Taming The Paper Beast (Updated)

I have three filing cabinets in my home – a tall four drawer letter size model for personal stuff, a two drawer lateral file cabinet for my real estate-related documents, and a two drawer letter size filing cabinet for my hard money lending documents. The four drawer cabinet is full, the lateral cabinet is getting there, and the two drawer one is still relatively empty. I’ve thought about going paperless before, but have always been somewhat afraid to pull the trigger. I did not want to give up the security of a physical bill or invoice. Over the past several months, I’ve become more comfortable with electronic documents, as I’ve used them more and more. And now, I’ve been inspired by Cliff to try to go paperless as much as possible. This means not only signing up for paperless statements from my utilities, brokerages, etc., but also converting my existing documents to electronic versions. The benefits are too great to ignore – I can rid myself of reams of paper and at the same time, create records that I can store longer and move easier than paper records.

I already have the needed equipment – a legal-sized scanner with auto-feed capability, a shredder (for destroying documents after I have scanned them), and a computer. The second important piece of this puzzle is a method for backing up the electronic copies. I currently have an external drive that I back up  my computer to daily, but I also want an off-site backup location in case my house burns down. I think I’ve decided to go with SOS Online Backup. They are definitely not the cheapest – they charge $50 a year for 15 GB of storage, whereas most other companies give you unlimited storage space for the amount. What swayed me to them was their great reviews from PC Magazine and what seems to be their ease of use. I also like that they can back up files that are in use, which is important because I leave my email client open all the time and the .pst file will still be able to be backed up. In addition to my electronic documents, I will also be backing up my digital photos, which are priceless. Right now, I have about 8 GB of data. That leaves another 7 GB for my new scans. I figure if I need more and SOS can’t provide it, I can always switch to another online backup provider.

An added benefit of switching to electronic records is that now everything will be searchable. Windows Search can, with a plug-in, index the contents of PDF files, which is the format my electronic records will be in. The old documents I am scanning myself will not be indexed because I will just be making images of them and not running any OCR software against the images, but going forward, the documents I get from the companies I deal with will be searchable.

The final step of this process is deciding on a filing method. How will I organize these files on my hard drive so that I can find what I need quickly? I actually read an article about this a week or so ago, but I can’t find it again. I can’t even remember if I read it online or in an actual magazine. Anyway, the typical choices in how to file come down to two methods – grouping by date or grouping by type. In other words, should I put all my invoices from January in one folder, or all the invoices from my electric company in one folder, all from the gas company in other, etc.? I’ve opted to go for the later method. I’ve also broken it down somewhat more by breaking out documents I only retain for one year and those I want to retain forever. Here is an image of the folder structure I’ve come up with. It’s not perfect and there are some holes – for instance, what if I get a combined bill for different services, such as internet and television from one provider? That doesn’t really fit into this scheme (unless I made a new folder labeled “Entertainment”), but I currently don’t have any situation like that, so I’m not going to worry about it. This will probably change a bit as I add items, but I think it’s a good place to start.

I also want to come up with a naming convention that makes it easy for me to identify what the contents of the document are without opening it. I’ve decided on the following: Company-N-Description-MMYYYY. “Company” will be the company the document is from, “N” is a single letter that will indicate if the document relates to me, my wife, or my daughter, “Description” will be a brief description of the document, and “MMYYYY” will be the month and year of the document. For example, a scan of my Roth IRA statement for this month would be named “Schwab-S-Roth IRA-042010.pdf”

With all the planning out of the way, I’ve started contacting the companies I have accounts with and switching to electronic records where possible. The longest part of the process will be scanning in all my old paperwork. And I still won’t be completely paperless. You’ll notice in the above folder structure that there is no spot for tax returns. I’m still hanging on to those in paper form for a while. Old habits die hard.. I also do not have any spot for my business documents – real estate buying and selling contracts, my business banking statements, etc. Those I’ll add in later. For now, I’m going to concentrate on my largest pile of paperwork, which is personal stuff. After that, I’ll move on to my business stuff, and then, hopefully, to stuff like owner’s manuals and documents for big ticket items I’ve purchased like entertainment systems, televisions, washers and dryers, etc. And at that point, I may be able to get rid of a filing cabinet or two!

And in other news, as I predicted a little while ago, hard money loan #4 has been paid off. I received the final payment yesterday.

Update: I tried the free trial from SOS Online Backup and have decided I don't like it. My first attempt at backing up files resulted in a status message that said "xxxx files backed up, 8 files not backed up. They will be backed up next time." What? They didn't say why or which files were not backed up. Their software does not have a log viewer. They have a log, but it simply gives the date and time of when the last backup was run. I was able to hunt around on my PC and find a more detailed log that listed the files that were skipped, but that info was buried amidst a bunch of other stuff. I have instead gone with Carbonite. That is the vendor my work uses, so I've got some experience with their product. For $55 a year, you get unlimited storage. I also like that their software gives you an option to put a colored dot on file icons. Green means the file has been backed up, yellow means it has a back up pending, and no dot means the file is not being backed up. If you are interested, Google "Carbonite coupon code" and you will find a link you can use to get a 10% discount.

One loan ends, another starts.

Sometimes everything just falls into place at the right time. Hard money loan #10 was paid off and just a day or two later, another opportunity came up. I can roll my funds into that one with no time spent not earning interest while searching for a deal.

The new opportunity is a single family house, 5 bedroom, 2.5 baths,  in a nice area of San Leandro (Northern California). The borrower is a well-experienced borrower who we have done business with in the past. At the height of the real estate boom, this property sold for over $800,000. Of course, that’s pretty much a worthless number now and I am always amused when I see such figures in the analysis data that gets sent to me. The more important numbers are as follows: The property was bought at auction for approximately $475,000. The buyer is putting  25% of his own money into this and we are lending the remaining. After repair value of the property is approximately $560,000 with an average days on market of just over 1 month. Using the ARV of the property, our LTV is 63%. Using the buy price, it is, as mentioned, 75%. Nearby and similar properties rent for just over $2,700 a month, so if we foreclose, we are looking at $33,000 gross rental income per year. It is in a stable neighborhood (few other houses for sale).

Here is a picture of the front of the property. There isn’t much fix up needed and the property is already vacant. We expect this loan will be paid off in 3 to 6 months, although the loan term is for 1 year. Standard deal – 10%, interest only, 1 year balloon, no pre-pay penalty. This will be labeled hard money #12.

All is not quite so rosy with the apartment complex in Houston. The last month I have data for, February, showed a decline in revenue, even as occupancy increased. This was due to increased concessions to get people to move in. Occupancy is fluctuating between 88% and 90% as the area continues to be hit by poor economic conditions. Cashflow is running breakeven. Management expects it to remain this way through the end of the first quarter and to pick up in the second quarter, as occupancy is increased.

Hard money loan #4, the motorcycle loan I did for a co-worker, should also be paid off in a day or two. I was told the payoff check was mailed yesterday.

The self-directed IRA is proceeding slowly, mainly due to a comedy of errors. First, I filled out the wrong paperwork to get the thing started. The company I am working with created an LLC for me. They were waiting for some paperwork to be mailed to them from the Arizona Corporation Commission. But the ACC mailed the paperwork to me, because I am the manager. It wasn’t until a month went by that I found out they were waiting for paperwork I had already received. I faxed it over to them last week, and I think that is all they need now. They have to send me my LLC documents, and then I can go open a bank account.

On a personal note, my wife and I each picked up a new 2010 Prius two weeks ago. We are both loving the cars. I’m averaging 53 miles per gallon, despite having a daily 66 mile round trip commute, mostly at highway speeds. I love being able to fill the tank less often and for less than I did with my old Avalon, which took $42 to fill up. The Prius takes $21. We each got the solar package, which uses a solar panel in the roof to power a fan to exchange the air in the car with outside air while it’s parked in the sun, keeping it cooler. Here in Arizona, that’s a huge benefit, especially since we haven’t gotten the windows tinted yet. With the purchase of the cars, we went from having no car payments to two car payments, so the passive investing income I’m getting will come in handy.

Big Update

Wow..It’s been almost three months since I started the process of setting up a self-directed IRA. Time flies! I am approaching the end to setting everything up, I believe. Probably half of the delays were my fault. First, I filled out the wrong paperwork – I filled out the Traditional IRA application instead of the Roth IRA application. I didn’t catch that until the account had been opened, so then we had to close that account and restart the process using the correct forms. Then, Schwab, where I had the assets I was funding this IRA with, refused the request to transfer funds out. It took three tries. The request kept getting rejected because the paperwork from the new IRA custodian didn’t specify “Roth IRA” in one location on the paperwork. Once we got that straightened out, the transfer went smoothly. But each rejection took a couple of weeks, so we lost a lot of time there. After the funds are transferred to the new custodian, the next step is the creation of an LLC. The IRA will then purchase all the shares of the LLC, thus giving me, the LLC manager, control of the LLC funds.  Well, I checked with my account rep and he told me the fund hadn’t arrived from Schwab yet. Turns out, he was checking the old traditional IRA account that we incorrectly set up initially. Once I pointed this out, he checked the correct account and saw the funds had been transferred. Last week, he started the LLC creation process. I checked the Arizona Corporation Commission’s website this morning and found that the LLC was created yesterday. The next step in the process (and the final one, I think) will be to open and fund a bank account. I believe I will be getting a letter from the LLC custodian to take to a bank that will allow me to open a bank account in the name of the LLC. I’ll contact my account rep later today and find out the next steps I need to take.

Had an update on the Houston apartment complex. I missed the semi-annual conference call, so I only have the info in the monthly reports to go on. It looks like the economy is finally catching up to the Houston market and more jobs are being lost there. Occupancy for January went up slightly and early February also showed some gains. Occupancy is at 90%. Total cashflow was negative $911 in January, the first time the property has had a negative cashflow since we bought it. Management expects cashflow to remain low for the first quarter of this year. This property continues to outperform other similar properties in the area however. The overall market occupancy is 84.8%. The submarket we are in is running 86.6%. As mentioned earlier, we are at 90%, so I feel management is doing a pretty good job. Rent concessions are actually about $200 below budget for the month of January. Higher insurance and real estate tax escrows continue to adversely impact the bottom line. Management was looking into obtaining new insurance and hopefully that process will be completed soon.

On the hard money loan front, things are running smoothly. I have two loans that will likely be paid off soon – hard money loan #4 and #10. Loan #4 was a loan on a motorcycle to a former co-worker of mine. He was recently laid off (about 1 year after I was also laid off) and he is selling the bike. He thinks he has a buyer for it now. The property for loan #10 has been on the market for about 3 months. The owners have it priced a bit high. We knew going into this one that their estimate of the value of the property was probably too high, but even using our lower estimate, the deal still looked good. Now it’s just a matter of the owners coming to the same conclusion on their own. We estimated the property was worth $320,000 and loaned $192,600 in the deal. The owners started out listing the property at $378,600. They have lowered it now to $348,600. They have the property fixed up nicely and have staged the house so it shows well. Even so, they’ll probably have to lower the price again. They are current on payments though, so I’m not worried.

Loan #11 is progressing as well. We had to evict the previous owner to get him to leave, but that process only took 1.5 months, which is relatively quick. The property needs paint, carpet, tile, and some minor flooring work. It should be set to go on the market in 3 weeks. This is the property bought by my partner’s wife, so I’m sure things will move swiftly.

And lastly, my wife and I took a little trip to Las Vegas last weekend. We got a deal from the Wynn for 3 free nights plus $300 in free play and took advantage of it. When we got there, my wife wanted to play the $300 credit on a $5 video poker machine. She sat down and, on her very first hand, got this:

Amazing!! The rest of the trip sort of went downhill from there, but it was a heck of a way to start! And it was nice knowing that we were playing with their money for basically the entire trip.

New Year, New Opportunities

The holidays were a pretty busy time for me and I realized I neglected to write about the performance of my Houston apartment complex investment. I also just got the update for December, so I’ll write about both now.

In November, occupancy dropped to 90%, due in part to the declining Houston economy. This property still continues to outperform the other apartment complexes in the area by 3-5%. The manager expected vacancies to remain at this level though December due to the holiday season, but expressed hope that rentals will increase after the first of the year. Cash flow decreased to just under $4,000 for the month and was impacted by higher insurance costs and real estate tax escrow requirements, as mentioned in the last update.

For December, occupancy remained flat, as expected. The submarket we are in declined to an overall occupancy of 87%, so we are still ahead of the curve. Unemployment in the area has increased from 6.5% in Q1 of 2009 to 8.4% in Q4 of 2009. Obviously, that affects the availability of renters. The Managers are cautiously optimistic for 2010 because job losses have slowed and they have increased their marketing efforts to attract new tenants. Cash flow dropped to just around $350, still impacted by higher insurance and tax escrow requirements. The good news is the management has obtained new insurance that will reduce the cost by about 30%, which translates to a savings of about $35,000 per year. The decrease in cash flow means there will be no end of year distribution to investors. For 2009, investors so far have received a 6.75% annual return overall. Management fully expects investor payments to continue next quarter. The semi-yearly investor conference call will be held the first week of February and I’ll have more info then.

I continue to receive on-time payments on hard money loans #10, 8, and 4. HML #9 was paid off at the end of December and that money is sitting with my partner looking for a new investment. We had one lined up, but it was a short sale and at the last minute, the bank decided to reject the offer, so that fell through.

My move towards a self-directed IRA is making progress. I have converted my rollover IRA to a tradional IRA and then to a Roth IRA. The next step is to transfer the funds to the company the sets up the self-directed IRA. I was planning on going with the iTrust product, but after discussion with the company, have realized that the LLC product, rather than the trust, is a better fit for what I will be doing. The only thing holding this up is that I haven't had time to fill out the paperwork yet. I hope to get that done this week. I'm not in a huge rush as it seems the hard money opportunities are slowing down a bit. My partner is noticing increased competition at the foreclosure auctions.

And finally, it’s been over a year since I was laid off from my day job, but I will finally be hired as a full-time employee again come next Monday. The company I have been working as a contractor for for the last nine months or so has decided to bring me on board permanently. While my passive income is not yet high enough to cover my living expenses, it was high enough to cover the expenses of my loans and credit cards during the year I was laid off. (I normally don’t carry a balance on my credit cards, but the layoff changed that temporarily.) It was a huge relief knowing those bills were covered during the times I had no income coming in. My practice of putting 15% of my paycheck into a savings account also helped my ride out that year. This whole experience has taught me the importance of both passive income and maintaining an emergency savings account.

Double Update

I haven’t reported on the Houston apartment complex for the last two months, so here’s a two month recap:

August occupancy was 95% and revenue was $228K or, excluding a payment from AT&T for having them become the complex’s preferred phone provider, $196K.Total cash flow was $40K.

The economic woes hitting the rest of the nation have finally started to creep into Houston, which had been somewhat spared from the slowdown before.

In September, occupancy dropped to 94%. There were 22 move-outs, about half of which were due to the slowing economy and half due to typical reasons – home purchases, job transfers, etc. These move-outs have already been filled thanks to new marketing efforts.

In September, revenue was $202K revenue with a cash flow of $14K. The large drop was due to an escrow analysis by our lender which showed our escrow account was being underfunded for insurance and tax costs. Therefore our monthly payment for our loan will increase slightly and a chunk of cash had to be deposited into the escrow account to bring it in line with estimated payments. This deposit was mostly covered by income we received from AT&T last month for referring our tenant and new tenants to them for phone service, but it does impact the figures for this month.

I also received another quarterly profit distribution.

In other news, I continue to receive on-time payments for my three outstanding hard money loans – hard money #4, #8, and #9.

March Updates

It's been a good week!

I received another interest payment for the hard money loan I made on the property in California. I also received another on-time payment from my hard money loan to my (former) co-worker. And last, but not least, I got a great monthly update on the Houston apartment complex.

Total revenue for the month of March was $199K, the highest amount so far. Management also collected some bad debt that they had previously written off as uncollectable, so that was bonus money coming in.

Occupancy was 95% for the month of March and cash flow for the month was just over $32,000. The property is performing better than expected. Management will be revising their forward-looking projections based on the improved performance. The investor distributions for the first quarter will be mailed out this week. But the best news of all of is that management will be increasing investor distributions in future months based on the better-than-expected performance of the property!

General Update

Well, the holidays are over and things are settling back down to a normal routine.

I received another on-time payment on Hard Money loan #4.

I received another quarterly profit distribution for the apartment complex in Houston. Again, the distribution worked out to our preferred 9% annual ROI. After five months of rising, the occupancy rate dropped, but only by one percent back down to a more normal 96%. I knew the 97% rate from last month wouldn't last too long. (Marketing and retention expenses dropped by about 20% from last month, which may explain the drop in occupancy.) Repairs from Hurricane Ike are wrapping up. Return on equity for the property this quarter is currently at 8.7%, but excluding the cost of repairs from the hurricane, it would have been 10.9%. Next month will see a one-month profit disbursement to sync us up with a calendar-quarter payment basis in the future.There is a bi-annual investor conference call scheduled for the end of this month that will provide investors with an overview of how things are going so far and what the outlook is for the next year.

I almost got hired at a local real estate investment trust company. I made it to the final three applicants, but the company ended up choosing someone else. Too bad. This REIT specializes in commercial real estate and they have over $50 billion in properties under management. I could have learned a lot from them.

Work on my ebook has stalled. Actually, I am done with it, but my wife is working as the editor and she hasn't had time to work on it lately. Hopefully, that project can get moving again soon.

This Is Why I Like Passive Income

Last Friday, I was driving back from lunch and my co-worker noticed steam and liquid coming out from the front passenger side of my car's hood. A check of the temperature gauge showed my car was close to overheating. Luckily, there was a Toyota dealership nearby, so we pulled in there and dropped it off for repair. Turns out, I need a new radiator and some other repairs. The estimated cost is just over $1,200.

Yesterday, I came home from work and picked up the mail. I had three checks waiting for me - one was the second payment of hard money loan #4 and the other two were from two of the four flipping LLCs in California that I am invested in. The three checks more than cover the amount of my car repair. Nice!

Automatic Income

I received my first payment from Hard Money Loan #4 last night. What is really nice is that the borrower has set me up as an automatic payment from his checking account. Each month, the bank will automatically send me a check. No need to worry about him forgetting to mail it or getting lost in the mail or any of the other excuses people make when payments are late.

Opportunity Knocks And I Answer

The other day, I was sitting at my desk talking with a couple of my coworkers when one started talking about his credit score and how it had dropped about 40 points recently. This guy subscribes to a credit monitoring service and keeps a close eye on both his credit score and credit report. It turns out, his score dropped because of a motorcycle loan he recently took out to get a new motorcycle. He got a special low rate, but must not have read all the fine print because the loan showed up on his credit report as an unsecured loan, i.e. a credit card. Now, the motorcycle company still has the title and they are listed as a lienholder on the registration, so this is really a secured loan, yet it is being reported as unsecured.

So this dropped his credit score because it looks like he now has a maxed out credit card. We were discussing how we could get this corrected. We both agreed it would be a hard task. Chances are, if he called the customer service number for his loan, he'd get someone who didn't even know the difference between a secured and unsecured loan, let alone how they are reported to credit agencies, etc. So it looked like an uphill battle to get this changed. (I should point out that he is planning on purchasing his first house soon, which is why he wants his credit score to be as high as possible.)

After thinking about it for a few minutes, I realized I could help him. I could put on my hard money lender hat and lend him the money to pay off the loan. He could then make sure the lender reported it as closed and it would not be included in calculating his credit score. He would continue making monthly payments to me. I would not report the loan to any credit agencies (unless, of course, he defaults). I offered him the same terms as his current loan: 3 years, 7.9% APR. I also charged a 1 point origination fee. He accepted the deal and today we drew up the paperwork and signed everything. I've now got another hard money loan going, my fourth one overall. I get more passive income at a higher interest rate than a bank would pay and he gets a higher credit score. Everyone wins! And, to return to something I wrote about three years ago, the point I charged means I created money from nothing again!

I should point out the obvious: I trust this guy, I know he has a steady, stable job that he has been at for several years, I know the approximate value of the motorcycle, etc. I wouldn't normally make a hard money loan with the collateral being a depreciating asset like a vehicle.