Panning For Rental Property

MD new housing starts 2000-2011Gullgraver_1850_California

I know.  In today’s modern world, that’s a pretty goofy mental image: some old-timer crouching over a stream and sifting for that one gold nugget.  And yet, that’s kind of what we did when we looked for our first rental property.  I estimated that we spent ~200 hours screening properties to find The One.

Now that we’re officially on the hunt again, I figured I would detail the process we’ve used previously and are planning to use (and evolve) again.  Although, this time we’re looking for something a bit different.

So let’s start with the master plan:

  1. We have a 2br/2ba condo that is a pure investment property.
  2. We live in a 4br/2.5ba townhouse with a low enough cost structure and in a very desirable neighborhood that it should also make for a good rental.
  3. We want a single family house close to my wife’s employer, in a neighborhood with good public schools, and with a dedicated rental space.

So, the goal is to keep house #2, rent it out, and add a third rental to offset the cost of our next place.  As always, our general philosophy is buy and hold.  I guess that means we have some pretty specific requirements.  Perhaps some of these characteristics reflect others’:

  • “Class A” (lots of folks have different definitions; this is close enough for my purpose)
  • Good k-12 public schools (7+ on greatschools.org)
  • Close (<2 miles) to public transit (for us that means trains into DC)
  • Close (<1/2 miles) to a community park, ideally with running/biking trails
  • Because we’re looking to use part of our house as a rental (e.g. a big chunk of a finished basement), we need to be near our target tenants’ desired location, have a separate access, and have utilities available for the rental space
  • We’re looking to offer our tenants a studio or 1br space for between $750 and $1000 a month
  • Modest appreciation, at least keeping up with inflation.  We’re in the buy and hold space, so we’re not looking for anything that requires huge increases in value to make our investment pay off.

I’ve been doing some digging on this topic since I listened to a podcast by Paula Pant over at Afford Anything where she outlined some of the key factors she uses to invest in real estate:

  • Price to rent ratios
  • Building permits (new starts and renovations)
  • Job creation
  • Infrastructure development

Over the next few posts, I’d like to dig into some of these factors a bit as I’ll be exploring them in more depth as part of our own search.  I know there’s lots of discussion out there about “big” data.  My goal isn’t to make this into a science project, but I do believe there’s some useful data available for real estate investors, and it is not limited to subscription only sources.

Let’s start with an example.  We currently live in MD, and we’re looking for our next property in MD.  So, I started at Maryland’s open data site.  There’s a bunch of data sets to geek out with.

I’ll pick the new residential housing units data set to start.  In theory, a county with lots of growth, would be likely to offer a good opportunity.  Here’s a quick snapshot of the 24 MD counties, their total new residential housing starts from 2000 through 2011 (I couldn’t find a more recent data source).  I also included a line chart view of each county over that time period to illustrate any trends.

It looks like the top three counties from this time period were Montgomery, Prince George’s, and Anne Arundel.  On each of their trendlines, you can see upticks in the last 3-4 years.   Thinking back to that era, the 2005 BRAC was in full swing.  While it may have caused significant challenges around the country, the Ft. Meade area and it’s surrounding counties (those three) benefited from a significant influx of DOD related jobs.

What do you think?  Do new residential starts portend a good rental real estate market?  Will this trend continue in the future?  There’s always talk of the DC “bubble,” although with the current president working to limit federal government employees, the real estate sector may be in for another shake-up in this area.  Drop me a line and let me know.

2017

As I look back on 2016 and the almost one year anniversary of this blog, I am of course reflecting on how the first year went.

Observations:

  1. I’m lucky if I post once a month.  If the content was awesome, I would be more OK with that.
  2. My earlier posts involved more analysis and resonated more.  I perceive they were better”quality.”
  3. I’ve read lots of other folks’ blogs, and I’ve hesitated to either comment or reach out because I’m not psyched enough about the content I’ve created this far.
  4. Starting a blog and building an audience is a sloooooooow process.  Let’s just say that I have a lot of room for improvement.

My goals for 2017 are pretty simple:

  1. I’m not planning to pump out lots of quantity.  That means I want to improve the “quality” of the content that I’m writing.  More data.  More insight.  More analysis.
  2. Reach out to other members of the blogging community for idea exchange.
  3. Find ways to get in front of other bloggers’ audiences (e.g., guest post, etc.)

    Let’s see how I do… Happy New Year, everyone.

    Any specific goals on your mind for the new year?  

    Real Estate Investing: It’s Not That Passive, But It Beats Working For Your Boss.

    tick-tock

    600 hours.

    And that’s just what I kept track of once we had an offer submitted.

    I’m going to delve into what I’ve experienced during the purchase, renovations, and management of our first rental property over the 2 years we’ve been involved in it.  Keep in mind that we’re brand new to this business.  There’s a lot of startup activity we’ve gone through to get to this point (and probably some more to come).

    the-hunt

    Even this ole dog can get up and move if properly motivated. An income stream for life? Let’s go!

    On The Hunt

    Let’s start with some data that I don’t have.  If you’ve read any other post on this site, you can probably guess that I like data. During our search process, we digitally screened North of 150 properties. I made 2 spreadsheets for this task.  One mimics the Multiple listing service but adds a few more columns.  With this first tool, I could see all inputs from the listing and get a rough estimate of cash flow.  For properties that looked interesting, I would fill out a more detailed sheet.

    Spreadsheet#2 calculated several measures of profitability (or loss) based on some more specific details.  I filled out upwards of 40 of these detailed sheets.

    Finally, we went to see about 5 places.  We made offers on two.  We were outbid on the first.  And, the second took 10 months from the time we wrote our offer to the time we actually closed.  I would guess we spent about 200 hours screening for our rental in 2014. Let’s amend my total at the start of this post to 800 hours.

    the-grab

    Ah, the thrill of the chase…is so much better if you get the treat at the end.

    The Grab

    In October of 2015, we found a short sale: a 2 bed, 2 bath condo that priced about 25% below market.  We walked through the unit and saw lots of potential.  No major problems, just an interior badly in need of updating.  So, we put in an offer almost on the spot.  We made a list of the major things we needed to do with 3 point estimates to complete each.  And then we waited.  We filed contact extensions.  We waited some more.  In summer, we went on vacation and then updated our financing pre-approval.  We found out we were pregnant…and filed another contract extension.  About 8 months from the time we put in our offer things started moving.  Finally!  All told, we spent about 20-25 hrs between the end of 2014 and August 2015 keeping the contract alive.

    keep-contract-alive

    Now, there were lots more forms to fill out from the sellers’ bank.  We coordinated the appraisal and the inspection.  The bank finally set the closing date for September 30, and things went more smoothly.  We made a more detailed punch list of our renovation activities and a schedule.  That’s the time you see in September: about 63 hours of effort to get us through closing and actually into the unit on the 30th.

    the-flip

    Sometimes you get in over your head. Almost.

    The Flip

    You bought it, you broke it.  … Or something like that.  I admit that at times it felt like we were barely keeping our heads above water.  We were both working full-time and then trying to renovate our condo and get it on the market ASAP.  We spent almost $15,000 taking our condo from ugly builder’s white and grimy to a chic penthouse apartment in one of the most desirable locations in the area.  In addition to the cash and contractors’ efforts, it took us about 400 hours of our time spread out over 2 months.  We contracted for the counter top installation, HVAC replacement, and appliance haul away/install.  We did every other bit of paint, flooring, fixtures, cleaning, etc. by ourselves or with the help of one great friend.  But, we kept our vision firmly in front of us and pressed onward.

    reno

    You might think that cutting floor boards on a Saturday is beneath you.  Or that you’ve progressed beyond replacing the fill valves in a toilet tank.  If so, you’re right.  Go work in your cubicle for another 30 years before you can retire.

    For everyone else, I can tell you that there is no more liberating feeling than swinging a hammer to build your own system.  To quote Sam at Financial Samurai, “don’t be too proud to be rich.”

    the-meal

    Worth IT.

    The Aftermath

    Now that things are up and running (we’re entering our 10th month of having the unit rented), we are enjoying the result of all our efforts.  I’ll follow-up with more detail in future posts.  For now, our aggregate has been about 100 hours of total effort to handle rental operations.  Despite the monthly ups and downs, we’ve brought in a gross income of over $17,000.  Divide that by 800 hours, and we’re making $20/hr!  That puts us squarely in the basic Human Resources and Gaming Supervisor categories. Woo hoo!

    savor

    Before you scoff, remember this is income that:

    • Comes in whether I’ve had a bad day at work or not.  In fact, it comes in whether or not I show up to work at all.
    • Will get better over time (both the hourly rate and the annual gross).
    • Currently has a mortgage associated with it, taking a big chunk of the gross income.  Someday it will be paid off, and then we’re that much closer to financial freedom.  Better still, someone else is paying our mortgage for us.  All of our cash outlays are complete!  More on that in another post too!
    • Allows us to learn about and claim a number of potential tax deductions/business expenses.

    Now this is a seedling I am excited to nourish.  Grow little money tree, grow!

    I Have a Dollar. What Should I Do With It?

    George Zoomed

    It depends.

    Of course.  Smart A$$.

    No, really. It depends on a ton of different individual factors that are unique to your specific situation.  Funny enough, I’ve been taking about this very question with a bunch of folks. One friend has retirement savings that need a new purpose. Another is debating between adding debt to purchase a rental property vs. pay down their home mortgage.  And, we’re asking a similar question about how we could move closer to our work locations and acquire a second rental property.  My point is simple: everyone faces these kind of trade off decisions routinely.  I don’t think I could or should answer the question for anyone else, but I think there is a framework that folks can apply to their own situation.

    At the heart of this topic is the concept of opportunity cost.  (Hold on to something solid; this gets heavy quickly.)  Opportunity cost is what you give up when you commit.  Just got married?  Congratulations; you just gave up your chance to date Claudia Schiffer (Or Justin Timberlake).

    Bought a CD?  For the money you invest in CDs, you’re giving up on the chance to buy Amazon stock with those dollars.

    Bought Amazon Stock?  Those dollars won’t be buying into the Uber IPO.

    Bought Uber?  Those dollars won’t be buying a rental property for you.

    To get more technical:

    …opportunity costs are used to measure the differences in returns between a chosen investment and one that is forgone. For example, consider a person who invests in a stock that returns a paltry 2% over the year. By placing his money in the stock, the investor gives up the opportunity to invest in another investment, such as a risk-free government bond yielding 6%. In this situation, the opportunity cost is 4%, or 6% – 2%.

    Read more: Opportunity Cost Definition | Investopedia http://www.investopedia.com/terms/o/opportunitycost.asp#ixzz4HBW1h1hG

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    Sounds easy doesn’t it?  Let’s take a more personally  relevant example to understand some of the nuances of this kind of decision.  Say that I have an extra  $1000 sitting around.  As cash, it might as well be under Aunt Bertha’s mattress.  What should I do with it?  I see a couple of options.

    1. Pay down bad debt: one of our car loans
    2. Pay off our other car loan and start a “debt snowball
    3. Save/invest it for our next rental property

    Option 1

    This one is pretty straightforward.  Say our loan balance is about $5000.  The interest rate is 2.25%.  We’re a few months into this one due to the untimely demise of my beloved Scion xB.  Of course, our first car loan doesn’t change at all.  So, by paying down Loan #2,  we payoff the loan 14 months earlier, and avoid about $80 in interest over the life of the two loans. Our total interest paid for Option 1 would be $743.02.

    Option 2

    After almost 4 years, we have about $1000 left on our first car loan.  Let’s say our payments are $100/mo.  So, by paying the loan off now, we save a whopping $11 in remaining interest and free up $100/ mo to apply to the other car loan.  This is the start of the “debt snowball” popularized by folks like Dave Ramsey.  In short, it’s an emotionally satisfying way to pay down your debt.  Although, it’s not financially optimal(this is an awesome tool; check it out for your specific situation).  After paying off the first and applying the payments towards the second, we  find the total interest paid for Option 2 is $689.60.  Sounds a bit better.

    Option 3 

    This is the most complex of the three. We carry the existing two loans without avoiding any interest.  The rates are pretty low, so maybe it’s OK.  Now, a low cost bond fund has historically returned 3% (Vanguard’s has been a bit better with all the craziness going on over the past few years).  We’re looking to invest the money for three years.  If we assume past performance is indicative of future (possibly a BAD assumption), we’re looking at a potentially life changing $91.32 in distributions.  Our net interest paid for Option 3 would be $651.70.

    So, how do these three options compare?  Someone play the “wah, wah” trumpets.  OK, I’m hoping that while our numbers aren’t terribly exciting, this concept is.

    Opportunity Cost

    Trade-off between paying down one loan, debt snowballing another, and investing funds instead.

    It looks like Option 3 provides us with the best overall benefit.  What if we were willing to wait a few more years? What if we consolidated our car loans into a lower cost HELOC?  What if …?  And, that’s why I said, “it depends” way up front.  Your specific situation will vary.  Maybe you have higher rates or larger balances.  Maybe  you’re questioning weather or not you can afford to make extra payments each month.

    The point is, you can use math to help make the best decisions possible with your limited dollars.  Those dollars can be the seeds of your future.

    Don’t Bet Against “US”.

    With today’s headlines of a pending Brexit, it’s easy to forecast doom and gloom in the future.  Don’t despair.  There may be rough waters ahead, but history shows we’ll survive.  In the immortal words of Warren Buffett, be “Fearful when others are greedy and greedy when others are fearful.”

    DontBetAgainstUS

    Historical US vs. major international index returns over time.