How do people aquire multiple units in such a short period?

Question

I am a former builder, did one flip REO property about 10 years ago, that was financed with my business line of credit. I've been doing research on house flipping and buy hold investing (mostly flipping). But anyway, one thing I don't seem to understand about buy/hold. How is it that so many people are able to purchase multiple properties in such short periods? I understand getting value when you buy and all that. However, at some point, properties and repairs need to be paid for. So as I understand it the deal works like this:

Find a property (I know, easier said than done but humor me)

Get a great price well below market

Arrange financing or pay cash. This is the part where I get confused. If I pay cash for the place, well, that's pretty much ALL my cash. How will I get more properties? OK say I get financed via a HML or private money. Get the property, do the repairs put a tenant in. How is the lender being paid back? Refinancing and pulling equity out? Say I get a property for 70k and it takes 30k repairs and now the value is 140k. Am I getting a mtg for 100k to pay the lender back and a payment of say 600 a month. Collect rent for 850/mo, cashflowing 250 ( I know there are other expenses but stay with me).

So now I want another property and go do the same thing again. But when I go to refinance, will the bank just keep refinancing the properties that I control? Then there is the debt you incur. Is the answer just to keep racking up mtg after mtg as long as the cashflow is good?

Tell me what I'm missing here.

Thanks

Jason G. · Answer

@Jeremy England, we saved for the down payment on our first SFH investment property and for a portion of our second. Took out a HELOC on our primary and used it to cover the remainder of the down payment on the second SFH. The third SFH down payment came completely from the HELOC. Our fourth (which we have yet to find) will also be paid using the HELOC and we have around 40k in reserves. Rent covers property manager, mortgage, HELOC interest payments, vacancy, maintenance, and CapEx. Remainder goes into saving for next property plus we are able to put aside almost 3k a month for future investments from our W2 incomes and also our bonuses and tax refunds. So that is how we are funding our investments, all with 20% conventional mortgages. Everything is buy and hold.

Matt K. · Answer

word of caution... if you going this route (lot of houses small cash flow) you're going to want to have outside cash flow and healthy reserves. When it rains it pours, last thing you'd want is overrun on current flip, unexpected capex repair, and vacancy all overlapping. If you don't have the money to cover this... you'd get screwed.

Matt K. · Answer

the overly simple wayGet property cash, make repairs (cash), do delayed financing and use ARV, get all your money bank (or most of it) and repeat.60k purchase, 20k rehab, 100k ARV, 1k mo rent. Pull out 80k for loan and pay yourself back... (again overly simple example). At best you're only getting 80% of the ARV back out of a house... so if it took you 90k to get a house worth 100k you're not getting all 90 out.If you use hard money or whatever then you have carrying costs/prepayment penalties etc that would make things more difficult than paying cash. But the overly simple version of that is you'd convert a high interest rehab loan into a longer term loan (still higher interest than conventional loan) at the end of your construction. You'd probably have like 20% of purchase price down and they finance the rehab.

Account Closed · Answer

i have a Rental that I owe 30k home value of 190k (tenant in place)i also have a primary owe 200k value is 370k (live here)which property should i do heloc for to fund 2nd investment property? i should only uses heloc for down payment correct?

Matt K. · Answer

Stuff gets sold below market value all the time..look at car dealers more so the used ones.

Jeremy England · Answer

I see. Just doesn't seem logical but I suppose it's happening every day.

Matt K. · Answer

maybe you've inherited the house and don't care, maybe you're getting a divorce, starting a business, the list can go on and on. Most likely you'd take below market value for your house because you have no better options (like selling it for more).

Jeremy England · Answer

Regarding purchasing distressed properties, Why would a person who has equity in their property sell below market value? Because I 'm assuming equity is REQUIRED for the deal to be any good unless you are trying to short sell right? So I'm a homeowner, lets say I have a house who's ARV is like 100k and I owe 50k. I'm broke so no money to pay my mtg. A guy comes along and says "hey, sell me your house to avoid foreclosure and ill give you 55k". Why would someone do that? Why not just sell the house for closer to FMV. I get that perhaps the house is in disrepair and I can't afford to fix it to sell and no conventional bank is going to finance it because it's so bad. Is that it? What other reasons do people have for selling below value if they have equity.

Nicholas Weckstein · Answer

Wow , so sorry for all the horrible typos. Did that on my phone. Autocorrect seemed to have get the better of me.

Nicholas Weckstein · Answer

I often think about this as well. In my mind it goes something like this. Buy a place for cash. Say it's 60k. You rehab and be in 30k place is worth 100-110k. Your in for 90k. Cash out refinance 75% so for the sake of this day that is 75k and then continue to do it. Yeah you'd probably need to get bridge financing or short term hard money. But I do see the dilemma here. You have to keep in mind your DTI ratio. Because if you buy the place for cash and go to refinance but can't due to DTI well then your money is stuck. I guess the best you can do. Is just pre calculate and try to get a rough idea when u are evaluating the deal if it will allow you to refi and keep going. I'm with you though, I see people adding 5-10-20 doors a year. It's crazy.