Lost my Health Care this Week

I’m in the leadership group at work, so I knew this was coming.  With the new Affordable Care Act requirements, my old health care plan was canceled.  The plan didn’t meet some portion of the ACA’s requirements.  Our problems at work were compounded because our insurance brokers never let us know that there was a provision in the ACA which allowed us to lock in our 2013 rates for 2014 albeit with a shorter duration (Plan ended Dec 31, rather than Mar 31).

The president of our company has stated that we should not expect raises (yes…like ever again).  That’s one hell of a pay freeze.  I’ve been looking at ways to optimize my expenses.  Republic Wireless…done it.  Reduced insurance coverages…done it.  Asked for a discount with the internet company…done.   No cable TV at home.  Cook 99% of our meals at home, yep.  I just need to learn how to make my own wine (AND I’ve received an offer to be taught how to make wine…that’s a win IMO).

Essentially we’ve made our monthly budget as efficient as possible.  Total savings from this optimization: about $400/month.  The last bill I had to pay, which I had no control over, was my health care bill.  My company is generous.  The total insurance bill for my family and I was $483/month and I was responsible for $140 of that.  Because I own over 2% of the company, I was not able to pay for that insurance pre-tax through an HSA or anything like that.

Enter Obama-care.

With the exchanges, I all of a sudden had the opportunity to optimize my health care as well.  In order to really examine my health care options, I needed a few pieces of information:

1) Our company sponsored health plan’s costs were set to increase by 92% for FY2014.
2) My portion of the bill in 2013 was $140/month
3) The company only anticipated a 25% increase in health insurance costs for 2014 (company would cover $428/month)

Based on this information, I ran some very rough numbers as a starting point:

Total estimated 2014 health care costs (group plan): $927
Company coverage: -$428
Difference: $499 – (An increase of 356% from my contributions in 2013)

Using this information, I went to Healthcare.gov and started surfing for plans.  Our company sponsored plan is/was a really good plan.  Low deductible, coverage for a bunch of things, etc.  The only problem with this plan is that my family and I are fortunate to be quite healthy.  We don’t need a really good plan, we need a catastrophic plan (now called a High Deductible Health Plan, HDHP).  There is no sense in paying for a $1,000 deductible if you never even hit $1,000 in medical expenses in the year.  Yes, I may have a bad year where I do have significantly more than $1,000 in medical expenses, but maximum out of pocket expenses under Obamacare is $12,500/year.  In a worst case scenario, I can use the cash flow from my rental properties to pay the full $12,500 (I receive about $982/month from the properties if I self-manage).

On Healthcare.gov, I learned a few things:

1) Because my W2 income is low enough (and apparently not projected to grow…), I qualify for the state’s health insurance for children.  Because I qualify, I have to use the state program rather than the exchange for my daughter.  ($77/month; $5 copays)
2) The HDHP plan I found is a catastrophic plan.  The deductible is $12,000/year, or only $500 less than the max out of pocket.  This plan only costs $307 before any tax credits (let’s assume I don’t qualify for a tax credit)

Using the available data, I quickly calculated that with a health care plan that I can choose for myself (rather than forced into one specific plan), I should be able to realize a savings of $499-$307-$77 = $115/month, excluding any company match/kick back, etc.

The current plan proposed by the president of the company is to give all employees a ‘raise’ equivalent to the anticipated company expenditures for health care in 2014.  For me, this means a raise of $428/month.  Knowing this last bit of information, I can dial in my savings/health care optimization a little tighter.

1) We are not going to use the plans that are 92% more expensive.
2) The company is not offering health care for 2014, but giving everyone a ‘raise’ to compensate for the company paid portion of health care ($428/month)
3) In addition to the company portion, I was paying $140/month for health care in 2013

Under the new scenario, we can add the company ‘raise’ with my previous out of pocket expense and subtract my new premiums.  In doing so, we arrive at the following equation: ($428+$140) – ($307+$77) = $184 savings/month.  To really optimize this whole process, I will have to open an HSA and deposit at least the $184/month into the HSA.

While I grumbled when I first heard that our premiums were jumping 92% because of the Affordable Care Act, I decided that the ACA actually benefited me significantly by allowing me to 1) choose my own plan and 2) get a savings/’raise’ in 2014.


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:


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

Lifetime Earnings?

I was recently reading the post “”Where Has All the Money Gone?” by Escaping Dodge.  The premise of the article is to go to My Social Security, determine how much I’ve earned in my lifetime, then compare that figure to my net worth (detailed in a future post).  The idea is to shock all of my generational cohorts into Financial Freedom Fighter mode, cutting out all unnecessary spending and preparing for Financial Independence.

I wasn’t sure what to expect when I went to the My Social Security website.  I entered the necessary information and logged in.  The initial login page has some information about how much social security I would receive when I turn 67 (about $18,000/year !?!).  I then clicked to see my “Earnings Report”.  I braced myself to see a HUGE amount of earnings vs. not much net worth.

After adding all 15 or so years of work, I was pleasantly surprised to see that I have ‘only’ earned $338,828 through the 2012 tax season.  Nearly half of those earnings have occurred in the past three years (2010, 2011, 2012).  With the addition of 2013 taxes, that figure will be much closer to $390k in lifetime earnings.  My wife has been working the whole time we’ve been married, this number doesn’t include any of her earnings, but even still, I feel good for accomplishing all that we have accomplished on our earnings.

The article “Where Has All the Money Gone?” is meant to shock readers.  Readers are supposed to wonder how all their hard earned money has disappeared.  Based on my findings, I feel I’ve (just about) maximized my potential when compared to my earnings.  Obviously I could have trimmed my budgets in a few places (less Starbucks).

The article is too one sided.  Specifically the article does not ask: what experiences were gained with the money that wasn’t saved/invested?  Granted, many people trade money for things, not experiences.  Things break, wear out, get old, go out of style, etc.  Don’t buy things.

Experiences?  Sometimes the nuances of an experience get hazy around the edges, but generally an experience will stay with you for a lifetime.

Generally experiences are worth…experiencing.  Maybe I’m just getting older, but I was just thinking about one of the road trips my wife and I took.  We flew into San Francisco and over the course of three weeks, we drove from San Francisco to Yosemite, then north through Oregon to Seattle and the Olympic Peninsula.  I thought “We just did that a couple years ago”, then I looked at the date stamp…2006!  Eight years ago.  Time has flown.

I know you’re wondering how My Social Security’s lifetime earning’s report relates to my trip to California in 2006 it’s this: how do I quantify my road trip in California?  I still think the trip was last year.  I can still smell the bay trees in our camp ground; still feel the bone numbing ocean water; gaze in awe at a sequoia; hear the snuffling outside our tent in Crater Lake NP (my wife STILL swears it was a bear); taste San Francisco sour dough at the Ferry Building.  Is that experience worth an extra $3,000 in my bank account?  I say no.

Ask yourself this question: What is your fondest memory?  Time spent at work?  That thing you bought?  Probably not.  You probably answered: Holding my baby the first time; That great Christmas dinner; That time at the beach when she “lost the coffee but saved the boy”; Sitting next to that special someone thinking “I’m going to marry this person”.  The thread that runs through all of those answers: Not one of those experiences cares about your lifetime earnings from the Social Security Administration.

The reason I am driving for Financial Independence is so that I can have more experiences.  I realize it means I will probably have less stuff, but that is a trade off I am willing to make.  I would rather hike the AT with my dad, than buy a 2nd car.  I would rather watch my daughter’s face light up when she sees a buffalo in Yellow Stone for the first time, than put in an extra 80 hours at work for that bonus.

What do you want to experience?


“Unique” financing

I figured that if I’ve only got 12 months in one year and I’ve got MORE than 12 goals to accomplish, I might as well get started knocking my goals out.


I’ve been biking to work, although this week has been rough.  I biked to and from work on Monday, biked TO work on Tuesday, and plan to bike HOME from work on Friday, but it’s been bitter cold.  My ride in on Tuesday morning was literally painful.  The above photo was taken after ice began to fall out of my beard.  That was the biggest smile I could muster.  Paraphrasing from “Jaws”…”I think I need a bigger beard!”

So, I’ve been biking to work.  Not at my 66% threshold yet, but I’m working on it.  Once it hits ~30degF, I’ll be able to ride every day.

Not to sit back for too long, I’ve been working on at least one of my other goals: use ‘unique’ financing to fund a purchase.  I have two instances of using unique financing, but will only discuss one of the potential deals now.

For the past two years, there has been a duplex for sale in Philipsburg, a good C-C+ town.  I had toured this duplex over two years ago when I was considering becoming a landlord.  I didn’t understand the benefits of purchasing a fully rented building.  The cash flow benefits of my UFUOs DOES explain why I enjoy rehabilitating housing.

I’m always searching the MLS for properties that meet my ideal rental criteria and I stumbled across this duplex again.  The owner had dropped the price about $2,000 since I last looked at it.  I learned that the owner had paid off the mortgage since I had last toured the duplex.  Because there was no lien on the property, there was no ‘Due on Sale’ clause to be fulfilled, so this gave me the opportunity to make an unconventional offer.

In addition to no lien on the building, the advertised rents were significantly under market rent for the units.  A 2-bedroom unit in Philipsburg rents for at least $500/month, meaning this duplex should generate $12,000 gross rent for the year.  The units are currently rented for $475 and $435, or about 91% of expected rent for the area, meaning there is upside potential for the rent.

Lastly, the residents are both medium-term residents, meaning they have been living in the building for more than one year, which increases the chances they will remain in the building so long as I am providing good living conditions for them.

Banks are currently offering me 80% financing, meaning I need to have 20% cash to put down (plus closing costs).  I don’t, and won’t have 20% to put down on this duplex for approximately 6 months.  Rather than let that bother me, I decided to make an offer in which the owner carries the debt until I have my 20% and I can get a standard loan from the bank.

I crafted my offer as follows: I would put 10% down with the owner to carry the balance amortized over 30 years, due in 1 year.  This means that the loan is a ‘standard’ mortgage, paid back over 30 years (rather than the 20 years I get from local banks), however the loan is due in 1 year, so I will need to either pay off the loan in one year (not going to happen) or refinance the property within one year.

In order to make my offer stand out and show that I know what I’m doing, I included my entire financial snap shot including: IRA balances, Individual stock balances, net worth including HBS and personal property as well as my personal monthly budget.  I also included a personal resume.  Lastly, I wrote a cover letter similar to the one I sent to the owner of the 4-plex in Millheim (see: About that Deal…).

I honestly think Realtors must get tired of the standard 30-year financing deals, because the first thing I heard about my offer was from the seller’s agent, and he said that my offer “was the most impressive offer package he has seen in his 30 years as an agent.”  My Realtor told me that I “certainly keep it interesting” for her.  She indicated that she has a bunch to learn from my work.  Sometimes I think “not the conventional path” is the story of my life, but that’s OK by me!

For this specific deal, I will need to come up with $6,090 plus closing costs in order to purchase this duplex.  Pulling this cash together will be tight, but should be doable.  Rather than ask for the standard 45 days, I asked for 60 days, which gives me two month’s of rent  and four pay checks to save and time to move cash out of stock accounts if needed.

The deal isn’t signed by both parties yet, but has been agreed to (verbally) by both parties.  Hopefully by the end of next week I will be able to report on my executed contract on the duplex.

Stay tuned…


2014 Personal Goals Breakdown

Yesterday I broke down the 2014 goals for HBS.  Today I’m going to break down my personal goals for 2014.



(This was right before I started a climb with some friends in New Hampshire…see mom, I do wear my helmet!)

1) Finish wood stove room – Well, this item has been hanging around my ‘to do’ list for a LONG time.  We were set to begin work tearing apart my 2nd floor, but right before I was going to put a hammer through the wall, my wife asked if I would consider finishing some of the ‘open’ projects on my list.  I agreed.  My goal is to complete this project myself (while still having it look nice).  I admit, I will miss the foam stalactites hanging from my ceiling.

2) Get master bedroom finished to the drywall – I want to get the 2nd floor mostly finished this year.  Combined with the wood stove room, the completion of the 2nd floor would give me a sense of accomplishment with my house.

3) Enter, run and finish a marathon – I’ve had this goal for a while, but something has always come up which either prevented me from running or simply didn’t allow me from running (which is pretty much the same as preventing me from running…).  Well, this year is different.  I actually wanted to compete in an ultra-marathon (on trails), but decided it would be a better next step to try 26.2 miles rather than 30+ miles.

4) Bike to work 160 days this year – I admit, I fell off the bike-to-work band wagon five or six (or more) years ago.  It’s a long story, but basically, one car’s engine exploded, so we purchased a second car.  My parents were more than generous to offer to fix the bad-engine-car, so we fixed that car and had two cars, so why bike to work anymore?  Now we’re back down to one car.  Today, I just put a lot of money into the car for new spark plugs, wheel bearings and break pads.  To top it all off, the car was out of gas, so I had to put $50 into her.  That’s all to get me back and forth from work.  Following in Mr. Money Mustache’s footsteps, I’ve decided to start biking to work.  I will need to invest in some good lights for the bike, but I estimate I can save between $750 and $1,000 by biking to work (gas money only; wear and tear would be extra savings).

5) Increase passive cash flow to $500/month, excluding real estate investment – This is basically my dividend income.  I currently earn almost $80/year in dividend income.  Every month, I invest approximately $85 in dividend paying stocks.  With the new year, I will be increasing this monthly investment by almost $200, to a total of $260 per month.  I have found that if I start this, there is pain for a few months until I adjust to the ‘lost’ income, but after a while, I look at my portfolio and think “Holy Cow, look at that!  I didn’t even feel the loss!”  Again, this is forward looking, meaning that the $500 won’t show up on my tax returns for 2014, but rather for 2015.

6) Invest a minimum of $100/month into my daughter’s stock account – Around the end of the year, Sharebuilder.com fired out an email that offered to give $50 to any custodial accounts that were funded or made a trade by Jan 15th.  I’ve wanted to open a custodial account for my daughter for a while, so this $50 was just the push I needed.  My wife and I had been ‘setting aside’ $100/month in our savings account, only we would raid the account when we needed the cash.  Well, I decided the money is better invested for my daughter, so I closed the savings account (used the remaining $42.66 to buy a year’s supply of TP) and now I direct our $100/month towards my daughter’s account.  Any extra money she gets (at least for now) goes into that account to be invested.

7) Repay my daughter what we owe her – We had a 40+ year old roof on my house when I was finishing my daughter’s room.  When I was working on the room, there were a few days I went up stairs and found liquid on the floor.  I just thought that one of our animals had had an accident, so I cleaned up the ‘mess’.  That was a great way to deal with it…until one day, when it was raining and I was working in the room and….DRIP…on the end of my nose (yes, think Tom Hanks in “The Money Pit”).  I thought what the HECK was that?  That’s when I saw the leak.  My 40+ year old roof finally decided to give up the ghost.  I had a friend come over and tear the entire roof off and put a new roof on.  A totally unexpected expense.  We had to raid my daughter’s college savings for the roof (but it kept her room dry!).  So, we figured a 16% return on her money wasn’t too bad, so we’ll be paying that back this year.

8) Invest all unplanned or ‘windfall’ income this year – Last year, because of the rental properties, I got a sizable tax return.  I should get a reasonably good return this year as well (I’ve since adjusted my W-2 so that I’m not giving the government any of my money throughout the year.  Let them take my depreciation at the end of the year!).  At work, we are supposed to get a bonus this year.  Rather than pay for day-to-day expenses, all of that money will be invested, either in dividend paying stocks (to meet Goal #5 or #6) or in HBS.

Bike to Work: Day 1

I plan to keep a running tally on my Bike to Work (BtW) days as well as general updates on the ride.


Well, today was BtW-1.  I dropped the car off at the shop to get new spark plugs and front driver side wheel bearings.  Turns out the car also needed break pads, not an inexpensive day.

The bearings have always been a problem.  We tried getting them fixed in the past.  Based on how everything sounds now, I’m not convinced they were ever fixed before.  The car now moves so quietly that I almost think there is something wrong, but actually everything is working perfectly.

So, I had a few choices: 1) I could walk or run home from the garage.  The garage is about 3 miles from my house, so not a huge deal, but I should really be at work.  2) I could have my wife and daughter drop me off at work, then sit at the garage for 8 hours (or walk home from the garage), or 3) bike to work.

In late 2013, I set my mind on biking to work for ALL of 2014, but the weather at the beginning of this month nixed those plans.  I just didn’t have the cojones to bike in -10degF weather.  Today simply forced the issue.

I broke out my dad’s 1974-era Raleigh road bike, put on warm clothing, hopped on and started peddling.  Amazingly enough the bike carried me the whole way to work, all 7.5 miles from the car shop to Envinity’s Shop.  It took me 40 minutes to make the trip.  It’s a 15 to 20 minute drive, so 40 minutes by bike isn’t too bad.

When I was younger, I trusted my night vision and didn’t use any lights.  I can remember plenty of nights, biking home from parties down town.  I was lit, but the bike wasn’t.  I don’t know if my eyes are getting older, if I’m getting more sensible or what, but at dusk, I realized why I need to have my bike LIT up for safety – people in cars simply don’t see people on bikes.  Today, I only had my pack and the reflective strip in the picture above.  Anyway, to make a viable go at BtW, I will need to make my bike look like a UFO.  I’m going to try to stop in to one of the local bike shops on Tuesday to get some lights for the bike.

Total Savings in 2014:
16.3 Miles
0.76 gallons of gas
$2.66 (gas at $3.499/gallon)

When did I last use Calculus?



My dad gave me a t-shirt for Christmas that says something along the lines of “The last time I used calculus was….” (yes, I forget the last time I actually used calculus)  The picture above is of an Antibubble.  A science experiment of mine that I completed with my dad’s help when I was in eighth grade (the picture is from a physists website here).  Sometimes I wondered why my parents pushed me to try these crazy math classes and science experiments (radio active salt…yes, I’ve got that in the basement somewhere!).

What I learned from these math classes and science experiments was not that ice crystals are anisotropic crystalline solids, nor dV/dt = a (I think, I may have gotten that one wrong).  Rather I learned that it’s important to stick your neck out.  It’s important to try new things, push my personal comfort zone; it’s important to simply show up.

Too many times people are offered ‘deals of a life time’ and for whatever reason, are not motivated enough to act on these deals.  Three times in the past three months I have asked a friend of mine to have breakfast so we could hash through some business ideas of mine (I even offered to pay because I knew he was/is short on cash).  Each of the three times, we’ve set a date and time to have coffee.  Each time I would show up, I would wait 15 minutes before I got my coffee (and send him a text).  Thirty minutes after our meeting was scheduled to start, I would be finishing my coffee, wondering why he hadn’t bothered to show up.  Forty five minutes after we were supposed to meet, I would be packing up and leaving.

I was going to offer to put up the cash and half the labor in exchange for him putting in half the labor and being a partner on a fix-and-hold rental.

He just never showed up.

About that Deal…

Apartment Building


I’m always cruising around, looking for good deals on properties.  In late 2008/early 2009, I had seen the above property listed on CraigsList for $80,000.  The interior was partially gutted.  The commercial space (on the ground floor) was originally a church, then was the post office, and most recently had been used as a strip club (keep in mind, this is in the heart of Amish country in Centre County).

I lost track of the building and purchased a few of my own UFUO’s.  Last year, the building came on the market again, this time at $215,000, with four apartments and unfinished commercial space (the mirrors and poles had been removed…I’m not lying).

$215,000 was way too much for me to afford.  With the commercial loans I am able to use to finance my properties, I need to put a minimum of 20% down (my current bank actually requires 25%).  This is $43,000 at 20%, or $53,750 at 25%.  I had $20,000 borrowed from friends.  I decided that the next time this property came on the market, I would try to purchase it.

Well, no one bought it.  The current owner decided to drop the price to about $190,000.  Still too salty for me.  I forgot about it and focused on my duplex.  The building still didn’t sell, so the owner dropped the price further, this time to about $150,000.  I felt it was just out of reach, but getting tantalizingly closer.

A little over a week ago, the owner dropped the price to $125,000.  This would be a long shot, but would probably be within reach for me.  The down payment would be $25,000 at 20% down.  I am in the process of refinancing a few properties, and had hoped the two properties would yield enough appreciation to give me the 20%.  Well, if you followed my post, you would know that I had a rough week and the first property came in SIGNIFICANTLY shy of any ‘good’ appreciation (post is here).

I decided that rather than get too down about the appraisal, I just need to exercise some creativity when I submitted my offer.  The same day my appraisal numbers came in, I read the blog post “Why I Often Pay More than a Property is Worth” by an author I really enjoy, Ben Leybovich of Just Ask Ben Why.

Many times, when two parties are negotiating a deal, an adversarial atmosphere begins to develop.  One party doesn’t want to pay full price for the house the other party is selling.  Sometimes these reasons are well thought out, other times not so much.  Ben’s post outlines many times when he decides to pay more than the asking price for the property.

Why?  Ben actually does a great job laying out the reasons to offer MORE than the asking price.  One of the reasons to ask more than the asking prices was if the owner could offer owner financing and take a lower down payment (the light bulb went on inside my head).

What if I could offer more than the seller is asking but ask the seller to carry the loan until I can get ‘regular’ financing?  To get the normal 20% down, I could ask investors to invest in the building, I could pay down the debt, if the building appreciated I would ‘own’ the 20%, or lastly and most likely: simply saving every last cent I own.

So, the day I learned I wouldn’t have the cash for a 20% or 25% down payment on a $125,000 property, I pulled up my spreadsheet and went to town working on my numbers.  I came up with an offer for the building of $135,000 with 5% down, the owner to hold the mortgage for 5 years at 5%.  With this offer, the down payment would be $6,750.  Between my appraisal and some stock I own, I can scrape together $6,750.

I wanted my offer to really stick out (beyond the financing).  I decided to send a cover letter along to the owner.  The property had been a mess when he purchased it.  He fixed it and the property now looks great.  Rather than try the (fairly) standard, “Well, the paint is a little off.  You used plywood for the kitchen islands rather than stone. Etc”, I would tell the owner that he did a really nice job with the property and that I really liked it.  In fact, I liked it so much that I felt it was worth more than he was asking.  See my letter here: Letter for Blog_Owner Financing.

On the way out to view the property, my Realtor and I discussed the offer and how to make it as strong as possible.  When we stepped inside the property, the improvements were so nice, my Realtor was actually quite surprised that a) I was interested and b) the numbers worked so well and no one else was interested.

As soon as I got back from the showing, I immediately emailed my Realtor the details of the offer.  I asked her to hold off on actually submitting the offer until I had rerun my numbers.

On Friday evening, I confirmed the numbers and asked my Realtor to prepare the offer.  Saturday, we reviewed the offer and made one final tweak, we asked the seller to carry the loan for two years at 5% rather than 5 years.

I scrapped my piggy bank (literally rolled quarters) so that I had enough for the good faith money.  We submitted the offer at about 3pm on Saturday.  On Saturday evening, I updated my rent rolls and my personal financial statement.  I sent these updated numbers to my Realtor in case the seller requested additional information about my financial situation.

Then we heard nothing.  And nothing on Sunday.  And nothing on Monday either, until about three in the afternoon.  My Realtor called to make sure the seller’s agent had received the offer and to see if the seller needed any additional information.  Apparently, the seller’s agent was out showing the property to someone else.

At first I was a little miffed that the seller was showing the property to someone else, but because of my offer, I understand the desire to want more ‘traditional’ financing.  However, by the end of the day, the seller’s agent told my Realtor that the seller had submitted my proposed mortgage to his attorney.  I think means that my offer is at least being taken seriously.

We’ll see how this all goes and I’ll keep updating the progress.

UFUO #2: Fail?

[Sorry for the premature email blast earlier today…hit the wrong button!]

To say that yesterday was a disappointment is quite an understatement.  I knew I had two huge ‘at bats’.  I hoped to at least get a single from one of these two.  In addition to these two at bats, a third ‘at bat’ came my way.  In all three cases I struck out.  Sort of made me want to go out and scream “WTF!?!?”    Trying to keep my head up and make the best of disappointing situations.

At Bat #1: I met with a potential investor to discuss a multifamily investment.  I was hoping the investor would be open to the idea of working together on this project.  The property is 80% rented and currently makes a profit.  Fixing and renting the last unit would only add to the cash flow.  Once the conversation turned to financing on the project, the entire discussion got frosty.  I was fortunate enough to have worked up an ‘alternative’ financing package that we were able to talk through, which eventually lead to a thaw of our conversation.  We left on good terms, will meet again in the future, but man, I really whiffed this one.

At Bat #2: I met with the boss today to discuss moving my Day Job in a different direction, but within the company.  Essentially, my proposed plan is to purchase run down houses, fixing them and holding onto them for rentals (sound familiar?).  I was hoping for some buy-in to start this process this year, including the purchase of at least one property.  While I wasn’t entirely shot down, the initial reaction was “let’s discuss it this year and maybe consider moving this direction in 2015 or 2016”.  While not a total loss, it wasn’t the reaction I was looking for.  I’m searching for creative ways to make this shift a reality this year.

At Bat #3.  I knew this ‘at bat’ was coming at some point, but didn’t anticipate it happening on Thursday.  I’m in the process of refinancing UFUO#2.  Gross receipts (monthly) are $1,170, which is a FAT paycheck.  Obviously, loans, insurance, taxes, etc all eat into that and the profit is significantly less, but it still leaves a tidy sum at the end of the month.  As part of the refinancing process, I pulled all my receipts to see how much I actually spent improving the property.  Net receipts were about $15,000, excluding my time.  Given the improvements to the property, I wanted to at least cover the cash expenditure on the property.  Well, the appraiser determined the property was only worth $10,000 more than when I purchased the property.  At 75% LTV, I’m only able to access about $7,500 of the improvements.  Not only is this a frustration, it significantly slows my ability to continue investing this year, which compounds my frustration on a bunch of levels.

While I could be really down about yesterday, I instead chose to do my best imitation of Brian from Monty Python’s “Life of Brian” (If you need a refresher, check here).  I returned home, consumed an adult beverage and pulled out the spread sheets to review.  I also started to question some of my personal investment theses.  Do I really need to continually purchase extreme fixer-uppers?  (Answer: No).  Should I focus on single family fix-to-rent projects?  (Answer: Probably not in the markets I am currently able to afford.)  Should I look for capital appreciation in these B-/C+ neighborhoods?  (Answer: Probably not, look for excellent cash flow).


What did I learn from the spread sheets?  Well, for the markets I am currently able to afford, a duplex, triplex and even a 4-plex costs marginally more than a single family home.  Sure, you have to deal with exponentially more resident issues (MY NEIGHBOR JUST BURNED SOME POPCORN…CAN YOU FIX IT FOR ME?  yes, I really got this phone call this week).  However, even after dealing with the resident issues, duplexes, triplexes and 4-plexes usually offer significantly more cash on an annual basis.  In addition, with smart purchases, one or two units will carry the whole building, meaning that additional units simply add to the bottom line.

While continuing to look on the bright side of life, my Realtor and I toured the apartment building today.  The building is in AWESOME shape; the price is perfect; the property cash-flows (at it’s current 80% occupancy); the property is in a market I want to move into; and, after our tour, I learned that the rents the seller’s agent had advertised were LESS than the actual rents (which I verified through signed leases), meaning there is even more money dropping to the bottom line than originally advertised.  This single property would satisfy all of my 2014 investment goals.  Using my cash flow projections, I would then enter 2015 with a huge (for me) war chest ready to begin purchasing additional rental properties.  My Realtor jokingly said “I don’t know Liam…this property may be in too nice of shape for you to buy!”

My biggest hurdle for this apartment building is the down payment.  I have some ideas and will be submitting an offer, probably Saturday, with my ‘creative’ package.  We’ll see if the current owner is interested in ‘creative’ offers.  More details to come as this project progresses.

In addition to seeing the awesome apartment building, I had a major epiphany regarding investments with my Day Job.  One of the problems with my Day Job is that the company has nothing to capitalize (use as collateral on a loan), so when we pull loans, the banks put a lien on owner’s houses.  If the company were to collapse, some owners could possibly lose their homes…not a pretty prospect.  My idea is to enter into a partnership with the houses-on-the-line-owners and myself.  We would look for fixer-upper single family homes and do the old fix-and-rent.  Then, rather than refinance the property, we would use the equity in the property to reduce the houses-on-the-line-owner’s exposure by ‘swapping’ the rental property’s equity for the owner’s equity.  Obviously, it’s a two way street.  The partners get access to the equity; in my proposal, I would get access to all the cash flow (depreciation would be split).  I’ve pitched the idea.  We’ll see how it is received.  (However, after seeing the apartment building today and the associated building’s numbers, I actually question this partnership pitch, but I should probably have a few lines in the water).