Rental Property

Buying a vacation home on a teacher’s salary

April 6, 2011

Investing, Create wealth, control your cash, retirement planning

It’s at your vacation home, you whining harpy. (By the way, this picture was taken in Florida. Miami, to be precise. On February 11. A school day.

As philistines and libertarians, we make it a point never to listen to NPR nor watch PBS (why would we, they don’t broadcast football.) Unless, of course, NPR runs a story on a college classmate of ours. Especially with such an auspicious introductory line:

There are wealthy Canadians buying multimillion-dollar beachfront homes. And there are people like “Kirk”, who recently bought a 2-bedroom condo in Fort Myers, Fla., sight unseen.

Kirk is the high school teacher in question, and it’s not as if he retired from a lucrative career in personal finance before switching careers. He paid $56,000 for the condo, which sounds like a price out of the 1970s.

The NPR interviewer didn’t ask him how he afforded a vacation home on a teacher’s salary, especially with a couple of kids to feed. Nor did NPR ask him how he ever managed to date Khyrstine Thibeault, the hottest girl on campus, despite being neither a jock nor a rich kid nor remarkably good-looking. That’s where Control Your Cash came in. Kirk elaborates:

We went on vacation to Fort Myers Beach about 3 years ago, but I knew the price was cheaper inland than it was near the Gulf. We actually didn’t stay near this particular unit at all.
We bought the unit in early May and then we saw it in late August. We bought through Florida Home Finders of Canada in Brampton, Ontario. I saw pictures of the unit, went online to see what the area was like, what units were going for, etc. We didn’t use, or need, an appraiser or home inspector because FHFC had done all the legwork.
I borrowed C$50,000. I had $10,000 from a condo sale that went sour in Whitby, Ontario. With the Canadian dollar at U.S. 96¢ the Fort Myers condo was a shade under C$60,000.

By go sour, he means that the condo company went out of business and he got his down payment back.

I paid for it with a home equity loan over 25 years. I think it was 3½% or 4%. I wanted to keep it separate from the mortgage on my primary residence in Canada, just in case we do a home renovation. (If we do,) then I will extend my mortgage.

If you’re thinking about a big purchase like this, especially if it involves big financing like this, understand that a 3½% mortgage and a 4% mortgage aren’t interchangeable. You don’t just round the number to the nearest integer and hope for the best. If the interest rate on this home equity loan is 4%, Kirk would be paying $263.92 monthly. Which is $79,175.53 over the course of the loan. If it’s 3½%, he’d be paying $250.31 monthly, or $75,093.54. Or $4.081.99 less over the course of the loan.

I have an off-site property management company that guarantees me a renter and takes 8%. Every month they rent it out for $792, and deposit my share of that in my bank account. The homeowners association takes their $273 (Editor’s note: holy crap) and then I’m left with about 470ish a month. ($455.64, by our calculations.) I pay $122 on my loan every 2 months, (sic, he means weeks) so I guess I’m ahead about $200 every 2 months (not sure what he means here, but we think it’s “every month”. See below). My tax bill was just under $1000 at the end of the year. Tax time is coming up, I’m not sure what to expect there.

Our take? This condo was a sufficiently smoking deal that Kirk will still profit from despite making a couple of mistakes.

Here are a few tips if you fancy yourself a low-level land baron:

1. Know your numbers. Nothing’s more important than this.

Kirk had only a hazy idea of his interest rate. A 50-basis point difference is huge. His low estimate is 1/8 less than his high estimate.
Assuming the higher estimate, he nets a pre-tax $205.33 monthly. Hopefully a) it’s a fixed-rate mortgage and b) Kirk knows that it is.

2. This doesn’t necessarily apply to Kirk, but know your terms, too. If you don’t, ask someone. Keep asking people until the answer is no longer ambiguous. We know of one 40-something apartment dweller who was ready to “send some guys over” to deal physically with her old landlord. Why? Because she had been on a lease option, which works like a regular rental arrangement for a fixed term. At the end of the term the renter has the option to buy the place.

She had never heard the term before, and assumed that it meant her monthly payments were going toward eventual ownership of the condo, like an ordinary mortgage. No, those monthly payments were going to pay her landlord’s mortgage. Her lease expired and she had neither the tens of thousands of dollars on hand, nor financing in lieu, to buy the place. She had been nothing more than a renter, and didn’t even realize it.

(Editor’s Note: Therefore, a lease option is a wonderful thing to be on the other side of. Worst-case scenario, you sell your property for a price you already agreed to, all the while having had your mortgage payments taken care of by the renter. Better-case scenario, the lease term expires, the renter can’t afford to exercise the option and you get to keep owning the place. There’s an excellent chance of that happening. There’s a reason why most renters are renting, and that reason is fiscal indiscipline.)

Assuming Kirk’s numbers are consistent, more than 40% of his net condo revenue goes to taxes. Still, if he’s “getting paid” $1400 a year to own a modest vacation home, there are worse places for him to have put that home equity loan.

**This article is featured in the Yakezie Carnival: The Chuck Norris Edition**

Silence. It’s just good business.

December 23, 2010

How bad is our tenant? This is an interview with our prospective new tenants, a family of Gypsy bear herders

The Control Your Cash authors own an office building. In a couple of weeks, the tenant is supposed to start the 3^rd and final year of the lease. It calls for a fixed annual rent increase.

The tenant was late with the rent once before. That time, the good-cop author waived the 10% late fee after listening to an excuse from the tenant’s octogenarian chief financial officer. The good-cop author stressed that this would be a one-time-only thing.

A few weeks ago, the tenant asked that the rent not go up next year. He offered nothing in return, he just hoped he’d get $6000 by asking for it. Maybe he thought he had leverage – the building’s been half-empty for some time, leading him to believe it’s a renter’s market. Perhaps, but a contract is a contract.

We refused, and December’s check never arrived. The bad-cop author left a polite and unambiguous voicemail with the boss and spoke with the CFO, who refused to give a straight answer to the complex and nuanced question, “Did you send a check?”

The tenant himself called the good-cop author a few minutes later, claiming that the bad cop threatened and disparaged the CFO (he didn’t.) The tenant added gratuitous lies, such as “the CFO thought he meant January’s rent.” The bad cop overheard this, grabbed the phone, stated his position, and the tenant started spewing profanities and, swear to God, asked if anyone would be interested in “tak(ing) it outside.”

Indisputable conclusions:

-in Western society, the standard strategy for requesting a favor involves groveling and pretending to like the person who can dispense the favor. Berating and threatening are almost never part of that strategy. Therefore,
-the tenant has no intention of sticking around past December.

Additional points: the tenant opted to communicate exclusively via text from that point, and exclusively with the good cop. In fact, one of the texts stated that the bad cop “is not to contact us anymore.” Yes, the delinquent tenant is making demands while stealing office space.

Also, the tenant stated that he’d refuse to pay the 10% late fee. He asked the good cop if she really wanted to “destroy this business relationship” and if she’d want to “lawyer up” in lieu of caving into all the tenant’s demands. These would include, apparently, refusing to pay the current month’s rent. Nowhere in his diatribe was there a word about where December’s rent check is.

In the later chapters of Control Your Cash: Making Money Make Sense (available at Amazon and Barnes & Noble), we argue that if you’re going to invest in houses and rent them out, hire a property manager and pay her 10% to assume control of your headaches. Commercial property doesn’t typically work that way, and shouldn’t, but we at least weighed the benefits of hiring a property manager while dealing with this idiot tenant.

We didn’t get mad. We sent a cold and impersonal email to an eviction company and hired them. They charge $200 to put a notice on the door telling the renter he has 10 days to pay the balance (which just got $200 larger) or get out. The renter would still be legally obligated for not only December’s rent, but the remaining year on the lease. The security deposit we initially collected covers only a small part of that.

So he started using intermediaries. We got a call from the broker who originally engineered the deal, a quasi-friend with no dog in this fight. This is the equivalent of having an argument with your significant other and placing a call to the person who introduced you. We didn’t bother calling back the broker who, to her credit, had only two things to ask the renter: What am I supposed to do about this? and Did you pay your rent?

Then yesterday, a voicemail from someone we’d never heard of. Another real estate broker, but one who talked as though she was representing the tenant in court (“Mr. Smith really wants to pay the rent, and hopes both parties can agree to a mutually beneficial solution.”)

Huh?

If the tenant’s talking to other brokers, he clearly wants out of his lease. Which we’d grant, as soon as he cuts a $70,000 check for the entire remainder of the term. His threats to “lawyer up” notwithstanding, his would be one of the weakest cases in the history of jurisprudence. And why the tenant chose an intermediary whose very identity shows his hand made no sense at all.

The point of all this is manifold for people who want to make money by selling their goods and services to others (which is the only ethical way to do it):

a. If you’re going to be in a position where people can potentially owe you thousands, you need a written contract. (We did.)

b. When previously semi-reasonable vendors/customers/clients/tenants start acting irrationally, sever the relationship before they have a chance to. At least then you’re in control. Even if this tenant had never been late with the rent, why extend the lease of someone so bellicose? Let alone give him a price break.

c. STAY EMOTIONLESS. Take feelings into account in your personal relationships, not your professional ones. If you don’t, you will stay as poor as someone who buys lottery tickets and puts them on her credit card. Crap, this idea is so profound that it should have been a chapter in the book.

We could have made forceful but non-threatening calls to the tenant. We could have shown up (tempting, given his offer of a fight). We could have done what most people in these situations do, which is engage in unproductive conversations that don’t change anything (“When are you going to pay the rent?” “What do you mean you’re not going to pay the late fee?”, et al.) As if he’s going to give worthwhile answers.

Instead, put the phone down and don’t answer his calls (or any intermediaries’.) Because unless he says “here’s a cashier’s check for the full amount”, which he won’t, there’s nothing to talk about and anything beyond that is a waste of time. Hiring a pro and having the law on your side (plus a personal guarantee, agreed to at the start of the lease) makes life a lot less hectic.

**This post is featured in 2011’s First Carnival of Money Stories**

Buying a vacation home on a teacher’s salary

Silence. It’s just good business.

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