I've gotten my feet wet. Now what?

[Corey Smith]

I want to bounce my situation off of any of you in the BP community that are willing to read it and give an opinion. I became interested in REI two years ago this month, when I found BP and read Rich Dad. Over the first year or so I spent the majority of my time reading books, listening to podcasts, attending a few local Investor group meetups, trying to decipher what are of REI I wanted to try my hand at first, and paying off debt in order to put myself in position to make some moves.

Fast forward to today … as of June, we'll (wife and I) have paid off $65K+ in Car/Student/credit card debts, and bought three rental properties to add to the one formerly primary residence that we've been renting out of the last 9+ years. And we're now in position to start dedicating $3K-$4K a month towards REI.

One note about the three new properties is that they were Turnkey, and purchased using a HELOC. A SFR and Duplex in Birmingham, and a SFR in Kansas City. They cash flow just under $900/mo. combined, after accounting for the HELOC payment and accounting for Vacancy, Repairs, and Management. Knowing what I know now, I likely wouldn't have gone the turnkey route. I'll explain below.

We could likely continue to buy one or two turnkey properties each year until we reached our goals, which was our original plan, but I don’t want to take that route anymore. The properties all perform fine so far, and the management companies have been pleasant to work with. But I started to get turned off of the turnkey route during the buying process last year. Here’s why:

• The process was boring, and I felt like I wanted to much more involved than I was. I basically found the property I wanted, ordered the inspection and all that, then waited for rehab to complete in order to close. Which is exactly what you should expect from a Turnkey experience.
• I feel like I left money on the table. I’m not sure what cash flows would have looked like had I done similar properties from acquisition to placing them under management, but I know I’d have more than the little-to-no equity in the properties out the gate (assuming I bought it right).
• I’ll have to wait until we have ~$20K each time I want to buy a new investment. Which is fine, but I’m looking to speed the pace up.

After having contemplated using the BRRRR strategy in the past, I recently finished @David Greene's book on Long-Distance Real Estate Investing (great read, IMO) and I am going to go full-tilt on getting the money together to do a BRRRR project on my own, out-of-state.

I’ve given all this info (and sorry that it got kind of long, thanks for getting to this point) in hopes that I can get some feedback on how to attack that.

A few options I've contemplated getting the money together for a BRRRR project:

• Save up enough money to buy a BRRRR project using financing for the initial purchase (likely end of this year).
• Save up enough to buy a BRRRR project with all cash, and hopefully unlock better buys (likely end of next year, 2019). And continue to use that capital over and over again.
• Sell the three turnkeys (which were bought essentially at FMV, and hence have little-to-no equity) to get the HELOC money back out of them. Then use that money to go buy a BRRRR project with cash. And continue to use that capital over and over again. This one may not make sense, since they are performing. But they are also holding down three of my 10 golden tickets for financing, which could be used for better (ie. Better equity position) investments.

In the grand scheme of things, the “Save up” options are just a matter of patience (which is not a strong suit of mine haha). But I’m hoping someone could give me some ideas of other ways to more rapidly acquire investment properties.

What would you do, if you were in my shoes?

[Jason Cory]

I literally explained this earlier today in another Birmingham post earlier. Copy/paste below...

I keep noticing people saying you have to hold properties to make money or trade profit.

As a former appraiser I'm going to tell you what your lender is going to do regardless of area.

When you buy most times it's vacant so the value requested in an appraisal is the sales comparison approach. It's the wrong value to use & the wrong approach for you, the buyer. It's the highest value that you'll receive, as vacant, so it looks like a great deal on paper.

Unfortunately, if you need to refinance or sell with a tenant occupying the property your lender will request the income value with rent comps & a rent schedule to be included in the appraisal. The income value will be different than the sales comparison approach. It will be lower in predominantly owner occupied areas because it's not the highest & best use of the property. It fails 2 of the 4 tests in the HBU, maximally productive & financially feasible. When the lender bases the refi on the income approach (since that's its current usage) the paper equity you thought you had is gone because they originally lent you money based on the sales comparison approach not the income approach.

For example, lets say you purchased a house for $100,000 with the appraised value (sales comparison approach) being $125,000. That appears to give you $25,000 instant equity.

Let's say you refi in 3 years. Your rent amount is $1,000. You bought in a C area. Instead of annualizing the GRM multiplying the rent x 12 & dividing the GRM by 12 to get the value do it monthly because it's easier to understand but yields the same income value.

Monthly

$1,000 (rent) x 75 (GRM - C area) = $75,000.

Annual

$12,000 ($1,000 x 12) x 6.25 (75÷12) = $75,000

If you buy this way that's why you're told to hold properties because the value in the appraisal wasn't the intended use of the property therefore, it's the wrong value. Instead of having $25,000 equity you start $25,000 in the hole.

If you want to realize the sales price of $125,000 it has to be vacant, renovated again, & sold to an owner occupant to match the stated value of how you purchased.

If you sell tenant occupied it would be to another investor that's not going to pay retail or care how much you owe. They buy to invest also.

On the other hand if you buy in a predominantly rental area the following example is used.

Sales Comparison value of $50,000 (sales comparison is included in income value appraisals even if it's not the highest & best use. Its standard to be included)

Let's say it's a D area. Rent is $750 a month.

$750 x 65 = $48,750

Buy based on the correct value & property usage.

Buy as if you have to sell tomorrow.

Be able to sell tomorrow if you wanted & make a profit. That's investing. Holding for appreciation is prospecting. Every 7-10 years there is an economic downturn. That's when you would be selling based on advice I see given a lot on BP.

It makes no sense to buy for a 1% rule because you're buying for a different usage than what you will be using the property for but you are funding the business of the investor you purchased from that is selling based on the 1% rule because they sold based on the wrong stated value in the appraisal for the intended use that is different than what you plan on doing with the property.

I've appraised hundreds of these in my career & its caught many unsuspecting investors with the pants down so to speak.

If you're buying ask for the income value, rent comps, & rent schedule to be included in the appraisal when you purchase. Don't get caught trying to refi or sell occupied & think you'll get the sales comparison value. It won't happen.

Best of luck to you investing. Be sure you match value with intended use & highest & best use before you buy a property.

End copy/paste

Use those 3 as lessons learned. Start new with a portfolio loan with new properties buying strictly based on the income approach. Avoid B/C areas or you'll be in the same position. Stick to predominantly rental areas. Low entry, higher cash flow. Materials used for renovations are cheaper. Find properties with low maintenance Materials - brick, hardwoods, etc. Use the $2-3k as down payments. If you're spending $30-40k per house you're buying one every other month. Mortgage payment, insurance, & taxes are lower but rents are $750+. In Birmingham that should net you $400+ per month for each. If you decided to sell you'll be able to because even in the event of a downturn in the economy more people have $30-40k to buy a property instead of $100k.

You win Monopoly owning the St. Charles section instead of Boardwalk. Monopoly is a cash flow game. Follow the same principles. You're playing the adult real life version.