Podcast Episode 2
Published | Posted by Jonathan Taylor Smith
This is where I talk about my first rental property. It was March / April of 2015 and I was on a 7-day cruise to Bonaire, Grand Turk (and other destinations) with my wife and son (at the time age 7), along with two other couples who are close friends, each with their two young children (11 of us in all).
Book: Rich Dad Poor Dad
The Book (Rich Dad Poor Dad) that started my [... and Landlord] journey.
To read, I brought along the book Rich Dad Poor Dad... It changed my life! Despite having a great time with my family and great friends, this book had me really wanting the cruise to be over sooner than later, so that I could get off the boat and start looking for my first rental property - as the book (along with my prior interest in being a Landlord) had me passionately wanting to do.
Finally, I had found something that put into words what I had somehow felt all along - that going to school, getting a job and working for someone else (to make them rich), buying stocks / mutual funds and saving for retirement in a IRA / 401K was NOT going to give me the life (or retirement) I desired.
You see, I had been self-employed by my own Web Hosting business (also offering Domain Names & SSL Certificates) for almost 13 years (since 2002) when I came across this book. And while I first had the mind to do so, I had long since decided that I was not meant for college, instead getting a degree in Electronic Engineering Technology from ITT Tech. It seemed the cheapest and fastest way of getting a decent job that I would only need for long enough to start my own business and quit - which is exactly what I ended up doing.
So this episode of the [... and Landlord] Podcast tells the story of me being on that cruise, reading the book Rich Dad Poor Dad, and finding that first property a few months later, to add... and Landlord! - to my other titles of Husband, Father and Entrepreneur (Realtor would come later that same year).
Once I got off the boat, I hit the ground running, fresh with a new mindset about money and finances that has been clarified, refined, and enlightened by my cruise ship read of Rich Dad Poor Dad. And as I relate in this episode (#2) of the [... and Landlord] Podcast, this is not the best written book, but it doesn't need to be if it finds you at the right point in your search for the truth about money. For me, the timing could not have been more perfect - so forgive me if you've read this book and got nothing from it. I suggest you try it again, as this time you may have a different result - possibly being at a different place in your life.
Peppertree Townhouse Community - Durham 27705
My First Property - Peppertree Townhouse
My first action upon getting home was to contact a Realtor to get notified of properties meeting my criteria, which was a 2BR or 3BR, less than $100K, greater than 1,000 SqFt, in a location that "I'd be willing to live" (rather subjective, but I did not want a property somewhere I'd be worried about going at night). A few months later, we found that property in a Townhouse Community named Peppertree off Guess Road in Durham (about 20 minutes from where I live in NC). My Realtor was able to aid me in getting my offer to purchase of $60,900 accepted on May 19th 2015, for a July 13th closing (I had no idea how long it took to close an investment property purchase, so I gave myself plenty of time).
Doing my research into this property, I noted that it had originally been listed as a Short-Sale, back in January 2014 @ $74,900, then dropped to $69,900 in February, and dropped again to $59,900 in April 2014. It went contingent in June 2014 with someone, but failed to close for some reason. It was then cancelled in December 2014, failing to sell after 136 days on market.
The following month, in January 2015, it was relisted as an REO / Foreclosure @ $69,900, but again failed to sell. So it was then dropped to $64,900 in May, right as I came along. Knowing that it was previously listed at $59,900, I decided to offer just above that amount (by $1K), but still $4K below the current asking price @ $60,900 - and my offer was accepted... I was in the game!
Now to get this property closed... At the time, not knowing anything about investment property financing, I went to Lending Tree's Website, which referred me to Quicken Loans. I filled out an app with QL, provided all the requested docs, jumped through all the presented hoops, etc... and was able to get a 30-year loan in my personal name along with my wife (I use LLC's now), at 4.75% interest + 3 points with 25% down. And even this presented a problem, because $60,900 - 25% = $45,675 (which is below the $50K minimum for many lenders, including QL). I got around that because the significant points, fees and other closing costs more than covered the gap. And those additional points, taxes, insurance, fees and closing costs from QL and others involved in the closing were very significant, totaling just over $6K. My out of pocket amount due at closing was just over $18K, with anything else being rolled into the loan or paid in advance of closing. And I decided paid 25% down on this property to get a lower rate, but I could have also gone with 20% down.
Now I had more than enough to cover this amount in my personal checking account; however, most of it had gotten there from the month before, when I transferred $25K from my business account to my personal account in repayment of funds I had previously loaned to the business in prior years. And while this was all fully documented in my QuickBooks and on both my business and personal tax returns, the underwriter from QL would not allow it, saying the funds had not been properly sourced. Apparently only a certain total percentage of down-payment funds can come from a business (I forget what the exact stated amount was) - if not W2 payroll income. Thus, I had to come up with an alternate (acceptable) source for the $18K.
Now technically my wife is in the Military... Previously in the Army, but now a Lieutenant-Commander in an often unknown (and unarmed) branch of the Military, named U.S. Public Health Service (PHS). You'll often find PHS Officers stationed at places like the CDC, Federal Prisons and other places with Federal Medical Facilities. And so being a Military Officer, she has a Thrift Savings Plan (TSP), which is like a 401K for persons in the Military. And since I have business income, we put a significant amount of her salary into the TSP. So to get around this business funds sourcing issue, we took out a $20K TSP loan to cover the $18K needed out of pocket to make this purchase. Then once everything had closed, we simply paid off the TSP loan with those same business funds - since QL fully accepted the TSP funds as being properly sourced to be used to make this investment property purchase.
So this was my first use of alternate or "creative financing". I could have also elected to use funds from my Home Equity Line of Credit (HELOC), as that would have also been considered properly sourced funds by QL. However, I feared that doing so might be reflected on my credit prior to the closing, and QL might have pulled another credit report thus affecting the credit to debt ratio upon which we qualified; whereas the TSP loan does not show up on credit.
So with all things considered and when factoring in expenses (except for Property Management, as I self-manage) - this investment property purchase yielded a Cash-on-Cash Return on Investment (CoC-ROI) of ~11% over the first two years, and then ~15% post-refi after holding for 24 months (interest rate when up to 4.875% upon refi @ 25-years). Total annualized return (which takes more into consideration than just CoC-ROI, like tax benefits) - was ~36% over the first two years, and then jumped to ~60% post-refi, at which I was also able to pull out cash. With less cash remaining in the property, ROI goes up. But also monthly positive cash-flow went down a bit upon refi due to the slightly higher interest rate, 5-year shorter term and increased loan balance - all resulting in a higher monthly payment.
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