House Lust

I want this house.

I owe you all an apology. I've once again fallen off the radar, both from writing on this blog and from reading yours. There are a lot of little reasons. For one, as I work from home, I've moved my laptop to the living room as my computer is a constant distraction during work hours. This is good for my career but, admittedly, not so good for reading or writing blogs from nine to five. As often happens with habit change, there are unintended consequences (i.e. - I don't use my laptop very much in the evenings). I've also been studying for a professional certification, with the first out of three tests now completed. The tests are proving harder than I thought they'd be. But my biggest time bandit has been house lust.

Earlier in the summer, we bought our first single family home as a rental. Then, two months later, we bought a second in the same city. They're both rented now, and cash-flowing well. The transactions went so well, in fact, that we thought, "Hey, why not keep it going?" We've been stacking up cash for years, earning a negative real return, for this very purpose. There's a big part of me that dislikes having this much money held in a cash position, and this is one investment that Mrs. Done by Forty is comfortable holding. Our plan, at least at the moment, is to try to get ten rentals or more by the time we pull the trigger on early retirement.

The rub is that evaluating properties and potential markets is shockingly time consuming. There's a lot of information to obtain and verify for just one city, one turnkey company, or one house, for that matter. The majority of options don't end up looking like good ones when it's all said and done. Like momma told us, you've got to kiss a lot of frogs.

Even when you do find a prince, it's not like you can skip ahead to the wedding. There are negotiations to perform, contracts to redline, renovations to be made and supervised, a small mountain of docs to gather for the lender, inspections to be done and appraisals to get through. At any stage of the process, the deal can fall apart...like one did for us last month. One lender apparently had difficulty funding a flip, but only found this out after we'd paid for an inspection and an appraisal. We moved on to a second lender and paying for a second appraisal...which came back low. Ultimately we decided we'd had enough and walked from the deal. But the money we'd already paid was done and gone. It's a sunk cost....and not the kind that help us.

The whole ordeal has given us pause for thought. We love rental property, but we are neophytes and are learning on the fly. Rentals take a lot more time and expertise to manage than a boring old index fund. Additionally, we're learning that diversification is especially hard with houses.

We have a vision of owning one or two homes in a handful of different cities. We have family in southern California, so that might be an option. But each time we want to invest in a new city, we need to find and vet a new company, try to discern the quality of the neighborhoods, find a new lender, new inspectors...and on and on. Then there are the contractors. We might be able to find a plumber in Los Angeles, but what if the house needs an electrician, roofer, or mason? Do we just pick names out of the phone book? Simply put, there's some risk in 'starting over' with a whole new cast of characters in a new city. Diversification is a good idea, but it comes with its own hurdles.

And then there are the constant warnings about real estate of one of my favorite bloggers, Garth Turner. His blog, Greater Fool, warns Canadians (and paranoid Arizonans) about the folly of putting all your money in one asset basket, excessive debt, and the genuinely terrifying Canadian real estate bubble. His warnings hit home because we're fixing to load up on debt and real estate at the exact moment he's cautioning his readers about doing just that. Now, we're buying cash flow positive rentals instead of lavish personal residences...but on some levels the risks are the same. Properties, like any asset, can decrease in value. Leverage can be good, but often is dangerous. Repairs can be expensive. Homeowners can be sued.

As usual, I have more questions than answers. We really want rental income to be a big part of our early retirement plan, but aren't sure how to prudently move into different cities without "picking a name out the phone book". Do you readers have any ideas? Would you simply load up in the city we're currently invested in, since we have a positive track record with the turnkey company and contractors we've already used? Would you just push forward with new regions and third parties?

Thanks, as always, for reading.


*Photo is from taberandrew at Flickr Creative Commons.