Bassackwards Landlording going well! How do I get more capital?

[nhermanson]

Hello,

I will do my best to give as much detail in as succinct of a manner as possible.

1) Bought home 1 in Sep 2013 for $220K w/5% down.  (Equal commutes for the wife and me).  Most likely stretching our income as it was at the time roughly $87,500 and our mortgage all-in was $1505. 
2) Then, we started slowly renting rooms in the house.  $400/mo rent as of 1/1/14
3) $1000/mo in rents as of Sep 2014
4) $1500/mo in rents as of May 2015
5) Then, as we/I learned that wife was pregnant, and the further along she got the less likely it was that she would be going back to work anytime soon after the baby, we were somehow able to purchase a second home 6 blocks away from the first.  We bought home 2 in Aug 2015 for $164,500 and it came with an $1105 all-in mortgage. 
6) We also grew rents to $2040/mo as of Oct 2015.
7) My income grew relatively rapidly from roughly $55,000 in 2013 to $75,000 in 2015. 
8) I started a new job in Dec 2015 that pays $80,000 with limited bonus potential.  I see income at $82,000.  This new job is 30 minutes away with no traffic, and 45-50 minutes away with heavy traffic.  I do my best to avoid traffic and get in early and leave late, and then take shorter days on Fridays, but I still don't seem to have enough time with my wife and 5 month old son. 
9) The wife intends to start a professional organizing business in April/May when my mom comes back from Arizona (snow-birding as we live in Minnesota).  I am unsure of the level of income this business will provide, but I am excited for her and see next to zero start-up costs.   

The debate/problem/solution I have/am looking for is:
1) Is there a way to somehow obtain financing to purchase a third home close to my new work location, and then rent out the current second home that we are living in? (be it traditional (highly unlikely w/these DTI ratios) or non-traditional) 
2) Do we sell our second home to then buy a new second home closer to work?  (The second home we are looking at is priced @ $159,900 and has 2 beds 1 bath, and an unfinished basement.  It is 3.1 miles away from my office, and the office has a shower... So, I could bike, run, you name it to work!) (Also, I never did want to ever sell a home in the first place because of realtor fees :( )
* In both of the above scenarios, does it make sense to finish the basement to add another bedroom for the sale price or rental price? (adding an egress window, framing and dry-walling a bedroom, adding drop panel ceiling tile & carpeting)
3) Do we find a place to rent so that we can rent out our current second home?  (We have a dog, so that makes it a little tough, although the dog used to be fun, but is a little annoying with the baby at the moment, so we could potentially find a new owner)
4) Do we move in with parents for a short period of time to really sock away cash?
5) Do we stay put and save up money and deal with the commute?
6) Any other ideas you can come up with MMM community?

Current Balance Sheet
Assets: $470,500 ($61,000 currently liquid, although $33,000 is pretax & pre 10% penalty money) *Updated from $439,000 on original post
Debts: $434,000

Thanks for your input.  I know it may not look like a great situation, but we have really come along way.

[obstinate]

After all that work, you have only $5,000 more in assets than debts? Either you've added things up wrong or this is not working out well for you, and you need to drop back and punt.

[nhermanson]

After all that work, you have only $5,000 more in assets than debts? Either you've added things up wrong or this is not working out well for you, and you need to drop back and punt.

Yes, I technically added wrong.  It was late, and I just remembered that on Mint.com, I changed my home values to be the amount I think I would receive (after an overestimated 10% selling fees) if I sold my homes.  I tend to be super conservative too, not wanting to overstate anything.  So, after adding back the selling fees, and including the true market value of the properties, the balance sheet would look more like:

Assets: $470,500 ($61,000 currently liquid, although $33,000 is pretax & pre 10% penalty money)
Debts: $434,000

One other note, we had a health insurance year that is unlikely to ever occur again. Wife had kidney stones and a baby, I had colonoscopy @ 27 as I was diagnosed with Crohn's disease which came with $900/month prescriptions.  Also, wife left job and joined my insurance, but she had already racked up about $1500 of medical expenses on her policy.  Unfortunately, that of course doesn't carry over.  We spent about $10K out of pocket on medical expenses.  This year, I am on a new diet for my Crohn's and so far have not needed the medication, thereby saving us $900/mo!

[MrRichards]

I'm new here too, granted, but it seems to me you should stop buying things:

Things (not necessarily physical objects) you have bought according to your post:

• First home, which was a stretch with your two incomes at the time
• Second home, also a stretch as indicated by your use of "somehow"
• The luxury of a stay-at-home parent/spouse
• A long commute
• A dog

So, umm, maybe stop buying things?

And there are fees selling anything, real estate is no different. You can't just not sell anything because there are costs associated with selling. The costs are negligible if you don't buy a house every other year.

Side note: In my experience, any business worth going into has entry costs.

[olivia]

Are you going to buy a new house every time you change jobs?  You just started the new job 2 months ago, you should probably stay put for a while and see if you're going to stay at the job long term. 

It makes zero sense to buy 3 houses in 3 years with no forethought.  Plus I can't imagine you getting another mortgage with your income and debt/asset ratio.

[nhermanson]

Good input,

Mr Richards: First home (more expensive than I wanted), dog, and baby I may have been talked into by wife! :) Although the baby is cool.  No, in all seriousness, he is quite a joy. 

Please keep in mind that our current housing outlay is effectively $570/month as we are +$535 on the first property and are paying $1105 on our second.  One could argue that this is not exactly true because of the maintenance expenses that we will incur, but there are also the tax benefits as well.  I also mentioned that we are willing to ditch the dog.  Sometimes better job opportunities come up.  Remember, I'm trying to "buy" a short commute.  I didn't "buy" a long commute, but "bought" a higher paying job which also has much better advancement opportunities.  Maybe I'm silly, but I thought the Mustachian way was to be amazingly resourceful always looking for ways to enjoy what you have and optimize your situation. 

olivia: I do intend to stay in the job for the long haul.  That's why if I need to work long hours for the next 3-5 years, it would be nice to be closer to work.  The second home is only 6 blocks away from the first, so I did have some forethought there:  A) Easy to manage w/proximity, B) We enjoyed the neighborhood, C) Reducing our total housing outlay each month.

Again, I appreciate the input, but I like to be a positive creative problem solver.  I was thinking that potentially I could hit up some other sources for funding.  Family, friends, colleagues?  Maybe this is also crazy, but I'm sure some of you have done it before, and done it successfully.

[olivia]

Good to hear you'll ditch the dog. Are you going to throw it in a shelter or just get it put down?  Are you open to ditching the wife and/or kid, too? Stuff you make a commitment to that doesn't offer a good ROI will really get in the way of FIRE.

[nhermanson]

Ugh... I'm not that terrible of a person... We would find a good home for our dog, one that would still allow us to see her. My parents or my wife's parents both recently lost their dogs. (Of old age).

[SwordGuy]

Looks like you rubbed someone the wrong way. :) 

You're grossing $535 a month on a $11,000 downpayment.  That's $6,420 a year on a $11,000 investment, or 58% cash on cash return based on gross receipts.

I'm assuming that $535 a month gross profit covers PITI, Principal, Interest, Taxes and (Home) Insurance.

It doesn't cover vacancy costs, refurbish/cleaning costs, property management costs or repair costs.  How about termite coverage or HOA fees?   If you start to factor those all in that 58% can dwindle down really, really fast.   Even down into the negative percentages!

Rule of thumb is to have minimum rents of 1% of the purchase price, or $2,200 vs the $2,040 you currently get.   Over time you are likely to get burned by some major repair bills or a bad tenant.  And, since you are blithely spending that $535 a month instead of saving it for that kind of problem, it would be very easy to fall behind.   Thankfully you have a cash stash to cover this kind of thing, but if you are buying more properties that cash stash will get used up in more down payments.

The properties I'm currently renting are at 1.6% and 1.68% of purchase price.   Then again, I'm not buying ready-to-move-in properties at retail prices.  I'm buying fixer-uppers and fixing them up at at total cost of about 60% of retail value. 

If you are serious about investing in real estate, you need to stop buying properties and then trying to rent them out as an apparent afterthought.   You need to buy them at the right price and right terms so you're pretty much guaranteed to make money from the get-go.

Get a book like this one and really learn how to do the numbers.  This is too important to fly by the seat of your pants.

http://www.amazon.com/Estate-Investor-Financial-Measures-Updated/dp/1259586189/ref=sr_1_2?s=books&ie=UTF8&qid=1455505642&sr=1-2&keywords=cash+flow+real+estate+in+books

[andyp2010]

Sorry to take this off the original topic but it'd be great to find out how you kept your Crohns at bay with just diet. Wont be stopping my medication as it's so cheap it's practically free but god could I do with a boost in energy or at least a little consistency. Is there a name or just one you've found that works for you?

P.S. I'd be very nervous being over 80% LVR but outside the US we are a little more conservative it seems.

[jda1984]

By the prices you're throwing out, I'm guessing you're in the Twin Cities market.  I have some real estate here and am doing pretty well with it (about 1.2% rent to current value).  It sounds like your last purchase was a poor choice, though one you jumped into at the time due to other constraints (baby coming, near the other house, etc.).  I'm not sure where your job is, but 30 minutes (presumably by car) could be 8-30 miles depending on traffic/route/time of day.  If traffic is terrible, but the office is close, consider biking.  There have been times where biking 13 miles to my suburban office is faster than taking the drive through traffic.  That's not the rule, but occasionally it comes out ahead.  If it's longer, then I'd look into moving closer.

I'm not sure of the size and/or location of your second place.  If it's 2 bedroom, in decent condition, in a somewhat nice area, you can probably get somewhere between 1050 to 1200 per month for it, which is less than you should for a rental.  This leads me to believe you should sell it, though I realize you'll lose some money on the fees.  Another idea--maybe you could "swap" houses with someone in your target neighborhood.  I would want to structure it as mutually renting (you lease to them for $1100/mo, they lease to you for $1100/mo) to provide some legal recourse, but it could be a win-win if there is another family that wants/needs to be where you're leaving.

Depending how close your parents/parents in law are and the relationship you have with them, temporarily living with them could make a lot of sense.  If they're home during the day your wife can have some adult company, they will get to see their grandson more often, and you can save some money.  If entering into something like this, I would set some time to review the situation and decide next steps.  It doesn't have to be "move out", but taking a look at how things are working in say 3 months is a good idea so that neither side feels stuck.

[2Cent]

Depending how close your parents/parents in law are and the relationship you have with them, temporarily living with them could make a lot of sense.  If they're home during the day your wife can have some adult company, they will get to see their grandson more often, and you can save some money.  If entering into something like this, I would set some time to review the situation and decide next steps.  It doesn't have to be "move out", but taking a look at how things are working in say 3 months is a good idea so that neither side feels stuck.

I would recommend against this unless they have a place where you could live as a separate family, like second kitchen, bathrooms, living room, etc. Else for a couple thousand dollars you risk ruining the most important relationships in your life.   Not worth it. Even with a probation period, it hurts the relationship when you find your parents don't want you to live with them, or you or your wife doesn't want to live with your parents.

[jda1984]

I would recommend against this unless they have a place where you could live as a separate family, like second kitchen, bathrooms, living room, etc. Else for a couple thousand dollars you risk ruining the most important relationships in your life.   Not worth it. Even with a probation period, it hurts the relationship when you find your parents don't want you to live with them, or you or your wife doesn't want to live with your parents.

2Cent, I agree with you in general.  It was an idea the OP threw out, so I offered some thoughts on it.  I know several families that have done this successfully, but unfortunately also know of a few that it didn't go well with.

OP, you know the dynamics and space considerations.  Weigh the risk of the relationship souring more heavily than the money saved.

[MrRichards]

I was thinking that potentially I could hit up some other sources for funding.  Family, friends, colleagues?  Maybe this is also crazy, but I'm sure some of you have done it before, and done it successfully.

Are you suggesting that you try get enough money to buy a house out of your social network? I don't think I've seen that kind of advice here.

[nhermanson]

@Swordguy: Thanks for your input, I will definitely review.  If you were in my shoes, which you are not, would you advise selling any properties?  I understand that it can be wise to cut losses, or avoid compounding mistakes.  Maybe I'm trying too hard to fit a square peg in a round hole?

@andyp2010: I'm generally on the SCD (Specific Carbohydrate Diet).  I try to avoid highly processed foods and eat a lot of meat.  (I'm working on adding in more fruits and veggies, but I used to eat a ton of breads, crackers, chips, etc.) http://www.breakingtheviciouscycle.info/

@jda1984: Yes, I am in the Twin Cities Market (the Como neighborhood in St. Paul).  I work in Edina so it is a 20 mi commute.  Home one is a 3br/2ba with a non-conforming basement br that we can add an egress window to, home two is a 2br/1ba w/an unfinished basement.  The swap idea is very interesting.  Also, the in-laws thing, yeah that probably wouldn't work.  The only way would be next winter when my mom isn't home! :)

@MrRichards: Yes, my social network.  I don't think I've seen it here either, but just throwing out all options. 

Most reasonable minds, it appears, are telling me to stay put for awhile.  Seems fair.  :)