SMARTERLANDLORDING

ADVICE FROM EXPERIENCE

Jenna

How to Fund Your Rehab

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It takes money to make money, right? Yes and no.

So, I’ve proven that seller financing is out there. You can truly buy a home with no money out of pocket. After that, what do you do about repairs? We are way to new to real estate game for our private lender to trust us with any more than we needed. I’m still baffled that we were able to convince her at all!

So, we had to get creative in financing the rehab. Of course, that includes doing a good bit of work yourself. Elbow grease is hard on your back but easy on your pockets!

The first thing we did was went to Home Depot and applied for a consumer credit card. It was inevitable, right? Home Depot allows you to make interest free purchases for 6 months-24 months, depending on the dollar amount of your purchase. The minimum dollar amount is $299 (pre-tax). We decided to lump our purchases together so that we never fell below $299.

If we really only needed a shower rod to complete a unit, we would couple that with the purchase of a gift card, so that we met the $299 threshold. Couple this with a healthy practice of returning unused items and making sizable monthly payments, and it’s not too bad!

Just make sure that you pay off the balance before your 0% financing term expires. If you fail to do so, Home Depot charges you interest retroactively!!

Home Depot also has a project loan which allows you to finance large renovations with extended low-interest financing. Given our rapid growth though, we did not qualify for any more credit than we were already awarded. Waamp waamp.

I should note that Lowe’s has similar financing options. It just happens that Home Depot is incredibly close and convenient. Both retailers employ local contractors as well. So, if you need to finance a project but can’t do the work yourself, this might be an option. Please consider all of your options though; I’ve heard horror stories.

What are some of the creative ways that you have financed your rehab?

Seller Financing – It’s Real!

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When you are new to real estate, and without much starting capital, seller financing is the strategy that gives you hope. With seller financing, you don’t need a bank. You don’t need a hefty down payment. You don’t even need good credit.

I was sure that seller financing was a strategy of fairy tales.

As it turns out though, obtaining seller financing is completely possible. I bought a property with seller financing within 6 months of purchasing my first property. Regular banks would not have financed another mortgage for me that quickly, and I didn’t have 20% of the purchase price saved for a down payment. So, attention newbies and veterans alike, seller financing exists and it’s in your best interest to find it!

So, how did I find a seller willing to finance?

  1. I looked for real motivation. This property was days away from being sold at a tax sale for several years of past due taxes. If the owner hadn’t have sold her property, she would have lost it completely and gained nothing. I did her a service by jumping in with an offer at the last minute. Seller financing allowed us to close in just a few days.
  2. I asked. It’s as simple as that. You never know if someone is willing to carry the note if you don’t ask. In my case, I let her know that the only way this would go through is if she would be willing to seller finance the property. She listened and agreed.
  3. I told her she could foreclose on me if I failed to make payments. That’s right. If I stop making payments, she can take back full ownership of the property—including all of the hard work that I’ve put in and wonderful tenants I’ve put in place. This made her feel a bit more comfortable.
  4. I promised that she wouldn’t have to pay a dime in closing costs or legal fees to transfer ownership. She wouldn’t be financially hurt by agreeing to seller finance.

So, here I have an owner who is willing to seller finance. That doesn’t mean that we agreed on the details. This particular owner was quite stubborn about the dollar figure that she wanted to gain from selling this property. Now, many investors would like to interject at this point and say that she has no bargaining power given her situation. Quite frankly, I was outside of experienced territory and I’ve never been the kind of person to feel as if I was taking advantage of someone. So, I heard her out. There was no way that the property was worth what she wanted, but I listened anyway.

It’s important to remember that this is a people business. We are dealing with real people who are experiencing real problems—and who deserve the respect to at least hear them out. If I had low-balled her, she would have walked right out of the door. It was obvious, given the tardiness of her actions, that there was a part of her that was unconcerned with losing the property at tax sale. I listened.

Then, I told her exactly where I needed to be for this property to make sense for me. That’s right; I put all of my cards on the table. With seller financing, the silver lining is in the terms—because everything is negotiable. Here are the steps of our negotiation process.

  1. I told her that the back taxes owed would absolutely need to be deducted from her asking price—since that would need to be paid immediately. I also explained that the private loan I would need to get to pay these taxes would have a high interest rate. This allowed me to shave off a bit more from the asking price. After all, it wasn’t my fault she didn’t pay her taxes!
  2. Remember how I promised that she wouldn’t pay anything out of pocket for closing costs? Well, I had an estimate of what that would cost me, and dollars add up! I showed her this estimate and explained that this dollar amount should also be deducted from her asking price. She agreed.
  3. I explained the extent of repairs, and what it would cost me. At this point however, she was adamant about sticking to our new—already declining—asking price. She became flustered and kept saying the property is being sold “as is.” OK OK, calm down. Let’s switch gears.
  4. I explained that it wouldn’t make sense for me to purchase a property at the after repair value while ¾ of the property was vacant. It would inhibit my ability to perform renovations. Would she be willing to allow me to start my payments 6 months from our closing date? Yes, in fact, she would. I purchased the property on December 31, and I won’t start making payments until July 1.
  5. Next, I showed her the numbers. I listed the taxes, property insurance, private loan payments, utility expenses and any other expense that I could think of associated with the property. I also told her that I needed to make $200 in profit per unit for this deal to be worth my time. We looked at the numbers and could easily tell how much of a payment I could afford to give her every month. From there we manipulated the length of the loan and interest rate until that monthly payment landed where it needed to be. We shook hands and met at the closing table two days later.

In this case, I bought a quadplex with $0 out of pocket. I gained a 20 year loan with an incredibly low interest rate, and I have time to renovate and rent out the units before I start making payments. Each seller financing deal will be different, I’m sure. Maybe the next seller will be adamant about the length of the loan, the down payment, or even the monthly dollar amount. The beauty of seller financing is that It doesn’t matter. Every inch of the terms are negotiable and you’re the boss.

Go out there and get it.

Newbie Fails

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Remember how I spoke about feeling like a newbie? 

Well, it didn’t end there. In fact, I’m constantly reminding myself that I’m an amateur. In an effort to encourage those of us who are completely green to real estate investing, I’ve shared a few of my most humbling mistakes below. Hopefully, you will be able to avoid some of these same pitfalls. Please share some of your novice blunders too!

 

  1. I learned pretty early that easy work can be made hard if you don’t have the proper tools. When we started building our RE toolbox, we thought it would be easy and cost effective to buy a Mr. Seven Hands  instead of multiple screwdrivers. Boy, were we wrong. This thing is a mess. It’s easy to keep handy, but it’s hard to use in tight places. It tries to fold when you are using it, which is annoying! To be honest, I’m just plain embarrassed at even owning the thing. Can I still call myself a serious investor?
  2. During our first phase of renovations, we felt like complete idiots when we realized how much trim needed to be painted. Our 1920’s triplex is filled with beautiful crown molding, floor molding and tons of detail. After we got a good dose of the time-consuming nature of any paint job, we stopped and looked at our trim work and almost wept. Newbies just don’t know! Paint Lesson #1
  3. Is it a beautiful rainy day outside? If so, do not paint a room with windows or doors open. Paint will bubble when introduced to moisture and humidity. We spent more time scraping and sanding than we did painting on this one. Paint Lesson #2
  4. If you are like me, you aim to get the job done regardless of the circumstances. I get tunnel vision towards the end of a project. So, it’s no surprise that I stubbornly continued painting the exterior of my house, even though temperatures were dropping. Paint Lesson #3, paint peels when it dries during low temperatures. Scrape, sand, and paint again.
  5. I had the electrician over one day to fix a fan, which had apparently given out. So, I ran to Home Depot and picked up a new one. Being the frugal gal that I am, I bought one of the cheapest ones available. Looking back, I’m surprised that the electrician didn’t laugh and walk off the job. Instead, he politely said, “This is for a bathroom. You’ll need to go back and buy one with a fan blade of at least 52 inches…” Duh.
  6. How many of you can install your own appliances? Well, I’m learning. I had to order an extra-long dryer cord not long ago. I wanted to make sure the length was long enough before installing it to the dryer. So, what did I do? I plugged it in the outlet—ungrounded. It tripped all of the breakers in the house and blew a hole straight through the shirt I was wearing, charring my undershirt. Sheesh! I should have known better. I’m turning red just thinking about it. Electrical Lesson #1
  7. I hate popcorn ceilings. So, here I am in the bathroom spritzing the ceiling with water when all of a sudden the exposed light bulbs explode sending shards of glass everywhere! It nearly scared me off of my step stool. Every idiot knows that cool water and hot glass don’t mix, but sometimes I’m brainless. Electrical Lesson #2
  8. Our most recent building purchase has fuses instead of breakers. This is new for us. So, we are tinkering with the fuse box trying to figure out why some of these Edison fuses don’t fit. Then, it hits us. Part of an old fuse is stuck in there! So, my partner goes to work trying to pry that old fuse out… only to realize that we are buffoons. That particular spot required a small-base fuse, not an Edison. So, we had to call the electrician out to fix the mess we made. Electrical Lesson #3
  9. We went from being renters in June to owning 7 units in January. That means that we have 7 house keys, a cellar door key, a storm door key, and a rent box key. Throw in the fact that we have 2-4 copies of each key, and you can see that we are confused! Can you imagine how embarrassing it is to bring a contractor over and then fumble with key after key? It is one thing to feel like an amateur and it’s something completely different to feel like an amateur in front of a professional.

You can bet that we’ve learned from these blunders and made appropriate adjustments. Please tell me I’m not alone. If you are a know-it-all, expert real estate investor, I encourage you to pull from your past. Enlighten us with your former fumbles. It can be humbling for you—and encouraging to us all.

How Nextdoor.com Can Benefit You

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I’m a millennial. Naturally, I’m registered on at least 6 different social media sites—all for different reasons. Each social media site provides a unique platform. Facebook keeps me connected to family and friends. LinkedIn provides me with professional visibility, and Pinterest keeps track of products that appeal to me.

So, which social media platform is best suited for the real estate investor? Nextdoor.com

Nextdoor is a social media site that connects people within specific neighborhoods. In order to register on Nextdoor, you have to first verify your address to proving your residency in the neighborhood. You must use your real name.

The site allows for neighbors to exchange information about block parties and community clean-ups. Neighbors can buy and sell items between each other, and they can report break-ins and burglaries instantly. Good neighbors make good neighborhoods. I enjoy the camaraderie that this site provides.

While, those are my personal reasons for using Nextdoor, it has benefited me greatly as a new investor as well.

 

Example #1:

I marketed a vacant unit in the area on Nextdoor. Within 24 hours, I had an application submitted based on a neighbor referral. No multiple showings; no craigslist chaos. The applicant is now a wonderful tenant. I would rent to her a million times over.

 

Example #2:

I posted an inquiry about a property, stating that I was a real estate investor. Within minutes, I began receiving messages from other real estate investors in the area. These investors provided me valuable information about the property. Plus, I am now connected to other well established investors who farm in my area. This pool of investors are my competition—as well as potential mentors.

 

Example #3:

I was working in a unit when I discovered that I needed a reciprocating saw. I’m a new investor. I have yet to purchase a ladder, let alone a reciprocating saw. So, I posted on Nextdoor asking if anyone would lend me or rent me their saw. Within 30 minutes, a neighbor was at my doorstep, saw in hand. If that’s not neighborly love, I don’t know what is!

 

Example #4:

Many of my neighbors know of me, even if we haven’t met yet. They know which properties I own, and they appreciate my investment in the area. This neighborhood-wide recognition will undoubtedly add to my credibility as an investor. Recently, the neighborhood association newsletter editor asked me to participate in an interview, which I happily obliged. Companies are told to market their brand. As investors, we have to take advantage of opportunities that allow us to market ourselves!

 

I encourage all new investors to consider unlikely resources, like Nextdoor, when developing your RE portfolio. I also encourage me tenants to register on Nextdoor as well. If my tenants are grounded in the community, surely they won’t want to move. At least, I hope not.

Getting a 203K Loan? Expect Trouble!

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Yeah, I said it. The 203k loan is troublesome.

But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.

There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.

Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.

Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.

That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.

Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.

For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.

The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.

Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.

With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.

Plus, my other property acquisitions should feel like smooth sailing after that—right?

 

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The Biggest Obstacle to New Investors – It’s Not What You Think

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I spent 2 years researching real estate and speaking with investors before I jumped in. I saved vigorously because I was convinced that capital would be the biggest challenge to my real estate goals. While capital is still a challenge, I’m not sure that I would call it my biggest challenge.

The biggest challenge to part-time investing is working full-time.

Luckily, I have a job that gives me almost constant access to the internet—not to mention an incredibly flexible schedule. However, those perks come with the understanding that I will most likely be working more than 40 hours a week.

It feels like I’m working all day, every day. It’s a good thing that I really enjoy real estate investing! I can see how new investors could become burnt-out fast. My philosophy at the moment is to maintain the bare minimum of work/life balance that is needed to keep me moving forward. I’m motivated at the thought of a having a more satisfying work/life balance in the future. Fingers crossed that this all pays off!

So, for all of the newer investors out there who have yet to realize your dreams of quitting your day-job and achieving financial independence, this post is for you. These are a few of the things I do to help me get  through a day of work and real estate.

1. Organize Yourself. I use lists for every part of my life and I include ever minute task that needs to be accomplished. If possible, use a list aggregating app, like Out of Milk, so that you aren’t making multiple trips to the store or a rental property.

2. Prioritize Tasks. Decide at least the day before which tasks warrant priority for the day. Are they work-related are real-estate related? Maybe it’s a church commitment that demands your time. Either way, schedule it in and get it done first! If you spend time checking emails and sorting files, you could very well waste the time you had to devote to important obligations.

3. Learn to Say No. I’m no good at this one, but at some point you have to start turning down outside requests. Hopefully you won’t have to turn down a killer deal! Weigh the reward for each request that is asked of you and then make sure you’re able to politely decline if doing so would detract from other high-reward action items. Staying focused on high-reward action items will keep you motivated and energized!

4. Maximize Your Commute. If you are spending all of your time working, your family may begin to worry. Use your commute to and from work to touch base with close family and friends. Even short conversations can boost your energy. I also recommend using your commute to listen to podcasts and audio books about real estate. It will educate you and inspire you to keep going.

5. Schedule Housework. I don’t know about you, but if my house is a mess, my anxiety level is through the roof. If I don’t set aside a specific time to clean house and prep meals, then I will never get around to it. This is an important component for me—one that I intend to devote more attention to in 2014.

6. Blend Work and Play. Any time you can knock out two things at once is a major win. I seriously hate painting. However, I’ve found that inviting friends to paint with me (with promises of wine, beer and pizza breaks) can take the edge off. This way I feel like I have a smidgen of a social life and the daunting task of painting all by my lonesome is lessened.

To new or experienced investors, please comment with recommendations that have helped you. This is a very real struggle for some of us. Sometimes a small suggestion can make all of the difference! These tips sure have.

Jenna’s Real Estate Resolutions for 2014

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If you’ve ever read anything on building businesses or obtaining personal success, you know that statistics show that you are more likely to achieve a goal if it is specific, measurable and written down somewhere.

With that in mind, here are my 2014 Real Estate Resolutions, all of which should be accomplished no later than December 31, 2014. Some are simple; some are not—but they are all important to my success as an investor.

  1. Buy a ladder and a water key.
  2. Purchase another multifamily property.
  3. Complete the wooden fence around my triplex.
  4. Read at least 3 new books on investing and/or entrepreneurship.
  5. Purchase an external hard-drive to store all of my RE documents.
  6. Every week, schedule time for house work, exercise and friends/family.
  7. Create a home-office to include a locked file cabinet and paper shredder.
  8. Develop a close relationship with 5 more contractors and 5 more investors.
  9. Renovate the kitchen of my apartment with new cabinets, floors and counter tops.
  10. Review my credit report and dispute all inconsistencies no later than June 30, 2014.

 

What are your Real Estate Resolutions for 2014?

 

Tips for DIY Painting

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If you are new to real estate investing, I’m guessing you will be doing some work yourself. That’s great! This has truly been the biggest learning curve of my life. We have been rehabbing our triplex for 5 months now, and I can say with certainty that I’ve found the task that I would like to hire out, as soon as possible—painting.

Painting is the worst.

It is repetitive on your wrist and wearing on your back. You have to tape and lay down drop clothes. You need to designate an outfit for ruin. The worst part is how long it takes! This is especially true if the room requires multiple coats. One room we painted required 5 coats! Remember those custom colors?…

If you’re like me and you can’t quite afford to hire the job out yet, head this advice. I learned the hard way.

  • Buy good paint brushes. Cheap brushes will shed. Better brushes are easier to clean.
  • Buy one of those 14-in-1 paint tools. I’m not sure what all 14 functions are for but I use it a heck-of-a lot.
  • Clean you brush after every use! 
  • Clean your paint rollers after every use. They are reusable. Seriously… I didn’t know this.
  • Buy drop clothes, preferably the cloth kind. Do not use table clothes—despite how free they may be. The paint will leak through.
  • Pick neutral paint colors and stick with it. This will save money and headache in the long run.
  • Take a picture of your paint color, brand and sheen. Keep it on your smart phone until you’ve memorized it! This way, you know you’re buying the exact same paint each time.
  • Buy paint in 5-gallon buckets instead of gallon cans. You’re going to go through more than you think. If you’re using the same paint colors, you know it will be used at some point. It’s cheaper in the long run, and you can use the empty buckets for so many things.
  • Buy the cheap paint. It doesn’t matter how expensive it is, you are going to need at least 2 coats.
  • Don’t leave the door open if it’s raining outside. It will cause paint blisters on your wall.
  • It’s easier to scrape paint from finished floors than sand them from unfinished floors.
  • Do not use painter’s tape on finished hardwood. It will take the top layer of polyurethane right off!

I’m sure this doesn’t cover all of the painting mishaps that I’m doomed to encounter. If you have other bits of advice, please enlighten us all.

Real Estate Advice for Rookies

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This past week made me reconsider if I should be blogging about real estate.

Aside from books, blogs, and conversations with investors, I don’t know much about what I’m doing.

I’m great with numbers. I can analyze, budget and prioritize like a pro. Despite my strengths, I have underestimated the time commitment every single time. If you are getting into real estate because you think that it’s easy, please turn back now.

This post is for the rookies.

I set a goal to have the vacant unit rented by November 1. So, I started showing it before it was even ready. I walked prospective tenants through the repairs. One woman bought into my vision and signed a lease. There was no turning back.

We stayed up past midnight all week to make sure that we met our deadline. We bought and installed appliances, hung blinds, built cabinet doors and changed out receptacles. We painted the entire apartment—two coats.

If you had given that list to me 2 weeks ago, I would have said, “no biggie,” with confidence. I had no idea how time consuming it would be. I can’t imagine what it would have been like if I had to do it ALL myself. Luckily, I have an awesome partner and helpful friends.

Truth be told, I’ve received ample advice to add a cushion to cost estimates. I just never knew to do the same thing when estimating time commitments for do-it-yourself repairs. Maybe I’m a too confident for my own good…

If I were to relate this new, hard-learned knowledge, I would recommend that  estimated time commitments be multiplied by three for any first-time endeavor. That multiplier of three should not include the time you spend reading how-to articles and watching you-tube tutorials either.

Don’t feel overwhelmed before you start though. There is a learning curve. I’m confident that I could install a sink and faucet in half the time it took me before. I can vinyl tile a kitchen floor like nobody’s business. And, you should see my putty knife skills. It’s serious.

 

Breaking Rule #1 – Update

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Remember how positive I was about our experience with renting to a friend? Well, the old proverb proved to be true after all.

Our tenant friend told us last week that he will need to move out before his lease is up. He’s in nursing school and would like to devote more time to study and less time to work. We shouldn’t worry; he will do us a favor by staying until January 1st.

Grrrr. Thanks—but no thanks.

So, let me recap for you. We have one vacant unit that is rent ready November 1 (later than expected), and now an impending vacancy after a 3-month occupancy. If I don’t get these units occupied ASAP, I could be footing the mortgage with $0 cash flow for a couple of months. No. no. no….

It makes me anxious.

So, I told our tenant friend that we would start marketing the property immediately. He seems flexible enough to move mid-month if I find a tenant with the desire to, but he would need a couple of weeks’ notice to move his things.

Oh, and we have to prep the apartment of course. Remember those custom colors he requested for his living room? What a mistake!

Needless to say, we won’t be renting to friends again. I’ve found that I can’t be blunt or forthright about how this is not acceptable. I’m so friendly that I will most likely refund him part of his security deposit, which of course would be out of the question for the average tenant.

Where is that silver lining you ask?

It could have been a lot worse. He did give us ample notice, and he has taken care of the place. I don’t think I would say that it worked out to our benefit though. Even though we were able to gain cash flow earlier than we would have, we reorganized our work schedule to get that unit rent-ready first. That was probably a mistake—along with buying custom paint.

 

Commence face palm:

  1. Know where your palms are.
  2. Take your palm and move them towards your face. (Speed of contact varies from situation)
  3. Take 10 seconds to breathe and recuperate your thoughts.
  4. Slowly slide your palms down your face.
  5. Give evil glare.