Enjoying the Process Part 8

[Ashley K. Butler]

Hello and great evening BP Community from the Great State of Arizona!

Here’s an update on the journey to purchase a property to house hack.

I was looking for properties and working with agents to purchase a property to house hack in the Pinal County, Chandler, Gilbert, or Queen Creek, AZ markets. I was looking for a small multifamily property, but pivoted to focusing in on the single family property and renting out the rooms, and became very interested in the Casita (or Mother-in-Law Suite) set up.

So far, I have:

* (Attempted) gone through the preapproval process to figure out how much I can afford going the VA Home Loan route with no money down, and with speaking with several lenders, running my credit several times, and even attempting to get a family member to cosign, I do not qualify for very much at all on my own, at least to where I would feel comfortable living in a place for 12+ months.

* Been consistent with networking and connecting with new people.

* Continued my personal education by listening, studying, and reading of several books, audiobooks, and podcasts. I’ve also been focusing on getting back into the financial services industry, and putting my licenses to work, as I have learned a great deal about R. Nelson Nash and his Infinite Banking Concept and how I can apply that to Real Estate for myself and others.

* Been consistent with playing Robert Kiyosaki’s Cash Flow Board Game at a meetup and am still learning so much more every time I play.

* Over $16K in savings and credit is still at least over 700, but my savings rate slowed this month.

* Put W-2 work search on pause, since surgery is coming up in less than a month.

* Registered and start my classes online for Software Engineering on Saturday, and will be saving the tuition assistance payments the VA will be paying out.

* I spoke with an investor yesterday and he mentioned going the seller-financing/subject-to route, which I am totally open to. However, in that case I would not want to house hack, since I would not be able to use my VA loan. I would just simply rent it out.

As always, the focus for me in 2023 (and life) is still #GetBetter #GetSmart #GetWealthy.

BP Community I’d love to hear your thoughts.

Well, that’s all for now, and until then I am enjoying the process and hope you are too!

[Shiloh Lundahl]

@Ashley K. Butler I am going to give you the opposite advice. Stop working with agents and don't depend on your VA loan unless you want to get rich very slowly.

There is definitely a better and faster way to do what you are looking to do.  I speak not only from experience, but also because I live and invest in the market where you are considering buying a property.  I am going to encourage you to not be tied to a particular city.  Forget about Gilbert and probably Queen Creek and Chandler.  Focus on Mesa, Apache Junction, Florence, Coolidge, or Casa Grande.  They are older cities with older homes but that would be better for you right now. You will more likely find a 3/2 house with a guest house or a 4/2 in one of those cities with a better price point than in Gilbert or Queen Creek.  

You live in the Mecca of real estate investing with tons of wholesalers finding and wholesaling properties every day.  There is no good reason for you to buy a property at market value at this point in your life.  Buying properties under market value is kind of like a dance. There are several steps you need to take in a certain order in order to make it all work. But when you learn the dance then you look awesome on the dance floor. Here are the steps to take:

Step 1: Find a deal. Search Google for "real estate wholesalers in Arizona."  Visit their websites and asked to be placed on their buyer's email list.  Go to 5-10 meetup this month (including mine in Mesa) and ask for wholesalers to put you on their buyer's list.  Set up lunch with 4-8 investors this month (which you pay for) and then ask them their journey in getting started with real estate.  Toward the end of lunch ask each investor who the best wholesalers they know are and what is the best way to get onto their list. In one month's time you should start getting about 100 wholesale deals coming to your email inbox.

Step 2: Fund the purchase. The next step is to secure funding to buy the property in cash. If you don't have the cash, then you are going to need to work with other people in order to buy the property.  Most properties that are sent out on the wholesale list need to be purchased with cash. That is one of the things that wholesalers often offer a prospective seller - an easy and quick close. Working with banks to get loans are anythings but quick and easy. So you will probably need to use a private money lender or a hard money lender or both. In order to do that, you will need to get to know hard money lenders to lend you money to buy the house.  The only problem is that hard money lenders usually don't lend money to people to buy their primary residence. They usually have you sign a document saying that you won't use the property as a primary residence as a condition of their loan.  This is because they charge high interest rates and there are some laws in some states that limit how high the interest can be on a primary home.  This means that you can't get a loan if you are planning on living in the property yourself. So now you have 2 options. You can either continue living in the home in which you lived before buying the property and then, once the property is all fixed up and ready for the refinance, you move into as you refinance it.  Or you can ask another investor to buy the property in his or her company name and then put your name on the deed right afterwards so it shows you as an owner too.  You will need to wait 6 months to refinance but this will work too.  

When you go to purchase the property, the hard money lender may lend only 80-90% of the purchase price.  That means that you will need to use your own money or you will need to get money from a line of credit or from a private money lender to help with the down payment and with the repairs. The private money lender may be a friend, family member, or possibly even an investor who you have networked with. If you do work with a private money lender, then have them lend the money at the time of purchase and get it recorded on the settle money statement as an additional loan on the purchase settlement statement - this will be helpful for the refinance.  Keep in mind also that it is very important that you are accurate with your numbers and that you account for the hard money and private money interest payments that will need to be paid during this process.

Now that you have funding set up and you have deal flow coming to you. the next thing to do is to pull the trigger and buy the property. You do that by reaching out to the wholesaler and stating that you want to buy the property that they just sent out.  The wholesaler will want to know the name in which you want the hold title so that they can assign the property to you.  It can either be your name or your companies name. I usually buy properties in my companies name if is is going to be an investment and my name if it is going to be my primary.  If you are going to get a hard money loan on the property then it will need to be in a company's name. The wholesaler will then want you to deposit a non-refundable earnest money, usually cashier's check or wire to the title company or closing attorney's office. Once that is done you then include everyone on an email including the insurance agent, the hard money lender and private money lender, your assistant if you have one, the title escrow officer, sometime the wholesaler if it would be helpful, and your accountant so her or she can stay informed. This way everyone can talk with each other to get the information that they need to coordinate the closing of the purchase of the property.

Step 3: Fix the property. Once you have purchased the property, now you are ready to get it fixed up. Be careful not to over improve the property for the neighborhood.  Remember, you bought it under market value for a reason. And that reason was so that you could force appreciation and make it so that the property is worth much more than the amount you spent to purchase it and rehab it, including all the holding costs.  You should know what you would like to do to maximize earning potential even before you purchase the property and a pretty accurate guess as to what it is going to cost. Now is the time to put the rehab plan into action. So who do you ask to help you will the repairs? Good question. Hopefully you have continued to network with other investors through going to meetups and lunches.  If that is the case, then a great resource is going to be the investor who has between 5 and 15 properties and that buys a property or two every year.  This investor already has a list of people who know how to rehab properties but is not able to keep them busy enough for them to work for the investor full time.  So these sub-contractors or laborers do work for other people other than just this investor.  That is a great resource to ask for one or 2 contacts.  But probably not more than that.  You don't want to come across as an entitled person that thinks since you paid $20 to take someone out to lunch then they should share with you their whole system and all their contacts.  It is very tacky to do this and it doesn't build relationships.  

Now, when I'm not doing extensive work to a home, I work directly with the sub-contractors or laborer and I don't hire a contractor unless it is absolutely necessary.  If all I need to do is some drywall repair, paint, and switching out the flooring, then I don't really need a contractor for that.  So I don't use one.  I usually have my assistants watch over the rehabs and make sure that they are being done correctly with the paint and flooring that I have chosen, etc.  When I didn't have an assistant, I watched over the work myself. 

A quick tip also about working with contractors or sub-contractors is never finish paying them until the job has been completed.  If you pay them before the job has been completed then their motivation to be pulled off a paying job to come back and finish your job in a timely manner is low.  You can pay them portions throughout the process, if it is a big job, and you can pay for the materials, but don't pay for work done before it has been completed.

Step 4: Find the tenant or tenants.  I think your best bet would probably be to do a rent by the room model, with or without a casita.  Let's say you find a property in Mesa that is a 4 bedroom 2 bathroom home. This would be perfect for you to rent out the big room and 2 of the smaller rooms and for you to stay in the other smaller room.  You can advertise looking for roommates or rooms for rent on several websites including Facebook marketplace.  Have the applicants fill out applications and do a background check and let them know the rules in the lease agreement.  You can create month-to-month leases in case you don't like them then they are much easier to just not renew their lease and to bring in another roommate.  

Step 5: Getting the property refinanced.  If when you purchased the property, you did so with a rehab credit bringing the value of the property up to what the market value is minus the rehab, then it is much easier to get it to appraise for market value and it is easier to get the refinance done.  Throughout this process, probably even before you decide which property to buy, meaning this step could or should really be the first step, you should know how much of a loan you could get on a primary residence. You will want to know how much of a payment you could qualify for because if you don't qualify for a loan then this process isn't going to work and you are better off looking for a property that you can take over using the "subject to" method.  But if you work with a loan officer and they give you a loan amount that you would qualify for, then you are in business. Another little trick that I also use when applying for a loan is that I always work with 2 or 3 banks for the refinance at the same time because not all banks are the same and they ask different questions and require different things to qualify a borrower and not all of them will get someone across the finish line.  

So let's take a look at the numbers. 

If you can rent out each of the rooms for between $750 and $900 including utilities ($900 for the large room and $750 for 2 of the smaller rooms and then you live in the 4th room), then you would be bringing in $2400 in rent. That should be good enough to help pay for a mortgage on a 250k - 300k mortgage.  For example, if you were to find a house in Mesa from a wholesaler for 230k that needed 50k in work but that was going to be worth 350k when you were done with it, then you could get an 80% loan for 280k and that would cover the purchase and the rehab.  Your only out of pocket expenses might be the closing costs and some holding costs.  With a 30-year loan right now on a primary home, you may be looking at a 6.5% interest rate so we are talking about a loan payment of around $1770 a month.  Add another $150 for taxes and insurance in mesa and you are at a monthly expense of around $1920 a month.  So basically you would live there for free.  But not only that, but you also created 70k in equity.  And if you live in the house for 2 of the last 5 years before selling the house, then that 70k in equity shouldn't be taxed when you sell it.  How long would it take you to save 70k?  Longer than the time it would take to learn the steps of this process and carry them out?  Probably.  An additional tip would be to live in the house for 2 years and then sell the property on a 2 1/2 year lease option.  This would make it possible for you to sell the property to a tenant buyer that would pay above market rent and you wouldn't need to pay closing costs or realtor fees when you went to sell it saving you an additional $25,000 or more when you go to sell it.

So this is what I would recommend instead of working with a realtor or trying to get a VA loan. This process will create money for you. Working with a realtor or trying to get a VA loan will dramatically slow down your process to wealth creation.

If you have questions about this process, feel free to reach out.  Have a great day and good luck investing in real estate.