Show Me (You) The Money!

As I sit around the house relaxing with the family I've had some time to ponder on what a crazy but eventful year this has been. The number of projects undertaken and new skills learned from this adventure couldn't be counted on toes and fingers combined.

One of the goals of this blog has been to provide some insight to others on the actual costs to renovating a 100 year old property. In today's post I will be "Showing You the Money". Below I provide an exposed look at where my major expenses have been and what kind of work I was able to get done within my budget.

What does it cost to replace a roof, how about gutting a bathroom, or how much plumbing work can one get done for around $6,000? These are questions that filled my curiosity before starting this project, and might provide useful foresight to others in the budget planning phase. As I've been running through all the projects in my head, I pulled together costs and added a brief summary of the work for all to reference. Since purchasing the investment property for $240K last March, there has been around $87K of renovation costs put into the property. Of this $87K, the project funding has come from a combination of insurance money (roof damage), bank renovation loans (203K Streamline), and cash out of pocket.

Renovation costs have been focused in two main areas: long term infrastructure investments (roof/electrical/plumbing/masonry), and rent generating investments (bathroom/kitchen renovations, light fixtures, appliances, ect). Completing these repairs has has improved the property from a rundown foreclosed building into an income generating 2-flat. With the bleeding of MAJOR project costs slowing, and my tenants now providing a monthly rental income of $1,400/month, the much anticipated start to my ROI has begun.

In my next blog I'll be diving into some of the numbers behind the rental property. We'll discuss cash flow positions and some of the trade offs that went into purchasing this investment property.

"Lien on Me"

After 3 months of navigating through a legal nightmare I'm long over due for some updates to the blog. I mentioned in my last entry in July that learning about liens has been a very eye opening experience, and something I think worthy of its own post for those doing serious renovations.

Liens 101: A lien is a legal mechanism that uses the title to your property as collateral to ensure payment to contractors for materials or labor. If for example you hired me to tile your bathroom floor for $2,000, after I complete the job there is a set amount of time you have to pay in full before I am allowed to "lien" your title. When a title is liened there are two main concerns for the home owner. The first is lenders will not touch a property with a lien, it must be cleared first. If you're looking to sell or refinance you are hosed until the lien is lifted. The long term ramifications could include the bank foreclosing your property to pay off the lien, but this process can take years from my understanding and often times extensive legal fees for the contractor.

So you may be asking yourself, why did the contractor lien you? Why didn't you just pay the contractor what he was owed and this problem would have never come up? Come on dead beat, pay up! If it were that easy, then I wouldn't have a story to tell now would I?

To explain this modern day Catch 22 I must give you a three sentence overview on 203K loans. 203K loans are deserving of a post of there own in the future, as they were the essence of how I pulled off this renovation; but, for now a brief overview will have to suffice.

203K Loan 101: A 203K loan at its core is a very low interest construction loan that is backed by the federal governments FHA (Federal Housing Authority) program. To lower the risk on these loans certain lender requirements exist, one being most banks require a general contractor to run your subcontractors. (They assume you need a babysitter) In this case two checks are issued to the General Contractor "Babysitter", the first is 50% up front and the final 50% upon completion.

What happens if the bank pays your General Contractor the first 50%, but the General Contractor does not pay his subcontractors? Maybe the GC just took a surprise vacation somewhere and fled the country, bet it on some high stakes poker, or used your money to pay off other debts. Your first thought might be, no big deal you have a contract with the GC and he got paid. Not my problem right? Surprise... Surprise... I thought the same and was completely wrong!

In my case the general contractor used my money to pay other business expenses and claimed he would use the second 50% to pay his subcontractors. For obvious reasons I didn’t want to pay the general contractor another dime due to trust issues, however he threatened to sue me for contract breach if I paid his subcontractors the remaining amount directly. The subcontractors on the other hand wanted the money for completing work and were threatening to lien the house.

The Catch 22: (“Screwed Either Way”)

1) Pay subcontractors directly to prevent getting my home liened, thus getting sued by the general contractor for contract breach

2) Pay the general contractor, risk losing all the money if he doesn’t pay the subs


[THIS IS WHERE IT GETS EXCITING!]
If you’re still actually following along with this legal predicament then I’m about to explain how this got worked out after 3 months of headaches. My contractor agreement had a clause that stated the bank didn’t have to pay the general contractor if there were unpaid sub contractors or if liens were on the property. It also stated the general contractor was legally responsible for any legal fees I had to pay to remove a lien.

Solution: The solution came down to telling the general contractor I was asking his subs to go forward and lien my property. At this point I would be starting the legal process, and per our agreed upon legal contract he would pay for my laywer. The GC, not wanting to occur legal fees, quickly forwarded me a contractor termination agreement that allowed me to pay his subcontractors directly. At this point the subcontractor lifted the lien and as of two weeks ago the bank released final payment.

I’m now officially lien free and have all my subcontractors paid off! Lessons learned:

1) Have a contractor agreement on large projects!!!!

2) Make sure your subs are getting paid!!!

3) Upon larger payments require a notarized Lien Waiver form
(Essentially a very fancy receipt that legally prevents contractors from being able to lien your title)



(Special thanks to Allison and her legal input throughout this process!)

“Insured” Headaches

Thank God for insurance. Well… Kind of…

I chose insurance as my next topic for the blog as I’ve been living in an insurance nightmare for the last four weeks. While I hope none of you ever have to go through the kind of claim process I did, I figured a brief summary should be included being the essence of this blog features all major financial aspects surrounding a first time real estate investment property.

Let’s kick things off with the good news. A check was issued to me last Thursday from the roofer’s insurance company in the amount of $52,517.92. I will say this is, and may forever be, the largest check I’ve ever tried to cash at my bank. Upon reviewing the check, the tellers face spoke a thousand words. She looked up, looked down, looked up, and continued to stare at me like I was Bin Laden trying to open a new checking account and collect my free $100. After two managers were called over to assist with the deposit, it was quickly explained the money would not be available 5-10 business days. Both entertaining and somewhat expected results.



While this may sound a bit happy go lucky, I can assure you the process of getting a check was not easy and took around a month. It first had to be decided whether to use my own insurance to get the job done right and quickly, or rely on my roofers liability insurance. I determined paying the $1,000 deductible, and risking the major increase in my coverage didn’t seem appealing. In hindsight, this may be debatable.

What is important for readers to understand is while your personal insurance will likely replace and compensate to exact “AS-IS” value, contractor liability insurance is not so friendly. In my case all damages from wall repairs, painting, cabinets, and wood floors all took significant depreciation hits in the payout. To be precise the amount removed from the final payout due to adjuster depreciation was $8,175 dollars. If we use plaster repairs as an example my contractor quote was for $15,250.00 and the adjuster used 1% depreciation for every year over 25 years (25%) and paid out only $11,437.50. To be fair to the adjuster he was lenient in some other areas such as the total amount of flooring and cabinets being claimed, but nonetheless depreciation was huge hit and not expected.

If the depreciation wasn’t enough to throw gas on the fire the fact that my contractor made a profit on the claim boggles my mind. Riddle me this. You hire someone to install a new roof. They screw up badly, cause significant damage to the house, and while they file an insurance claim they sneak in a line item for ~$1,750 of profit on repairing the damages. The home owner gets depreciated, while the general contractor gets paid profit. Lovely.

Before I dive into my next rant too early, I wanted to also mention that the general contractor is charging for additional work he did without notice during the project. Needless to say things are ramping up and may be heading towards arbitration. Get excited as there will likely be a topic on Mechanics Liens and contracts coming up shortly. Wish me luck.

I have a gas problem…

Last week it was time to fire up and test the second floor water heater. The only thing holding us back was the locked gas meter for the second floor unit – or so we thought... After giving Peoples Gas a call on their emergency phone line, they quickly arrived to the scene within 4 hours. The lock was popped off, a couple swift kicks to loosen the valve, and gas had been turned back on to the unit upstairs. The gas man marked the meter using a sharpie and stalked the dial like a hawk for movement. Ten minutes later and sure enough it had slightly moved. What did this mean? A gas leak….

When I first opened up and exposed the kitchen walls around two months ago I thought it was fascinating that my building still had the original 100 year old gas lamp lines. The lines were installed at the turn of the century before electricity had been wired to the house. The first pipes I noticed were the risers in the kitchen, upon opening the roof we found the piping ran to all the ceiling fixtures in the entire house and had been covered with new light electric fixtures.

After the gas man noted the leak he pulled out a fancy meter and started checking all the recent work the plumbers had done. No beeps. Our attention, as you may have guessed from my segway, quickly shifted to the 100 year old gas lines. Could it really still have gas running through the lines after 100 years of not being used? BEEEEEEEEEEEEEEEEP. Yeap.

What is scary about this is the fact that the leak was coming from an old ceiling fixture line that should have been sealed and capped off. Every time the light was turned off and on it was like playing a game of Russian roulette on whether my attic would be going up in flames.

While a huge fire may have solved my water damage problem, the gas man didn’t allow that option and quickly shut off (locked) the meter. The plumbers came out on Friday and traced the old lines to the basement, cut the pipes, and capped them off. After 100 years the house no longer has gas running through my ceilings and walls and is finally an all “electric” property. Thomas Edison would be proud.

Rain Rain Go Away

When I arrived into my home with moving boxes on Monday morning I experienced one of the most helpless moments of my life. I entered the front door and immediately had flash backs from my childhood of a waterpark called Wyandot Lake. This time however there was no laughing or sounds of kids enjoying their adolescent worry free life’s, just the echoes of free falling water as it saturated the 100 year old wood floors.

As I sit on a plane right now returning from a business trip in San Diego I can’t get the house out of my head. With recent storms that blew in again yesterday, saying I’m anxious to get home would be a colossal understatement. It has been a tough and emotional week as the roofers botched the tearoff and replacement of the flat roof when they didn’t cover it before the storm on Monday. It’s ironic that I write this post after my previous one on Angie’s list as this contractor was not an Angie’s list contractor. Since I can’t write a nasty complaint on Angie’s website, I’ll use my blog as both a sounding board about this company and a therapeutic release of frustration. To the owner of the construction companies credit he has accepted fault and created a plan to remedy all damages under his insurance policy. Nonetheless I’m now moved into the first floor unit while living under a huge tarp and and my time schedule for getting my second floor unit rentable is set back by at least 2 weeks. With a projected rent of around $1,400/mon for the unit this setback will cost me personally around $700.

A water restoration company entered the scene on Tuesday and have been working hard to remove moisture from the building. Over seven fans have been setup creating a hurricane effect on my second floor while turning my electric meter into a ferociously spinning top. Our hope is the original wood floors will not need replaced. The total cost for the roof replacement was budgeted around $11,000, an additional $2,000 was spent to replace the insulation, and $3,500 to replace all the decking with new plywood. In addition a mold company is to be paid around $4,000 for treatment and preventive spray in the attic while the roof was open. Needless to say this will all be ripped up and redone. The only portion of the project that will remain was the $6,000 of masonry work that was done to rebuild my north parapet wall and spot tuck the inner parapet walls for the new roof.

It has been an early lesson that investment properties are not a cake walk or for the light hearted. Tears will be shed, but the long term potential will hopefully outweigh the short term set backs. I look forward to getting back into town and regaining some sort of stability in my home life.

Original plaster ceiling will need torn down and redone

Steamy Hot

I spent some time debating on what type of water heaters to purchase for a rental property. On the cheap end I could likely get away with two 40G 6 year warranty tanks for around $700, on the higher end I could purchase two 50G 12 year warranty tanks for around $900. In the end I went with the better 50G 12 year GE tanks. It’s difficult deciding where to cut costs in rentals, but I feel like infrastructure is a place where quality will pay off down the road. The cost of $200 more for 6 years of piece of mind and knowing tenants won’t be complaining about cold water was justifiable. Plus, anyone who knows me knows I take ridiculously long hot showers in the winter so we could call this a bit of a personal splurge as well. If the strategy on this property was to flip I would have went cheap, a buy and hold strategy requires long term foresight.





Before



After

Let the Games Begin... Plumbing is up to bat!

It’s now been 4 weeks from my closing date and I’ve been anxious to get the construction started. Time is ticking, and with a rental property every week of vacancy is money out of your pocket. The masons and roofers have been at a standstill with the recent crappy weather, but I’ve decided to pull the trigger on plumbing.

I’ve selected Chicagoland Plumbing as they had excellent reviews on Angie’s list. Edwin and his crew have been extremely responsive, polite, and provided great workmanship. The project scope included the removal of all old ¾” and ½” galvanized piping and replacing all the supply plumbing to the first and second floor units with the copper. They are also installing two brand new water heaters (I have requested to purchase on my own separately) which will have separate gas lines run for corresponding Units 1 and 2. Upon completion they will hook up kitchen and bath fixtures as necessary. I have budgeted $5,000 (water heaters included) for this project and their quote for labor and material is around $3,500. I’ve allocated $1,000 of the budget for purchasing new water heaters from Home Depot.

Below is a link to their website and a picture of some of the shinny new copper in the basement utility room. I highly recommend Edwin and his crew at Chicagoland plumbing for anyone that needs great work done at great prices. Thanks Edwin!

http://www.chicagolandplumbing.net