Can't get past basic hurdles to start.

[Charles Ownby]

Hello. I was introduced by a coworker to BP who is a long time and highly experienced investor and he has poured a lot of knowledge into me, however, I think we're at a point where he isn't going to go any further with me until I demonstrate I'm serious and willing to do my own legwork and I agree and am more than willing. I'm ready to be on the other side and able to show someone else the real estate way one day. I am married with 5 children.

Here is my situation. I just bought our new to us forever home(October 2021). It has some equity and needs some work. The ARV on it would be fairly significant once upgrades are done. In addition, my wife has a home she inherited and it is free and clear but there is an issue. Her dad was keeping up the insurance while her grandmother was still in it and for a while afterwards but he let it lapse and didn't tell us. Now, it needs some roof and flooring work and we've been unable to get homeowners without the repairs but can't get lending without insurance. I've just recently learned about builders risk and am looking into that.

In addition, my credit used to be awful. I've cleared most of it up and as of January this year it was in the low 700's. In April, a medical collection popped up that I truly had no knowledge of and another item from years ago but both have since been removed but my scores haven't rebounded yet. Regardless, I can't currently seem to get approved for anything through traditional banks and don't want to apply anymore as each hits my reports as well.

Between my personal home equity and our 2nd house we have probably 100-120K worth of assets that could be tapped. The 2nd house is worth probably 80-100K and with 30-60K worth of work, would put it up to 180-200K in value. My primary home is currently worth about 510K with 375K on the mortgage. My desire is to get a loan to fix the 2nd house and then cashout refi to pay off the repair loan and use the remaining cash to fund flips/acquire rentals. My problem is I can't seem to figure out how to make it work.

I've read, watched, listened to countless hours of podcasts, youtube videos, and articles and I hear all kinds of stories on using other people's money, using private lenders, hard money lenders, etc. but I can't seem to find them. They seem to be like unicorns. I've contact ones listed here on BP and I can't seem to get any response or find others. Google searches don't yield much of anything except conventional lenders.  I hear a lot of general statements made about just making it happen or finding a partner but I don't seem to find anything tangible to grab hold of or follow to actually get the ball rolling. Most of the stories I hear usually reveal in the meat of it that they had someone along the way that helped, provided funds, had a friend, etc. but we don't have anyone. Both my wife and I are going at this entirely alone. No one on either side of our family has any financial literacy or drive and definitely don't have any funds to contribute, even if we offered some return on it. They just don't have it.

I don't know if I just don't know where to look or if I am doing something wrong but I really want to get the ball rolling and start my real estate journey and change the trajectory for my family. My wife and I both came from not much of anything and have endured so so much in our lives. We came from poverty, I went back to school, got a great job and went from gov't assistance early on to now making six figure income. We've bought our dream home that just needs a little work and are able to support our family of 7 but still struggle at times. We've changed our finances, fought to repair our credit (except one unforeseen thing can popup and set us back months at a time) and are ready for the next step. We're on that last 100 yds to the top of the hill (which is the hardest and requires the most diligence, patience, and tenacity) but we just need a little wind on our backs. I'm hoping that posting all this here will at least point us in a direction or help us identify and remove our own barriers that maybe we aren't seeing. I know there is a lot here and is probably all over the place but it's where we are.

Any help, guidance, tips would be greatly appreciated.

[Scott Trench]

Thanks for joining BP and sharing your story, @Charles Ownby

It sounds like you've been through a lot and are doing everything in you power to get started in this business. That's great to hear. 

There are a few areas where I think some intentional focus can do wonders for you: 

1) Building a strong personal financial foundation. 

2) Continue self-education and Create a clear-cut business plan for the project. 

A strong personal financial foundation. 

You are dependent on creative financing to complete a rehab project on a property that you own, free and clear. This speaks to an opportunity to improve your personal finances. A good emergency reserve for your personal life is 3-6 months of expenses, in cash. On top of that, I'd like to see $15,000 - $25,000 in emergency reserves for your first investment property, and another $10,000 per additional property. Even in the case of a property that is owned free and clear, your situation demonstrates that fact that life is just so much easier when you have access to liquidity. 

I think that you should focus on this as your number one goal. How do you generate a meaningful surplus in your day to day life, so that each month, you save up $1,000, $1,500, $2,000, or more, in cash, after tax, that can be deployed towards your first or next investment? 

How can you keep this up until you have 6 months personal emergency reserve, PLUS $15,000 - $25,000? 

The easiest way to do this is to sell the property to someone else, and use the proceeds to shore up your overall financial position. Then, you can reinvest in the future, from a stronger position. This is the most immediately actionable and obvious next step to me, based on your situation. I am skeptical, at first read, of the analysis that $30-$60K in rehab will add $180-200K in value. I will elaborate on this later on.

If you choose not to sell the property, then this still applies, and becomes even more important. Investing in real estate is automatic and recurring with a strong personal financial position that is well-capitalized and produces strong positive cash flows. It's really hard without one. RE sucks cash OUT of your life in the early part of the hold period. This compounds weakness in the personal financial position.

You've done a great job in repairing your credit, but I wonder if the other planks of a strong financial foundation, including a strong emergency reserve, and a strong monthly positive cash flow are in place. These are essentials, in my opinion, for getting into this business.

Continue Self-Education and Create a Clear-Cut business Plan for the Project: 

Your analysis paints the following picture: 

-The property is worth $80-$100K. 

- $30K to $60K of rehab is needed. 

- After which, the property will be worth $180K to $200K. 

A flipper would analyze this project conservatively, and assume a purchase price of $100K, a rehab cost of $60K, and an ARV of $180K. You would do well to narrow this range considerably, but let's take the conservative case.

In the conservative case you are "investing" $160K to make $20K. Your analysis likely does not include holding costs (utlities, taxes, insurance, and hard money costs). A flipper would likely use a hard money loan to finance the project. Your first project will take at least 3 months if you are good, and 6 months if you struggle. We should plan on 6 months for a first project, with the exception of those going into this business full-time, and hope for the 3 month rehab. Interest on a $75K hard money loan at 10% interest is $3,250 over 6 months, and you will likely pay another $2,000 in points. 

All told and your profit on this project is conservatively projected to be a few thousand dollars or very close to zero. 

Try running those numbers in the flipping calculator here on BP, and see what you come up with. If I'm right on this, then you need to either: 

- Revisit your assumptions and see if your conservative case is actually closer to the middle of those ranges you produced.

- Or sell the property and use the proceeds to bolster your financial position overall.

Conclusion: 

In writing this, I've talked myself into the idea that the best thing you can do here is probably to sell your property, take the proceeds, shore up your personal financial position, and begin building towards the next investment, perhaps a year or so down the road. That's probably the last thing you expected, but I am interested to hear your thoughts and others' reactions.