Why Home Remodeling Always Takes Longer And Costs More Than Expected

Amazing, Expensive, KitchenMy general contractor, who is also my tennis teammate, was making fun of me for spending $6,000 for replacing my 40 year old gravity furnace that was lined with asbestos. I needed to replace all my ducts and vacuum seal my house for a day to prevent any asbestos from escaping as part of the replacement and permit process.

“I could have done it for $2,000!” he said as he tried to make me feel bad about my decision.

So when my general contractor came back to me with a bid of $9,000 to paint the interior of my house, patch, tape, and sand all holes in the walls, I almost threw up in amazement. My house has some nice crown moldings and standard baseboards, but everything else is pretty normal. “$9,000 is a great price,” he said with a serious face.

Because I thought $9,000 was ludicrously expensive, I declined his bid and found another fella I worked with in the past for $7,000. After he discovered I was going with another fella, my general contractor then came back to me and said I was wasting my money because these new guys he knows can paint my interior for only $5,800!

What the HELL! How is it possible that he honestly thought $9,000 was a good initial price when he now says he can do it for $3,200 less (36%) after I found someone else? Once again, he’s trying to make me feel bad for spending more than I should. He was hoping I’d take his bait at $9,000, and was gambling that I had no other resources. Little did he know that I’m the most resourceful person ever. If I am wronged, I will go to any length to fix the situation.

Everything began to unravel after this incident.

Why I’m Paying Down My Mortgage Early And Why You Should Too

Pay down mortgage haveAfter buying my latest primary residence, I now have four mortgages. Three mortgages felt OK since one was a primary home mortgage, the other is a vacation home mortgage that produces income, and the last one is a rental property mortgage that is cash flowing nicely. But four mortgages feels like too much, and I plan on doing something about it by paying one off!

I’m sure only a small minority of you think having four mortgages is OK. Even though being leveraged in a rising real estate market is good for building net worth, eventually the good times will end.

What’s interesting about personal finance is that we all have different levels of risk tolerance. Some people aren’t comfortable with any debt, hence they don’t borrow anything. I admire such people for their ability to live thoroughly within their means. Other people let lifestyle inflation get the best of them and take out massive debt that is not comfortably supported by their income. Obtaining credit is so easy in America. The only people who annoy me are those who expect others to constantly bail them out.

One of the curiosities about debt is the joyous process of getting into and out of debt. There’s a certain thrill of buying things with debt. Everybody wants something they can’t have or fully afford, including myself. Then once we reach a maximum debt limit, it’s almost equally as fun getting out of debt. Each $1 that is paid down feels like a victory. We tell our friends about our progress and look like heroes. It’s a win both ways!

This post will review my thoughts on the ideal mortgage amount based off the ideal income amount, discuss the history of my first mortgage, share more reasons why I’m paying down that mortgage, and my new mortgage pay down strategy. 

Documents Needed To Refinance A Rental Property Mortgage

Mortgage Rates Today for 30 year fixed, 5/1 ARM, 3/1 ARM, 1/1 ARM

If you haven’t refinanced your property in the past several years, it’s worth checking the latest rates today. The 10-year yield is back below 2.5% as Wall Street economists scurry to revise down their interest rate assumptions once again. I swear they have the best jobs on Earth because they never, ever have to be right.

I am a firm believer that interest rates will stay at these levels +/- 1% for years. Information transfer is instant nowadays thanks to the internet, and policy makers are much more adept at managing inflation and unemployment in America. As a result, go with an ARM rather than a 30-year fixed mortgage to save yourself money.

The general rule is that any time you can lower your interest rate by 50 basis points (0.5%) and break even within two years, you should refinance. Nothing is more beautiful than locking in a low rate and paying down the loan with ever-weakening dollars thanks to inflation.

Unfortunately for landlords, refinancing a primary mortgage is simple compared to refinancing a rental property. The reason being that refinancing a rental not only requires various Home Owners Association board members to cooperate with the process if you own a condo, the bank does much more due diligence.

From the banks point of view, lending money for a rental is riskier because the default assumption is that you require rental income in order to pay back the mortgage. Therefore, the bank needs to add an added margin of safety in the form of a higher mortgage rate to compensate for their risk. Rental mortgages are usually 25-50 bps higher than a primary residence mortgage.

I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years. But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term. 

What Is The Best Way To Make Money Fixing And Flipping Homes?

Pre Flip Fixer

Pre Flip Fixer

The following is a massive guest post by Samurai Mark Ferguson, who became a licensed real estate agent in 2001 after graduating from the University of Colorado with a Business Finance degree. Mark runs a team of ten real estate professionals and is an avid real estate investor. Mark owns 11 long-term rental properties and fix and flips 10-15 homes every year. 

I have been a licensed real estate agent since 2001 and I am real estate investor. I love selling houses, but it is much more fun to buy a house, fix it up and sell it for a profit. I have fix and flipped close to 100 homes in my career and you can make a lot of money fix and flipping homes. It is also possible to lose a lot of money if you don’t do your homework or know what you are doing. Despite my experience, I still lose money on occasion!

Fix and flipping homes may seem like a pretty simple concept. Buy a house that needs some work, fix it up and sell the house. The truth is it takes a lot of time to find the right deal, find the right financing, find the right contractor, decide what to repair, maintain a property, value a property, make sure all the needed repairs are done and then sell the house. Fix and flipping is not something you can spend a couple of hours on a week and be successful. If you don’t take the time to do things right and mess up any of the parts of a fix and flip, you can turn a nice profit into a big loss.

How much money can you make fix and flipping homes?

Fix and flipping houses is not an easy side job that will make you a fortune while you continue to work at your day job. You may see fix and flippers on television appear to make $100,000 on a fix and flip, but television can be deceiving. It is extremely rare to make $100,000 on a flip, unless you are dealing in high value/high risk properties. Most of the television shows I see about fix and flips leave out many of the costs associated with a flip and overstate the profits.

I try to make $25,000 on each flip I complete that I buy for less than $150,000. If I buy a flip for more than $150,000 I hope to make more money, because higher value flips use more of my resources and I cannot buy as many properties.

I network with and meet many investors who also fix and flip homes and my margins are very similar to theirs. It is important to know what other investors are expecting for a profit, because you will be competing against them when trying to buy properties. If you are buying homes off the MLS or at the foreclosure sale expecting a $50,000 profit when other investors will settle for $25,000 in profit it will be hard to find any houses to flip.

Although it is tough to make $100,000 on a flip I have done it twice. Those were higher dollar properties purchased for over $200,000 and sold for over $350,000. The real money is not hitting it big with one flip, but in flipping multiple properties that make a modest profit. I have 9 fix and flips in various stages of the process from on the market and under contract to waiting for a contractor to start work. Those 9 fix and flips should make me $250,000 or more in the next 6 months or less. If you are wondering about my math, I want to make at least $25,000 on each flip, but I average about a $33,000 profit. That means I should make around $300,000 from these 9 flips once they are repaired and sold. I am the sole owner of my fix and flip business and that is all profit to me, although I do have to pay staff who help with the fix and flips, my rentals and our real estate sales team.

Increasing Passive Income Through Leverage And Arbitrage

Sunset in San Francisco, Golden Gate Heights

Priceless View Of The Sunset In Golden Gate Heights, San Francisco

Earlier in the year, I had a nice conversation with a well-known San Francisco angel investor about risk and reward. I had a chunk of money coming due from an expiring 5-year CD and I wanted to get some advice on what to do with it. I asked him whether he would be leveraging up or paying down debt in this bull market. He responded, “Sam, I always like leveraging up. It’s how I made my fortune.” This angel investor is worth between $50 – $100 million dollars.

Of course you can’t just leverage up into any old investment. The investment has to be something you know fairly well and has a good risk/reward profile. The only thing I have confidence leveraging up on is property. Everything else seems a little bit like funny money.

Although I quit my job a couple years ago to try my hand at entrepreneurship, I’m a relatively risk-averse person because I’ve seen so many fortunes made and lost over the past 15 years. If I was risk-loving, I would have done what so many brave folks do nowadays and quit as soon as I had a business idea, instead of methodically moonlight before and after work for three years before negotiating a severance. The breakfast sandwich guy I used to go to for 10 years while I was working told me he was worth $3 million dollars during the dot com boom in 2000. I went back for old times sake last month and he is still there!

Despite my risk-aversion, I do believe money should be used to increase the quality of your life and the people you care about. As a result, I did something recently that might seem financially risky, but I think the move actually lowers my financial risk profile now that I’ve had a chance to fully process the situation.

I finally found my panoramic ocean view Golden Gate Heights home! A room with a view has been on my bucket list forever. But it never occurred to me to look in San Francisco, despite being so close to the ocean because I thought such homes would be unaffordable. San Francisco already has the highest median single family home price in the nation at $1 million. To add on a panoramic ocean view would make prices outrageous, or so I thought.

It’s the same curmudgeon as never asking out a super model because you think she or he will say no. You’ve just got to ask and I’m sure you’ll be delightfully surprised once you try.

After spending months aggressively looking for my next ideal property within my budget, I found a view home for less than half the cost of my existing home on a price/square foot basis. How is this possible you might ask? The farther west you go from downtown and the established neighborhoods, the cheaper prices are in general (see the graphic I created in The Best Place To Buy Property In San Francisco Today). But the farthest away you’ll ever be is 7 miles because San Francisco is 7 X 7 miles large. Given I’m only going into a downtown office two times a week, I don’t mind the extra 15 commute. To be able to watch the sun go into the ocean every day for the rest of my life is priceless.