All Forum Posts by: Eric Martel

@Jade Bloomfield @Lauren Olson I think it is obviously important to consider  your local market when looking for the right market to implement your strategy. Because it is local doesn't mean that your accessible.  You have to consider the resources available to you. How much money do you have to invest, do you have access to PML, contractors, property management, etc. How much time do you have available for your investments? Then look at different markets including your own and compare the returns in each market.

When we started on BRRRR strategy we looked at our local San Francisco Bay Area market. We considered the amount of money we had, how much we would have to borrow from Hard Money Lender for bridge financing, permitting, inspections, unreliable and expensive contractors. CA law is also tenant friendly so if you are rehabbing a property that is already tenanted then good luck. We looked at properties to get an idea of how our strategy would perform. We estimated our returns in CA and it was less than the inflation. We started to look out of state and found many markets that performed very well. In terms of resources we didn't need a HML anymore, contractors were reliable and less expensive. We had to build a relationship with local realtor who steered us in the right neighborhoods and who managed the contractor, sent us photos/videos.

It depends on the resources you have available, your particular strategy then identify the market criteria that makes sense.  I jut published this article on BP today.

Define Your Best Market

As long as the terms are the same. Why not?

I am assuming that you current loan was about $70k so the payments are about the same. Technically you would save money refinancing and getting some cash back but for me it wouldn't be worth the headaches. What is prompting the refinance?

How many payments have you made on the current loan?

@Blake Hrabal We pay 12% interest to our PMLs. I also agree with @Evan Polaski we pay interest only also. At the end of the project you give your investor an option to get their money back or reinvest in your next project. 

When we got started we did the BRRRR with PML. We refinanced and paid the investors out. We also did a 4-plex in St Louis based on JV. We paid out the JV when we refinanced and shared the profit based on the appraisal from the bank. Later that year friends and family wanted to buy some rentals so we started flipping them at the point.

In your situation in order to refinance you will need a 6-month seasoning period where you will have to pay the interest on PML. If the numbers don't make sense for that strategy then flipping might make more sense until you have enough cash. 

FHA loan must be owner occupied so that won't work. I hope I understand your question correctly. Technically you won't have 20% in the deal when you refinanced because you will get a loan on the new appraised value based on comparable sales. Take @Evan Polaski example. He put 35k in the house and when he refinanced he got 54k from the refi. The bank is looking for 80% LTV. I hope it makes sense and that I understood your question correctly.

If you do the BRRR I would recommend bringing your investor as a PML and pay them out on the refi.

To bring in your investor as a PML you just need to provide him with a promissory note (1 page) outlining the terms of the loan. We pay our PML every month interest only. Very straight forward. They may want to have a lien on the property and the title company can help with that. 

To bring your investor as a JV is a little bit more complex. You would have to create a JV agreement outlining the terms which is more complex and also outlining the share of profit. At the end of the project provide the project accounting to the investor so that he knows how the money was spent and compare with the budgeted numbers. Get your investor excited to be working with you on the next project by showing him his annualized returns at the end of the project. We had some investors who achieve 100+% annualized returns.

To create your REI empire, make sure you have another opportunity right after the end of your project and have him move the funds into the new project. In general respect your investor's money, be transparent, and be in control of the project.

I agree with @Dan H., Prop 13 should not be considered in your calculations. The key is that you should buy an asset that has negative cashflow. Don't count on appreciation. Using the 200k from the refi to invest in properties that have better ROI will only subsidize the loss you will make on your old home. Which would you rather have?

1) Selling your house and investing the 280k in out of state cashflowing properties. If you invest in Memphis or Cleveland for example you could buy and finance 14 houses (portfolio loan) would get you $3,500 net cash flow. Return on Equity: 15% (3,500/280k)

2) Refi your house and investing 200k in the same types of properties above will get you 10 houses at $2,500 net cash flow. Take away the negative cashflow on your SD rental of $1,300 and your net cash flow on your portfolio is $1,200. This is ⅓ of the net cash flow from option 1. Return on Equity: 1,200/(200,000 + 125,000) = 4%

I agree with @Don Spafford. You have to build your team on the ground. Last year I did 85 SF rentals in Cleveland and Memphis. I saw 10 of them when I travelled to visit the team. I am doing this full time so I could go and checkout them out but that doesn't scale. If you don't have time you may want to consider buying turnkey rentals instead. You get immediate cashflow and property management. For multi-family that is another story. Look for markets that meet your goals. Having friends and family in the market you want to invest should not be a criteria. You can make new friends. :)

Maybe I missed it but I think the first steps is to understand what your investor wants out of his investment with you. Does he want to be PML? JV? If you are doing a JV for a flip and he is a GC he probably won't be a silent partner since you want his expertise. Make sure your goals are aligned.