Monthly Archives: November 2013

Financial Independence through Owner Occupied 4-plex?

(note: this post was first written Feb. 27, 2013 but not published, some current details have changed, but not the gist!)

The view from the 'plex, sometimes.

The view from the ‘plex, sometimes.

Some of you might be familiar with the book ‘Your Money or Your Life’, or in some other form contemplated financial independence. I’ll loosely define financial independence as not being dependent on traditional job income to get by. This could be from traditional retirement, early retirement, whatever. Who hasn’t dreamed of not having to work for a living, at least sometimes or at some point!

The eco-plex is my current best chance at retiring someday before I’m dead. It certainly didn’t start as a financial choice, but I think it’s turned into a good one for me, not probably the most lucrative, but it fits my current proclivities and personality. I sometimes think everyone should do it, but I know the market has changed, Anchorage is unique, and there are things I like to do or can handle that not everyone is into, so this post isn’t a how to (please please do your homework if you are planning to go this route – I’m actually not at all savvy or knowledgeable on investing in general, and there are, of course, headaches and real risks to owning rental property). But I will explain below, with a fair bit of detail, how the ‘plex is working for me financially. Long story short, good enough that I have to rationalize living off the back of my tenants, all capitalist pig style (I’ve rationalized that I don’t, really, and read below for details of this rationalization).

I’ve always had, or knew I could have very low expenses (I’m healthy and able, I’m not a shopper, I grow some food, I don’t need to and have rarely owned a car, I like living in small spaces with lots of people, I am fine with mismatched and worn goods, and while I always plan to shop at the thrift store for them, I even more often get given things or find them in the dumpster, etc, etc). I still remember my original plan when I was contemplating quitting grad school was to find a good job making $100K a year (I’ve rarely made anywhere close to this – but it was a possibility with the education I received – loan free by the way, I was very lucky with scholarships and need based grants and I do feel blessed for that). I planned to live on $7K of that per year (dumpster diving, sharing small spaces with folks, whatever…I had it all calculated in any case, and though I probably only managed that one year of my adult life, I was within a factor of 2 of that in grad school and some other times). But ultimately I decided to choose work based on my heart rather than the money, and I’ve similarly spent plenty on travel, my child, and other happy events. Not that I am immune from impulse purchases and unnecessary restaurant meals when the money is there. I’m an incessant budgeter, but I don’t sweat it too much when I break my budget, as long as I don’t go into debt – I don’t carry consumer debt, never have.

OK, so I dreamed of the eco-plex for quite a while, at least for the 2 years that I worked a normal job making somewhere north of $50K per annum saving up money and job history to buy it. I wanted the 4-plex to fit with my low budget life, but mostly I wanted it as a project – a way to live in community, a way to have a garden while keeping the shared walls and smaller apartment sizes of my renter lifestyle, and a building that I could make as energy efficient as possible as a demonstration and also nest in a bit – making it beautiful in ways that mattered to me.

I wanted as many units as possible while still qualifying for an affordable mortgage (1-st time homebuyer with 2.5% down – FHA), thus the 4-plex – to spread my influence and the efficiency of having shared walls the furthest. I wanted to be in a walkable neighborhood, near work (I’ve changed jobs 3 times since the purchase, but always been able to walk to work – the farthest was 2 miles away). I had to be able to afford it – and with my income history, this was the only one that fit the ticket – luckily I liked it too (see early posts in this blog for more on this topic). I bought it for about $275K in 2008, with only 2.5% down as I said (and over 6% interest).

For the first 2 years I owned it, it certainly did suck money, but mostly because I allowed it to. There were plenty of small repairs, etc (most detailed somewhere on the blog), and I spent about $30K out of pocket, after home energy rebate, on insulating the building better and other big ticket energy efficiency improvements. I was still at my good paying (for me) job, and living pretty simply, so I had the money to do this and the loss on my taxes (from depreciation of the property and my improvements, higher expenses than income, etc) of a few thousand dollars was pleasant at tax time. During this time the units were definitely not modern and immaculate, and they still aren’t, but for the right person they have a certain charm. Rents were pretty much rock bottom, and it was easy to attract tenants with this plus the allure of a ‘green’ rental and garden space. I did have some non-ideal tenants, but everyone has been reasonable and personable, and I have been lucky enough to not have to evict or lose rents or have tenants who caused even semi-major damage. I think living in the building has helped a lot – I know exactly who is there and what is going on, I know my tenants personally, and any problems can be discussed and worked out before they become unmanageable.

The next two years were much closer to break even. My tax accounting still shows a loss (and I don’t cheat, so this should be accurate), but it got smaller and smaller. I was still remodeling units and upgrading appliances and other above and beyond improvements (the sorts of things that depreciate on your taxes instead of being expended away), and also taking care of a lot of deferred maintenance. Sometimes I called someone in, but often I did the work myself (usually with the help of friends and family). Over this two year span I frequently did feel overwhelmed – mostly from having my unit torn up and always feeling like I should be finishing up a house project. This was common among my friends with project houses, and mine is certainly a project – as intended. Usually the more routine 4-plex maintenance was much easier to handle and took up a much smaller part of my time and energy. Yes, there were plumbing emergency calls late at night, but not frequently and the frustration and worry was usually quickly replaced by the satisfaction of a fix. Often these got called out to plumbers, but I still always feeling good when the work is done and I’ve paid the bill. Many of my tenants have been short timers – students or seasonal employees, or couples who had a baby and moved on, so I’ve had my share of move outs and move ins, but these are often quite smooth. I do take this opportunity to do the last landlord’s delayed maintenance on the units and make some improvements while they are vacant, so there can be some work and stress there, but again it feels rewarding to me in the end. I have it down so that I rarely have much of a vacancy anymore – maybe a week if I want to make improvements, sometimes less than a day. I use craigslist to find tenants.

Last year I did a streamlined refinance to 3.9% (a bit higher than the rates at the time, but that covered rolling my closing costs in). I’ve also come a long way in making the building efficient and choosing good tenants and I’m starting to feel serious financial benefit. According to my schedule E, I actually made money on the place last year. Only about $1k, but it’s a start (of course, my unit is not considered in the IRS rental property calculation, so the portion of the expenses for my unit aren’t taken into consideration).

So how am I doing day to day? This is the way I look at it: I wanted to have a big space to garden and the ability to do energy efficiency improvements and nest. Maybe I could have gotten a nice, small, condo to do this, but probably not with significant garden space. Likely my more traditional choice would have been buying a single family home. Rock bottom for a small one in my neighborhood probably runs about $170K (after a quick search on Zillow), for a mortgage of $755/mo plus utilities, insurance, and taxes. Certainly more, in the end, than the $800/mo I was spending on an apartment before I bought this place. In any case, I would have put plenty of money in upgrades to improve the efficiency and durability of this house, and I would have nested at least a bit (ok, maybe a lot – by which I mean aesthetic improvements). My mortgage is about $1200/mo, ~$1795 after insurance and taxes. My utilities (remember I’ve worked to make it efficient, but there is more I can do) average about $450 or less per month. I’ve estimated that if I wasn’t upgrading, just replacing and repairing things as needed, my monthly set aside for that would be about $250. That totals to $2495/mo. My rental proceeds are currently $2400. So I pay $95/month plus whatever I pay to make my desired improvements. Seems like a good deal to me.

Update on 11/17/13 – My rental income is a bit higher now, mostly because my son and I both have our beds in one big bedroom of the basement unit, and rent the second room to a good friend. I also finished upgrades (at least the ones that were in progress) on the middle unit, so it is worth a bit more than any unit was before. Repairs and needed improvements (like bike parking for all our bikes!!) do take more than I budget sometimes though. Partly because when I discover a window is not closing all the way anymore, and can’t easily be fixed, I replace it with a top of the line, insulated fiberglass frame, triple pane window. I am trying to only do necessary repairs and real efficiency-boosting projects now.

Honestly, I am a bit burnt out on house projects and didn’t originally publish this because I wasn’t really so sure, despite trying to convince myself, that owning an old building was a sane life strategy! Most of the time, it seems great, but it seems that when emergencies do happen, they come in groups (I discovered a roof leak, a toilet leak, and a couple of other problems all within one week a couple of months ago!). And despite some preventative maintenance, and trying to replace things with durable, fool-proof fixes, the small emergencies don’t seem to be decreasing with time. But my knowledge of how to deal with them generally is, and I do more myself than in the early days. Generally, upkeep is cheaper than in the beginning, but someday big things like the boiler and roof will need replacement, and so I need to be banking those savings. I also get a lot of help with my projects – especially the dirtiest, trickiest, most labor intensive parts, which is wonderful. I have no illusions, and neither should you, that this is a one-woman against the world project!

And for the conclusion on the financial independence aspects (which I never really finished elaborating), right now it allows me to build equity while trading my original investment, ongoing sweat, responsibility, and some influx of ‘hobby’ money. In plain terms, unless something big breaks, I don’t really have to spend any money beyond rental incomes each month on living accommodations or utilities or small repairs. In return, I handle emergencies, shell out for supplies big or small, manage the place, shovel snow, etc, etc. Sometimes manageable and pleasant, sometimes overwhelming! If I sell before I pay off the mortgage I will have cash equity I can take with me (if markets don’t crash). Otherwise, I will have a modest rental income when the mortgage is paid. I think it’s been a wise choice, all in all! With my down payment, I could have built a tiny house with tiny utilities and been in a similar place, maybe, today – but without the friends who live with me, the shared walls, and the equity building. I have friends with single family houses that rent out all the extra rooms and also live rent free, and this seems like a great strategy too – only slightly less equity building and fewer plumbing problems to fix! I might take that trade off!