Villa Park Nanny Suite Update

It's almost a house again.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-23.

Those windows look so much better than what was there before. This won't even REMOTELY resemble its before state!

-Suna

The Villa Park nanny suite is starting to look like a building again. As of this morning, it is officially dried in. Our GC will finish wrapping the building in Tyvek (or a similar plastic) to prevent any damage to the OSB siding. Then the city inspectors will give us the go-ahead to continue building the structure. What a wonderful Christmas present that will be.

If all goes well, the nanny suite will be on the rental market by the end of January.

Streams of Income from Rental Properties: The Two Examples and Cash Flow

Cash flow is not the same thing as return on investment.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-20.

Ten days ago, I told you I would give you two examples of how to make money from rental properties and that I would use these examples in a series this series of articles. Things got busy after that, but here is the article laying out the two examples. We’ll also talk about how these two examples cash flow.

I could use real-life examples for this series, but the math would not be consistent between the examples, which could be confusing. So I’m going to use hypothetical examples for clarity. It will be much easier to get the basic principles across if the underlying assumptions are the same.

First, a couple of definitions. Investors talk of two kinds of cash flow:

Positive cash flow

Your rental brings in more money each month than your mortgage payment, including taxes, interest, and insurance (You don’t usually consider maintenance and depreciation at this point.)

Negative cash flow

Your rental brings in less money than its mortgage. (We’ll talk about why negative cash flow is not necessarily a deal breaker as this series progresses.)

	Positive Cash Flow	Negative Cash Flow
Purchase price	$100,000	$100,000
Down payment (25%)	$25,000	$25,000
Monthly payment	$550	$550
Monthly rent	$950	$540
Gross cash flow	$400	$-10

It should be fairly obvious that these examples make a couple of unrealistic assumptions.

• Why pay 25% down? You don’t have to, unless you’re getting conventional financing, which is probably the only way you’d get a 5%, 30-year mortgage today.
• What about other closing costs? We’ve conveniently ignored them to keep the math simple.
• Why would anyone take on a property with a negative cash flow? Like I said, we’ll get to that.
• Negative Cash Flow
• Cash flow can be the least important reason to buy a rental property. In some cases, it can even be advantageous to buy a property with negative cash flow—that is, at least initially. In our example, losing $10 each month on rent returns about -1.9% on your initial $25,000 investment. Kinda scary, huh?

Positive Cash Flow

But let’s take a more common example, one with moderate positive cash flow. If you could rent our example house house for $950 (or $400 more than your payments), you would make $4,800 profit on that house every year, assuming no expenses other than the taxes, insurance, and interest wrapped into the mortgage payment. (It can happen easier in Central Texas than in some other markets.) That’s a 19% annual return on the $25,000 you invested to buy the house.

For some investors, that return is good enough.

Results

This negative cash flow example, could be a perfect example of applying the martial arts concept of winning by losing. Over time, the other advantages of ownership can overcome the initial cash flow deficit.

Wouldn’t it be worthwhile to lose $480 (or even $1,200) per year for five years if you would realize a $10,000 profit at sale? While we can’t say with perfect certainty that a given property will appreciate, history says it will if you can afford to hold it long enough.

What if you inherited the low rent with the property but you could increase the rent at the end of the lease? Maybe next year, the property would be able to generate $600 month without spending any more money on it. Then you’d be making $60 a month instead of losing $10. And what about inflation? Over time, inflation will probably push up the rent, but your mortgage payments won’t go up except to cover the inflationary effects on your taxes and insurance. Your cost of money is locked in for 30 years.

So the important thing is not necessarily positive cash flow today, but a cash flow you can comfortably live with knowing that it will probably improve with time.

I’ve been guilty of looking only at cash flow, and I have erroneously sold properties because of that shortsighted view. I’m focusing now on buying in growing areas where population density will increase the value of my holdings. That will improve my bottom return on investment even before I take tax reduction, appreciation, and debt reduction into account.

I’ll talk about these income streams in future articles.

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Posts in this series:

1. Streams of Income from Rental Properties
2. The Two Examples and Cash Flow
3. Tax Reduction Through Depreciation
4. Equity Growth

The Importance of Due Diligence

The wall art was the most interesting thing about the house. Other than the artwork, the interior of the hose was a disaster.

Even well-done pretty graffiti scares off retail buyers and drives down the price of an investment property. You can paint over it. It may take several coats of Killz, but you can.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-18.

I got an email from a wholesaler today offering a property in Round Rock for $90-thousand. I performed the desktop analysis quickly and became very excited. While I couldn’t find anything that had sold on the street in the last year, two houses on the next street over had sold for just north of $200-thousand. That left a lot of room in the deal to cover whatever redevelopment the house might need.

I told the wholesaler I wanted to make an offer contingent on a walkthrough of the property. The wholesaler said we had to close by Christmas, and I agreed to the stipulation. He mentioned that he had a bid for $7,000 to cover foundation repair. Other than that, he said, all the house needed was paint.Even allowing another $5,000 to cover accidental damage to the plumbing during the foundation repair, I was still happy with the deal.

The house looked pretty good from the outside. The schools across the street made it feel welcoming.

Boots Are Made for Walkin’

Russell and I met at the house during his lunch hour. The first red flag went up as I drove to the house. The comps on the next street turned out to be at least 20 years newer, and all of the houses on that street were much more appealing than any of the houses on the subject property’s street. My comps were not really comparable, but I couldn’t tell that without seeing where the main street had been extended for the newer development. Even the pictures on Google Maps made the houses look comparable.

Location, Location, ... Or Not!

On the other hand, the subject property was across the street from two schools. Location and location.

We walked the property and found that the exterior would need more than just paint. A dog had trashed the back door. Some of the eves and facia were rotten. No big problems but enough to start adding up.

Inside the house was in really bad condition, but the demo had already been started. All the carpets had been removed when a water pipe broken and flooded the house. A note on the kitchen cabinet said that repair was in process.

I won’t go into all the details, but the repair estimate came in at between $35- and $40-thousand.

The final analysis showed that we were likely to lose money on this deal. So we walked away.

To Buy or Not to Buy

When I got back to the office, Carol had run a much more accurate CMA than what I had pulled for the desktop analysis. She estimated the ARV of the house at between $140- $160-thousand. We determined that the deal was just too risky, even if we could get the house for $80-thousand. One of our mentors, Shenoah Grove, agreed. So we walked away from another property.

But the wholesaler said he had two other investors willing to take the property at full price. I wish them good luck. There are plenty of people with money to chase these deals—many of them are too willing to take on a project without fully understanding the numbers. No matter what you see on shows like Flip or Flop, those people are professionals. They almost always know what they are getting into before they buy the house, and they walk away from 20 or more deals for every project they take on.

Here is what I want you to take away from this article:

While I won’t accuse any wholesaler for outright lying, their numbers are almost always overly optimistic. This business is risky enough without walking into a deal without doing your own due diligence. Always include a contingency for unknown factors. Every project has them, but you can’t know what they are before it’s too late.

I’m going to keep my eye on this property to see what happens to it.

Dogs and Doors

Harvey can’t believe Brody would attack my foot. Rose watches Harvey.

The garage provides enough space to stain all the doors and let them dry.
The stain on the doors matches the bookcases and trim in Suna’s office. It contrasts well with the green walls.

It’s a tug of war.

We expected more.

But with one thing and another,

We were trying to outdo each other.

—Paul McCartney

Rose and Brody have accepted Harvey. Rose is so easy going, she was never at question. I was more concerned with how the two mail adolescents would get along.

Brody, who has been with me since he was six weeks old, is comfortable enough with me to use me as chew toys—especially my socks...especially when they’re still on my feet. Harvey looks on in disbelief every time. Sometimes he looks at me as if to say, “I would never treat you like that, New Daddy.”

Doors

The painter lined up the new doors in the garage to stain. They looked almost like they were floating if you ignored the bits of wood at the top and bottom that held them together.

The garage made the perfect place to stain the doors. It had plenty of room to work, and it didn’t matter if the overspray hit the floor or the walls, not that there seemed to be that much overspray. Finally, leaving the doors open a bit provided plenty of airflow to encourage drying.

Once the stain dried, it is a perfect match for the bookcases and trim installed throughout the house. It stands out nicely against the green Suna chose for her office. It’s darker than the caucasian color of the downstairs, but it may be a bit too close of a match for the bamboo we installed upstairs. It does stand out somewhat against the chocolate color of the master bedroom and the orange of the master bath.

 

Raising the Roof

That gap shows how much the house was raised.

That’s one of the big old beams poking out!

Foundation in process

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-15. This is Sue Ann’s post. I’m including it here because it talks about one of our personal projects, and I wish I had written it.

Between (among?) all of us, we’ve done a fair number of remodels and rehabs. However, the one we are currently working on, Villa Park, has to be unique. We are literally having to raise the roof on this house!

We knew all about the drainage issues (see our post on November 25), so we knew we’d have to do something. Turns out we have had to completely remove the foundation, which was crumbling, and put in a nice, new up-to-code one. And for that to happen, the house had to be 8 inches taller! Take that, poor drainage!

This required some engineering consultation and careful planning. They literally had to cut the house horizontally and prop it up, then reinforce it so that it will be stable (and meet code, cause we’re in Austin and they care! We also don’t want it falling down on people.) The gap in the photo at left shows how much higher the house is now. The one at right shows the beam, and what has to be repaired on the exterior for it to look like a real dwelling again.

Once the house was all stable and the right height, a great deal of work was done to create a new, stable foundation. All the pipes for the plumbing were put in first. Road base and other material was placed at the bottom, plus lots of rebar. The third photo shows that in progress. The vapor barrier has been placed over half of the foundation. Now it’s all covered.

I hear the concrete was poured already, or is being poured as we speak.

The foundation is poured. This is a step.

EDIT: Yes we have a foundation. I’ll put that picture at the end. FINALLY we can turn the shell of a building into a really nice 3 bedroom, two bath dwelling! This is definitely not a rehab that is quick and easy! But, it will last and last, and most importantly cash flow!

PS: Lee or one of the contractors would have a lot more technical detail to add to this. Also, thanks to Tony G. for the photos.

A New Harvey

Sara pets Harvey at the Annex
“What’s that other dog doing over there. He looks nice.”

“Thank you for feeding me. Will you be my new daddy?”
You can see the poor boy’s ribs through his coat from the front. There are also two wounds on his side where he was either shot or impaled by something.
I don’t know how anybody could abandon such a sweet boy to starve to death. There must have been something serious going on in their life.

That’s just the way it is

Some things will never change

That’s just the way it is

Ah, but don’t you believe them

—Bruce Hornsby

When we went to our friend Janet’s house for Thanksgiving, our neighbors were there, too. Ralph and Sara told Suna and me about this dog someone had dumped at the Rattlesnake Annex.

People dump dogs in the country all the time. I guess they think the dogs can survive by hunting or something. But most abandoned dogs are shot when they try to get at someone’s livestock or chickens. Almost all of the others starve to death because they have to learn how to hunt. If they’re abandoned, they don’t have time to learn before they starve. Only a few get rescued.

I didn’t think too much about another abandoned dog. Ralph or someone would probably put him out of his misery before he suffered too much. So I was surprised when Ralph called this morning to tell me I needed to “come get this dog.” He was still at the Annex, and Ralph had apparently been feeding him enough scraps to keep him going. Ralph explained, “He waits at the gate everyday for his people to come back and get him. He only leaves long enough to find some water or maybe a little to eat.” Ralph said the dog was understandably shy and hard to get close to. It had taken him a couple of weeks to get him to take food without waiting for Ralph to leave.

When I pulled up at the Annex, Sara was petting him. They had given him a bone with some meat on it to chew. I talked to them a bit. When he saw me leaving, he walked calmly to the car. When I opened the door, he jumped in, crawled into the passenger seat, and sat down looking at me like he was trying to say, “Okay. Let’s go home now.”

I took him home, and Brody accepted him without question. Suna calls him Harvey. Or Starvey Harvey because he’s so starved (only 19.2 pounds, although his frame will support at least twice that). To keep from making him sick, I fed him only about half a cup of dog food, which he ate greedily. When he was done, he jumped on the couch, laid his head down on my lap, and went to sleep.

That is not normal behavior for a rescue. I’ve spent the better part of a week getting a rescue to let me see them. I’ve never been accepted so quickly.

I guess Harvey is home.

 

Dogs Get Ready for Yule

“Yeah. I’m a big shot real estate developer, too. Mnya!”
“I got this thing around my neck. Sigh.”

“Hey! My food is here, but the action’s over there. I’m torn.”
Suna pets Brody.

Not a lot to say today. I just wanted to share some pix of the dogs, especially since Suna dressed Brody up for Yule.

 

Streams of Income from Rental Properties

Rental properties build your wealth through four different income streams: cash flow, tax reduction, equity growth, and appreciation.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-05

I seem to always be talking about redeveloping distressed properties, but I also have a portfolio of rental properties. Owning rental properties is the surest way to build wealth that will outlast your lifetime and ensure your family’s well being should something stop your ability to earn a living.

Notice in the last paragraph, I said, “wealth building” and talked about legacy. I specifically didn’t say, “Cash Flow” because that is only one benefit of owning rental properties, even if it’s the one most investors focus on.

Rental properties can provide the following ways to create wealth:

Cash flow

The amount of money the property takes in over the cost of ownership on a monthly or annualized basis

Tax reduction

The amount of income you can shelter simply by owning properties

Equity growth

The increase in the net worth of your properties over time through debt reduction (paying off the mortgage)

Appreciation

The increase in the value of your property through inflation or market dynamics

Over the next few posts, I’ll talk about each of these benefits. We’ll use an oversimplified example of a rental property you purchase for $100,000 to show how simply owning and renting a house can make you much, much more money than you’d think—certainly more than by leaving $25,000 in the bank. The next post in this series sets forth the two examples I use and talks about cash flow. You may not believe it, but I’ve had these conversations with my tenants. Unlike many “landlords,” I really don’t want long-term tenants in my houses. There are sensible reasons to rent for a year or two, but I really believe in the win-win situation. I prefer tenants who have a long-term plan to secure their future. I realize not everyone wants to be a home owner, but I want my tenants to understand their options. I believe they respect me and my properties more if I tell them the truth and try to help them succeed.

If, after reading this series of blog posts, you don’t believe you should be finding ways to invest in rental properties, talk to me about buying your house.

Posts in this series:

• Streams of Income from Rental Properties
• The Two Examples and Cash Flow
• Tax Reduction Through Depreciation
• Equity Growth

Villa Park Progress

Still only slow progress on the foundation.
The exterior walls are still all temporary, but we’re making progress on preparing the footing to receive the permanent ones.

The site looks good—from a distance. When you get up close, you see what a mess it is.
Brody doesn’t like being in the back. He’d rather ride in my lap, but that’s not happening.

Work continues on the Villa Park foundation. The piers are mostly done, and the exterior footings are down. That means we were able to set the building down.

It’s a relief not to have the building floating in the sky—even if we don’t have the “real walls” in place.

 

We Have a New Project!

Blue Ridge on the day we closed on the purchase.

This post originally appeared on the Hermit Haus Redevelopment website on 2015-12-03.