Sunday, August 07, 2016

Adventures in Real Estate Investing

It's a common Foreign Service life dilemma: to keep or not to keep a house/condo/apartment when hired into a job that will keep you abroad and will provide housing for you.  (Yes, truly a first-world dilemma, this is clear.) It's also a lunch room topic that attracts folks from other tables slide their chairs over and join the discussion, as there are very few of us who have no opinion or who haven't really thought about it much. In fact, there may be only seven people like that and I haven't met them yet.  Nearly everyone falls into one of the following categories:
  1. Owns some form or shape of real estate and rents it out while living overseas.
  2. Owns, but keeps it for their own use and doesn't want the headache of managing rental tenants.
  3. Doesn't yet own, but is considering it in the near future, especially if a DC tour is imminent or if they're looking to invest the portion of their salary that would normally be going towards a mortgage but is now being spent on less, shall we say, durable goods (i.e. weekend travel, dinners, cars, student loans). 
My husband and I owned a small house in our home state and when we packed our bags five years ago, we signed up with a local realtor/property management company in our town and handed over the keys.  We were very fortunate in that our first tenant moved in just days after the house was vacated and stayed until earlier this year.  We were doubly lucky as this tenant took excellent care of the house and garden all those years.  

Sounds good so far, so why then did we just spend every day of our only two-week R & R traveling half way around the world to sell this house and buy a new one, just to turn around and rent the new one? That can't be fun! (It wasn't.)

Here's our not-so-short story, and this is by no means meant to be proper real estate investing advice on the topic, but rather one couple's experience so far that may give others some ideas.  

We'd owned our "old" house for 13 years when we joined the FS. At that time, we'd decided that if things didn't go well in our new life, while we really didn't want to move back into this little house, it would still be a good back-up plan - just-in-case. We also wanted to maintain our residency in our home state and figured that being home owners would be a very strong proof of that continued residency*. We chose to rent instead of selling.  Also, should we have sold it then, we'd have had a pile of equity to then re-invest when we didn't yet have the time, motivation or idea of where to put that income. Frankly, we wanted one less huge decision to make; therefore, renting the house felt like a solid plan that also gave us some time to figure out what we wanted to do with the house without having to rush the decision. 

Our first home together. We owned it for 18 years!

My beloved spring tulips where I learned to love gardening.

Before heading to Colombia, my husband made the house as "bullet proof" as he could for the future tenant. This involved repainting the interior in neutral tones (covering my favorite lavender which not everyone would be so fond of); making the landscaping as simple as possible (including taking down a troublesome tree in the yard that needed a lot of maintenance and dropped branches in winter); replacing or servicing appliances to avoid having to make a large purchase decision by phone with the property manager should one of them fail; and repainting the house's exterior.  As this was all done as part of preparing a rental property, I believe we were able to deduct many of these big expenses, too.  

Next, we interviewed a few property managers and selected one to handle all the details. Each real estate market will have different norms for what these companies charge.  We were charged 50% of the first month's rent to find and place a tenant, including all the requisite credit checking and advertising of the house, and then a monthly fee of 10% of the rent to collect rent and deposit it to our account, to handle any maintenance issues that would (will!) come up, and to do occasional walk-throughs with the tenant to ensure that it was not being beat up.  

At this time, we also hired a landscaping company to take care of the trees, bushes and lawn 2-3 times per month.  The realtor thought this was going above and beyond for the tenant, but my husband had been mowing our particularly steep yard for many years and knew what a bear it could be. We decided that the cost of this yard service would give us the peace of mind that the house was not becoming that trashy rental in the neighborhood that isn't cared for and would help attract tenants who might not be able to handle the mowing themselves.  Five years later, when we walked through the house and yard - it looked exactly as it did when we left.  This small investment ($140-180 monthly) - which could be factored into the rental price - really paid off.  Plus, the property management company handled paying the landscaping company and then this cost was included in our year-end statement of income and expenses which made preparing our taxes much easier. 

So if everything was running so well - why did we choose to sell?

After about four years of distance from the house, sentimentally-speaking, we were able to evaluate it more objectively.  For me, the house had gone from being a beloved first home to purely an investment. And as an investment, it was doing quite well with our low mortgage and steady tenant. But we took a good look at the neighborhood: at the neighbor who was continuing to collect junk cars that were now parked alongside OUR curb (don't get me started), at the neighbor's chicken coop and unrestrained chickens that were still digging in our garden and pooping on our deck (don't get my husband started), at the house across the street's still peeling paint, and we were just was ready to move on.  This decision came to me later than to my husband as I'm the more sentimental of the two of us and those chickens had been pissing him off for years. So when I said, "I'm ready to sell," there was no need to convince him further.

But then we came to a very common real estate investing stumbling block: were we selecting a house for US to someday live in, or to be purely a rental?  For many years we'd tossed around ideas of where we'd like to retire, and the list of possible places ranged from one corner of the country to the other and included some favorite spots we'd visited abroad.  We just kept spinning the "what-if" wheel and finding places that we liked, but then we'd find a problem with that area, then we'd find another location etc... and we were just not making a decision. 

Enter a coworker from our last post who was about one year from FS retirement.  She mentioned off-hand one day that she'd been doing some real estate investing and had done a lot of research on the topic.  As I said in the beginning of this story, about ten heads turned when she said this at lunch one day and the next thing we knew, she had organized all her research into a "brown bag" lunch on the topic for a sizable group of us. She included how to evaluate a rental market, how to select a property manager, how to see if the figures add up to a worthwhile investment etc... It changed my mind completely about our decision. Forget finding the dream property for our dotage - we just needed a new place to park the equity from our house that had a good chance of increasing in value. Pure, simple and non-sentimental.  We added a proviso that we also had to like the place enough that should I cause an international incident and have to leave the FS earlier than expected - we wouldn't hate to live there. 

Our criteria for selecting a place went something like this:
  • The location had to have a stable base of employment for our tenants, i.e. not a one-company town, but rather with a variety of industry from military, to higher education, to high-tech, to medical (for example).
  • The location should be near a major international airport so that we could get to it easily from abroad without changing planes twice and then driving three hours. 
  • The property itself couldn't be too fussy. Meaning no hot tub that could be a liability and a maintenance headache. 
  • No Master Gardner garden that would just go to waste with an uninterested tenant or that would really limit the tenant field to finding the perfect person to care for it. 
  • No houses that had been "re-muddled" by the prior owner and now had to be explained to a perspective tenant. "The spacious master bedroom is here, but to make room for this beautiful walk-in closet, you'll use the downstairs bathroom off the dining room."
  • No septic systems for the tenant to mess up, 'cause when septics go bad - they can really cause a stink!
  • Good commuting distance to the above-mentioned employment centers or decent access to public transportation.
  • Area for a pet as we learned that approximately 75% of renters have animal family members and we didn't want to limit our tenant population so severely. 
  • Good schools, again as this makes for attractive rentals for families.
  • But not TOO many bedrooms, which may attract that family of seven and all their crayons to be ground into carpets and scribbled onto walls.  
  • Low/no condo or HOA fees that eat directly into our profit and generally increase each year without our being around to have a vote in the matter.
Soooo.... after two weeks of intense looking, we finally found a place.  Through this process, my husband and I each developed crushes on a few houses that we eventually, and sadly, had to cross off our list.  For me, it was the perfectly maintained mid-century rambler on the golf course on that quiet dead-end street with the immaculate back yard. But it had a very special heating system that would need pricey maintenance and a Martha Stewart garden that would be expensive to keep up or a damn shame if it wasn't. DANG! Then it was the single-level, family-friendly, great schools house with that huge back yard that was hiding an undisclosed failed septic system my husband had suspected and discovered with some open-source research.  NEXT! And finally, the 1905 awesomely-restored house that my husband really wanted to sink his teeth into someday.  But there was the little matter of the den of level III registered sex offenders (count 'em six!) just one block away from this beautiful Craftsman bungalow**.  Sigh.  

Finally, we walked into a house we never thought we'd buy.  It's pass-the-sugar close to the neighbors; it's in a development that I'm certain years ago we tsk-tsked when they cut down the forest to excavate the building sites, and it's just very Americana cookie-cutter. But the neighborhood is so peaceful and friendly. And kids can walk up a little shady path to a huge county park with wooded off-leash dog areas, a water park, summertime movie nights and two Little League fields. It's high on a hill to get the sunshine and will be away from the flooding river valley below. There's a small yard that's easy for a tenant to maintain and would make a cat or dog happy.  And there are five schools within five minutes' drive. Sold.

Our new investment house.
We bought this house because we reminded ourselves that it's not for US - it's an investment - and that was the whole point of this exercise.  What remains to be seen is how quickly we can rent it and whether or not the house increases in value as an investment should - but that's all crystal ball stuff that nobody can fully predict until after-the-fact.  But with our diligence beforehand, we can sleep at night knowing that we made an educated decision.  I hope that our experience may prove helpful to others in this situation, or at least be a starting point for more lunch table discussions.

*We are very fortunate that our state of residence does not have state income taxes. Because even though someone is posted to Bujumbura - we are still liable for paying state income taxes as a declared resident of that state. This is one reason why we were very protective of maintaining our residency.  To be honest, we didn't investigate the actual criteria for maintaining state residency, but we feel very above-board and honest keeping it through property ownership, voter's registration and driver's licensing there. 

**I strongly advise buyers to contact local police or sheriff's departments to request through public disclosure a listing of all 911 calls made to a certain radius around a prospective house. This is how we discovered the half-way house and the volume of registered sex offenders just one block from a property that we'd already made an offer on and had to subsequently rescind.  This particular information can also be found through online open sources, but the incidence of car break-ins, burglaries, drug arrests etc... can be obtained through local law enforcement agencies. 

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