House #2 – 4210 Chant Teenaged – How to Find Top Notch Contractors to Maintain your Rentals

July 2013

With our first rental, we found a tenant, AND they were paying us rent! They were putting almost 700 dollars in our pocket each month.

Delicious.

This situation felt so good to us that we started having dreams of an army of tenants paying rent every month. Dave found another great deal on a potential house. This time though, it needed more work, but the price was much lower.

We purchased the house for $68,000. It needed paint, new floors, and some updated bathrooms. It was very different than house #1 and seemed scary to us, but we navigated a deal with a property manager who had a business flipping houses to turnkey investors. He agreed to give us a good deal on a rehab project if we gave him the property management responsibilities going forward. Since we knew nothing about rehab at the time, we decided it was a good deal. We signed up for a year’s commitment. The property manager charged us 8% of gross rents as a management fee. We mainly chose this path to make it fairer as it was primarily Dave and me, who were most engaged with the day to day activities. The other three were happy to contribute money, but it didn’t seem fair if only two of us did all of the management, especially since we didn’t know what we were doing. Yet.

Rental House Rehab

We purchased the house and started the rehab process with the property manager. At first, we replaced first-floor flooring with tile, and upstairs with carpet, painted with a more modern color, and replaced broken faucets and re-tiled bathtubs/showers. We also replaced many light fixtures and changed sockets and switches to a more modern white color. I was surprised how fast this process went and really how painless it was if you had somebody managing the entire project. (in this case, the property manager)

The secret here was that my partner D went down to the house EVERY DAY and got every name and number from every contractor who showed up to do work. They were excited to do work for us directly in the future, and we wouldn’t have to pay the property manager’s markup. WIN! Out of this exercise, we got a painter, a floor guy, an AC guy, a general handyman, and an electrician. We were set if we ever decided not to use a management company, and trust me; we decided quickly that property managers were not something we thought we needed to employ.

Final Product Pics

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Rental House Financing

At the beginning of this journey, we were all scared to take on more debt, especially with a group of 5 guys. What if somebody quit or worse died? We made the now foolish decision to put each house in the name of 2 of the five people. It seemed less risky at the time, but in hindsight, we should have had only one person on each loan for simplicity. On this deal, it was D’s turn to put it in his name, but D had no more Fannie “bullets,” so we put it in the name of the LLC. This meant we needed to go to a local small bank and get a portfolio loan. This loan was different from a standard 30-year mortgage because it was not backed by Fannie Mae, nor was the rate fixed. Therefore, after five years, the rate would reset to the going rate at the time and be fixed for the NEXT 5 years. The plus to these loans though, was that they were quick to close and had lower closing cost then Fannie loans.

Cons of a Portfolio Loan

• Shorter amortization period (15 or 20 years) – which means a higher payment per month, less cash flow
  
• higher rate than a typical FHA or Conventional Loan
• Rate is not fixed for the duration of the loan. (Rate resets after a certain number of years. In our case, five years.)

Pros of a Portfolio Loan

• Quick to close – Bank does all the underwriting in-house, so it goes fast
• Less scrutiny than a conventional loan – Since it’s in-house Bank doesn’t go through the same rigorous underwriting like a Fannie loan. e.g., IT doesn’t feel like you are getting a colonoscopy when you submit for a loan. These banks don’t require surveys or full-blown appraisals either.
• Less closing costs. Typically I can close these loans for less than a few hundred dollars in lender fees. This one was a little unique as it was our first, but as we get into a rhythm with these banks, the expenses start to drop.

Here are our numbers on this one. You’ll see over time that this house was a dog for us in the cash flow department. Sometimes this just happens. In the first couple of years, we had tons of repairs and even an eviction, which we will do a whole post on later. However, now in 2018 it has recovered and doing quite well, and of course, it has appreciated quite a bit over that time, but it barely held its own on the cash flow schedule

We also gained invaluable experience with this house as we learned about rehabs with the help of our newly found property manager. We learned that it’s not that hard to manage a few people to do a job. Things like putting in some new floors, new roof, paint some walls, replace some toilets. Months ago, this seemed hard, but now we were starting to get the hang of this! We also got a team of contractors that we still use to this day, and they are excellent and cheap!

Net Worth Pre-House #2

Net Worth Post House #2

Not a ton of increase as it’s still split among five guys, but soon you will see this thing start to take off.

See House #1

See House #3