Continue this strategy?

Question

Assuming I can purchase, rehab, rent and refi out all cash outlay while retaining 10-20% ARV equity while the property continues to support > $100 a door / month cash flow after expenses. Tell me why it doesn't make sense to continue this process as an ongoing strategy? What sinkhole am I missing?

(1) Of course it fails if my evaluation of expenses vs. income are incorrect.
(2) The ARV equity is a potential sticking point and perhaps not the right word.  These properties would be slow to unload to end-users because the city's population is dominated by renters. However they would comfortably cash-flow at the "ARV".
(3) The cash-out on these properties is in the area of $40k.

Chris Martin · Answer

Right on the money.

See also this BP thread related to your question. The local lender we are using doesn't care about seasoning. Cash flow, Debt ratios, collateral (appraised, unfortunately) are the important factors. Historically our tranche typically consists of 4-6 properties.

Steve Babiak · Answer

I think you're catching on.  See this post:
http://www.biggerpockets.com/forums/311/topics/84758-number-of-mortgages-per-individual?page=1#p528079

Scott W. · Answer

actually, there are banks that will do cash out refis after 6 months these days. search for a local small bank or credit union.

the one i am going to use says they can with 25% equity. we'll see. 6 months is up in july so will let you know if it's true or not. claims they're going to sell it back to the govt but i swore fannie/freddie/etc has 12 months of seasoning requirements?

Bill Robinson · Answer

I appreciate you pointing that out.

Edited: I believe I missed the point in my original response.

If I expand I need to take into account that my liabilities will increase with each property. So even though I may not be reducing my available capital my reserves vs. operating expense ratio will decrease. I need to make sure I know where that needs to be in order to not be under capitalized.

That would drive how fast I should proceed based on how fast I can build reserves as I expand. Do I understand your warning?

Steve Babiak · Answer

The reserves I question are for ongoing operations of the "rental business".  Funds to cover major repairs, extended vacancies or nonpayment, evictions and other legal expenses, etc.  It's prudent for every landlord to be sufficiently capitalized by having reserves, and most lenders will have some requirements for reserves to be held by the landlord.

Bill Robinson · Answer

Steve Babiak If you mean to ask what do I do if the rehab goes over projected costs? or do you mean as the ongoing buy-hold concern?

Regarding rehab going over projected costs: The amount put at risk is only a portion of my available funds. I have multiples to cover overrun. I prefer to recoup the entire project outlay but don't have to in order to keep going or eat. I also am not a a full-time investor and have a salary.

Ongoing buy-hold: I already have a small (?) portfolio of rental properties in the area providing cash flow.

Do I understand why you asked about reserves based on my answer?

Steve Babiak · Answer

No mention yet of reserves ... so Bill Robinson what are your plans on reserve funds?

Bill Gulley · Answer

Hey, I'm not always sarcastic! :)

I doubt you'll ever get a 30 yr fixed, you may get a 15 yr ARM or a modified rate structure from a small bank in your area. Do a blanket mortgage and make sure there is a release amount if you want to sell one off.

You can keep going with this until the bank thinks you are at your loan limit to one person/company. As you finish the first house the value is up which releases funds for the second, when you get to a point like 120K that is feasible for the bank to carry the loan, then roll it over. No seasoning as they refi thier own note. You work off the appraisals of the properties to the LTV and the overage can be taken out from the cash or keep it there to do it again. Good luck :)

Bill Robinson · Answer

Bill Gulley  I debated posting this stupid question. But right there you may have answered a whole raft of problems I have had with these small mortgages.

I do assume you are being serious and not sarcastic.

Can I impose on you to tell me if you have a similar answer to dealing with existing small mortgages such as this? If I was able to move them to fixed it would remove a portion of risk from the equation.

Bill Gulley · Answer

Well, as soon as I posted I see you changed it up on me... LOL

I have another soultion, but will you be doing more than one deal in the same area?

Put the money in the bank, borrow the purcahse and rehab costs pledging a CD and the property, when it's done, move on to the nect one and maybe the next one, when you're done you have 3 40-50 properties, now refi all three on a blanket mortgage and release the cash paying down to 75%. Do it again for 3 more. :)