Has anyone done this strategy and repeated?

[Joseph Pytcher]

Buying a distressed or 70% ARV home with hard money, 100% LTC then refinanced it at 75% or less and rented it out? Curious if anyone has done this several times over in order to build their rental portfolio. This, I would think would minimize out of pocket costs to acquire a rental property. Any ideas or thoughts about this?

Thanks!

[Mike H.]

I think it depends on how big your area is and how many you want to buy in a year. I've essentially been doing this for the past 5 to 6 years. I've been buying about 3 properties a year with this very strategy.

In the first few years, it was easy to find the houses discounted enough to make the numbers work. Although if you waited too long to refi, the appraisals would be awfully tight.

The trick now is getting all-in (purchase plus rehab plus the hard money lender costs) at 70% LTV. While its possible, I think the added fees you're paying for the hard money lender are going to push it up closer to 80% LTV on the best of deals.

However, if you only need to buy 2 or 3 a year, I think you're likely to hit on that many that should come in close to 70 or 75% LTV. But think about that. 5 to 10% out of pocket is still tremendous leverage. Compare that to having to put down 25% plus paying the rehab out of pocket, and you'll conserve your capital way more.

If I would have had to do that 25% down plus rehab out of pocket, I'd probably only own 3 to 4 houses right now if that. Instead, I own 19 and now those 19 rental properties are feeding my 5 to 10% down payments. So I can keep growing with essentially no money out of my pocket. Just the rental property business'. :-)

My goal when I started was actually 10 houses in 20 years. Then after the first couple houses, it was 10 houses in 10 years. Then it was 20 in 10. Now its 30 in 10. If I get to 30, I'm going to be tickled pink.

The other thing I would add is that the area and home type also plays a big part in finding the deals with the low LTVs. When I first started, I was open to anything that would cash flow well and come in at under 65% LTV (all in). Now that I have the cash flow, I'm really limiting my deals to a couple of key areas that I want to be in because of how much easier they are to manage and the long term growth opportunity that the area has because of the really solid schools.

I still look in some of the other areas. But its so much nicer buying 5 to 10 mins from home. But I definitely believe that, unless you have a big chunk of cash somewhere, using the hard money model is the absolute best way to build significant passive income and net worth. In fact, in my opinion, its the only way for us middle class people to do so.

That or come up with the next Facebook. :-)