There is not too much to do to fix a frozen pipe except to either try to thaw the pipe or wait for the pipe to thaw.  Obviously once the pipe has thawed, you need to be ready in case there is a pipe burst.  I advised my residents to move a space heater into the basement and call if there is a problem as it warms up.  Well, about two hours after that phone call, I got another phone call: “Hey, uhh, I got a swimming pool in my basement.”

The first thought through my head was: man, that didn’t take long to thaw.  Thought number 2: this is going to cost a TON; thought 3: I’m going to have to run down and fix the pipes this evening…there goes my Friday night call a local plumber and get this taken care of immediately.  I also asked a contractor friend of mine to take 12 gallons of water (six gallons per unit) to the duplex until this got resolved.

I called RotoRooter to see if they handled burst pipes.  Luckily, they do handle these issues and they try to ensure a less than 24-hour turn around.  The pipe burst at about 3pm, RotoRooter was called at about 3.45 and by 5.30pm they were on site working on the pipe.  By 7pm I had received a phone call that the problem had been addressed.

There were three bursts, two in a pipe and one that broke the back side of the water meter.  I now have a new water meter, some new pipe and (hopefully) a happy resident.

Through the course of this, I learned that the water had actually been frozen for a full 24 hours before anyone decided to call me.  No idea why no one decided to call.  I asked what they had been doing for water for the previous 24 hours (figuring they had purchased bottled water).  The reply: Melting snow on the stove.  I told both residents to call as soon as there is a problem like this in the future and not wait 24 hours.

Anyway, for 18 months as a landlord and one issue like this, not too bad.

BtW: Week #3

This week was cold.  Really cold.  Two of my units had some frozen pipes.  One thawed with no problems, in the other, the pipe burst.

In my other pursuits, I didn’t technically bike to work this week (too cold), but was able to car pool with one of my coworkers for three days this week and I rode my bike TO work on Friday.

I didn’t bike to work as much as I wanted, so I won’t count this week toward my 2014 goal of biking to work 66% of the time.  However, I will count this towards my 2014 frugality goals.

BtW Week 3 Stats:
Miles Biked: 9.6
Car Miles Saved: 57.6
Gallons of Gas: 2.74
Dollar value of Gas: $9.55

Using an APOD

An Annual Property Operating Data sheet (APOD) is a very important tool to use before you buy a rental property, while you own the property and even when you sell the property.  At its most basic, an APOD is simply a worksheet to calculate your potential profit or loss.  With minor tweaks to a basic APOD, you can have a powerful tool available at your fingertips.

As the name suggests, an APOD details the annual costs required to own the rental property.  Some APODs factor in lost rent due to vacancy, costs for repairs, costs for improvements, utilities, etc.  Typically, when I ask my real estate agent for an APOD, I receive either hand written chicken scratch from the current owner, or a worksheet that seems to show the house in quite a rosy light.  When I receive these “Income and Expense” statements, I usually ignore their bottom line and plug and chug in my spreadsheet.

I developed an APOD that is conservative, meaning the APOD exaggerates the downside risk, effectively taking a worst-case-scenario snapshot of the property.  I developed this because I want to ensure that I will make money when I purchase a rental property.  I don’t have cash to burn owning a property that doesn’t throw off cash at the end of the month.  To be conservative, I slice almost 30% off of the gross rent each month (detailed below).

Here is a snapshot of my APOD:

APOD_1

We’ll start working through each column:

The first column is rather easy, it’s simply current information about the building.  I always include the address for the building.  I do this for a few reasons.  First, it is simply a record of a property I reviewed.  Secondly, I now have one additional point of data for calculating my local rents.  Lastly, keeping the address allows me to follow up on the house or building if it goes off the market.

After the address, is the current information on the asking price, current rent, taxes and insurance.  All of these figures are then used to determine potential profit from the rental.  The ‘Month to Close’ allows you to remember when you purchased the building to calculate your first partial year’s gross income.  I prefer to have each rent recorded rather than only a gross rent for the building.  This allows me to determine if certain units are under market rent.  Again, I can also compare the rent of the new building to my rentals to determine if I am over or under charging.

Note: If this is a UFUO (Unique Fixer Upper Opportunity), then input your calculated rents (see: Calculating Your Rent).  Remember, if you purchase a UFUO, your first year’s numbers will generally look horrible because you are incurring costs while you are fixing the place (Watch for the post: Repair vs. Improvement).

The taxes and insurance are usually available on the MLS listing.  If not, ask your real estate agent for this information.  Note: It is good to verify the tax information by calling the municipality.

You do not need to include the information about the building’s size, zoning, heating system, etc.  I do just to remember how the building is set up.  I am usually leery of private wells and septic systems (many other people have no problems with them…it’s one less cost for me to consider).  I also try to keep away from oil heating systems, unless it is possible to upgrade to gas or high efficiency electric.

In the ‘Loan Information’ section, you should input your Purchase Price, Term for the loan, and the rate.  Typically banks will require 25% down for a non-owner occupied investment property.  Seldom will a bank lend if you have less than the 25%…but sometimes they do.  The second property I purchased, I was able to negotiate for only 15% down, which helped my cash flow significantly.

Let’s move to the Operating Expenses:

This column is relatively self-explanatory.    Under the “Administrative” heading are your ‘overhead’ items.  If you are smart and willing to put in a little work, there should be very few costs while you only own a few buildings.

I do not have a property manager yet, but if I did, all of her/his payroll information would be located under the “Property Management” heading.  You could include yourself as an ‘employee’ under the property management heading.  Monthly, you would be able to take the cash allocated under that heading.  I don’t do this because I am trying to expand my business, so I am reinvesting all of my profits.  This rate is also 10% of gross rent (part of the 30% off the top I mentioned earlier)

Under “Maintenance”, the ‘unexpected maintenance’ is a self-calculating cell.  I arbitrarily chose a value of 10% of the property gross cash flow (the second 10% off the top).  I assume this is what is going to randomly break and will have to be repaired (This is also part of my downside risk assessment).  Once my repair reserves are adequate to cover most random expenses (roof repairs, boiler repairs, etc), I will pare back the repair reserves and add that to my profits.

The “Services” heading lists typical services that may have to be paid.  I normally pay for trash because it is a fixed monthly cost.  If you have other services or utilities, you would want to include a brief description.

For “Utilities”, I included the typical utilities for our area.  I never include phone or cable in my rent, but maybe you want to do so.  There are two free spaces for other utilities at the bottom of that page.

HA!  Now we are at the fun part.  The Income/Payments column is a LOT of fun to look through.  Our first stop is the Income.  This is where we see the gross rent for the property.  Some properties may have coin-op laundry, vending machines, etc.  The monthly income from those other sources would be included as Other Income.

When my bank evaluates a loan, they assume a 5% vacancy rate.  In order to be conservative, I assume a 10% rate (the third 10% off the top).  If you manage your property properly, this vacancy rate may be as low as 0% (which is additional profit).

The ‘Net Annual Income’ is the total potential income less the vacancy.

Next step is to subtract the loan payment.  I break out both a 15% down and 25% down, just to give you an idea of what is possible (normal commercial loans are 25% down, but sometimes banks will give you 85% LTV).  For most loans, especially if you are purchasing through a corporation of some sort, focus on the 25% number.

Taxes and insurance are the annual taxes and insurance (probably more expensive than you thought!).

The IRS allows you to assume that your asset (rental property) will be worth nothing after 27.5 years of ownership.  This is called ‘depreciation’.  The IRS allows you to deduct 3.636% of the initial value of the building, not the land, which you purchased.  This accounting happens at tax time.  Depreciation is considered a ‘loss’ to your business, reducing your taxes at the end of the year.  It’s not quite cash flow to your bottom line, but significantly helps to reduce the profit on your taxes.  Just remember that depreciation gets ADDED to an eventual sale of the building (the tax man giveth and taketh).

Now, let’s step to the last column, “Cash Flow”.

In the Cash Flow column, we account for all the income and payments to determine what our profit or loss is for the property.  Again, I have split out the 15% and 25% down payments.  The ‘Annual Income’ is the vacancy adjusted income.  The loan, taxes and insurance are rather firm numbers.  It’s tough to get the bank or the township to reduce your loan or tax payments.

Operating expenses may be a flexible payment.  One of the easier ways to reduce the operating expenses is to evaluate the energy consumption of the property.  The addition of energy conservation, renewable energy installations or energy efficient equipment, may significantly reduce the operating expenses.

The number everyone is interested to see is the ‘Monthly Cash Flow’.  This is your potential profit.  I have found that some investors insist on purchasing properties with monthly profits north of $500.  I have found that I am happy with properties yielding $100 – $300 per month (per unit).  I have friends ask me why I bother purchasing those properties when I could go on vacation or fix my own house (or buy the flat screen, new couch, new car, new…head over to Mr. Money Mustache for his take on this ‘new’ junk).  My typical response is “Do you want to give me $100 per month for the next 10 years?”  They usually say “no.”  Well, these properties ARE giving me that $100 per month, generally without complaint!

When I am going to make an offer on a property, I note a few items on the APOD.  First, I check to make sure the monthly cash flow is greater than $100 per unit.  This $100 is totally arbitrary; you could have said it had to be “1 beelllion doolars.”  Because the APOD automatically calculates these ratios, I adjust my purchase price (which is my offer) to get to the $100/unit threshold.  This offer is then my ‘highest and best’ offer.  Unless the building is in terrible condition, or otherwise warrants a lower price, I usually simply offer my ‘highest and best’ offer and let the chips fall where they may.

The next section calculates the required closing costs.  This helps me pull the necessary money together for any of these deals.  With the example above, you can see the significant difference between the 15% and 25% down payments.

Assuming the property passes the $100 minimum threshold, I then look to the ratios section.  Looking at the “Ratios” section, we’ll see the effect a larger down payment has on our money’s velocity, because we are unable to leverage our cash as much as if we had only used the 15%.

I want to make sure that my cash-on-cash return is greater than 15%.  This means that you will have all your cash back after 6 2/3 years.  It also means that for each $1 I invest, in 365 days, I will have $1.15.  This is also double the average return of the stock market for the past 80 or so years.  Now, the initial cash-on-cash rate may be low because the current owner is renting the building at lower than market rates.  If this is the case, evaluate the building first with the current rents, and then with your new proposed rents.  See how it stacks up.  To get your building to the new rents, there will probably be some friction with existing tenants and you will probably have to find some new tenants.  You don’t want to pay to own a rental property.

For my local market, a good rule of thumb for the actual value of a property is to assume five times net income.  This is only a rough guide, but does help me during negotiations or when I refinance.

The APOD is THE tool I use when I am evaluating a potential property.  Don’t force the APOD to show positive results.  If the property is not beneficial, you don’t want to buy it.  Period.  No one has enough money to throw at a poor property.  Think Tom Hanks in the Money Pit!

I have a few tweaks to make to my APOD.  Once I have those made, the APOD will be available to purchase on this website.  Stay tuned!

Just Do It

For some reason, the Nike quote “Just Do It” reminds me of my brother, Ethan (along with the simple quote “Whatever…”).  Regardless, “Just Do It” is a great way to live your life.  There is no reason NOT to try something.  For instance, about one month ago I sent an email to a county official requesting a meeting to discuss a project.  An email is easy to send, and if it wasn’t answered (it wasn’t) and I was still serious (I was), I could call the official.  Never did I think I would willingly sit with a government official.

Well, today, I did.

I presented a project I want to pursue to two officials with the county’s Planning and Community Development team.  The project is a 10-unit building with 8 apartments and two commercial spaces that needs a gut rehab (UFUO #4?).  If I am able to get this project off the ground, it’s going to be tight, as in, I’m going to have to raise almost half a million dollars to see this project through to the end and if I OWE $500,000 on this project, the cash flow isn’t great, but it’s there.

The biggest stumbling block is “How do you raise $500,000 to see this project through to the end”?  A lot of people would simply stop with that question.  Their answer: “It’s impossible.”

Well, after my meeting today (with my Just Do It attitude) I learned there is a state grant available to developers (eg: me), of up to $150,000 to develop or redevelop properties that will house income qualified individuals.  For my county, “Income Qualified” translates to housing costs of up to $668.75/month for a family of two.  In addition to the grant being available, the county officials “would really like to see development in the town” where the building is located.

Without a “Just Do It” attitude, I probably wouldn’t have emailed and called the official and wouldn’t have learned about the grant, so I would be stuck trying to figure out how to raise 25% of $500,000.

What have you got to lose?  Just Do It.