The refinance of Rental #1 is almost done. As usual, there has been a flurry of last minute activity. I received the docs via FedEx today and was planning on having them notarized today and sent back. Turns out, I can't do that. The lender wrote up the paperwork as if I will sign them tomorrow. Since these are notarized, I can't just sign a different date, so I have to wait until tomorrow to get all the papers notarized. Pretty silly if you ask me. I know there are interest charges involved, which is why the date is important, but I don't know why I can't get everything signed and the escrow company can just hold off on dispersing the money for a day. Since I wouldn't have the money a day early, I shouldn't be charged interest on it and everything should work out OK. I guess the lender doesn't want to do that.
And tomorrow, I'm leaving for Laughlin for a couple days, so now I've got one more thing to get done before I go.
I will be wiring my funds to the escrow company today though. At least I can get that done today.
Tenant Late With Rent (Updated)
I spoke with my property manager yesterday and discovered my tenant is still late with his rent. Last week, he paid $550 of the $750 and said he'd pay it all by the end of the week. Since then, we've received $100 from his church to go towards the rent. While my PM was checking her computer system, she saw one screen that said he was all paid up and another showed he still owed money, so she was going to research that some more and find out the real status. However, she did sent out a nasty letter and spoke with the tenant and told him we need to stop this late payment habit. His cell phone is occasionally disconnected, so he's obviously got problems paying his bills.
The tenant's lease clearly states that, in addition to the late charges he has to pay, if he has not paid the rent by the 15th of the month, he is to move out or he will be evicted. I told the PM to enforce that rule next month. I am also faxing that directive to her so she's got it in writing.
Update: In my fax to my PM, I also said that I was concerned that in some states, accepting partial rent makes it legally more difficult to evict someone and, if that was the case in Oklahoma, to stop accepting partial rent payments. I just got an email from her saying the current small claims judge doesn't discriminate on eviction based on partial payment and that she has personally evicted several people who paid paid rent only. So that's a bit of good news for me...
The tenant's lease clearly states that, in addition to the late charges he has to pay, if he has not paid the rent by the 15th of the month, he is to move out or he will be evicted. I told the PM to enforce that rule next month. I am also faxing that directive to her so she's got it in writing.
Update: In my fax to my PM, I also said that I was concerned that in some states, accepting partial rent makes it legally more difficult to evict someone and, if that was the case in Oklahoma, to stop accepting partial rent payments. I just got an email from her saying the current small claims judge doesn't discriminate on eviction based on partial payment and that she has personally evicted several people who paid paid rent only. So that's a bit of good news for me...
Real Estate Investment Profit Calculator
There is no shortage of real estate and mortgage calculators on the web. Almost all are pretty simple, but they do a decent job of giving you a general estimate of what to expect given a certain set of assumptions. Some time ago, I came across the most comprehensive real estate investment calculator I have ever seen. I think I found it via Clifford of Changing My Direction, but I'm not 100% sure.
This calculator not only takes into account standard data such as purchase price, down payment, loan interest rate and length, taxes, and insurance, but is also figures out the effect the investment will have on your taxes, including depreciation, income, etc. The calculator outputs data for the first 10 years of your investment. It's pretty impressive.
As with any analysis tool, the results are only as good as the data you put in. I put in what I think are fairly conservative values for an analysis of my Rental #1 property. Some of the data I used were: 3% annual income increase (default is 5%), and 3% annual appreciation rate (5% is default). I used a maintenance rate of 5% of income - my previous calculations used a fixed dollar amount which worked out to about 2.7% of income. I also said I'd put in $5,000 of capital improvements above and beyond the maintenance amount.
According to the calculator, my return on my initial equity (down payment plus capital improvements) is 21.50% my first year, 22.55% my second year, and increasing to 32.22% by year 10.
The calculator also shows your return on total equity, which takes into account appreciation and your decreasing loan balance. This is really nice because this value will actually decline each year since your equity is rising faster than your investment income increases. My return on total equity starts out at 21.50% and by year 10 drops to 12.54%. This is a great piece of information to have. You can see very easily where the property drops belong your minimum ROI you want an investment to have. At that point, you can sell the property or refinance the loan to take more money out.
This calculator not only takes into account standard data such as purchase price, down payment, loan interest rate and length, taxes, and insurance, but is also figures out the effect the investment will have on your taxes, including depreciation, income, etc. The calculator outputs data for the first 10 years of your investment. It's pretty impressive.
As with any analysis tool, the results are only as good as the data you put in. I put in what I think are fairly conservative values for an analysis of my Rental #1 property. Some of the data I used were: 3% annual income increase (default is 5%), and 3% annual appreciation rate (5% is default). I used a maintenance rate of 5% of income - my previous calculations used a fixed dollar amount which worked out to about 2.7% of income. I also said I'd put in $5,000 of capital improvements above and beyond the maintenance amount.
According to the calculator, my return on my initial equity (down payment plus capital improvements) is 21.50% my first year, 22.55% my second year, and increasing to 32.22% by year 10.
The calculator also shows your return on total equity, which takes into account appreciation and your decreasing loan balance. This is really nice because this value will actually decline each year since your equity is rising faster than your investment income increases. My return on total equity starts out at 21.50% and by year 10 drops to 12.54%. This is a great piece of information to have. You can see very easily where the property drops belong your minimum ROI you want an investment to have. At that point, you can sell the property or refinance the loan to take more money out.
Analysis: Why Did Rental #1 Appraise Lower?
Since it's a lazy Friday afternoon, I decided to investigate why my appraisal of Rental #1 came back lower than one made less than 1 year ago. So I started looking over the two side by side and doing a point by point comparison. Here are the major highlights of what I found. NA refers to the new, lower appraisal I had done. OA refers to the original appraisal done in September, 2006.
Housing trends:
NA: sell time 3-6 months
OA: sell time less than 3 months
Driveway:
NA: No driveway
OA: driveway
Fireplace:
NA: 1 fireplace
OA: no fireplace
Patio:
NA: no patio
OA: patio / deck cover
Fence:
NA: cyclone fence
OA: no fence
Carpet:
NA: Carpet needs to be replaced in near future
OA: No repairs needed
Physical details:
NA: 7 rooms, 3 bedrooms, 2 baths, 1,585 square feet
OA: 8 rooms, 3 bedrooms, 2 baths, 1,640 square feet
Comps:
NA: 3 comps currently for sale from $74K to $79K
OA: 2 comps currently for sale from $77K to $88K
NA: 5 comps sold in prior 12 months from $47K to $79K
OA: 5 comps sold in prior 12 months from $75K to $90K
NA: Comps had inferior heat, air, superior car storage
OA: All comps truly comparable
Cost approach to value:
NA: Reproduction
OA: Replacement Cost New
NA: Site value $10K
OA: Site value $15K
The new appraisal rates the property at $62 per square foot. Since it also says the square footage is 55 square feet less than the original appraisal, this translates to a $3,410 drop in value. That alone accounts for one-third of the valuation difference!
So it's obvious appraisals are very subject to human error. I mean how hard is it to determine if a property has a fireplace or a driveway? Or to count the number of rooms in a house? And yet the two appraisers looking at this property differed on such seemingly cut and dried items as these. Now I will grant that comps sales have been lower, the market slower, and it is possible the tenants have destroyed the carpet in the 7+ months they've been there. However, I think the other errors can easily account for at least 50% of the difference between the two appraised values.
And yes, I did check to make sure they were actually appraising the same house :-) Pictures were included and all the other identifying details match. I am curious to see what the tax records state the square footage of the house is. I don't believe Oklahoma has that information available on-line, and I don't have the paperwork to look it up with me right now.
Housing trends:
NA: sell time 3-6 months
OA: sell time less than 3 months
Driveway:
NA: No driveway
OA: driveway
Fireplace:
NA: 1 fireplace
OA: no fireplace
Patio:
NA: no patio
OA: patio / deck cover
Fence:
NA: cyclone fence
OA: no fence
Carpet:
NA: Carpet needs to be replaced in near future
OA: No repairs needed
Physical details:
NA: 7 rooms, 3 bedrooms, 2 baths, 1,585 square feet
OA: 8 rooms, 3 bedrooms, 2 baths, 1,640 square feet
Comps:
NA: 3 comps currently for sale from $74K to $79K
OA: 2 comps currently for sale from $77K to $88K
NA: 5 comps sold in prior 12 months from $47K to $79K
OA: 5 comps sold in prior 12 months from $75K to $90K
NA: Comps had inferior heat, air, superior car storage
OA: All comps truly comparable
Cost approach to value:
NA: Reproduction
OA: Replacement Cost New
NA: Site value $10K
OA: Site value $15K
The new appraisal rates the property at $62 per square foot. Since it also says the square footage is 55 square feet less than the original appraisal, this translates to a $3,410 drop in value. That alone accounts for one-third of the valuation difference!
So it's obvious appraisals are very subject to human error. I mean how hard is it to determine if a property has a fireplace or a driveway? Or to count the number of rooms in a house? And yet the two appraisers looking at this property differed on such seemingly cut and dried items as these. Now I will grant that comps sales have been lower, the market slower, and it is possible the tenants have destroyed the carpet in the 7+ months they've been there. However, I think the other errors can easily account for at least 50% of the difference between the two appraised values.
And yes, I did check to make sure they were actually appraising the same house :-) Pictures were included and all the other identifying details match. I am curious to see what the tax records state the square footage of the house is. I don't believe Oklahoma has that information available on-line, and I don't have the paperwork to look it up with me right now.
Rental #2 Deal Is Dead
I got word last night that the tenant's housing assistance contract with Section 8 has been canceled, so Rental #2 is no longer a Section 8 house. It also means the tenant will likely have to move out, since she probably will no longer be able to afford the rent.
The seller thinks the problem lies with letting the old property managers continue to manage the property for so long. They had told Section 8, they were the property owners and apparently also were slow to respond to Section 8's repair requests. So by the time the seller started moving the property to a new management company and discovered all the problems, there was not enough time to fix everything and get the house re-inspected.
The seller will be refunding my earnest money deposit. Hopefully, my mortgage broker has not yet had the appraisal done on this property, so I can get that money back as well. If not, I'll be out the $350 or so for the appraisal.
The lesson here is, even though you have a property manager, it still pays to keep a close eye on your investments.
The seller thinks the problem lies with letting the old property managers continue to manage the property for so long. They had told Section 8, they were the property owners and apparently also were slow to respond to Section 8's repair requests. So by the time the seller started moving the property to a new management company and discovered all the problems, there was not enough time to fix everything and get the house re-inspected.
The seller will be refunding my earnest money deposit. Hopefully, my mortgage broker has not yet had the appraisal done on this property, so I can get that money back as well. If not, I'll be out the $350 or so for the appraisal.
The lesson here is, even though you have a property manager, it still pays to keep a close eye on your investments.
