Poke holes in my plan...

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Poke holes in my plan...

Taft Love
Spokane, WA · Member since 2017 · 45 posts · 17 votes

Hi all,

Happy New Years!

I have a plan for financing properties and want to run it by all of you. Since I'm still learning my way around funding deals, I'd love to hear if I've missed anything. Are there any details that would make this impossible?

While I welcome opinions on whether or not I'm going about this the "right" way, what I'm hoping to learn is whether it's possible and if there are any rules of which I'm not aware that might sneak up on me and ruin my ability to fund deals.

- I'm buying SFR that will cost around $100k all-in. Planning to BRRRR, taking my cash back out. However, my market is tight and I'm willing to leave $5k in each deal.

- I've saved up around $60k in cash. This is enough to start a couple of deals, but I'll run out of cash pretty quickly.

- In order to make sure that doesn't happen, I've worked out a deal to get access to a low-interested $100k (~7%) line of credit from a former business partner who wants to put his money to work.

- My plan is to start by using my own cash to get into deals. I'll put 20% down on each deal, leveraging hard money. A deal "pencils" if I can spend less than 80% of ARV while factoring in hard money rates.

- Every bank I've talked to has 6-month seasoning requirements for cash-out refinances—even for in-house loans. This means I can do 3 at a time using my own money. By the time the first 3 are done, I should be able to save up an amount equal to what I left in each deal. So I should be able to do 3 at a time forever. That means ~6 per year.

- If I decide to do more than 3 at a time, I'll need more cash. If that happens, I'll tap into the LOC. I'm planning to use the LOC for down payments and pay interest out of pocket.

So, what have I not thought of? Please let me know why this won't work.

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Andrew Johnson
Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
8y

@Taft Love I think you're getting some good advice and you're doing well at the "spreadsheet stage". The challenge is that everything looks good on a spreadsheet :-) But if you do a few of these rehabs you will run into one that takes longer, costs more, doesn't rent for as much as you think it will, etc. Not to mention that you'll have the occasional tenant that crushes a unit and you'll spend $2K-$5K having to bring it back. The reason I'm bringing that up is that it doesn't look like you've put down (you've probably thought about it) how you're going to 1.) have reserves at the beginning and 2.) keep adding to that reserves pile as your treasure trove of properties grows. Maybe your friend can bump the LOC so can have that covered or you have a ton o' equity in your primary residence.

I would imagine BP does have a heavy element of "survivorship bias" when it comes to people posting about successful projects, buying right, pulling all of their money out post-rehab, etc.  The people that hit bumps along the road and didn't have the cash to see them through it, well, they never come back to BP and post again.  They're just out of the game.  So if I were in your shoes I'd do one.  Just one.  Test your theory.  See how your rehab estimates do, if you can pull money out after 6 months and leave 5% in the deal, if they rent for what you think they will, etc.  You hear a lot more of "I should have gone faster soon" because the "I should have gone slower" investors are sunk :-)

So if you have Deal #1 that should be $60K of your money and $70K as a LOC from your former business partner. If your buying an SFR that's "$100K all-in" you should have enough capital. You can skip a HML and the points/fees associated with it. And 7% really isn't that bad when you look at normal loans around 5%. After your season for 6 months you can pull out your projected 95% of ARV and go from there.

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  • Jim Goebel
    Real Estate Investor · Des Moines, IA · Member since 2016 · 922 posts · 533 votes
    8y

    Sure here's a few:

    1. If you are starting from scratch and planning to self manage the construction, parallel processing multiple projects (ie: 6 in a year) is no small feat.......  What experience level do you have here?  If little I see this as being a non realistic goal
    2. What do you mean by leave 5k in your project?  IE a 5k equity position?  Depending on your cash position that's risky as from my experience there can be significant deviance from project estimates based on things that are outside of our control as investors--- especially when you are new.
    3. Why go hard money - can you not approach a traditional bank and get financing for a rehab deal?
    4. Can you not get a cash deal with your 60k in your market that you can finish with leftovers and cash flow?  If so, do that.
    5. What about your product?  I know this was financing specific but you need to integrate an understanding of your market and what you're going after with your financing strategy.
    1Reply
  • Slocomb Reed
    Real Estate Agent · Cincinnati, OH · Member since 2014 · 170 posts · 102 votes
    8y

    @Taft Love Have you considered getting a line of credit secured by your new property to pay off the hard money loan once you have a long-term tenant in?

    The bank I use for LOCs doesn't require seasoning or historic financials for the property to determine what the income will be (just current lease and proof of rent payment), and the loan processing is super simple and I can get a LOC for up to 80% LTV at 5.5% with no fees or points.

    Doing this right now. I bought and fixed up with a hard-money-like loan, getting a LOC secured by the property to pay off that loan right now, then I'll convert to long-term financing soon as I can.

    2Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    Oh wow, that's a really good plan. I didn't realize that was an option. I'll definitely ask around and find out if similar options exist in my market!

    0Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @Jim Goebel Thanks for the input!

    1) You're right that managing six in a year is an unrealistic goal. I hope to be there in a year or two. Always thinking ahead :-).

    2) What I meant by leaving $5k in a project was that I am willing to cash out $5k less than what I put in. So on a $100k ARV project, if the bank's max LTV is 75%, I'm willing to spend up to 80% of the ARV when I analyze the deal (though that's not ideal). The market is super competitive now and it's hard currently to find deals that pencil as a BRRRR without leaving a little cash in at the end.

    3) Most of the deals I'm looking at are foreclosures. I've yet to find a house with the right price that is also eligible for any rehab loan other than FHA 203k. I've already used FHA and will also lose deals to other investors because every one is in multiple offers.

    4) I could go this route, but it's not ideal for two reasons. It ties up all of my cash, which limits my ability to pick up more deals (even with conventional financing) and it means that the next project could take a lot longer.

    5) Not sure I understand the question. Does product mean the house or the loan instrument?

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y

    @Taft Love, buying at 20% off is one thing, but, you haven't discussed your cash flow expectations - after each 95% Refi. If you're trying to beat out every other investor in a hot market, will there be any cash flow left for you in your successful offers?

    How about: analyzing some potential deals here, without getting ahead of yourself?...

    0Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @Brent Coombs

    I've modeled out the cash flow on each of these (using mostly conservative numbers) and it looks pretty good. Aiming for $200 per door per month. I think I've done a poor job of explaining myself on the 5%.

    I can do a cash-out refinance for 75% LTV. I am willing to spend up to 80% of LTV on purchase, rehab, and other costs. That's what I mean by "leave 5% in the deal". I hope I explained it better that time.

    0Reply
  • Geoff Perkins
    Rental Property Investor · Prosper, TX · Member since 2013 · 27 posts · 18 votes
    8y
    How are you planning on running your rentals? Are you factoring in operating capital for each property? Ex: unexpected repairs, vacancies, tenant damages, etc. I know from personal experience being over leveraged and cash poor when the unexpected happens can suck pretty bad. (Fraudulent lien from a contractor who went bankrupt and a house fire in a rehab)
    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    @Taft Love I think you're getting some good advice and you're doing well at the "spreadsheet stage". The challenge is that everything looks good on a spreadsheet :-) But if you do a few of these rehabs you will run into one that takes longer, costs more, doesn't rent for as much as you think it will, etc. Not to mention that you'll have the occasional tenant that crushes a unit and you'll spend $2K-$5K having to bring it back. The reason I'm bringing that up is that it doesn't look like you've put down (you've probably thought about it) how you're going to 1.) have reserves at the beginning and 2.) keep adding to that reserves pile as your treasure trove of properties grows. Maybe your friend can bump the LOC so can have that covered or you have a ton o' equity in your primary residence.

    I would imagine BP does have a heavy element of "survivorship bias" when it comes to people posting about successful projects, buying right, pulling all of their money out post-rehab, etc.  The people that hit bumps along the road and didn't have the cash to see them through it, well, they never come back to BP and post again.  They're just out of the game.  So if I were in your shoes I'd do one.  Just one.  Test your theory.  See how your rehab estimates do, if you can pull money out after 6 months and leave 5% in the deal, if they rent for what you think they will, etc.  You hear a lot more of "I should have gone faster soon" because the "I should have gone slower" investors are sunk :-)

    So if you have Deal #1 that should be $60K of your money and $70K as a LOC from your former business partner. If your buying an SFR that's "$100K all-in" you should have enough capital. You can skip a HML and the points/fees associated with it. And 7% really isn't that bad when you look at normal loans around 5%. After your season for 6 months you can pull out your projected 95% of ARV and go from there.

    6Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @Andrew Johnson This feels like good advice. I've been trying to decide whether to do one or two during the first six months. My triplex is doing fairly well (my first property), but it's a small sample size and that confidence could get me in trouble.

    I'll plan to move forward with one and scale more quickly after. 

    Thanks!

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y
    Originally posted by @Taft Love:

    @Brent Coombs

    I've modeled out the cash flow on each of these (using mostly conservative numbers) and it looks pretty good. Aiming for $200 per door per month. I think I've done a poor job of explaining myself on the 5%.

    I can do a cash-out refinance for 75% LTV. I am willing to spend up to 80% of LTV on purchase, rehab, and other costs. That's what I mean by "leave 5% in the deal". I hope I explained it better that time.

    Admitting you'll likely have to leave money in each deal doesn't mean you did a "poor job" explaining. (It was me who guesstimated it down to a "95% Refi" assumption).

    However, have you done a "poor job" with your "$200/m cash flow per door" prediction?

    We won't know, until you share those figures - here. Thanks...

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    Howdy @Taft Love

    You have a good basic plan.  I agree you should not jump in thinking you can do 3 deals at a time.  I would stay away from the Hard Money as long as I had access to a Private Money Lender.  If you get to the point you are using up that pool of money then look for other private lenders.  If all else fail then use the Hard Money.  The Cash-out Refinance loan will cover more with the private lender money verses Hard money.  7% vs 12-13% plus points.  That's a no brainer to me.

    When you say $100K all-in do you mean purchase price, Rehab costs, Holding and Closing costs?  If so that means you would need $300K to complete 3 deals.

    Just because a bank has a 6 month seasoning period does not mean you can reuse that money every 6 months.  The seasoning period does not start until the property is available to rent.  If the Rehab takes 3 Months to get it to that point that really means 9 months from purchase closing to Refinance closing.  Sometimes it may be shorter or even longer.  Make sure you account for these type of delays in your plans.

    You also may find achieving $200 per door difficult using the BRRRR strategy. The main reason is the Cash-out Refinance loan raises the mortgage payment so much. Yes, you can leave additional equity in the property to increase your cash flow. So then it becomes a decision of how much of your cash do you need back for future deals and how much is acceptable for minimum cash flow. In other word your 5% can turn into 10 or 15% in order to meet your cash flow requirements.

     I definitely agree you may be planning to spread yourself too thin.  You still maintain a cash reserve for the unexpected.

    Why only SFR? You have a Triplex why not pursue multi family properties also? You asked the question about doing 6 per year indefinitely. With multi family properties you would be able to grow faster. You will eventually want to raise that $100K limit. There is not as much competition as with SFR (Home owners).

    0Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @John Leavelle That's a good question. I have not seen any decent MFR in my market. Seems there aren't a lot on MLS and the ones that do pop are bought too quickly or someone else has fixed them up and forced the appreciation I want to build into the property.

    0Reply
  • Andrew Johnson
    Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes
    8y

    @Taft Love I'm also biased in that I'm a "walk before you run" kind of guy.  And some of that is driven also from being married, having to factor her personality into the equation, etc.  My first commercial multifamily deal was 5 units and I paid cash.  Why?  I wanted to make sure that my downside was "make less money" rather than losing money, breaking even, etc.  It also served to test my theory about the market would perform, vacancy, the PM that I chose, etc.  So if I was going to make a mistake is was going to be with "house money" rather than debt.  But I'll be the first to say that it was suboptimal.  There wasn't any leverage, there was no mortgage interest to offset the net income, etc.  But I learned that I was overpaying for insurance.  I know that's a small thing but I put 25% down on 4 identical units that's a mistake I would have made with 4 times the downside.  Anyway, to each their own and "going big" is hugely popular on here.  I just like to "own my biases" that was someone in your shoes knows the personality of who is giving theoretical advice :-)

    1Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    8y

    I think you're in line with how to best leverage your funds and your private lender's line of credit to grow a portfolio.

    Here is the one thing I see that will require some tweaking. You will not be able to do 3 at a time with your own money if you're suggesting you're going to be out of pocket 20k per deal until you can do the cash out refi.  

    That would leave you with no money in the bank and there is no way you're going to qualify for any of the refi's if you have no money in the bank.

    What I would suggest is to find a hard money lender that will lend you 100% of the purchase and rehab (recasa financial is there in ohio and they will do just that). That way you keep your 60k in the bank as reserves (i.e. bona-fides to qualify for the refi's) and then you can do rate/term refi's on the properties once you get them rehabbed and rented.

    Local banks like rate/term refi's way more than cash out refi's - as do their auditors......

    So finding a hard money lender that can do 100% financing is a really beneficial tool to have. Maybe in the beginning that will be tough to pull off. But once you hit 5 deals under your belt, then start shopping your terms around and see what you can find.

    20% down AND hard money seems a bit excessive to me.....

    2Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @Mike H. This is awesome info. Thanks!

    I've spoken to a few private money sources that do 80%-90% of purchase price and 100% of rehab costs. If I put 10% of the purchase price down, that is likely to be about 5% of the final value. That would mean that I can achieve my goal (leave less than 5% of ARV worth of my cash in the deal) and get my cash out more quickly if I use a rate refi.

    That's not to say I'm ignoring people who thing I should use my money first, but I like the idea of using leverage—even if I only do one deal at a time.

    0Reply
  • John Leavelle
    Investor · La Vernia, TX · Member since 2015 · 1k+ posts · 865 votes
    8y

    @Taft Love

    I agree with @Mike H. recommendation for your situation. One important thing I strongly recommend is your get ALL your Acquisition financing and Refinance deals workout and Approved before making the purchase. It makes the whole process go much smoother and you sleep better at night. Also I know our markets are different, but, I haven't bought any properties of MLS either. Mostly, Driving for Dollars and bird dogs. Property Managers are also a good source.

    0Reply
  • Rick Pozos
    Wholesaler, Rehabber and Landlord · San Antonio, TX · Member since 2014 · 2k+ posts · 2k+ votes
    8y

    All of this is great theory. Go out and buy a house!!!

    You can talk about it all day and night, but until you actually do it, it is meaningless. You will learn more by watching or working with someone who is actually doing it if you are a little scared to do it yourself.

    There is nothing wrong with working with someone. Watch them make the mistakes and more importantly, watch what they do to fix them.

    You want to mitigate as much as possible, but when things come up you will just have to take things in stride. Keep on moving forward. Some deals will be little wins and some will be big wins. Good luck.

    0Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    Thanks! 

    I just had an offer accepted yesterday. I tend to be biased toward action, so I had a couple offers in before I even started the thread. Sometimes you have to build your parachute after jumping out of the plane :-).

    2Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    8y

    @Taft Love

    You're on the right track with that approach. You want to preserve every dollar of your own capital if you really want to grow a portfolio. And hard money is one of the better ways to do just that.

    0Reply
  • David Olson
    Katy, TX · Member since 2017 · 149 posts · 72 votes
    8y

    @Mike H. If you do a rate/term refi vs a cash out refi, don't you leave your money in the deal? Would a cash out refi be more beneficial for one who does not have the same cash reserves built up as Taft does? I'm starting the BRRRR as well and have been following this thread. Great content and very helpful. Also wondering how hard it is to get Recasa Financial to do a deal for a first time lender. I looked them up and they also cover Texas which is where I reside.

    0Reply
  • Brent Coombs
    Investor · Cleveland, OH · Member since 2015 · 6k+ posts · 2k+ votes
    8y
    Originally posted by @David Olson:

    @Mike H. If you do a rate/term refi vs a cash out refi, don't you leave your money in the deal? Would a cash out refi be more beneficial for one who does not have the same cash reserves built up as Taft does? I'm starting the BRRRR as well and have been following this thread. Great content and very helpful. Also wondering how hard it is to get Recasa Financial to do a deal for a first time lender. I looked them up and they also cover Texas which is where I reside.

    In Mike H's example, he had zero dollars in the deal to begin with! Get it? [But in general, yes].

    0Reply
  • Mike H.
    Rental Property Investor · Manteno, IL · Member since 2009 · 2k+ posts · 2k+ votes
    8y

    Yea. Thats why I use hard money. My HML does 100% of the purchase and 100% of the rehab. So the only thing I come out of pocket for is the points (4) and closing costs. So when I do rate/term refi, I'm basically still at 100% of the deal on the financing. The only thing I'm out are the points and closing costs.

    But to pick up a house for 6 to 8k seems like a no brainer to me. And some local lenders do 75% LTV which allows me to get some of that 6 to 8k back and still have it be a rate/term refi.

    The key with rate/term refi's is that local banks far prefer doing those than cash out refi's because they have auditors that go thru their books and doing a bunch of cash out refi's on their portfolio (i.e stuff they're keeping on their own books) is a bit of a red flag. Rate/term refi's not so much.

    3Reply
  • Nghi Le
    Investor / Lender · Seattle, WA · Member since 2014 · 1k+ posts · 730 votes
    8y

    @Taft Love

    If you want to do Mike's strategy, I can refer you to a local hard money lender who would allow you to escrow your down payment (or rehab), essentially rolling it into the loan so that it looks like you had 100% financing.  That way you can do a rate and term refi anytime.  I believe they usually require 20% down payment, but as mentioned before, they would take your down payment and put it into an escrow account and boost up their total loan amount.  Local lenders tend to be more expensive, but sometimes offer more flexibility and creativity.

    2Reply
  • Taft Love
    OP
    Spokane, WA · Member since 2017 · 45 posts · 17 votes
    8y

    @Nghi Le Sure, I'd love to learn more about that lender. Sounds like a solid approach for BRRRR!

    0Reply
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