What would you do???

Question

So I posted a thread yesterday about finally pulling the trigger and buying a house. (inspection is this afternoon, wish me luck) I have my goals and a plan set in place but I'm interested to know what the more experienced investor would do if they were in my shoes?

Here is my current situation. Buying my first house now under an FHA so 3.5% down on 136k. I live with my girlfriend who pays half of bills and am going to rent a room to my brother for $500 a month. I'm fortunate to have a great job that pays good money with little hours allowing me to focus on real estate. At 24, I have zero credit card debt and zero student loans. My only real expense is my gas guzzling mustang lol. That being said I have the ability to save roughly $2500 a month. Also a future business partner who works in the oil field and has more money than time. He is willing to go in as a 50/50 partner with me on any deals. Buy and hold rentals is my current strategy.

Taking all that in to account. I'd be interested to see how you would approach a real estate career?

Thanks for all the help BP!!!

Mike H. · Answer

Sure. I can give you the last 2 houses I've done:

1) Bevan Dr, Limestone(Kankakee).Purchase price: 73,333 (I like to offer with the numbers)Rehab: 34,200 budgetTotal Loan: 107,533I paid 4,300 in HM points plus another 2,200 in closing costs and got 3,600 tax credit so was out of pocket about 3k.Should appraise out around 175k to 185. I'm refinancing now and the lender is letting me refi up to 75% LTV with cash out refi (portfolio loan). Thats extremely rare but I'm going to do it because the numbers support it. So my new loan will be 125k (18k in my pocket).

Payments will be 671, taxes 300, insurance 70. So roughly 1050/mo in PITI. I'm getting 1,500/mo in rent. 450 gross profit per month (my target is typically 350 to 400 minimum). I'm getting about 17k. And I'm still adding 50k to 60k in equity capture.

All for 3k out of pocket.......2) Bradley, Quail DrPurchase Price: 63,829Rehab amt: 19kTotal HM Loan: 84k I paid 3,300 plus another 1800 in closing costs. Got a 3,200 tax credit so was out of pocket roughly 2k.This one I already refi'd. It appraised out at 139k. I rolled the refi costs into the new loan 85,500k. 53k in equity capture

My numbers:Rent = 1275/mo, Mortg = $535, taxes/insurance 300/mo: Total PITI 835/mo, Gross Profit is 440/month.  And 53k in equity capture.  For 2k out of pocket.

These are all pretty similar. Two things to point out. Technically, I'm saying I'm only out of pocket 2k to 3k with the tax credits. But the reality is that I'm also paying the interest out of pocket as well while I'm rehabbing. So tack that on there too. And utilities. And any rehab overages.

But its still a very good example of how you can use hard money loans to spread your capital much much furthers. The downside is you're very limited to the types of deals you can take down. The numbers HAVE got to be outstanding to work. But if they do, these are excellent deals.

At the end of the day, I'm essentially paying 3 to 4k in fees for the loan plus an additional 400 to 500 a month more in interest than a typical loan. So if your rehab takes 2 months and the refi takes another 2, you're looking at roughly 5 to 6k more in total costs.

But here's the beauty of it. If the numbers work. You're looking at taking down a property for 3k to 6k typically. You'll get that money back in 12 to 18 months on the rent alone and won't have to find a cash out refi.

With 60k and conventional purchases, you could maybe buy 2 to 3 homes tops. And thats stretching it. With hard money, I could easily buy 10 homes with that same money. And the extra 5k to 6k is only costing me $30 to 40 a month in profit. So instead of making 400 to 500 a month gross profit, I'm only making 370 to 460? I can live with that. :-)

Because 500 x 2 is only 1000 a month gross profit. 400 x 10 is 4k a month gross profit.
50k in equity capture x 2 is 100k. x10 is 500k. If you want to grow and have limited capital, then to me hard money is the only way to do it.

A partner would have been far costlier........

Jeremy Tillotson · Answer

@Nick Bitz just saying business with brother and girlfriend sounds like you could have a jerry springer show before this is done.

David DuCille · Answer

first, it's a girlfriend not a wife so her contribution may not be there forever.  2nd, brother as a roommate or any roommate, gets old after awhile so my initial advice is get some reserves saved to make sure that if both of them are gone, you can swing the mortgage without issue.  It sounds like you are already there.  The next thing is then simply looking for the next deal.  if your going to do tradtional mortgages, you will need 20% to put down on investment property and you will pay higher rates than primary residence mortgage but still those rates are around 5% right now so still it's cheap money.  It's all about analyzing the deal to know what you can get in rent.  In a perfect world you will find deals that cash flow now AND have opportunity for appreciation.  Personally, I'm after more cash flow at the moment even if it means limited appreciation because the market is still so relatively low vs 2007 that while my properties may not appreciate as much as I like, they are all bound to appreciate to some degree.

Jeremy Tillotson · Answer

@Nick Bitz I hear ya, just saying business and friends and family dont mix for me. I would have to let a friend go homeless before I rented to him, just saying. GF is prob different.

Mike H. · Answer

You're in Texas and you want to grow a buy and hold portfolio?

I would suggest you look into hard money lenders. There are some great ones down there.

The number one biggest benefit to using hard money is that it will let you preserve your capital so you can grow your portfolio. They may sound pricey, but they're way cheaper than taking on a partner - at least for any deals I've ever considered/done.

I'm in Illinois but I have a couple good ones too. I started with 43k in a HELOC and while I had a decent w-2 job, I had nowhere near 2,500 a month to play with. That 43k was it.

If I'd have gone the conventional route for financing (i.e. down payment of 25% to 30% plus rehab out of pocket) and then hoped for cash out refi's, I'd probably only have 3 or 4 properties by now. Instead I have 32 (closing on 33 early next month).

So with your income and your excellent credit, I would strongly suggest you at least consider the hard money route and look at the numbers to see what they would actually look like at the end of the day.

The key is to cherry pick the deals so you can limit your out of pocket as much as possible. And, given your situation, you could really take down quite a few houses over the next few years if you stick with it.

If someone like me, who had ZERO construction background or skills (and still has ZERO skills) and a smaller chunk of capital  to start with (43k) can do it, believe me, anybody can. But I can guarantee you that there's no way I would be at 32 if I hadn't used hard money loans - exclusively!   I honestly think 3 to maybe 5 would have been about it any other way.

David DuCille · Answer

thanks mike.  Just got a 4.75 rate on a cash out refi for a this crappy little 80k house we have.  I shouldn't say crappy, we made the house nice but it's in a crappy area.  Im interested in your strategy so that I can invest in better areas and truly build equity into the properties.  You are adding enough equity it sounds like to pull out a little cash when you refi though so isn't that considered a cash out refi vs a rate/term refi?

Mike H. · Answer

@David DuCille

Thanks. Yea. Believe me, if there was any other way possible to stretching my capital to buy more homes, I would have done it. But I just don't see how anything can possibly come close to using hard money to do what I'm doing.

Now the one thing I'll add is that banks are really loosening up their guidelines quite a bit. And if you're going to portfolio lenders, you may very well have no problem doing cash out refi's with them as soon as the house is rented and rehabbed.

So technically, you could buy with conventional, put down the 25 to 30%, pay the rehab out of pocket and then do a cash out refi with a portfolio lender as soon as you're done and the house is rented.  You may be able to turn that refi around in 3 or 4 months and get all your money back.

Just depends on how open your local banks that are doing portfolio loans are to cash out refi's. But that would help you avoid hard money fees if you could find one that does em.

That being said, you're still going to have to be floating 25k to 40k on a typical deal and thats a long time to be without that much money. What if you get 2 houses? Or 3?????  If you have a couple hundred grand, then maybe you can do it.

But I just find that all the local banks I use (and I do use several) are pretty comfortable doing these rate/term refi's once I buy em and fix them up. At the end of the day, they don't have any risky loans on houses that are in disrepair. And I think they also feel better of showing an auditor a rate/term refi as opposed to a cash our refi given that these loans are all being kept in house and on their own books.

Cash out refi on investment properties still has a negative connotation these the bank is taking more risk than a rate/term refi. Not saying the facts support that because I don't know. But I definitely hear from banks that they are much more comfortable with rate/term refi's than with cash out.

Andrew Cordle · Answer

@Nick Bitz

If I'm not mistaken, Bedford TX, is near Fort Worth? If that is the case, I know a couple good flippers out there that could probably help you find some deals or even do some with you and teach you how to flip a house.

Like I said, I know some really good flippers out there let me know if you want to connect with them.

AC

Nick Bitz · Answer

@Andrew Cordle

Thanks for input! I would love to do flips. It just seems hard to find opportunities in my area(that's probably just me not knowing where to look). The 40, 50, 60k deals I read about on here I never see.

Andrew Cordle · Answer

@Nick Bitz

First of all congrats on the first house you will never forget your first....:)

As far as your strategy there are many different ways that you can go, and many will work.

But like your question says, what would WE do, so I will tell you what I would do.

1. 50/50 finance partners are great but I think they are only good for in an out deals aka quick flips. So I would use it for doing buy-fix-sales and make my profit then invest that into my own rentals.

2. Couple things to keep in mind it sounds like you have a good job so that is great. But you will hit limits as far as your refi cash outs go. 4 to 10 then you would probably have to try to get in to blanket loans or commercial loans.

3. If you have a finance guy that will JV with you on deals I would be doing as many flips as I can make 15 to 20k a deal and start buying rentals free and clear of financed. Either way keep doing the flips and buy more rentals or pay off your financed rentals then finance more.

Hope that helps a little, good luck with everything I am sure you will do great.

Andrew

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