All Forum Posts by: Ed Caldwell

Great insight Ron Plata!

As consumers and users of all the new technology, we are used to instant responses and never think about the guy who has the job at the lending institution.  From my own experience, refinancing out of hard money loans is ALOT of pressure and it is easy to get stressed out and take it out on the traditional lender employees that never seem to move fast enough when month after month we are paying that high interest on a property. However, we all know dealing with traditional lenders is extremely slow, but we are forced to put up with it in order to get the great rates.  I have used one mortgage lender to refinance two properties within 3 months and they still asked me for all of the same documentation that I use on the first one and the second took just as long (At least 30 days).  UNBELIEVABLE.  As others have said, you have to find a good mortgage lender and build a relationship with them over time.  Like RE, this is a numbers game and trial and error.  My first lender was great and I built the relationship, but that ended at 4 properties.  The search continues, so you are not alone in finding the perfect lender, if they exist.

I try to put myself in the lenders shoes, and there ultimate goal is to maximize the rate of return on deployed capital.  Thus, traditional lenders are all in right now to loan money they can get back from the secondary market at lower rates (i.e. FNMA, Freddie Mac, etc.).  Unfortunately, banks and you all fall under the same guidelines for these loans.  Portfolio lenders that will loan their own money and keep the loans will require higher rates as they are also in the business to make money.  Thus, the more properties you acquire, the harder it will be to finance them at the lower rates.  If you can still cash flow positive and still make a descent return using a portfolio lender at 6% to 8% leaving 25% capital in, you will most likely find the customer service you are looking for. 

This is the reality and you should factor this in on the buy side of things and with your exit strategy.

I hope this helps with the mindset and understanding in the current market we are in.

You may also want to become a licensed Realtor if you plan to flip as this will save you 3% on the sale side and put more money in your pocket. You will also have direct access to the MLS in your area to find properties and put offers in fast on good buys. In Arizona I just had to take 90 hours of classes and the cost was very cheap for entry at a few hundred dollars. I learned so much about real estate taking these classes, especially the legal issues in my state. The alternative is to find a realtor in your area that is willing to add you as an assistant and give you access to the MLS. My hard money lender is also a licensed Realtor and was willing to do this for me when I started, but this was after I built the relationship with him and borrowed from him several times. NETWORKING is the key to this business and you are wise to have started here on bigger pockets ;-)

Best of luck however you choose to proceed.

I would think you need to use FHA with a low down as you don't have a lot of funds for a down payment? If this is the case, how would you qualify for a conventional loan to refi out of the FHA since most conventional lenders require more skin in the game and will require more reserves to secure the loan? All of my loans are conventional on my properties and they scrutinize everything from my cash reserves, my income level and needless to say debt to income ratios. They also generally required me to have 25% to 30% equity in the properties. If you are buying using traditional financing, you will most likely be buying at fair market value using the MLS and Realtors, which adds to costs. To flip, you need to buy at discount prices fast for cash.

Using the FHA to buy is great, but it is my opinion it is better utilized for longer hold times as it will take longer to get the value up enough to make a profit. If you can cash flow positive on a rental property with a low down, low interest, FHA loan, you will make more money in the long run. You get positive passive income, depreciation deduction for tax purposes, and hopefully some appreciation going forward. If it appreciates, then take out a HELOC against it and purchase another property while continuing to cash flow the first property. If the HELOC is more than your initial down payment, you just got all your cash out of the property and then some, so you now have a property that is cash flowing with none of your money in it! Rinse and repeat.

Just my two cents.

Traditional financing is extremely hard to use to flip properties, especially if you want have 20 rental properties in 5 years. The rules get more and more extreme as to how long you have to hold properties and it is hard to buy cheap enough using the slow and cumbersome traditional financing. The nice thing about buying a house you live in, is you can generally change/sell houses every two years and not have to recognize the gains for tax purposes and you can roll it into the next one. People have different ideas as to how flipping is defined and for how long you have to hold the property. If you have to use FHA and live in a property for a year before you can sell it, then 20 properties in 5 years does not seem like an achievable goal. What do I know, I am only a CPA by trade ;-)

I do know of investors that continue to get FHA loans on properties they buy as rentals and they tell the lender they will live there for the year and never do. They are gambling that FHA will never check in that first year or they have the ability to refi out of it if they do. From talking to these investors, they have yet to hear anything from anyone on any of these properties as they are performing notes. Similar gamble to buying properties "Subject To" the first mortgage staying in place. Lenders have the right to execute the Due on Sale Clause, but rarely do on a performing note in stable interest rate climates.

As a conservative CPA investor I have not considered this approach, but real estate is risky and some investors like to push the risk and see what if anything happens.  I guess that is a personal and integrity choice as long as they can live with any downside effects.

Hi Rita,

If you can qualify for a low interest FHA loan, I would not waste it on trying to flip a property. With a FHA loan you can buy up to a 4 unit property in most states as it qualifies as a residential loan. In a fourplex, you could live in one unit for a year and rent the other 3 and once your year is up rent the fourth unit and probably live there for free and bank the savings to put toward flipping going forward. FHA loans are ideal for cash flow properties if you can qualify for one as your first property. You could even turn this into a medium term flip and sell it after a few years by increasing rents and fixing them up over time. If you are set on flipping properties, it is very cash intensive as you have to pay cash to get a great deal. In these cases, you have to use personal funds/loans or hard money loans to close fast and you have to have the infrastructure in place to flip fast to keep the holding costs down. That means having a reliable contractor and marketing/good Realtor in place to turn the property.

I have used hard money in the past and you have to be confident in your market that you can fix and sell it within a couple of months or the hard money interest will eat all your profits away the longer you hold.  Make sure you research areas you want to flip in to make sure there is adequate demand/sellers in the price point you are going to buy and market in.

I hope this helps.

Most new investors are so overwhelmed when they start flipping with getting the deal, funding the deal, finding good contractors, getting the work done timely, and ultimately selling it for a profit.  An area over looked is securing the investment made in the property.  A vacant property is a thief's best friend and neighbors are now used to many different strangers coming and going from the rehab house, so they don't pay attention.  The prime easy target are the brand new appliances you just installed.  I learned this lesson the hard way on one of my earlier flips!  You are at risk from contractor subs you don't know to professionals that pretend to be homebuyers and use Realtors to show them houses. It is VERY easy for them to unlock a window when roaming the house as many Realtors just leave them alone to get a feel for the home.  After losing thousands of dollars on one house after the appliances disappeared, the solution I found was using  mobile alarm systems that I can move from flip to flip. I am not a paid rep, but I found Simplisafe online which has been great.  No contracts and all mobile.  I opted to pay the $25 per month so I could control the system online, which is well worth it as I have found Realtors that show my houses seem to always forget to reset the alarm when they leave.  When the house is a hour away, this is a blessing.  Worth the investment as it has saved me from losing appliances on two other flips already and buyers always seem to want to keep it, so it is a selling feature as well.

Also, ALWAYS remove your contractor lockbox from the house (or change code) as soon as the rehab is complete.  You should also check the lockbox periodically during the rehab as I have on numerous occasions found the lockbox NOT LOCKED with the key in it.

I hope this helps out others in our BP community to save costly mistakes I learned the hardway.

Amen

Welcome to the show and I agree with the other Zonies that  AZREI is a valuable learning and networking opportunity. I have been RE investing for the past couple of years and it is fun, scary, exciting and not easy by a long shot.  Don't get too caught up in analysis paralysis. Take it from a conservative CPA.  You have to learn enough to get started, but the key is  to GET STARTED.  I have learned more from doing and my mistakes than from any seminar, book or forum.  BP is a great resource to bounce questions while your doing.  I still work full time and thank God tax busy season is over so I can get back to my RE passion.  I started flipping, but it is harder to do in our market right now. Honestly, I am still figuring out which niche fits me best, but I am ramped up on direct mail and getting calls, so hopefully 2015 will be a banner year.  Best of luck and hope to see you at the AZREI meeting on Monday.

Hi Jeff,

I live in Chandler, a suburb of Phoenix.  Good deals and inventory are harder to come by these days after the hedge funds blew through here the past couple of years.  I have rental properties here, but rent returns appear better in CA where my nephew has all his rental properties.  The good buys are now down to neighborhoods like Maryvale that equate to missing copper piping and war zones.  There are still some deals, but ALOT of competition to get them.  Seems a lot of AZ investors also seeking more fertile ground in such places as TX.  Our market has stayed pretty stable, but the stabilization is lack of buyers staying even with inventory, so flipping is more difficult.  Buyers can only get loans in specific price zones, so the great deals appear to be in the $300K+ range. That said, you will have  hold them longer while the market recovers and rent income may leave you break even cashflow for awhile.  I hope this helps you out.

Thank you Terry and Brian.  Mr. Eckley is the lawyer I consulted and I must admit I was very impressed with his knowledge on the subject.  I guess I have to find a way to pay to play in this arena.

Just doing my vetting in accordance with BP suggestions. 

I love the complexity involved in this method of investing, just not the risk and the underlying cost to mitigate it.  It will be worth it in the long run.

Thank you both again.