All Forum Posts by: Chris Jensen

@Taylor Nunn I would recommend starting with the end in mind. When you find a property that looks promising, work with a real estate broker to conservatively estimate the after-repair market value (ARV) of the property that's supported by plenty of comps. That should give you a fairly reliable selling price. Then see what expected profits are after estimated deducting purchase, rehab, and selling costs. If you're comfortable with the estimated profits, and you have a reliable expected selling price, then it's probably a good deal. Hopefully that helps a little.

Another consideration is that even if you refi to get max equity out of the home, you'll still have 20-25% equity tied up in it (assume it's ~$80k).  Cash flows and returns on that $80k, given your projected rents and estimated expenses, likely won't be as much on that home as if you were to sell and use that $80k and househack a 2-4 plex.  And you'll still be able to take the rest of your equity and apply toward more properties.

@Account Closed, it's easy to do a cash-out refi on a home you don't own outright, assuming you have more equity in it than the minimum downpayment required on the newly appraised value of the property.  We're doing that right now on one of our single family homes.  You sign an application, agree to terms, lock in a rate, and go through the normal appraisal and title work.  At closing, the bank deducts the downpayment on the new loan, closing costs (including escrow amounts), and the balance of your previous mortgage from the refi proceeds, and the rest is a check to you.

Here's a quick example using the BRRRR method. Let's say you sign a contract on a home for $100k and pay $20k cash from your HELOC as the downpayment. The loan amount would be $80k. Then let's say you put $40k of rehab into the home, again using HELOC funds. Keep in mind that as soon as you use those HELOC funds you begin paying interest. Your total investment in the property is now $60k ($20k down and $40k rehab). Let's assume that the after repair value (ARV) of the property is $200k, and you rent the apartment out for a "seasoning period" of say 6-12 months.

After the seasoning period, you ask the bank to do a cash-out refinance, and you go through the process I described above. Sometimes banks will require a bit more downpayment on a cash-out refi, but for simplicity let's use 20% of the AMV or $40k, with closing costs of 2% or $4k. At closing, the bank will initiate a new loan for $160k (200k-40k) and deduct from the $160k proceeds: 1) $4k closing costs (including escrow items) and 2) $80k balance from original loan (will be lower since you'll have paid off some principal by now, but using $80k for simplicity). You'll get a check for $76k (160k-4k-80k). With that check you pay off your $60k HELOC balance, and you're left with a nice little $16k profit on the transaction. $16k profit on $60k total invested (using just your HELOC) = 26.7% pre-tax return, and you now have a nice, updated, rented property that you can put on autopilot while you put all that cash to work on the next BRRRR property.

@Alex Gallardo, some quick thoughts to get the conversation started. During this coming year: 1) join a local REI group to connect in-person with industry professionals (contractors, brokers, bankers, etc) or other investors, 2) get a P/T job in the industry, 3) pursue a degree in a related major (e.g. construction management, finance, business, marketing, etc) but approach school and each class with the attitude of "How will this help build my real estate business?", 4) save as much money as possible, 5) build your credit as much as possible, 6) maybe house-hack a duplex or flip a small home to get some experience, and 7) just for a little balance, read up on what experts are saying about a possible real estate downturn. Definitely not an exhaustive list, but it gets the juices flowing. The great thing, though, is that you're thinking about this now rather than 20 years from now. Congrats and best of luck as you prepare to pursue your goals!

@Paul Palo, you were wondering what strategies other couples use to invest in real estate.  Thought I'd share my situation.  My wife and I have 6 daughters ranging from 17 yrs to 3 yrs.  I have a demanding day job.  My wife stays at home to run the house.  And we're both very busy volunteering with our church.  So our available time for extra curricular activities of any kind, let alone real estate, is limited.  What we've found, though, is having such limited time makes us very focused when we do get time.  That might be something to think about.  Maybe it's just a problem of too much free time?

As it relates to our real estate business, we've kind of landed on different roles.  I do some aspects, she does others.  Those roles tend to play to our strengths, so we both enjoy fulfilling those roles.  Maybe there's a role your SO can perform that is helpful overall but which plays to her personality and experience.

As a case in point, currently we're laying the groundwork to move into multi family properties.  My wife is very supportive of where I feel we need to go, and she's letting me do all the research (podcasts, books, BP forums/blogs) and team building (meeting with bankers, brokers, CPA, lawyer, contractors, etc).  I identify potential properties, she makes the first visits (like your SO, my wife has a great eye and great intuition, so I rely on her opinion of the property, neighborhood, etc).  I run all the analysis (my background is accounting/finance so naturally this lands in my lap).  More of the load is on my shoulders right now, but I'm ok with that... and more importantly she's ok that I'm not as available as I normally would be.

You guys might benefit from a few heart-to-heart conversations to see where each other really is and to gauge alignment.  Then determine roles and responsibilities along with next steps.  I'm certainly not a relationship expert or a real estate expert.  Just a few things about how we're doing things and what's worked for us.  Hopefully there are a few nuggets that can help you and your SO.  Best of luck!

@Kris Miller I won't claim to be an expert, but here are some thoughts to consider.  Many are similar to what others have said.

Regarding coming up with an offer amount, something you could do next is determine a CAP to use for that property. Difficult to do, because there are many variables that drive CAP rates. One variable is recent sales of comparable properties in the market. Another variable is class of property (general guidelines are A=4-7% CAP, B=7-8.5%, C=8-12%, D=12+%). Another variable is the condition of the local market (e.g. hot markets with higher prices bring CAP rates down). Best to talk to a local real estate professional (e.g. commercial broker) for insights on CAP rates. But once you have an appropriate CAP rate for that property, you can divide NOI by the CAP rate to get a starting point for market value of the property. From there you can consider other factors such as rents, deferred maintenance, required rehab, your required returns, etc and land on an offer price that's supported by data.

There's a lot of material out there about negotiating with unmotivated owners.  Avoid the temptation to be so enamored by the property, or be so urgent to lock in a deal, that you bypass the analysis and make a rash decision.  I'd recommend establishing your bargaining range (starting with your ideal price and ending with your walk-away price) along with defining your best alternative to no agreement (e.g. holding onto your money for something better).  Go into the conversation with the stated goal of coming to a win-win agreement, and be creative in finding ways to make the owner happy while getting what you want.  If it can't work, don't be afraid to walk away... as hard as that may be to do.

Hope there's a nugget or two in there that helps.  Good luck!

@Ben Schofield, I just went through a similar situation with one of my rental homes, and my experience was as @Kevin Romines described. I looked at HELOC, but my local credit union would only do a HELOC for 75% LTV up to $50k max. The interest rate would have been 2 points higher than a mortgage on a primary residence. I might have been ok with the rate, but I wanted a lot more of my equity than the $50k max. So I decided to just cash-out refinance. I didn't do a lot of searching around, so maybe there are other options. Just thought I'd share my experience. Good luck!

@Nad V. there is a lot that goes into answering your question.  I'll just provide a few thoughts geared around the concept of beginning with the end in mind.

First, what comes next after this home? If you want to acquire more properties, then you will want to focus on a value-add house that can be purchased and fixed up for no more than 70% of estimated ARV. If you don't want to deal with a lot of rehab, then you're most likely going to get a home for near-market price which will prevent you from acquiring more homes unless you have a lot of extra cash on hand.

Second, what is your exit strategy?  A couple obvious options are flipping vs. renting it out.  If you are fine either self-managing the home or paying for a PM, and the estimated rents, expenses, and financing costs all result in a cash on cash return that is acceptable to you, then definitely rent it out.  After a seasoning period (6-12 months) you can do a cash-out refi, get back most if not all your invested cash, and repeat the process with another home.  If you don't want to deal with renting it out, you can certainly flip the house.  But be mindful of what market prices are, and refer back to the 70% rule in the prior paragraph.

After beginning with the end in mind, then focus on finding a home that meets those goals.  Hopefully there's a nugget or two in there that can be helpful to you.  Best of luck!

@Anjali A., it seems your question is really about exit strategy, though it's light on details.  I'll provide my own thoughts on analyzing deals, and you can fill in the blanks with your own details / assumptions.

Step one would be to acquire a property and get it to the point of the exit strategy (rent out vs. flip). When you say "flips go for double the price" I assume that involves a certain amount of rehab after purchase. General rule is to shoot for an all-in investment amount (purchase price plus rehab) of no more than 70% of the estimated selling price (aka ARV). If you can get those numbers, then you move nicely into step two, the exit strategy. You asked about two of them... renting vs. flipping.

My preference is always buy-and-hold/rent, but there are a number of considerations.  First, how will the property be managed?  Hiring a PM adds costs but is more passive.  Self-managing can avoid costs but is more active.  If the financial analysis won't support hiring a PM, and you don't want to take on self-managing, that points toward flipping.

Second consideration is rents.  General rule is to shoot for total monthly rents of 1-2% of market value.  Market rents below that threshold point toward flipping.

Third consideration is expenses.  General rule is to estimate 50% of rents to cover all expenses before debt service.  If, after conservatively estimating each individual expense, total expenses add up to more than 50% of rents, this points toward flipping.

Forth consideration is your return on investment goal.  After deducting debt service, the resulting pretax cash flow as a percent of your total invested cash represents your cash on cash return.  If the return meets your desired goals, then great.  If not, then this points toward flipping.

Again, these are just my opinions. Hopefully there's a nugget or two in there that can be helpful. Best of luck on your REI journey!

@Ernie Sturzinger which home is the HELOC on, and what LTV is it? For example, is it a 80% HELOC on your main home, or a 95% HELOC on your 1st rental? Reason that's important to know is it lets you know how leveraged you'll be. With a HELOC on one of your properties that's tied up for 20 years on this new property, you're stretched really thin. A combined $400/month cash flow ($300 on property 1 and $100 on property 2) doesn't leave you a lot of wiggle room in case something big happens. There's a general rule that you should shoot for at least $100 cash flow per door per month, after all expenses and debt service. For you, that would be at least $700. Your first property gets there, but not this second one. So there's the concern for being stretched too thin. As an aside, cash on cash should be calc'ed after including debt service. There's just no way to make a return in the 2% range look attractive.

And like @Brent Coombs said, there's also the practical problem that all your funds are tied up in your current properties, and you have nothing left to acquire additional properties.  Unless you have excellent W-2 income that quickly generates "investable" funds, or you're willing to wait 10 years for your monthly cash flows to build up enough (assuming you don't need to cannibalize them in the meantime).

I would recommend using the BRRRR approach on a fixer-upper so you can get your funds back out of the property in 6-12 months and move on to the next deal. Using a HELOC to facilitate BRRRR would be an excellent approach. Still need to focus on higher cash flows and more attractive cash on cash returns either way.

Hope that helps.