Meth, Oh my!

Well one good note in relation to my last post. The Fannie Mae 4 home limit was raised to it's previous limit of 10 financed homes. The requirements for new loans are much stricter and now require 6 months PITI (principal + interest + taxes + insurance) reserve for each rental property as well as a 20% down payment, but these are welcome changes to keep only financially prepared individuals in the game.

So I got an offer accepted on a short-sale property. In the process of doing my due diligence, I paid to have a Meth inspection performed by my inspector at $150. I've never bothered doing this before, but there was evidence of alcohol and cigarettes at the property so I thought it wouldn't hurt. Well the results came back positive with a 1.9 microgram reading. You may be wondering if that is a lot or a little. Well to give you some perspective, the legal limit in Utah is .1 micrograms (so we are 19 times higher than the state limit). Apparently though, this is considered a small contamination and I've since spoken with another invester who was purchasing one with 4.5 micrograms. And if they are actually cooking Meth at the property the contamination can even be much higher than that.

With this new data, I began to call Meth Remediation companies and to my dismay each company gave me a completely different story on the cleanup. I'll summarize what they told me below and I'd love to hear back from anyone that has actually gone through this process before and can give me and any future readers of this blog some advice.

County Health Dept: The county health department representative said that I could clean the property myself and to certify it, I would need to send in a sample of the carpet as well as surface swabs. He said that contractors would all tear out the carpet (which is correct, that is what all three recommended).

Vendor 1: Vendor 1 basically told me that my appraiser was probably someone with a high school education who only had a 30 minute training course on Meth and that his results would likely not even be recognized by the county health department. He recommended retesting the entire house to pinpoint the areas that need to be cleaned. If the cold area return comes back positive, they recommend replacing the heating ducts and he implied simply doing that may allow the property to pass. Vendor 1 said health department should not be giving out recommendations. He also called my appraiser and told him that he may be involved in a lawsuit if I back out of the deal (if the bank decided to sue).

Vendor 2: Vendor 2 told me that if Meth was detected in one part of the house, then the whole house needs to be cleaned. His bid was very reasonable at under $3000 to clean the entire home. The cleaner that he uses is harmful to metal and wood surfaces. He says the heater will likely need to be replaced as it can't be completely cleaned (and it's a metal surface), but that only flexible ducts would need to be replaced. He also said that new or old paint (as well as areas around nail holes) may be damaged.

Vendor 3: Vendor 3 told me that his special cleaner will remove mold, dirt, and Meth and would leave the place looking and smelling clean and fresh. His minimum charge was $5000, but it didn't sound like there would be problems associated with Vendor 2. Vendor 1 claimed that Vendor 3's special cleaner was illegal since he would not disclose it to the EPA and that no chemicals are allowed in the air ducts.

I don't think I could do business with Vendor 1 because he bad mouthed everyone and everything. He was way to arrogant for my style. I liked Vendor 2, but felt that even though he was cheap, it might cost way more in the long run to use him. Vendor 3 was reasonable, but I think I might get one or two more bids before making any decisions. I'll probably ask for references from their last three jobs.

Portfolio Lenders

Since my last post, and yes I know it's been a while, the housing bubble has burst and there are a lot of great deals in the market. You have to be very patient as the banks are taking months and months to respond to offers as they are inundated with foreclosures and short sales.

The huge problem now is getting financing as Fannie Mae has lowered their allowed limit of financed investment properties from 10 to only 4. Most banks follow these standards but a few banks called "Portfolio Lenders" don't. Here is the list of bank that I have contacted that would not take my application because I have four or more rental properties:

• Wells Fargo
  
• US Bank
• America First Credit Union
• Washington Mutual
• Zions Bank
  

These banks are able to lend past the Fannie Mae limit of 4:

• Washington Federal Savings (currently requires 25% down)
  
• Countrywide Financial (currently requires 40% down for non Fannie Mae properties)

So now is the time to get private financing from friends, family, business associates, or via business lines of credit. I am always looking for additional sources of funds to invest and can pay 1-2% per month. Not only a great return on your investment, the money is also backed by an asset that I have purchase at way below market value.

Getting a home equity line of credit - or not...

After reading some real estate investing books, I decided to take a bunch of equity out of our investment properties and either use that money for other real estate investments or possibly starting a fixed Universal Life policy as a tax free investment (not necessarily for the death benefit). I've always been skeptical of life insurance policies, so this was not an easy sell, but this book does a great job explaining the advantages.

Anyhow, I've now talked to all of the banks I normally do business with including, Washington Mutual, America First Credit Union, and Aurora Loan Services, and Countrywide. Guess what? You guessed it, the mortgage crisis we are in the middle of has caused banks to go to the other extreme and stop offering Home Equity Line of Credit (HELOC) loans on non-owner occupied properties. It simply does not make sense to me that a bank would be unwilling to loan me money on an investment property if I clearly have tens of thousands of dollars of equity in the home, especially if I'm not even reaching the 80% loan-to-value (LTV) ratio that most banks prefer to stay at or below. I've even heard of some banks lowering the limits on existing HELOC loans without even contacting the homeowner. I guess I may just need to hold out until this crisis is over.

Cash Flow Real Estate Investing in Utah

My goal of purchasing two properties per year to use as rentals is under performing right now. I have made a few offers, but most properties aren't cash-flow positive with only 10% down.

Let's take for example, a $200,000 home (below median home value in Utah). If I were to pay 10% down I'll be financing $180k. At 7.5% (a normal non-owner occupied investment property rate), my 30 year fixed payment is $1259 which does not include taxes and escrow. A quick search of the MLS shows 4 homes listed exactly at $200k today and all of them are 3 bedroom. There are several pages of homes for rent that have 3 bedrooms in the Daily Herald and the price range is significant. The 20 that I looked at had rents from $700 to $1450, with an average price around $1100. This means I am $159 negative cash flow per month without considering escrow, vacancies, and repairs. If I go with an interest only loan, my payment would go down to $1125/month which in the end still means negative cash flow.

Utah has become a market where you have to get a really good deal on a property, or pay 20% or more down, before you can produce a positive cash flow.

~Happy Investing

Prosper.com

I have been a lender and borrower at prosper.com for several months and am very impressed with their offering. I took out a loan for myself of $1000 and because of my AA rating received a rate of only 7%. I then re-invested this money back into prosper.com to lend out to other higher-risk borrowers at an average rate of 20%. I realize there will be several borrowers who will not repay these loans so I expect my actual returns will be 10-15%, but this is extra play money that I am willing to take a higher risk in order for potential higher returns.


If you are in need of a loan, I would love to assist you in setting up your loan request and getting it funded. Prosper collects 1% from all loans in order to run it's business. I receive a small referral bonus directly from prosper so I am motivated to help you get your loan. Follow the link below to sign up.



Otherwise, if you would like to lend money out in order to receive much higher returns than your bank is able to offer then the link below is for you. You and I both receive a $25 referral bonus when you are approved as a lender.



See you on prosper!
Please ask if you have any questions.

Tim
http://tmellor.com

New job -- more pay but longer commute

I recently accepted a job offer that will increase my commute from 34 miles to 45 miles each way. My current vehicle gets 25 mpg so I will be spending approx. $3000 in gas each year ($700 more than current job). If I decide to get the carpool pass, it will cost me $50/mo or $600/year but could save me many delays and aggrevations. Luckily the increased wages will pay for this increased cost plus some.

So now that I've defined my values, how will this decision impact them? The two hours of commute each day will limit my time with my family, but does give me the opportunity to listen to audiobooks (lately "The Work and the Glory" and other religious and financial books). It should definately help my financial goals as I will be bringing home about $800 more per month after tax. I plan to raise my retirement saving, and when applying for a loan they generally ask for gross income so I can potentially purchase more properties. Moving closer to work is an option, but we really like where we are right now with our home within 7 years of being paid off (and a great 4.25% interest rate). Another option would be getting a hybrid vehicle so I can always drive in the carpool lane and get better gas mileage. If I were to get 45 mpg and not buy a carpool pass I would save almost $2000/yr.

Core Values

While my family was gone to Montana and I had some free time alone to think and ponder. One of the financial audiobooks I'm listening to recommends setting five core values and make goals to achive those values. A financial goal to make $1 million dollars is not a good goal unless it reinforces a value such as financial security or freedom from debt. So here is my attempt to document my values:

1. God (Service in and out of the church, prayer, scripture study, temple attendance)
2. Family (Raise my children, spend quality time, build my marital bond and relationship, vacations)
3. Financial Freedom (Ability to retire early, travel, serve another mission, be charitable, cabin)
4. Education/Culture/Arts (Plays, museums, operas, travel, site seeing, drawing, photography, lifetime learning)
5. Nature (Hiking, camping, skiing, gardening, cabin, photography, travel)
6. Health (Exercise, eating right)

Now the next step is to have my spouse make her values and based on the two sets of values, make goals that will help to achieve those values. The audiobook makes the point that far too many couples never discuss finances or perform goal planning together (or even at all) and it often causes mid-life crisi and broken marriages since the spouses are moving to two different life targets.

I love google!!!

Google just added yet another feature that I love. Google maps now allows you to save your own custom maps with places you've been or places you'd like to go, or places where you know people, or whatever you want. I've created to personal maps; the first one shows places I've been and the second shows where properties I own are located:

My Wanderings

Trademark Properties Real Estate

You can also add pictures and html descriptions to the places on your map. I'm going to be busy playing with this new toy for several days at least.

Tim

Intro

Education
I earned my Bachelors of Science in Business Information Systems and my Masters of Science in Computer Information Systems. I also have earned a variety of certifications including: Novell Certified Netware Administrator 5.0 (CNA), Novell SUSE Linux Enterprise Engineer 9 (CLE), and Linux Professional Institute 101 (LPI).

Profession

Although I am a computer programmer by profession, my passion is real estate. I currently own two duplexes, and two single family homes that are rentals. I obviously don't love being a landlord and fixing toilets, but I love the thrill of getting a good deal on a home and seeing my tenant pay off my mortgage.

Family

I am happily married to a wonderful woman and have three wonderful children. We own our own home and love to see some progress on our yard each year. We love to be outside together or playing games when we don't have work or other obligations.

That's all for now...see my profile for more information.