I don't see how this is sustainable

[Matthew Thompson]

Hello, I just finished "The Book on Rental Property Investing". I enjoyed reading the book, I found it very inspiring and informative and I appreciate how the book shows you real world examples on how you can build your real estate fortune.

However I see one major problem that is like a 800 lb gorilla in the room. Financing. The book tries to deal with this, but I don't see how you can make money unless you get low APR fixed rate non balloon mortgage. In other words, a traditional bank loan.

Essentially, you can really only go as far as your income allows. You can buy a (potentially) 150K SFR for 80K and spend 20K to renovate it. You can then straight flip it or rent it out. If you make say, 80K a year you can do this two or three times before the bank will start refusing you loans.

Sure, other ways to get money do exist. Maybe you have a rich buddy, or maybe you can find a loan shark, I mean, hard money lender, that will set you up with a 20% APR loan with a balloon due in 2 years (because you're going to 'season' the property and refinance right?). The fact banks usually only count income from rental properties at 75-80% of what you're actually getting should throw up a red flag.

Some people do pull it off though. It's possible yes. Basically the people who pull this off aren't just property investors but loan brokers. In fact I'd argue that it is in selling loans to banks and securing profitable financial arrangements that they make their real money. Without that skill, they are just holding a few properties and making 10% or so APR per year on that, which would not be enough to live on.

I'm still interested in property investing. However, I think I am going to stick to straight flip and sell or perhaps paying cash for properties and rending them out while slowly acquiring them over the years. 

Another option I've considered is putting 20% down on a $800,000 MFR complex (10-20 units), but that would require commercial financing, and since I have no experience, I don't think I'd be able to qualify for a commercial loan. Correct?

That is, unless someone can explain to me how I'm wrong here. I'd love to be wrong. I'd love to quit my job and live life on my own terms. 

[Aaron Mazzrillo]

I haven't borrowed money from banks in 10+ years and I continue to grow my rental portfolio right here in "overpriced" southern California. Of course, the momentum has slowed somewhat lately, but I picked one up as recently as 2 months ago and was going to keep a total of three, but then wholesaled two of them. I do maintain several lines of credit, but I do not even consider conventional pretender lender institutions for financing.

Your lack of knowledge and fear of the unknown is obviously preventing you from understanding that going to a bank to borrow money is not how most investors build real wealth. I have told many consulting clients the secret to building wealth in this business is blocking out an acceptable amount of time EVERY week and working on building your private financing connections. Relying on pretender lenders (lenders that lend out other people's money and then sell the loan) will get you nowhere fast... unless you have a very sizable portfolio and are looking for a large pile of money. Banks actually like those investors better than the average Joe because it is much harder to invest $5M at 5% than it is to invest $200K at 4, 5 or even 10%. 

I rely solely on private lenders to fund my business and rental acquisitions. I keep my wholesaling business charging full steam and use income from that business to 'fix' financing on long term keeper properties. The key in this business is digging your nails in and hanging on. 

Here is a recent example;

I purchased three houses with a combined value of $635K. (Yes, California is not cheap!) What I paid for them is much less than that though, of course. So, the answer to your first objecting brewing in your head right now is; We don't pay retail. Become a better buyer. Let's move on...

I owe $261K total on those three houses and I'm paying 9.9% interest on that money. Pretty high interest rate compared to today's going rates, but I'm not a zero down first time home buyer with crappy credit who qualifies for the new subprime loan; FHA. All three of those loans are interest only with balloons. For me, this a 'capture the equity' game first and a cash flow game second if I must be frank.

I am going to refinance those three loans with another private lender next month. He is a retiring landlord and he understands real estate. What do you think all those burned out 7 figure landlords do with their money when they cash out? Go gamble on the stock market? Not likely. They mostly only know real estate. Most smart landlords eventually transition to lenders in some capacity. 

My new private lender is going to fund $195K which means I'll have to put in $66K. My new rate will be 7%. The difference of $261K at 9.9% and $195K at 7% is over $1K net cash flow and around an 18% return on my money. Lock up the equity, then fix the financing by using wholesale fees to pay down debt.

Another example is a duplex I paid $140K for when it was worth about $190K. I borrowed $125K at 12% from a hard money lender. Then refinanced down to $108K at 9.9%. Earlier this year I refinanced again down to $60K at 7% with a private lender.

2 years ago I purchased a townhouse for $125K. It was worth about $210K at the time. I borrowed $100K from a private lender at 12%. A few months later, I refinanced with another lender back up to $125K purchase price at 7% so I'm basically into the property for closing costs and fees; a few grand at the most, but I've captured a solid $75K net equity. Now, I'm considering either selling it and paying another rental off F&C or paying down the loan back to $100K. 

I use the income from wholesaling and the random rehab I do to definance my keeper rental portfolio. I have some rentals that are in the keeper pile and others that are in the trading pile. Many other investors I associate with are going to a local bank here and getting blanket mortgages on 10-20 or so rental houses at 4-5% with 15 year balloons. That is a great rate, but I don't like that if I want to sell a few of them off, my monthly payment doesn't change. And, if I ever get into trouble for whatever reason, that bank doesn't give a crap about me. They just want their monthly payment. I never once showed a bank statement, credit score or tax return to one of my private lenders either, nor have I had to get an appraisal or any other report. 

In the beginning, most investors start out with banks, but quickly learn it will limit growth to play by their rules. So, they turn to private investors and grow their portfolio substantially. At some point, many go back to banks to get much better rates/terms not available in the private community.

Block out some time every week and work on your private lender leads.