Escrow Has Closed!

I am now the owner of a rental property in Tulsa!

Rental #1: Docs Signed, Money Wired

I've signed all the documents for Rental #1 today, had them notarized, and mailed them off to the escrow company this morning. I've also wired the funds. We're all set to close on Monday, a couple days early!

Phone Excise Tax Refund Not Being Claimed

One of the huge advantages of investing in real estate is the special tax breaks you can take advantage of. Many people invest in real estate solely for those reasons and yet, they fail to take advantage of even the simplest tax saving strategies. For example, msnbc.com is carrying an Associated Press story about how roughly one-third of the early tax returns filed so far (over 10 million of 31.8 million) have failed to claim the telephone excise tax refund offered this year and a surprising number of those were returns filed by professional tax preparers. Granted, itemizing the bills might be a bit much for most people, but claiming the standard credit is as simple as filling in one additional line on your return. To me, there is no excuse for a tax professional to miss this deduction. If yours doesn't claim it for you, fire them.

The standard refund is between $30 to $60, depending on how many dependents you are claiming. If you have your phone bills from 2003 and later, you can itemize and get a refund of the actual amount you paid plus interest. I actually do have all those bills and spent an hour or two last weekend adding up amounts. My total: just over $250! And this is a tax refund, not a deduction, so it is a dollar for dollar reduction in your tax bill. I should state that the reason my credit was so high is because I have four phone lines, so your credit might be less. Use IRS form 8913 from the IRS to itemize the credits. The instructions for filing out the form are here. If you are taking the standard deduction, you do not need to use a special form. I should also note this credit is good for the 2006 tax year only.

Rental #1 Closing On Monday

I got the HUD for my Tulsa property today and, surprisingly, I didn't find any errors on it! I think that's a first! Assuming it's okay with the seller, we're going to move the closing up to Monday instead of the 28th.

On another note, another one of my arbitrage plays paid off today. Picked up 20 shares of HQSM back in December for 21 cents a share, got reverse split down to 1 share, received my 99 round up shares today to bring me to 100 shares, and I sold at $6.41. Including commissions, that's a profit of $622.79 in 79 days and and annualized ROI of 25,645%. Unfortunately, these arbitrage plays are getting harder to find. I haven't found any since the first of the year.

Rental #1: Insurance For Tulsa Lined Up

Since I plan on getting another rental property this year, I figure I better start numbering the properties. This will be Rental #1. (Houses I will be rehabbing are numbered House #x.) I'll also start using labels for my posts for easier searching.

I called the insurance agent that the current owner uses for this property to get insurance for when I own it. The quote given me was a pleasant surprise: $388 per year. If I want to add water damage protection due to broken / frozen pipes, it's $419 a year (assuming the house qualifies). That price includes basic coverage for the cost of the house plus $100,000 in landlord liability coverage. The good news is when I ran the numbers for this property, I used the insurance cost the seller is paying, which was $464. Don't know why my costs are cheaper. Maybe I have a better credit score?

Bad Loans Being Returned

MSNBC has an interesting article today about how large banks are forcing mortgage originators to buy back their bad loans. The story says that some banks have a contractual right to force the mortgage originators to buy back bad loans - loans that default early in their life or have mistakes, such as flawed property appraisals.

We all know the increase in interest rates has caused an increase in foreclosures. This is the first I've heard that the bad loans can come back to hurt the mortgage originator and not the current note holder. Seems like the increase in foreclosures is getting so large, no one wants to be left holding the bag.

I think I have to side with the banks on this one. Mortgage originators relaxed their standards so much, you could get a practically get a loan just as long as you were breathing. This is obviously the fault of the mortgage originators. But on the other hand, surely the banks get some information about the mortgages they are buying. They must have had some clue about the risks they were taking on. Unfortunately, I don't know enough details about the note buying and selling process to have an opinion on the banks' acquiescence in this, so I have to go back to blaming the folks who let the loans be made in the first place.

Title Issues On Oklahoma House

I spoke with our escrow officer today and she told me about two title issues on the property. Back in 2003, the then owners had a mortgage that was assigned to another company and then reassigned to a second company. Two of the recordings of those assignments were found to be defective. In both cases, the appropriate person in the mortgage company did not sign the documents. (Oklahoma law stipulates that only specific corporate officers are able to officially sign certain documents.) The escrow company has attempted to contact the two companies to get this corrected, but one company is out of business and the other is not responding to requests.

The way to clear the title in cases like this through a Quiet Title Suit. The procedure is fairly straightforward: a lawyer is hired and he publishes a notice in some newspapers and journals asking anyone who has interest in this property to come forward and contact him. If no one responds, the lawyer then goes before a judge and explains what he did and asks that the judge declare the previous mortgage holders interest in the property be voided. Once that happens, the title is clear.

This whole process takes 60 to 90 days, during which time I will not be able to sell the property. This is fine, since I wasn't planning on doing that. I will also not be able to refinance the property using another escrow company. However, if I use the same company, they can get started on it because they would still have the abstract and know the history and where the title clearing process stands. So this means I may have to wait another 2 or 3 months before refinancing, which I can live with. Meanwhile, the escrow company will not distribute my funds to the seller until title has cleared.

This just goes to show no real estate deal is ever the same. There is something unique about each one and, hopefully, you always learn something new.

Trouble With Louisiana Project

My hard money lending investment in Louisiana has hit a bit of a snag. There has been a big shake up in the structure of the LLC that is handling the renovation of these office buildings. The guy who was in charge has been bought out by another investor. The old manager just wasn't getting things done and seemed to have a very hands-off approach, resulting in delays. The new manager and the remaining principles are hands-on, micro-manager types, so I expect things will start moving forward much more quickly.

The snag is that the new manager wants six months of no payments in exchange for a higher interest rate. He is apparently in a bit of a cash crunch right now and is in the process of selling some of his other commercial properties. This guy is worth somewhere around $40 million and Les, one of the other investors, thinks he is a "smart cookie." In fact, he thinks this guy knows more about real estate than he does (and that's quite a lot). He also feels the guy will be good for the loan.

But since the February payment is late, technically the mortgage is in default. We (the other investors and myself) are currently voting on the course of action to take. We can restructure our loan and give the guy 6 months of no payments or we can start the foreclosure process. In Louisiana, the foreclosure process takes about 9 months. The mortgages are for $700,000 each on two buildings and the buildings are estimated to be worth roughly twice that.

So, do we delay payments for 6 months and get a higher return after that or delay payments for 9 months or more and get our principle back? In actuality, if we foreclose, it'll probably be a year or more before we get any principle back because we've got the 9 month foreclosure window, then more time to market and sell the buildings. Of course, my interest in the property could always be sold to someone else so I can get my money back sooner.

I voted for the 6 months of no payments with a restructuring of the note to a higher interest rate.

On a related note, our mortgage on the parking garage and lot is in the process of being refinanced with a conventional lender and we will get our investment back from that. I'll get $30,000 back, leaving $120,000 invested in the other two buildings.

This is just the simplified version of the saga. The whole thing is like a soap opera and it really boils down to incompatible people trying to work together. That didn't work out. But as Les says, when there is trouble, I make money, so I'm not too concerned.

Lots Of Action Today

I saw lots of action today with my reverse split arbitrage stocks and a bit more progress in my Oklahoma house purchase.

Although I said back on January 29 that my PAQN reverse arbitrage play was completed, this turned out to be a bit premature. I made this play using two brokerages - Scottrade and Schwab. Scottrade got my round up shares on the 29th and I sold them. I had assumed that Schwab would get them shortly thereafter. Turns out, it took over a week longer. Today they finally showed up in my account and I sold. I didn't bother to calculate the exact return like I did for the Scottrade sale, but it was probably a little better because I sold this time at $1.25 instead of $1.15.

In other news, I finally got to clean up some leftovers from a failed arbitrage play. Back in November, I made an arbitrage play with Dolce Ventures, DLCV. This company underwent a reverse split and name and symbol change. Their new symbol is SGAS. For whatever reason, it seems their Board of Directors decided not to award round up shares after the split, so I was left with just 4 shares of SGAS in each of three accounts. For most of the time after the split, the stock traded around $5, so it didn't really make sense for me to sell since at that price, I wouldn't cover my costs and initial investment. So I just held on to the stock. A noticed a week or two ago that the price jumped to $10 for a brief moment and then, maybe an hour later, dropped back to $5. Hmm.. So I put a limit order in to sell at $10 and waited. Today, my order was executed and I sold my shares in all three accounts at $10.02. I ended up making about $2 on the play, but it's better than losing money. And considering the arbitrage play failed, I'm happy to have made even $2 on it.

On the new rental property front, my new property manager and I are clearing up some details regarding the management agreement. Our escrow officer is out of the office this week, so I don't know yet if she received the paperwork and earnest money I sent to her last week. No other problems on that front. I still need to contact the insurance agent and mortgage broker to get those tasks moving forward.

More Income From REIT Stock

This morning, I wrung a bit more income out of one of my stocks by selling covered calls. If you've ever played Cashflow 202, you probably have bought options - calls and puts. A call gives you the right to buy a stock at a certain price by a certain time. When you sell a covered call, you are selling someone the right to buy the stock from you for a certain price by a certain time. Covered means you actually own the stock that you might have to sell to the call buyer. (A naked call means you do not own the underlying shares, so if the call buyer wanted to exercise his option and buy the shares from you, you would first have to buy them from someone else. This is a fairly risky play because if the stock rises in value, you would have to pay more for them than what you agreed to sell them for.)

One of my favorite stocks is a real estate investment trust that trades under the symbol SFI. I've been a holder of this stock for 6 years and love the company. Their business is making loans on commercial properties across the country and because they are a REIT, they must pay out almost all of their profits to their shareholders each year in the form of dividends. Thus, this stock combines two of my favorite investing concepts: real estate and cash flow.

The stock is generally a non-volatile one. The price doesn't jump around too much, so options generally don't have a too attractive risk / reward ratio to me. However, I noticed the price has had a bit of a run-up lately, so I put in a limit order to sell some calls. This morning, that order was filled and I sold 5 March 17 calls with a strike price of 55 for $1.25 per share per contract. One contract is good to buy 100 shares of stock, so I've sold someone the right to buy 500 shares of SFI from me at $55 per share on or before March 17. For this right, they paid me $625, or $1.25 per share times 500 shares. If the stock price on March 17 is below $55 per share, their contract is worthless (since they can buy the shares on the open market for less). If it is above $55, then they can exercise their contract and I must sell them the shares at $55 per share. But because they have already paid me $1.25 per share for the option, I actually make $56.25 per share.

Obviously, I hope the price on March 17 is below $55, but even if it isn't, I'm not worried. It can go up to $56.25 and I still won't be losing money. And if I do have to sell, I plan on buying the shares back anyway, since I want to keep holding this stock in my portfolio.

The nice thing about this is that this is in my Roth IRA account, so all the money I get, both from regular dividends and from selling the options, is tax free!

Options on stocks are just like options to buy a piece of real estate. You collect a fee for giving the option buyer the right to buy your property within a certain amount of time. Just like in lease option deals, I hope the option buyer never exercises the option to buy because that nets me more money and I can turn around and sell someone else the option to buy, thus bringing in more income.

Note: This is not an offer to buy or sell any securities. Do your own due diligence. Figures do not include commission costs.

OK Property Taxes Will Be Higher Than Expected

I did some more research today on property taxes for the Tulsa property I am buying. My original estimate for taxes was $371 per year, which is what the current owner is paying. Turns out, that figure is because the owner was able to buy the house so cheap. From what I can see on the Tulsa County Assessor's website, property taxes are calculated based on the purchase price (for new home owners) and the school district the property is located in. This property is located in the T-1A school district. Based on their Tax Estimate Calculator, my taxes will be about $1,000 per year. That's almost three times the current tax bill!

Using this new figure, it looks like my cashflow will be around $140 per month instead of $200 and my ROI will drop to the 16% range. This is assuming a standard loan amortized over 30 years. If I use an interest only loan, I can increase the cash flow by about $60 a month, which gets me back to my original numbers. However, I am very leery of interest only loans, so I'm not sure I will go this route.

Details Of OK Purchase

Per Doug O's request, here are some of the more pertinent details of the purchase. This is a three bedroom, single family house that is currently leased through November 1, 2007 at $750 per month. It's 1,815 square feet and has been recently remodeled. Purchase price is $77,000. Comps are as high as $89,000. Taxes are around $375 per year and insurance is around $465 per year. Based on my calculations, I think I can cashflow near $200 per month with an ROI of around 20%.
The seller is going to be the property manager for 10% of the gross monthly rent. I trust the property manager. I think she's one of the hardest working people I've met. In fact, if you read Building An Empire, you know the person I am talking about!