Net Worth Challenge

After some intense negotiation (well, maybe not as intense as I’m making it sound), we have come to an agreement with the sellers and will be purchasing an additional home to use as a rental property. This additional property is a single-family, attached dwelling — basically a half-duplex. The previous owners purchased the unit as a townhome for $96,000 about a year ago, but have since outgrown the place. The property originally listed for $99,000 and my wife and I negotiated the price down to $92,000. We are very excited about our purchase and look forward to renting it out in the coming month.

Our negotiations ended a couple weeks ago, right after my last post that talked about our loan pre-approval process. Since that time I (yes, my wife is leaving this work up to me) have been frantically finalizing the terms of our loan, coordinating a home inspection, ordering an appraisal, preparing to purchase home insurance, and planning the transfer of funds into our checking account. I’ll talk briefly about each of these items below:

• Home Inspection - Although this is not required by our lender, I still feel better having a thorough inspection done by a licensed professional. The home inspection did not turn up anything drastic, which I was pleased to hear. I consider it to be a well spent $225.
• Appraisal - This is an item required by the lender and typically ordered by the lender. However, as the home buyer, my wife and I have to pay the bill at closing. The appraisal came in at $93,000, which I believe to be lower than the value of the property. The positive result from this appraisal will be the fact that I can appeal the assessed value that the county has recorded for this property. Currently the county values the property at $110,000 — and charges property taxes based on that assessed value. If I can successfully appeal that assessed value, which hopefully will be easier with the appraisal document, I will be able to lower my yearly tax bill. The appraisal cost us $425.
• Home Insurance - I have been working with State Farm Insurance to get a rate on home owner’s insurance for this property. Since it will be used as an investement property, the insurance merely has to cover the structure and not the contents. It will be up to our renters to obtain rental insurance in order to protect their belongings. Our preliminary rate for the year will be $330. This number may change after a thorough inspection is conducted by State Farm Insurance today or tomorrow.
• Planning the transfer of funds into our checking account - This may seem like a small step, but it’s important for me to plan out the transfer in order to minimize my tax liability for 2007. A majority of the money we are using to purchase this home exists in our “house fund”, is invested in a mutual fund. Selling part of our mutual fund creates a taxable event and we will have to pay capital gains taxes on any profits from our investment — which should be significant (that’s good and bad). Therefore, I am trying to shuffle around money that is held in cash, checking, or money market funds in order to minimize the amount of mutual funds that we’ll have to sell. I will not be to avoid selling part of our mutual fund, so it is a certainty that next year I’ll have some capital gains taxes to pay.

All of these items have been taken care of and our closing date for the purchase of the property is NEXT WEEK!!! Since the closing takes place in March, our net worth update for February should not be affected too greatly — but the numbers from March will certainly be different than originally expected. I’ll try and share some additional numbers regarding this investment property over the weekend.

I mentioned a few weeks ago about our intention to purchase another rental property this Spring. After gathering the required financial documentation (statement of assets/liabilities, current account statements, etc) I was able to get preliminary information from our bank — in essence a loan pre-approval. The reason I use the word ‘preliminary’ is because I had asked the bank to not pull a credit report. Until I’m completely certain of intention to purchase a particular property, I do not want to have any unnecessary inquiries on my credit report.

We intend to use the home as a rental property, therefore the bank gave us their investor rate, which is slightly higher (about half a percent) than the primary residence rate.

• 20% Down Payment: 30-Year Fixed @ 6.675%, 0 points, and small closing costs
• 30% Down Payment: 30-Year Fixed @ 6.500%, 0 points, and small closing costs

Loan rates have certainly increased since our first purchase, which was a duplex a few years ago. However, these numbers are certainly manageable for our next rental property endeavor. I had the bank give me two rates, using a 20% down payment for one and a 30% down payment for the other. Originally I was not interested in purchasing the property with anything less than 20% as a down payment, but I may ask the bank to quote me a rate using a 10% down payment — just to see what the numbers look like.

Now that I have the rate information I need, my next step is to begin evaluating potential properties. As I mentioned earlier, I have been searching for several months and have created a list of properties that I consider great candidates for rental homes. There is one in particular that I am prepared to make an offer on today. I’ll post the details about that in the upcoming days.

My wife and I are off to a great start in 2007. We experienced the best of both worlds because our assets increased and our liabilities decreased, resulting in a nice increase of $7,923.50 to our net worth. Our savings rate is holding steady and our expenses were well under control for the month. We are making contributions to our Roth IRA accounts, 401k accounts, and House Fund according to our 2007 Financial Goals.

I am very pleased with our start in the New Year. Let’s hope to see similar gains in the upcoming months!