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Kevin's Thoughts!

Maybe you agree, maybe you don't… find out!

— September 5th, 2008 —

My Corporate Preparation bill came in, along with all the paperwork to file our rental companies 2007 taxes (we used a 6 month extension). $1700!!! Alas, I’m told that’s about right. I was surprised on how much detail was required, including all expenses broke down by each of our six units.

The rental company itself is just doing so-so. Everyone actually paid on time in July, but not since. We had one late payer for August, and two this month – including that one that still hasn’t paid August. They are on the short road to eviction if they don’t make good REAL soon. Seems like everything is breaking too. So far this summer I’ve replaced two water heaters, had one fixed, replaced a stove and a dishwasher, and am dealing with a leaky roof now in one unit. Good thing I’m just looking to build equity, because I’m dying cash-flow wise. At least there are people in all the units – our last one took 9 months to rent (which is a big part of why our cash-flow is horrible). Honestly, I don’t think I would have done this if I had a working crystal ball two years ago. Now that we have the farm, I know I wouldn’t. In fact, as units free up, we plan on selling, leasing-to-own, or leasing each and every one of them. Hopefully by the time I retire, we will be out of that game.

Wow.  Hard to believe its been almost 5 years since we bought our first rental house.  We still have six, but would love to get out of the business.

The rental economy has been bad.  Homes we rented for $1500/month in 2007 are going for $1195/month now.   Its rare that we have all six homes rented.  Fortunately, we can ALMOST cover the mortgages with just five full, but that leaves nothing for hot water heater replacements, air conditioning problems, or anything else that goes wrong.

Basically, for the last 4 years, we have been losing about $1000/month when averaged out over the year.  Not good.

So why are we still in it?  Most of the homes are worth less than what we paid for them.  One, in particular is worth a LOT less – like we have about $155K invested in it and street price is around $103K.

The business is also tying us to St. Louis.  Not a problem when I was employed by that multi-national company I originally mentioned.  Alas, lost that job 2 years ago.  Fortunately the banks don’t seem to care so long as they get their payments on time.

Bottom line:  The business sounded good in 2006, but it hasn’t worked out that way.

I work for a multinational company. I get a nice base salary, and bonuses if I work really hard, and if the company has a good year. Bad year for the company? No bonus no matter how hard I work. Do get that base salary though, presuming it wasn’t SO bad a year that I got fired. Nice medical, dental, 401K, and pension benefits to. Cool to be well employed.

But what happens when that ends?

Last year, my wife and I decided to take a 2nd mortgage out against the equity in our house and use those funds to buy rental properties. About a year later, we have (6), and MIGHT be able to do one more.

Why rental properties? Well… we typically finance them with a 75% primary mortgage, a 15% 2nd mortgage, and 10% down (from our Home Equity Loan). All the mortgages are fixed rates, and because of my day job, we are getting pretty good fixed rates at that. So far, we have been able to rent the units within a month or two of acquiring them, and manage to get enough rent to pay the mortgage and Home Equity Loan payments – so we are extended, but have enough cash flow that the business is more-or-less covering its expenses.

Over time, rent will likely go up, but our expenses are relatively fixed. The higher the inflation rate, the faster these units will become profitable – they are basically inflation proof. We are in deep ca ca if we enter a period of deflation, or if the economy gets so bad, that people losing their homes to foreclosure become homeless rather than renters. If the economy is great, our business profit potential suffers – until some of those smaller loans get paid off, after which the company will simply be less profitable, but should still return some profit.

Alas, there is no free lunch. We are finding each unit takes about 4 hours a month in effort to maintain. Because of that, we plan on maxing out around 10 homes. More than that and the demand would impact my day job, and thats not acceptable.

Still, in the end, we hope these units will make a nice supplimental income for us when I do retire in 15 or so years. Having such an income stream will definetly make retirement a lot easier financially.