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Monthly Archives: November 2018

It’s a Go! And So Is the Other One!

The scary asbestos near the air conditioning unit is just outside of this picture. It will go away!

Oh wow, it’s been an exciting time over here in the Cameron office. There’s so much news, it won’t fit in one post!

First Things

The asbestos report finally came in on The Hermit Haus. And yes, they found some. We had dreaded that.

But, hooray, it was only in one tiny spot! It’s in the grout around the window air conditioner in the big office. That will be easy to remediate, because we can leave it there and cover it up safely. So we are moving forward on the project…or will as soon as our team is available to work on it.

We do have a bid from our fabulous Hermits’ Rest Enterprises contracting team, which means we know what the first phase will cost us.

Now, what exactly will we DO? We will have a much better idea soon, because tomorrow the architectural team will be here bright and early to start measuring the building.

The house has many beautiful ceilings like this.

But, That’s Not All!

The architects will also be taking a look at the house directly behind the church, which we now have under contract. We’re getting it from a wonderful family who want to work closely with us as we move forward on the project. We’re all for it, because we feel like friends already.

This property is amazing, and is just begging to be brought back to its former glory. The architect, who loved how square the church is will be a bit ovrwhelmed by now NOT square the inside of this house is, even with its four huge rooms on each floor.

We have a couple of different ideas for business plans with this property, so we are having some folks look it over to provide feedback on the feasibility of different options. Any option will be FUN.

The house has been changed a lot over the years since it was built as a doctor’s office and residence, and its history has led to some challenges, but we’re just going to take our time and work on it, tackling the most important structural issues first. We may even use the downstairs for our offices until the Hermit Haus renovation is done. So many possibilities!

In the coming weeks, we will share some of the history of the Gillis House, run ideas past our devoted readers, and share even more new developments. In the meantime, here are just a couple of teaser photos of the “before” interior.

Curved ceiling and stained glass in a front window.

Beautiful fireplace in the formal front room.

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Since Suna Asked…Debt Coverage Ratio

Speaking of filling vacancies, we just gave new tenants keys to Villa Park A! It looks much nicer now with the plants trimmed a bit, but Sue Ann forgot to take a picture yesterday.

This post is another segment in the unofficial series “What Makes a Good Deal.” Today I’ll talk about an obscure statistic called Debt Coverage Ratio (DCR). DCR describes the ability of an income property to pay for itself and pay the owners a premium for managing it. It comes from the commercial real estate market, but I like to apply it to the single-family market. After all, renting houses is a commercial venture.

To calculate the Debt Coverage Ratio, you need the annual Net Operating Income (NOI) of the property and its total Debt Service (DS) for the year. Here are a few definitions and considerations:

GPRI
Gross Potential Rental Income is the amount you would make if all units were fully leased at market rent. You will seldom realize this number, because you’ll see at least some vacancy and market rents tend to vary over the year. For example, you have a house that you could rent today for $1200 per month (GPRI=$14,400). Your current tenant pays $1100 per month ($13,200 actual). If that tenant’s lease renews, you must decide if bringing the rent to market is worth the potential vacancy expense ($1100 if you can get a new tenant in place in one month) plus the cost of renovating the unit.
NOI
Net Operating Income of the property is the GPRI left over after paying for the operating expenses such as taxes, insurance, vacancy, and maintenance. It does not include the reserves for capital replacement (although you should definitely have them) or debt service.
DS
Debt service is the total amount of money required to satisfy all lenders. If you have both a mortgage and a home equity line of credit (HELoC) on a single-family dwelling, DS is the total monthly payment required for both notes multiplied by 12.
DCR
To calculate DCR you divide NOI by DS. When evaluating a potential investment, multiply the monthly pro forma NOI by 12. When evaluating an investment you currently hold, use the actual NOI for the last year.

Here is an example calculation:

GPRI $14,400 The annualized market rent of $1,200 per month if everything goes perfectly
Taxes – 4,623
Insurance – 1,223
Repairs – 750 Even if you’re leasing new construction, something will break.
Vacancy – 600 Plan on at least a couple of weeks of vacancy each year. You may need more in some markets. And don’t forget about commissions and advertising.
NOI $8,364

I’m using $600 for vacancy because I’m assuming one month vacant for every two years, or a 95% occupancy rate, which is pretty close to what my single-family properties average. Multi-family properties are considered “stable” at 90% occupancy.

First Mortgage $7,800
Second for repairs 1,200
Total Debt Service $8,000

DCR=NOI/DS

Just looking at the numbers on this example, you can see I wouldn’t be getting rich from it, unless I were banking on appreciation. Dividing the NOI ($8,364) by the DS ($8,000) I get a DCR of 1.05. That means for every dollar of debt the property pays, I would get to keep a nickel.

But if you look at the current actual rent ($13,200), the NOI is $6,004. DCR becomes .75. Now I would have to kick in a quarter for every dollar of debt service. Ouch!

On commercial investments, lenders expect DCR to be at least 1.25. You should be able to keep a quarter for every dollar the property pays in debt service. That is a reasonable expectation even on single-family rentals.

Luckily, I can turn the formula around to cipher how much rent I need to achieve that goal.

NOI=DS*DCR

If I want a DCR of 1.25 on the $8,000 annual debt service, I would need a $10,000 NOI. Assuming the other expenses stay the same, that means a GPRI of around $18,000 or $1500 in monthly rent. That’s $300 a month more than current market rent and $400 more than the property currently generates.

If that increase isn’t reasonable, I need to either walk away from this opportunity or find a way to force appreciation by spending more money to improve the property to make it attractive at the higher rent.

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Rattlesnake Fulfilling Her Purpose! And Is Another One on Its Way?

Our foster dog, Sweetie, asleep with my youngest Jacob, and Maggie.

What a wild couple of months! We have finished our move into the Rattlesnake house. What an adventure that has been! Nothing really major, just random things that kept me on my toes. In addition to that, I have opened her up to foster dog named “Sweetie.” She’s a great dog. That saying is true that I can’t save them all, but fostering comes close. Fostering is a great way to figure out what kind of dog you want and what temperament is a good fit for your family. I’m happy to help anyone become a foster or permanent family. There are many dogs that would love to call you “woof” which translates to Mom/Dad.

Our first Thanksgiving at home was wonderful! It was held the Saturday after Thanksgiving. Since we can be thankful everyday, I think it still counts. We had lots of family gathered around, and we had a great time.

This clock fell off the wall, but still worked. Rather than toss it, I made it art.

When I was a kid, the house we all went to for gatherings was the “cousin who lived in the country with the biggest house.” That torch has been passed to me. We have people who like to play horseshoes, musicians, and lots of kids in the family. I can accommodate all of that.

One of the appeals when I first saw Rattlesnake was just how big the inside was. Plus the surrounding yard and carport can hold A LOT of people! The original list of those invited was over 40. We had 14, and we had plenty of elbow room.

Continue reading →

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Deciding If an Opportunity Is Right for You

Not all decisions are binary.

Although the decision to invest or not is binary, the question really boils down to, “Is this the right investment for me right now?”

Your reason for investing should drive the type(s) of investment(s) you invest in. To oversimplify a bit, there are two investment strategies: building wealth and creating income. In the real world, these two strategies are not mutually exclusive. Where you are in life will influence your strategic choice.

Let’s look at an example rental house that requires no initial out of pocket investment. We’ll assume the debt on this property covers the initial renovation and all the costs of acquisition. We’ll even assume the house provides positive cash flow from the time it’s rentable—$50 each month after allowances for debt service, taxes, insurance, vacancy, maintenance, and capital replacement (big ticket items like HVAC units that can’t be expensed off in one year).

Multiple Perspectives

Here are a few ways to look at this opportunity: Continue reading →

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Parkwood Walls and Floors

This interior paint color goes well with the fireplace stone.

Carol sent a quick update on the Parkwood project. Over the holidays, the interior painting was completed. It’s a really nice neutral that goes well with the kitchen colors and contrasts well with white trim.

Work was also done outside, which included yet another dumpster load of debris. This time it’s tree trimmings and brush removal. The back and front yards both look a lot better with the trees trimmed up to look well groomed and cared for.

As for the interior, Carol found some really good deals on stainless steel appliances for the kitchen, which will bring it into the modern era! Today the plan is for Carol and Ray to pick out granite for the countertops. That is always one of the highlights of any project. No one can tell us we cannot have fun and stick to a budget!

The new floors are heading down the hallway!

Right now, the team is working on installing new flooring throughout the house. That’s going to look great! It’s the same luxury vinyl tile we have used in other projects, which is really durable and attractive.

More Photos

Wow, now the trees are trimmed and brush removed. That’s a yard!

 

All those branches and twigs next to the dumpster came from the trees and bushes in the yard. Now you can see a HOUSE in there!

 

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