How have you used leverage to get started?

Question

Good afternoon BP!

I am curious to know about some of the stories you guys have when it comes to how you got started. What was your "AHA" moment and how did you use that epiphany to get started on your real estate investing?

Rich Weese · Answer

Jamaal,

My wife and I are going to be taking a road trip this summer to finish the last three states we have never visited. Nebraska, North Dakota and Iowa! I'd love to break up the trip and chat with you when we are in your area. (We have visited all the continents and 108 different countries)

I learned the following at a very early age:

If owning one house was good, owning 10 houses was better.

If owning 10 houses was good, owning 100 houses was even better.

I continued that trend and I believe four years ago, my wife and I went over the number 1000 in single-family residences we have owned or built in our lifetime. I still have one subdivision and around 400 apartments. I've been winding down for the past 10 years.

Good luck always.

Dan H. · Answer

My Mom invested in RE so I sort of had the AHA moment as a teenager but got good grades, went to college, worked at, in hind-site, stupid but maybe character building low paying jobs while attending school, graduated, joined the rat race with a job I loved for a long time, met my wife, had a child.  We were saving better than most people in the rat race but nothing special.

Now I had to convince her of the benefits of RE investing and time flies.  We were having a great time living and traveling but not doing much to create a means at an early retirement even though I knew what RE could do and provide.  We were living in a middle class home and it was the late 1990s.  I wanted the wife to look for 2 rentals after which we would look for our next home.  She was having none of that, she wanted the nice home.  Finding homes as investments has lower criteria in at least the finding aspect than finding the forever home.  So prices continued to rise while she kept ignoring my requests to buy 1 or 2 investment properties.  She finally found an appropriate forever home where our offer was accepted and our old home because our first rental (and to this day is our worst performing property but that is another story).  We missed out on significant gain but both our new home and old home (now rental) both continued to appreciate for a while.  We refinanced and took more out of them than we had invested in them (we did not blow this money but had it in mutual funds that performed similar to the rest of the stock market in the Great Recession).  We were heavily leveraged but not over leveraged (very important because we did not need to sell when the market was later depressed).  Then the Great Recession (GR).  Best opportunity of our life and the wife had already had her AHA moment.  She was aware of how much more we would have made if she had done what I wanted rather than what she wanted.  The problem was we did not have much to invest.

Buying the first duplex was not easy.   Both of our homes had lost a lot of their value.  Our other investments (stocks/mutual funds, some mineral rights) had lost a lot value.  But we somehow managed to buy a thrashed duplex that was near the worse in the area but had good cash flow and appreciated (as did most of our other depreciated assets).  After the first duplex purchase we purchased at least one property a year except for 2016.  I do not want to count but we own around 20 units, all but one, in San Diego county where the average cost of RE is well over $0.5M.   I still work my rat race job (and at times still like it) but I have not needed to for quite a few years.  RE investing has been real good to us.

So the AHA moment really needs to be for all parties of the decision making and for us that happened in ~2005 (about the time we refinanced both properties) but we did not have the resources to purchase until after the RE had depreciated due to the GR.

To the title of the post: We basically have used refinamces to leverage both market and sweat appreciation to have increased both our RE holdings and the value of our other investments.  We are pretty diversified but the assets that funded the diversity is primarily from the RE appreciation.

Thomas S. · Answer

I started with seller financing along with a HELOC DB and have maintained that practice. I prefer to maximise my leverage, 100% when possible, with a large accessible cash reserve. I have learned that dead equity is not the best use of money. Real estate is where you park your cash when you no longer have any use for it.

Account Closed · Answer

@Rich Weese

If owning one house was good, owning 10 houses was better.

If owning 10 houses was good, owning 100 houses was even better.

Words of wisdom right there I tell ya - That's pretty amazing you have travelled all those places - I have quite a few states to hit yet but I've done almost every country in Europe - Asia is next.

Happy travels.

Marc Faulkner · Answer

I started by getting sellers to seller finance the sale and still use this technique as much as I can!

Rich Weese · Answer

Hi Daniel,

I want to make sure you understand I have not done this recently. I would purchase an apartment building as a limited partnership where I was the general partner and signator. If the loan was assumable, I would assume it. If it was not assumable, we would do a subject to or wrap around loan and I would sign.

In some instances, there was already a first mortgage to an institutional lender, and a second mortgage to an additional company or previous seller. Both loans would be assumed or taken subject to.

Example:

I purchased a property in Colorado Springs by the name of the Bella Vista Apartments. It was 202 units. I don't remember the exact price (It was 40 years ago) but let's assume it was $4 million. I remember there was a first mortgage and a second mortgage. I need to make another assumption here as far as loan numbers. $2,500,000 on the first mortgage and $500,000 on the second mortgage for a total of $3 million in financing. The buyers would need to come in with $1 million or 25% down of which I would receive a 6% commission which was approximately $250,000. It was easier for me to raise $750,000 of the down payment and take a third mortgage for the $250,000 commission I was owed. As I stated in my book, I really didn't care whether I got cash or monthly income. It was all spendable! Times and rules constantly change in real estate and I only explained in my book what I did, not what is possible and legal today. I would be more than happy to answer other questions if you have them.

Daniel Akerman · Answer

I am VERY intrigued by this strategy, but I'm not sure I understand it. Were you pulling out 2nd or 3rd mortgages on properties you purchased, and then using that money to purchase notes on other properties? I would love to learn more about what you did, and get your recommendations for resources on learning about purchasing notes.

Chris Lohmeier · Answer

My aha moment came last February, three years after turning my first primary residence into a rental property and after three years of doing nothing else real estate related.  My girlfriend and I drove by a sign on the side of the street that said “For Sale By Owner.”  I called the number and started talking with the owners, an older couple who had been using it as a rental property and who were tired of dealing with poor tenants.  The property needed a bit of work but I knew from watching the market that they were way under charging rents, and not screening was getting them bottom tier tenants.  Decided I might as well see what the bank says, this was the main thing holding me back previously, the thought that the banks would just dismiss me.  Long story short, they didn’t dismiss me and gave me a business loan.  After a month of sweat equity and a month of screening for the perfect tenants, I made nearly 30% CoC in that deal.   The real aha moment was when I looked back and realized how easy it all was.  I finally believed I could do this.  I went on to purchase a 5-plex that July, another SFH this February that I’m currently converting, and just the other day I drove by a sign on a 4-plex.  After talking that owners of that 4-plex, another older couple winding down their real estate empire, it looks like I might be able to purchase roughly $500k worth of properties for about $10k out of pocket, through seller seconds and a small personal loan, by years end.

Shiloh Lundahl · Answer

@Jamaal Johnson I funded my first investment property back in 2010 with money from a HELOC. In fact, I have used leverage on every property that I have owned since then too.

I went through a guru program where I learned the concept of quantum goals. Basically taking your goals and exploding them into much larger goals similar to what Grant Cardon calls 10Xing your goals. That was a turning point for me and the other turning point was when I met one of my bankers who was able to give me a bunch of loans in 2017.

Rachel H. · Answer

@Jamaal Johnson I started finding deals for other investors as a bird dog then as a wholesaler. From there, I became a landlord with single-family homes. After that, I sold my entire portfolio and went into mobile home investing. Been quite a journey, that's for sure. I'd say the hardest part about being successful as a real estate investor is finding a niche that works well with you and your personality. Hope that helps. I've got more stories in my books! :)

How have you used leverage to get started?

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