How to Acquire more Properties?

Question

I am purchasing a town house, foreclosure move in ready condition. After running the number I show $200 per month cash flow. I calculated all monthly expenses such as taxes, monthly maintenance fee and still come out positive cash flow. My question is after I close on the property with 20% down 15,000 down with 4% percent financing, how do acquire more properties since I just spent 15,000 down? Do I refinance a year later and cash out? is there another strategy?

Kurt K. · Answer

That's one of the "downsides" to buy and holds, is that you can run out of investing funds fairly quickly. Using equity is one source, partnership is another source (someone who chips in the money while you do all the "work" of running it), 0% down (much harder these days) is another source, or just simply waiting till you have more funds saved up to buy another. One of the best ways to buy more properties is to update your property you just bought and create "forced appreciation", or make it worth more from your updates interior/exterior/landscaping/etc. Then 1031 exchange that property into a larger property that produces even larger cash flows.

The "upside" to buy and hold, is that it is also like a snowball. Where at the start you own a couple of properties and cash flow is much more scarce. But as your portfolio increases (whether in number of properties or "size" of properties) you will have ever more cash available, and eventually a cash flow surplus, all the while you are building equity on your properties.

A lot of the above options have to do with personal preference or what is available in deals in your area. It is hard to give a catch all answer of "this is the way to do it".

John Chapman · Answer

Bill Gulley@Bill  I've never had a conventional lender ding me on having too much access to credit but I could see the logic in it if they decided to do it.  I'll be the first to admit that using credit cards is not an approach that can be applied across the board. And you are correct that I did have a good job that could help me cover payments if I needed it.  I've been doing it for six years and never missed a payment, but I"m super organized and careful for the reasons you identify.  I kind of perceive this source of fund as a way to leverage your w-2 job and good credit.

John Chapman · Answer

Bill Gulley Sorry for the delay in responding.  I was referring to those checks credit card companies send you (or sometime) they will just deposit the money.  The offer is some fixed percentage until it's paid off.  (I recently received one that was 5.99% with no balance transfer fees.)   I've made it a point to steadily increase by limits on all of my credit cards so that when an offer like that comes around, I can't usually obtain anywhere from $10-20K.  (I do make it a point to annually increase my credit card limits, so that's why I can get that much.)  I think they are a pretty good deal if managed properly and carefully.

Jon Holdman · Answer

Rentals are a cash on cash game.  If you're making $2,400 a year on a $15,000 investment you're making a 16% cash on cash return.  So, accumulate your cash flow and add in whatever money you were saving to buy the first one.  When you have enough, buy another.  It will go slow at first, but then turn into a snowball.

You won't be able to get 4% 30 year fixed loans forever, though.  At some point you're probably looking at 15 or 20 year loans.

Mark P. · Answer

I started a year ago and just bought my second house.  I was three years post a financially devastating divorce and realized I had to make a move.  I am an IT guy with a master's degree and a pretty good income.  I also do consulting on the side.  I worked with a guy that was liquidating all his properties and moving to Florida to retire.  We talked one day and I asked him if he would help me out.  Long story short, he gave me a 5 year note on a house that he already had rented.  We did the math and worked it out so the cash flow would cover the 20% down after the 5 years.  We had a lawyer do the paperwork and amortization table for about $700.  He had nothing to lose.  Five years free payments and if I default or can't get the loan after 5 years, he gets the house back.  He knows I'll take care of it because I want to own it and I am motivated.  With the cash flow from the house, and I had a good year with my consulting work I accumulated enough money in one year to buy another property.  I could have just bought the first house, but he gave me a 2.75 interest rate and the bank is 5.75, so I figured I would be stupid not to milk that for as long as I could.  I still have four years to save the down payment when the note comes due and I am confident I will have that more than covered.  I closed April 30th on my second house and rented it in one week.  I am working now on trying to get a multiplex, but I am low on cash right now.  
Another tidbit of personal experience:  A big bank wouldn't talk to me about my second property, but I had a friend that was a banker from a small town bank.  I always stayed away from the small town bankers because I didn't want anyone to know my personal business, but I figured I do as well or better financially than most of the people in my town, so what the hell do I have to be ashamed of?  I spoke with him and he had a LOT more flexibility on the loan for the second house I bought.  Build a relationship with a small bank...that's my advice.

Bill Gulley · Answer

John Chapman, absolutely, the issue of using half the credit line is usually in underwriting, not by the originator or loan officer level, even if they did, it's not worth them mentioning when income is sufficient so I'd bet in your case it would never be an issue. A 20k limit would be a 10k assessment and a 3% payment would be $300 to be applied, a 30k income only gets budged 1%, a 100k income won't register. Usually it only presents an issue worth mentioning when the ratios are really tight or just over the limit. Now, for some, if they have ten lines of credit at 20K, that could be significant to them without knowing.

Thanks for mentioning this as I don't recall this issue ever being raised here, so it may be newly disclosed information to be aware of. :)

Bill Gulley · Answer

John Chapman, thanks, you had me scratching my head, running through sources in my mind from accounts receivables financing, borrowing agains the box with your broker...so, credit card checks...good plan for short term money.

Some can be a good deal, those entry rates are also known as sucker rates and if not paid they can go to killer rates. I get offers weekly but don't go there.

There is a problem having high limits even paying as agreed as conventional lenders may apply half the limit in underwriting debts when there is no consistant balance, the reasoning is that if you have an open account you will use it. I've had to have borrowers payoff smaller debts and cancel cards to get them qualified.

So long as you have the income to cover it and you're a good money manager raising the limits can provide a good source of funds.  :)

Bill Gulley · Answer

John Chapman, Can you touch on "life of balance checks"?

I suggest you become very familiar with seller financing and private money arrangements as well. In reality, buying SFDs with 100% seller financing is rare, you need a motivated seller and trust, experience and be in good financial health to pull it off as a principle method. Look for landlords retiring, a good source to buy an entire portfolio with seller financing! :)

Account Closed · Answer

Get the owner to hold the financing for you.  Often they will hold a mortgage for all or most of the money.  It is so much better than dealing with banks.   It takes a little knowledge to learn how to convince the seller to do this.  Read this article for a start http://ronclimer.blogspot.com/2013/04/seven-reasons-why-i-love-owner-financing.html Read Nickerson's book.  
Once you have a few houses with owner financing , you will wonder why you ever dealt with banks.

John Chapman · Answer

One other option that I used to do is look for alternative sources for the down payment or the money that I would ultimately end up leaving in the property (buying with HML or private money and then refinancing)  Depending on your personal situation, this can accelerate your growth, but you have to be careful.  For example, when I was starting out, I would use life of the balance checks (hard to come by now) with low interest rates.  I also used personal loans.   (Caveat, I had a good W-2 job) The monthly payments would sometimes exceed cash flow and other times not, so it kind of averaged out.  (I'm talking true cash flow not, just cash flow after PITI).  From my perspective, if the cost of capital is significantly less than the return, then it make sense as long as you can carry the monthly payments.  I only used this strategy when I perceived an urgency to purchase, that is, when I thought prices were awesome and would not last long and when I thought financing was killer.  Essentially, what you're doing is compressing your purchases into the immediate future rather than spreading them out over years.   At some point, you need to retire (pay off) the debt you took out to buy the properties, which you do when the deals aren't there.  Just my two cents.

How to Acquire more Properties?

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