Tiki Torches and Tenants

As some of you may know, my wife and I have over the last few years bought a house, lived in it a year, and then moved out and bought the next one.  We now own three properties (see update below) , one duplex and two single family homes.  One of the homes we live in, and the other two are rentals.

Often when reading blogs you hear only about the good, tenants paying on time, minor maintenance and boom…collect the cash.  All passive income right?

This month we have a couple of good ones to share.

Part 1: Tiki Torches

A few weeks ago we get a call from our old next door neighbor.  He tells us he woke up to a  a crackling sound in the back yard.  Low and behold our tenants had a party in the backyard complete with tiki torches.

Afterwards the party moved up the street to a local watering hole leaving the tiki torches lit.  Well of course one of the torches fell over catching the wooden fence (wood floats don’t you know?…like a duck) on fire.  Luckily our neighbor was able to put the fire out, and then put it out a second time when the embers lit back up. Without him being there, we might have been talking one or two houses that caught on fire and potential injury or loss of life.

Damage was a planter and a couple of sections of fence.  Repairs to the fence ran $1,472 which will be passed on to our renters.

They aren’t dummies, combined this young couple makes something like $170K-$180K/year….well except they didn’t think about putting their tiki torches out before they went to the bars….so maybe we can call them dummies with regard to tiki torches.

Part 2: Tenants

About the same time as our tiki torch incident, I get a call from a realtor doing a tenant background check.  But self….weren’t all of our tenants under contract for a year or more….and the ones that we were being ask about were under contract until May of 2017….and they signed a lease extension in October….self, why would I be getting a call from a realtor?

When I was growing up, never once in my wildest dreams would I have terminated a lease early, at least not one that I could pay.  Its not that or tenants lost a job or anything, nope, something they liked better came up….squirrel….

Look, we decided not to keep our tenants in an adversarial rental situation, we settled on an extra months rent to terminate the lease. (probably should have held out for two)  At least to their credit, up until then they had been low maintenance tenants, paid on time and did fully serve our their first lease.  When they did end up moving out, the place was in good shape.

Don’t underestimate a renters ability to do odd things.  Even when you think you have them under a long term lease.

The Result

OK..  Because we had tenants who were moving out, we thought it might be a good time to assess the market conditions of our duplex.  Right now within a block of the duplex there were 10 or 12 houses that had been scrapped and replaced with high end condos.  The market in the area is red hot.

So we put our duplex on the market.  Low and behold, in the first week we had 3 offers, one in cash.  We chose the cash offer and got just a couple of thousand dollars under list.

We actually had a really nice appreciation on the property since we bought it in 2013 (about +100K on a $280K purchase price).  I doubt we can get that kind of run in the next few years and we thought it would be wise to sell and book some profits.

Update…last week we completed the sale of our duplex…and that will be reflected in our next monthly net worth update.

Oh…and the property game continues.  we have a new house under contract.

 

 

 

2016-05 Net Worth

Total Net Worth in May: $424,163 (+$5,685) – Satisfied

May was was a solid month.  We broke thru the $420K level for the first time.

Look for big news coming.

Assets: +835,798 – No Change

We made no changes to our assets this month.

As I have mentioned before, real estate valuations are very subjective, I plan on making a couple of updates a year, and the value listed is conservative and would hopefully approximate the net cash we would take home after a sale (excluding the mortgage payoff but less closing costs and realtor fees).

But I will (knock on wood), have some changes in June….

Next month I will update the value of our cars

Net Cash Accounts: (-$1,424) –Not satisfied

I paid for some dental work this month, so my FSA account went down by $1,200.  This is use it or lose it money anyhow, and we did set up the FSA this year knowing I needed to get this specific work done.

In addition, and this is a small house keeping thing………..I fully admit to being a nerd, I enjoy balancing our accounts in Quicken.  I am OCD when tracking our finances.  I enjoy it, I come home after work and to unwind I balance our accounts in Quicken.  I mean all of them, FSA, HSA’s, escrow accounts, mortgage balances etcyou name it……..I  update them daily.

Anyhow, so in Quicken, when we take cash out of our ATM, I make a transfer into an account called ‘wallet’, where theoretically we can make expense entries as we spend our cash.  It all sounds good….but bless her heart….my wife is terrible at making entries in on small items purchased with cash.  I am a little better but my cash entries , aren’t exactly GAAP compliant.  So over the course of 3 or 4 years, our net worth summary ended up with about $1,000 more in our ‘wallet’ than we really had in her purse/my wallet.

My OCD self needed to get it fixed, its bothered me for months.  And I can’t easily subtract it from our net worth totals, because the expenditures really happened, we just didn’t capture them, and the Quicken numbers are tied into how we budget, how we view our spending etc.

We entered a $500 expenditure this month, and will take another $500 next month (so we can ‘budget the expense’ across 2 months) to get the ‘wallet’ account down to the few dollars we actually carry in cash.  Its not a perfect solution as it makes it look like our cash accounts dropped faster than they did.  But oh well, it will end up making our numbers look better at the end of the day.

By the way, I said last month we would likely be flat on our cash, and I was right if you exclude the FSA.

Net Cash Rental Accounts: -$3,358 – Not satisfied

Ok….I will write more about it in a separate blog post.

1) we had a tenant accidentally burn up a fence.  So we have paid to get that fence fixed, but as of right now we haven’t yet billed our tenant, about $1,500 to repair the burnt section, and the burnt out wooden planter and to re stain the fence.  We should get reimbursed in June.

2) We have a tenant moving out, so we spent some money to fix up the house, we bought a power washer to clean up the brick exterior and power wash the sidewalks.

3) We got a couple of rent payments sent to us that hit after the end of the month.

Next month should be better.  I would point out, if you have real estate, you absolutely need some capital reserves to get you thru the ups and downs.  Ie paying a handyman to repair a fence while you are still waiting on your tenant to pay you back.

Retirement accounts: +$7,346 – A solid month,  satisfied

We made an extra payment of $2K to our 401K loan, and we made our normal 401K contributions.

Hopefully we can look to increase our contributions in July.

Liabilities: -$621,586 (+$3,122)  – Satisfied

A solid month in May , we paid an extra $2K on our 401K loan and had our normal $1,000 pay down on our mortgages.

 

How did you do in May?

Net Worth 2016-03

Total Net Worth in March: $405,389 ($91,563) – Incredibly satisfied

March was the best month we have ever had.  The stock market did well, our tenants moved in.

During the month we broke the $400K barrier for the first time, 21 months since we broke the $300K barrier and 4 months since we broke the $310K barrier.  I know we kinda ‘cheated; to get here since I picked this month to update the value of our properties, but even without the increase in asset values, we had a really good month.

Assets: +$78,242 –Incredibly satisfied

After holding off for some time, I decided that it was more appropriate to occasionally update the value of our real estate holdings.

I came to this conclusion for a few reasons.  There was getting to be a significant discrepancy between the values of our real estate and the values listed on the Net Worth updates.

More importantly, we are making decisions to buy/spend/rehab/invest etc on real estate, the results both good and bad are best reflected by keeping the values at least somewhat close to market.  For instance we might decide to sell a property if the value has gone way up.  Maybe we rehab a house based on our value vs the after repair value.  Maybe we accept low cash flow if we are getting 10% year over year appreciation vs selling if the market is flat.

I think real estate valuations are very subjective, and I don’t want to get into monthly updates since places like Zillow etc are so volatile. I plan on making a couple of updates a year, and I am trying to make it so the value listed would roughly approximate the amount we would take home after a sale.

The Duplex’s value went up from $308K to $340K in our latest Net Worth Estimate, similar structures in the area have actually sold in the $350K-$390K range.  Zillow currently has an estimate of $385K so I don’t think that $340 is overly aggressive.

I have increased the value on the rental house from $230K to $280K.  This house is in a booming neighborhood in Dallas.  Our real estate agent estimated that its current value would be about $300K.  So the $280K number I believe to be fairly conservative.

I  left the price of our current house the same as we just bought it in Nov of this year and a few months ago, I already increased the value a little based on some rehab work we did to the house.

I used KBB to update the value of our autos and reduced the car value by $616, and the SUV by $555.

Net Cash Accounts: (-$4,208) –Not satisfied

Our cash balances were down quite a bit.  My wife’s kids came to town, and we spent some money shopping, eating out etc.  So our credit card balances (which are paid in full every month) went up.

In addition we paid everything we could on our personal loan so the overall balances in this area were negative.

Net Cash Rental Accounts: +$965  – Satisfied

We were up this month on our rentals.  Finally have someone living in our old house offset by some final expenses we took on to get the house ready to rent.

Retirement accounts: +$9,708  – Incredibly satisfied

A great month in our investment accounts. My 401K account had its best month ever.  My IRA did well as Apple is starting to come to life. The wife’s 401K did well as she is entirely in a Vanguard S&P fund.

Honestly in this area we just need to continue investing, and to continue increasing our contributions over time.

Liabilities: +$6,857  – Incredibly satisfied

A great month, we paid off the personal loan (+5,761) we took out to buy/rehab the house we bought in Nov.  I absolutely hated taken out this loan, it went against just about everything my wife and I are trying to do.  Being able to get it paid off is a great relief, it lowers our fixed costs by $310/month.

Next month we will turn our focus to the 401 loan, we owe $19.2K, I would like to see us have it paid off by Aug.

The remaining improvement (approx +1,100) was just due to regular amortization on our other loans.

How did you do in March?

Net Worth 2016-02

Total Net Worth in February: $313,826 ($8,943)

February was a solid month.  The stock market particularly KMI rebounded, and we didnt have a ton of major expenses.

Assets: +$0

We continue to take a conservative view of property price appreciation, and have made no changes to the listed values of our real estate holdings.

I haven’t typically updated the value of the properties.  But I think going forward I will update our assets a couple of times a year and will probably do a full update next month.

Net Cash Accounts: (-$1,168)

Our cash balances were down slightly.  We did a lot better on spending and our credit card balances (which we pay off in full every month) were down $1,000.  Our checking account was down $2,500 as we made an extra payment to our personal loan.

Net Cash Rental Accounts: ($476)

We were slightly positive on our rental accounts even though we continued to spend money getting our house ready to rent.  Great news, we have new tenants that have signed a lease and will be moving into our house in March.

Hopefully with both rentals fully leased, we can see some improvement in this area over the next few months.

Retirement accounts: ($4,300)

The month was solid, KMI, knock on wood seems be turning the corner and rebounded from $15/share back to $18.52.   I still like the company for the long run, it has fantastic assets but its been tough to hang in there over the last year or so.

During the month, we moved about 1/4 of the cash in our 401K account into our other funds.  The market seemed oversold and each time we get a 10% pullback I try to move money from cash into equities.  In addition I turned off new contributions to the Vanguard Healthcare fund.  The Healthcare fund has been a huge winner over the last few years, but I believe this fund is at risk from being targeted in this political cycle.  Pharmaceutical companies  could be challenged for a while.  I don’t plan on selling anything in the fund, but its time to put contributions in other places. (Value, S&P, Small Cap)

Liabilities: ($5,335)

This was a much better month.  We were able to pay down our personal loan by $4,239 in Feb.  Hopefully we can have it paid off in March or at the latest in April.

The remaining improvement (approx +1,100) was just due to regular amortization on our other loans.

How did you do in Feb?

Net Worth 2016-01

Total Net Worth in January: $304,882 (-$21,727)

January was one of our worst months in years from a ‘Net Worth ‘ perspective.  The stock market was terrible, we had moving expenses and additional rehab expenses.

Assets: +$0

No change in this area.

We continue to take a conservative view of property price appreciation, and have made no changes to the listed values of our real estate holdings.

I did a back of the napkin calculation.  We likely have our 3 properties listed as much as $100-110K less than they are worth.  Duplex $20-25K light, Old House $60-70K light, New House $20K+ light.

I don’t update the properties because of the difficulties of identifying market value without selling them and we aren’t in the market to sell.  Plus there is a lot of transaction costs to buy or sell a property.

 

Net Cash Accounts: (-$4,196)

Our cash balances were down this month as we paid about $15,000 towards house remodeling expenses, Plus a couple thousand more went to moving expenses.  We offset this by taking on a $10,000 personal loan.

Net Cash Rental Accounts: (-$2,492)

We were negative this month as we spent money to get our old place ready for rent.  We bought a dish washer, paid for a make ready cleaning etc, replaced some hardware like door locks, towel racks etc.

Unless we have something unexpected happen, I would expect this area to be a lot more positive over the next few months.

Retirement accounts: (-$6,113)

Its been a tough few weeks, our contributions have been offset by continued losses in the market.  Not much is going well.

We bought some more Disney, and in our 401K account we move some money (5% of the total) from cash into mutual funds.  If we get down 20% off of the highs, we will move another 5% of cash into the market.

I know the market will return, and we try to be counter cyclical to the market, ie move money in a disciplined way out of cash and into the market when the market is doing poorly, and trim a bit of our high fliers/winners in an up market.

Liabilities: (-$9,195)

Ok….Not happy with this one.  We had a cost overrun with our rehab projects.  Honestly it was on us, during construction we found additional things and chose to get the house into a live-able condition before we moved in, we ran over and decided to take out a short term personal loan (3 yr, $10K).

I think taking out the loan was the right thing to do, and overall we have added a lot of equity to this house.  We have a couple of additional things left to do, one of our bathrooms is only roughed in.  We need to install tile throughout, install fixtures and add a vanity/countertop.  In addition we need to install new flooring.

Our 2016 goal is STILL to reduce this category  in 2016.  I hope we can have this personal loan and 401K loan paid off this year (assuming we can get our old house rented).  I will be really disappointed if we dont make some real headway in Feb in paying things down.

2016 Goals

Part of the reason I created this blog was to hold myself accountable to financial and personal goals.

With that, here are mine for 2016.

  1. Hit 400K in net worth.
  2. Payoff 50K in debt.  We would like to payoff the 401K loan and most of the loan listed as Mortgage #2.
  3. Max out Roth by the end of the 2016 tax year (some of this may actually happen in 2017)
  4. Get our wills and other documents in order.
  5. Lose 30lbs.
  6. Have a successful marriage.  Don’t get me wrong, my marriage right now is really good.  But I don’t ever want to take it for granted.
  7. Learn to install tile.  OK, a random one.  In an effort to be budget conscious with our new property, we decided to do the tiling work for a bathroom that we had redone.  We have two other baths in our house so we have some time to do the work ourselves on this one.
  8. Take a trip.  (see #6), my wife and I really haven’t gone on any ‘real vacations’ since we got married.  Although we regularly go back to the Midwest for the holidays to see family, we really haven’t taken a vacation just to take a vacation IE a beach, a winery, a foreign country, a national park.  Hopefully we can change that this next year.
  9. Be successful in my career.  Honestly, knock on wood, I feel pretty good about things.  I have been with my current company about 8 years now.  I know the ropes, get along with my boss, like my company, the work life balance and am comfortable with my compensation.  However my company is merging for the second time in 12 months, so there is a chance that I could end up looking for a job.  Hopefully things work out.

What are your goals for 2016?

Net Worth 2015-12

Total Net Worth in December: $326,610 (-$11,823)

December was a tough month, we had a really bad downturn in Kinder Morgan.  In addition we spent a significant amount of money on rehabbing our house.

Assets: ($757,556) -$2,974

This month, I updated the KBB values for our autos, something that I hadn’t done in a while. Also, I dropped the assumption for the quality of the cars (good vs. very good condition).

We continue to take a conservative view of property price appreciation, and have made no changes to the listed values of our real estate holdings.

Net Cash Accounts: (-$3,419)

Our cash balances were down this month.  We had Christmas expenses, travel, gifts etc.

In addition, we paid just under $6,000 towards house remodeling expenses. I would expect about $10-15K more will be paid out in January as we finish up the work we are having done.

Net Cash Rental Accounts: ($1,677)

Cash for our rentals was up this month offset by some repairs/improvements.  As an example we installed some additional security lights, bought some new light fixtures and a couple of new faucets.  Short term we are investing our cash flow in repairs and upkeep.

Our long term strategy is to have well maintained properties that are easy to rent and where we can continually attract high quality tenants.  Over the long term we should be able to charge higher rents, have fewer vacancies and eventually earn more money.

Retirement accounts: (-$8,475)

Its been a tough few weeks, our contributions have been offset by continued losses in KMI.  There may be some additional downward pressure, but over the long haul, they have some of the best assets in the business, and KMI will benefit from the long term trend to natural gas.

Liabilities: ($1,368)

The liabilities went down due to our regular monthly payments. Our 2016 goal is to reduce this category by $50K