Thursday, March 23, 2017

A Transparent Look At Our Investment Property's Performance


When buying an investment property, I "run the numbers" to see what type of return I can expect. I make a bunch of researched assumptions, plug them into a spreadsheet and it pops back a bevy of numbers. Based on those numbers, we decided to buy or pass.

Jessi cares about one number: the pre-tax profit. She wants to make sure a property is cash flow positive each month. I definitely care about cash flow, and also the total return on our investment (ROI) since that's what we compare to other investments, like the stock market.

Since I recently completed our final accounting for the tax year, I thought it would be fun to look back and see how we're doing. I also know it's super helpful for others to see real live results. So, gird yourself for a bunch of numbers!

Cash Flow Analysis

Let's start with the cash flow analysis. We currently own 4 properties: LYN is the apartments. COL & JAC are duplexes. FIR is a house we converted into a rental half way through last year.

The line Jessi cares about is the 3rd line. Good news! Each of them are positive, even FIR (The money to fix up FIR is in the "Cash Invested" line).


We target $100/month/unit (line 5) and we're hitting it on the stable properties. I expect FIR to jump up around that level next year as well.

The final line (total ROI) is what I care about most. I expected COL to be at 52%, and we're easily beating that. JAC, however, I expected to be at 16% and it's slightly below that level. I knew it wouldn't be as high as the others because of the large down payment, but this is a little concerning. I was planning to re-paint in the near future, but now I'm starting to wonder if we can afford it.

(Side note: The cash invested in LYN shows $53K. That includes a $50K personal loan. The property is paying off that loan, so it's really $3K invested. That puts the total ROI at ~900%, and increases the TTL total ROI to ~60%.)

Overall, I'm happy with the results.

Classic Property Ratios

This isn't the only way investors look at properties. There are some classic ratios used:


The goal is a Gross Rent Multiplier (GRM) lower than 8.3. Technically my numbers are actual rents instead of scheduled rent (what you're supposed to get at 100% occupancy), but my vacancy rates are low enough it shouldn't matter. I don't personally rely on this number much, but I know others look at it. It confirms that JAC isn't our best investment (but not horrible).

In my opinion, a capitalization rate (Cap Rate) of at least 5-6% is. We're doing slightly better - that's good.

The 1% rule states that your rents should be at least 1% of your purchase price. We knew JAC was slightly below, but the others continue to above this threshold. This is another measure Jessi cares about when doing an initial evaluation.

The 50% rule is that no more than 50% of your revenue should go towards your mortgage. This is actually my first time verifying if we're actually hitting that. For both COL and FIR we did minimum down payments, so I'm not surprised that they're above 50%.

Appreciation

When we buy, we assume zero appreciation. We want the investment to be a solid one even if the market doesn't change. Never buy a property "because it'll go up in value". That's speculating, not investing and creating value (and why I'm disillusioned by the stock market). Still, it doesn't stop me from taking a peak. :)

There's two ways to evaluate the value of an investment property: look at comparative sales, and by an income approach (properties tend to sell at a consistent multiple of their rent). I used Zillow's Zestimate for the comparative sales. My income approach is conservative: take the monthly rent and divide by 1% (the inverse of the 1% rule).


Apparently Zillow doesn't feel comfortable making a guess on the value of a commercial building... The first ROI is comparing 2016 to 2015 (Y/Y). The next two lines are looking at the lifetime (LT) increase since purchase. At the very least, it's nice to know that I could sell the properties for a profit if I need to.

Fun to look at. If anything, it tells me it's OK to move forward with cash-out refinance of LYN. I should not attempt a refinance on any of the others at this time.

Final Thoughts

Am I making a killing? No. But I'm beating the stock market (36% vs S&P @ 9.5% and Dow Jones @ 13.4%). (OK. LYN is pretty good and COL isn't bad either.) Having said that, I spent more time managing the properties than managing my 401K, so there is a trade off. Of course, that's one of the things I like about rentals: there's an opportunity for me to add direct value to my investments, and that's what helped me get a 36% return last year. Plus, I actually enjoy working with tenants and doing maintenance. So it's win-win-win.

As for my next steps, I would like to buy another multi-family property (or two!) this year. Through some research last year, I learned that there are a lot of older folks who bought 1-3 duplexes 20-30 years ago for supplemental income. Lots of them own the properties free and clear (or with very small mortgages), are doing a lot of the managing and maintenance themselves, and have rents way too low for the area. I now have the proven experience of buying and successfully managing multi-family properties that I think I can help these folks fully retire. The plan will be to buy these duplexes at their current value, and then fix them up and raise rents to market rates (and then refinance to pull the invested cash out). This is exactly the same thing I did with LYN. You can see above that that's a winning strategy.

I'll probably be able to buy one property on my own. But I'm also interested in finding people with some cash to help fund deals through the refinance. I hear there's people with at least $25K that would like to outperform the stock market. It would be cool to help current owners retire, help improve homes in the city, and help others earn a better return on their money. So I'll be exploring that avenue later this year.


Friday, March 10, 2017

Our Awesome New Bathroom


When we bought our house in July, we knew the bathroom needed some work. Specifically, the shower leaked and needed to be redone. It was at this point we began to live out the book "If You Give a Mouse a Cookie" in real life (...it'll probably want a glass of milk. And if you give it a glass of milk it probably want...). For example:
  • If you're redo the shower, you'll want to remove one of the walls.
  • If you remove one of the walls you'll need a new cabinet and sink.
  • To get a new cabinet, you'll also need to take off some drywall.
  • If you take one wall of drywall off, you'll probably have to take drywall off all the walls.
  • If all the studs are exposed, you'll probably want to update the electrical and plumbing.
  • Also, if all the studs are exposed, you might as well install a pocket door.
  • You might as well also install a sun tunnel...
You get the idea. We ended up redoing everything. Here's a video of me walking through the bathroom before the project started describing everything I wanted to do.




The final result actually stay pretty close to the original vision. You'll notice I didn't mention the sun tunnel or pocket door in the video. Those were definitely "If you give a mouse a cookie" additions you'll see in the final video below.

During the project I was surprised by the lack of "smart" options. I thought it would be cool to have a shower that somehow recycle water and/or pre-heated the water and/or other magical things, but there weren't any good options. I also ended up putting in standard lights and a standard exhaust fan. There was one fan that played music via bluetooth, and had a nightlight, but the actual fan wasn't very powerful. I also strayed away from floor heating systems, mostly because my floor height didn't allow for it.

But I did install a smart faucet (this one). It's a hands free one with the ability to also control temperature. I also got a hands free soap dispenser. They're actually pretty cool. Not only does it save water, but also helps keep germs away. It takes a little getting used to, but overall we love it. Both are battery powered, so we can still use them if the electricity goes out.

It took many weeknights and weekends, but it's done! Here's the final video:



I also want to thank my friend Steve Gress for helping me. He wanted to learn how to tile and I managed to talk him into also helping with the demo and a bunch of other projects (like hammering nails into an impossible to reach place). Thanks Steve!

And some final pictures.





Now onto the next project: organizing the garage

Friday, February 24, 2017

Why I Like Star Wars (Spoiler: It's About Working On a Mission)

Use the Force Harry
Image: reddit.com
Here's a non-surprise: I like the original Star Wars movie.

The other day, I was trying to pinpoint why I still like it. Thinking about it in the context of the larger Star Wars universe, it really isn't that great: The light saber battle (singular) is really just a tease. The ending doesn't make a ton of sense. And Darth Vader seems tame compared to his younger days.

But Luke.

I like Star Wars because Luke's journey perfectly captures how I perceive my life and where I want it to go.

Here's a guy working a regular job he doesn't love, for a demanding boss, dreaming of a future just out of arms reach. Depressing right? (for the record: I like my job and boss). More specifically, Luke's day revolves around a schedule he doesn't control. He needs to be at work by specific times. When he is doing actual work (like cleaning the droids), he gets interrupted by someone else for another meeting (dinner in this case). It's an extreme version of office life.

Let's call it "schedule based time": How you spend your time revolves around a calendar of scheduled events. Typically, most of the scheduled events are created by someone else, and they span multiple focus areas.

Then Luke enters the hero cycle when he meets Obi-Wan Kenobi (side note, I'm in the "Rey is a Kenobi" camp) and his transformation begins. But, the Force isn't the only thing that changes Luke's world view, his time also changes.

Let's call it "mission based time": You spend your time in pursuit of accomplishing a goal, your mission. Typically, you don't have meetings, but you're the initiator if you do. Plus, you tend to have a singular focus.

This is what happens to Luke. The goal, the mission, is to get the droids to the rebel base safely (at least R2D2. How do people hate Jar Jar, but not C3PO?). Schedules don't matter. Food breaks are no longer mentioned. Even while traveling in the Millennium Falcon the focus is on the mission. There also seems to be an overwhelming sense of clarity on what to do next. For example, Luke makes the decision to save Lea easily because it aligns with the mission.

That's also why I like the movies The Secret Life of Walter Mitty, Ocean's 11, and The Fellowship of the Ring. Each of them transition from schedule based time to mission based time.

Inspiring.

Image: lusipurr.com
There also seems to be a correlation with mission based time and passion (and to a lesser extent "following your dreams"). If you think it's important, other things become trivial and you're willing to let them go.

It's also why I struggle to like the movie It's a Wonderful Life. I mean, I want to like the message, but I can't help but feel it's trying to justify living in scheduled based time. For example, Luke doesn't tell Obi-Wan: "I need to stay and run the farm because people are depending on the crops we produce." That probably would have been the responsible thing. Didn't the hobbit's have responsibilities in the Shire as well?

So if mission based time is correlated with passion. It seems that schedule based time is correlated with unwanted responsibility. (Correlation doesn't mean all the time, just a tendency to appear at the same time more often than not)

It's a tension I struggle with. Personally, I crave to set up my life to be in mission based time, but find a majority of my day to be schedule based time instead.

In Real Life

Stepping out of movies, we see examples of this in real life as well. Business owners tend to live in mission based time. Employees tend to live in schedule based time. High performers, besides being singularly focused tend to live in mission based time: Two great examples are Yo Yo Ma & Stephen King. Here's a snippet from King's Wikipedia page:
He [King] sets out each day with a quota of 2000 words and will not stop writing until it is met... When asked why he writes, King responds: "The answer to that is fairly simple—there was nothing else I was made to do. I was made to write stories and I love to write stories. That's why I do it. I really can't imagine doing anything else and I can't imagine not doing what I do." He is also often asked why he writes such terrifying stories and he answers with another question: "Why do you assume I have a choice?"
Boom.

Image: bensbargains.com
Even Jesus lived in mission based time during his 3 years of ministry. I get that the gospels don't cover every moment and thought (could you image if Instagram, Twitter & YouTube existed?). But it was clear that Jesus had a mission: the cross. He was so passionate about his mission of renewing our relationship with God he avoided "responsible" things like political/civic involvement, a job, and raising a family. Here's a great example in Luke 2:
Now his [Jesus'] parents went to Jerusalem every year at the Feast of the Passover... And when the feast was ended, as they were returning, the boy Jesus stayed behind in Jerusalem. His parents did not know it, but supposing him to be in the group they went a day's journey, but then they began to search for him among their relatives and acquaintances, and when they did not find him, they returned to Jerusalem, searching for him. After three days they found him in the temple, sitting among the teachers, listening to them and asking them questions... And his mother said to him, "Son, why have you treated us so? Behold, your father and I have been searching for you in great distress." And he said to them, "Why were you looking for me? Did you not know that I must be in my Father's house?"
How awesome is that? Even as a 12 year old he lived in mission based time.

So What?

I wish I had a brilliant call to action for this observation, but I don't. My guess is that I'm not the only one who picks up this narrative and subconsciously wants it as well. It is the first phase of the popular hero's journey after all.

My questions are: How do I live more in mission based time? Do I need to run a business full time? Do I need to become a high performer in a single area? Do I need a passion so intense it seems as if I don't have any choice? What if I don't? How do you balance all of this with current responsibilities? Is it OK to be George Bailey?

On the surface, it seems like the "right" answer is more nuanced than my question suggest. But is it? The examples of Ma, King, Jesus, and many others, suggests nuance is not needed.

Perhaps a good start is to stop watching movies about mission based time stories and start working on something I'm passionate about. Though, the trailers for the new Beauty & The Beast does look good ("There must be something more to this provincial life" - right?).

Friday, January 20, 2017

Smart Home Adventures: Amazon Echo (And Alexa)


For Christmas my parents gave me an Amazon Echo. It's pretty cool and we've been using it for a while. Since it's a voice activated system, I thought I'd record a video of my review. It's 10 minutes long, and that was to give you a good flavor for the types of things it does. The game of 20 questions is particularly interesting. Enjoy!

Tuesday, January 10, 2017

2017 Goals: The Maker Year


This might sound weird, but I've been looking forward to 2017 starting for a while. It's mostly because there's a handful of things I want to make and I didn't want to start them until the year started so I could have them as goals.

That's weird, right? Why wait to do something I want to do?

Well here we are and it's time to kick things off officially.

(While writing this Elinor figured out how to open her room's door all by herself... it's going to be an amazing year)

Given all the things I want to make, the theme for this year is "Maker".



1) Get Sore 4 Times Each Week
My first two goals are around health. I signed up for a Tough Mudder with my brother in June and I'd really like to be in shape for it. It's a half marathon plus an obstacle course, so I need to do more than run. According to various sources, you don't need to have 2-hour weight lifting sessions to get 80% of the benefits of lifting. Instead, you can spend a short amount of intense time. The trick is to take your muscles to failure. When you do that, they tear a little bit and then rebuild. How do you know if you went to failure? Your sore the next day or two. So that's my goal.

Furthermore, our bodies operate by the "use it or lose it" rule. So I want to regularly send my body signals that I'm using my muscles. Since sitting is the new smoking, I need to do something to offset it.


2) No Desert or Treats for 1 Month
To stay healthy you need to do two things: stay active and, limit your sugar & carbs. I tired the "scale it back" approach, and that didn't last long. So I'm starting out the year, Jan 1, with no desert or treats. I have a calendar based on Jerry Seinfeld's "Don't break the chain" concept to help keep me motivated.


3) Send 1 Thank You Each Week
This one is back from last year. I tried to go only paper last year and I never built momentum. I'm going to try again this year, but allow myself to use any medium to send the thank you. That should reduce the barrier enough to actually do it.


4) Complete a bevy of home projects
Here's the part where the maker year comes to play.

4a) Wood / Classic Construction
I plan to finish the bathroom remodel. It's turning out to be a large project, but it's slowly coming together nicely. I also want to build a standing desk so I'm sitting less often. Normally my wood projects are functional without any finish. I'm plan to have both function and finish this time. Then I'm going to take what I learned and create a new family dining table because our current one is too small to host large groups of people at our house.

4b) 3D Printing
3D printing (aka additive manufacturing) is the future and I'd like to understand it better. Plus, it just so happens that I work for a 3D printing company and have access to 3D printers (and the software). So I'm going to do 3 simple projects to learn more: an iPhone holder, an Apple Watch stand with integrated charger, and a case to hold my different watch bands.

4c) Internet of Things
I have a desire to better understand how software and hardware interact. Plus smart home things are cool. To learn more, I have 3 projects in mind: 1) get notifications from my laundry machines when they're done, 2) Automatically open and close windows, and 3) a digital photo frame that automatically pulls new photos from different social sources. I know very little about these, so it's going to definitely be a challenge.


4d) Food
Finally, I want to improve the food I'm regularly eating. So I'll be taking an online cooking class which should be fun. Plus, our current cooktop is not great (pots and pans don't sit flat on the burners), so I'm going to research and install a new induction cooktop.


Those are my goals for the year. I'm excited for each of these. It feels like a lot, but the trick will be to focus on one thing at the time for #4.

Monday, January 02, 2017

2016 Goal Review


Well... Well... Well... 2016 is gone and was a crazy year. It should have been called the "unplanned year". Here were the big unplanned happenings:
  • I travelled to Indonesia in March for 3 weeks. I didn't know about the trip until February.
  • We moved. We stopped looking the end of 2015 and put the search on hold because of another unplanned thing (see the next point). Then a property found us and we had an accepted offer within 8 hours of seeing it.
  • We had a another kid - a pleasant surprise - but not planned.
  • I got a new boss at HP and my team merged with my former team. I'm still adjusting to this change.
  • A friend approached me with a business idea based on some research I did. We're in the process of launching it now (more later).
Given all of this, my life looks significantly different today than it did at the beginning of the year. All that to say, from a goals perspective, I did a horrible job of staying on track.

It's kind of embarrassing and I'd rather gloss over it and move onto next year, but I won't.

1) Memorize 52 Bible verses
It turns out that adding verses on top of a lot of existing verses is hard. It started taking significant time to just maintain what I already memorized. It didn't help that after we moved I lost my system. This is my biggest disappointment.

2) Weigh 160lbs
I started P90X and counting calories in February. Then I lost momentum during/after the Indonesia trip and never got it back. Then we moved and I lost my workout space. I actually ended the year 5 pounds heavier. Yikes! 

3) Complete a 1 week water fast
I actually completed this and it was epic! Fun fact: it was during the fast that I landed on the name Samson.

4) Grow ProDIYLandlord
It's all bad news from here on out. I didn't write 26 posts. I didn't even write one every month! This is for a couple reasons. 1) I usually write in the morning, but have been finding it difficult to wake up early enough to write. I also sleep much heavier than I used to. Jessi can get up in the middle of the night and I don't notice. It used to be that Vinnie and I would go on adventures in the middle of the night and Jessi was the clueless one. Now that I'm writing it, this is something I should probably investigate... 2) My research indicated that landlords struggle with one thing: property maintenance. Actually, ALL homeowners struggle with this. My new venture aims to help with this problem. That means less time was spent writing and more time was spent on the new idea.

5) Send 52 thank you notes
Sending physical cards was surprisingly hard. I failed for 2 reasons. 1) I didn't have a good system in place to actually write and send the cards. 2) I felt like it had to be a "big deal" to send a paper card. This goal might come back, but in a slightly different form so I can actually gain momentum.

6) Read 12 books
I only finished 6 books and am in the middle of 2. One of them is "The ONE Thing" which is all about only doing one thing at a time. Keller says that next year I should only have 1 goal and put all my focus on that. After last year, this might not be a bad idea.


In the end, progress is better than nothing: 6 books is better than none and the new venture came about because I was writing for landlords. So in that sense, it's still a good year. Still, I'm ready to move on to 2017!