Closed House #2

by David | Nov 26, 2014 | My REI History

In my previous blog post I mentioned that I found my second real estate property. Quick update that the process is now complete and I’ve closed on house #2!

The purchase price was $58,700, and I put a down payment of $23,480. The closing costs came out to $3,841, for a total amount of $27,321. The cap rate is 11% and the cash on cash return is 6%.

I learned a lot from the closing process, and I want to share some lessons with you…

1. When signing the documents remotely, you need to use a notary to verify that it is in fact you who is signing the documents. Well, my wife and I are currently out of the country and needed to use a foreign notary. The title company recommended we go to the local US embassy since not all foreign notaries are accepted. When I called them, the nearest available appointment wasn’t until the middle of December! So, with some research, I found a local notary that would work. The problems with this:
   • It was super stressful, as we hardly had any time to complete this process and mail the documents before the closing date.
   • It cost more than I originally factored in the deal. I always like having all the facts and all the numbers ahead of time and I definitely don’t want surprises or additional costs at the time of closing.
2. Keep full control of the process. You need to decide when you want to close the deal and, based on that, work back. For example, let’s say your turnkey company updates that the house will be ready on November 15th and that a tenant is moving in on November 17th. If you want to close on November 17th, make sure everyone knows this and have the title company prepare the documents well in advanced.
3. Make sure you know how you’re going to wire the funds. For our first purchase, we paid using a check, no problem. In this case, with our being overseas, we thought it would be easier to wire the money. As it turns out, Chase has a limit of $25,000 on the amount you can wire per day. This meant I needed to break down the wire into two wires. And, since the first wire was for $25,000, it was blocked by the bank because they thought it was suspicious, which caused another delay since I needed to explain why I was wiring so much money. The bottom line is that you should know how you’re going to send the money and what limits your bank has, and make sure it’s all ready ahead of time.

Finally, as with everything in real estate, I recommend you always ask “why” or “what are the implications of that” regarding anything you’re told, and any options you receive. For example, since it was Thanks giving around the time we closed on the house, the title company updated me that they’ll be closed on November 27th and 28th and that we could either close on November 26th or December 1st. Beyond the fact that this would mean losing a few days of rent income from those last days of November, as part of the closing costs, the buyer needs to pay interest based on the number of days between the closing date and the last day of the month, which comes out to $7 per day. Closing on the 26th meant I would have 7 days of interest to pay as opposed to closing on the 1st which would mean 31 days of interest. I paid $35 instead of $217.

So, those are a few lessons for you… but the important thing is that we closed on house #2!

Who Said House Number Two?!

by David | Nov 6, 2014 | My REI History

I started the process to purchase my second real estate investment!

My second property is located in a middle class neighborhood in Memphis, TN. It’s a 3 bedroom 2 bath house with a big yard and car port, and the turnkey company I’m working with is currently renovating the property. The house is priced at $58,700 and the monthly rent is $725. If we deduct taxes, insurance, and management, the yearly net operating income is $6,558 which puts the CAP rate at 11%.

For this purchase I’ll be paying 40% of the property cost up front (I don’t qualify for a 30 year loan at this time) and I’ll be getting a loan for the additional 60%. The loan is a 10 year loan with a 7.25% interest rate. This means that the monthly loan payment will come out to $418 bringing the monthly cash flow to $128. That’s a 7% cash on cash return on the down payment (slightly less, 6%, when including closing costs). This will be even lower if we factor in potential maintenance and vacancy costs in which case the monthly cash flow drops to $56 (a 2% cash on cash return). Not great, since I am a cash flow investor, but as I explained in the previous blog post this is worth it for me since my goal is to create lump sums of passive income in the next 10-15 years and not necessarily today.

Now while you might be thinking to yourself that I’m totally crazy (and I might be…) for getting into an investment where my monthly cash flow is so low, you need to remember that after these 10 years, my cash on cash return will jump to 21% since the NOI will be my cash flow. In other words in 10 years (not as far away as you think it is) my cash flow will be $546.50 each month or $6,558 per year (and it will most likely be high since rent does go up with time).

Well there you have it, house #2!

Third Time’s a Charm

by David | Oct 20, 2014 | My REI History

This blog was born after I completed my first real estate purchase back in July, but my real estate investing adventure started long before that. It started about 2.5 years ago with a lot of research. The adventure also involved two failed purchase attempts that happened a few months before the first successful one.

I think one of the most important things about real estate investing is not giving up, and not being afraid of the hard times. Of course, it’s OK to fear the hard times (that’s normal), it’s just that you need to prepare for them so that, when they happen, you’re ready and aren’t surprised or paralyzed by them.

Here are the stories about the first two deals I tried to close:

Deal #1 was a turnkey property in Chicago. It was a duplex in a working class neighborhood. The top unit was inhabited by a small family and the bottom unit by a single woman. For some reason, the information provided by the turnkey company about the tenants wasn’t very reassuring. I never received very clear information about who the tenants were or what kind of background checks had been done when they applied to live in the house. Furthermore, the week we were supposed to sign the contract and I needed to send the earnest money, I was notified that the woman living in the bottom unit had left. This created some concern and a lot of uncertainty about the property and more so about the turnkey provider, so I stepped away from the deal. Perhaps this was a mistake since the property seemed like a good investment, but it would have been my first deal and I was very cautious.

Deal #2 was a single-family home in the Midwest. Everything was going smoothly; I had the mortgage approved and the contract was in place. The only problem was that the appraiser appraised the house at roughly $70,000 while the asking price was $95,000. This made me very nervous about the turnkey company since the main benefit of working with one is the fact that they are experts in their market or city. They are supposed to be experts on their neighborhoods and property values. Moreover, this was a mortgage that I was getting through a bank they recommended–so the appraiser was someone they’d worked with before. This led me to believe that the company is not the expert I need my turnkey provider to be, and I stopped working with them. (Sure, glitches happen, and this may have been a mistake on their part, but there are plenty of markets and turnkey companies out there.)

The moral of the story is: You might not succeed the first time (in fact, you probably won’t), but things get better and easier as you gain experience. So, if you head into real estate investing understanding that there’s a learning curve, early failure won’t be as hurtful to your morale as it may have been if you’d been expecting things to be smooth from the get-go.