All Forum Posts by: Jared McCullough

Currently looking at 2 properties of which both are reasonably assumed to be obtainable with $25k after closing. I have some extra money in savings so would like to turn it into cash flow properties by getting my money back out (i.e. I am willing to wait a few months to get the money back out). Conservatively I am estimating that there may be $5k in repairs thus why I am looking to get the $30k. Both properties should be easily over $40k appraisals so I don't see a problem with getting the $30K back out of it and repeating the process for the next year or so or until I find a reason I need the $25k. This being said I would still plan on at some point placing the $25K back into my back account. 

I have been researching for advice on what loan type is best for these lower value home prices as most of what I see on here tends to be larger value homes with previous financing before the COFR. 

My first question relates to which is the better loan type as I understand the COFR is going to have more upfront costs but inversely would these be lower based upon the price that I am buying in at? I am basically looking for a rough estimate of what is going to be the cheaper route between a LOC or COFR using the same loan terms.

My second question then relates to loan terms. I know most I see use 30 year notes I have been doing a lot of research on this and completely understand the short term capital gained by using a 30 year instead of 10 or 15 year (i.e. gross revenue is greater per month). My concern is the amount of interest you pay over the life of the loan so it is almost like deferred capital instead of gained capital. My initial thought was 10 years makes more sense in that after 10 years you now have property that is running full profit margins but I understand that for every house you do this in that is lost capital in the short term that could be being reinvested. I was hoping to find some calculator which could build a portfolio of houses then forecast the difference between taking 10 years versus 30 years but unfortunately could not (i.e. trying to build something in excel at the moment). With this though I see most use 30 year loans but this also is representative that most have higher value homes with higher rent so your net cashflow is substantially higher. I am looking at houses with a general cap of $650-$750. So you are talking only a few thousand per house between a 10 year and 30 year. I was hoping to have someone who may have dabbled in both explain their logic and what their end goal was. (i.e. if you end goal was to have infinite houses then obviously the 30 year is going to make more sense).

 Do you have any information supporting this business model?

For those that suggest they are buying lower tier cost (i.e. $10-30K) are you using the BRRRR method or are these just straight cash investments. I am trying to do some researcher to determine if it makes more sense to do option 1 or option 2:

Option 1: Out right purchase a property for say $25K and make gross revenue of $650/month ($7800/year) which would equate to about a 3-4 year payout before your in the green. This being said all investments from day one would be turned around to go towards buying additional properties. (Estimated $5-6k per/year)

Option 2: Do a BRRRR and get my $25k back to do another. Depending on loan terms this could mean a gross revenue of anywhere from $500/month ($6000/year) on a 30 year or $330/month ($4960/year) on a 10 year.

If you are doing a BRRRR what loan terms are you typically going with for these cheaper houses and are you applying any of your profits to paydown the loans. My biggest struggle at the moment is trying to realize the benefit of having to pay a 30 year loan versus making smaller profit up front and having more assets performing at full profit in a shorter time frame.

Jared

@Jaysen Medhurst

Jaysen,

Again thanks for reply I think probably what I recognize more than anything is trying to understand how to relate the general concepts on here to an individuals investment strategy. I completely agree with everything you mentioned above I guess my thought would be though is that at some point it is my understanding that most people want to change the portfolio from strictly an investment to a method of generating passive income (i.e. to essentially replace a full time job which is my long term plan). 

I guess I need to do a little more research (i.e. any advice on links to more information would be appreciated) but in my mind building a portfolio on 30 year loans I struggle to see the point at which you reach you generate enough profit to go from investing alone to generating enough passive income to make it a career. 

This meaning if you are generating $200/month/Unit it will take you over 50 units to make an income of $100,000. All of which will be on 30 year notes. Not sure the path it would take you to acquire 50 units but I would assume it is a multi year process. Assume at the end of 10 year investment you now have your 50 units and are making your passive income of $100,000 (This assuming this was your investment strategy). Your shortest loan is still 20 years and your longest is probably close to 30. Assuming I am 30 now and I quit my job at 40 once I have acquired my 50+ units in order to manage the 50 units as well as live off the passive income. That means to maintain status quo of having $100K income I would still be making my minimum payments on each property for the duration of their loans which means I would be 70 years old by the time I make my final payment (i.e. I am sure the bank will also have taken a boat load in interest as well).

Inversely it takes over 12 units (probably safely say 15) at $700/month/unit (assuming paid off after 10 years) to make an income of $100,000. All of these would be on 10 year notes meaning if I can acquire 15 units in say 5 years then on year 15 I would have not loans left and would be making $100,000 passive income with no debt the rest of my life. So again same thought process I am 30 now I can quit my job at 45 and live off of passive income debt free and only be managing 15 units instead of 50+. The alternative is to work until I am 50 or 55 and invest that $100k passive income into other investment avenues to setup even further success while still making good money in corporate America.

Those were pretty long winded examples to basically get across my question of do you have any good methods for how many of these methods/strategies break the boundary of straight investing to actually becoming primary income for the investor.

Jeremy ,

Thanks for the response and I greatly appreciate adding the comments regarding calculating the variable cost side as well. Do you think I am off base using a 10 year loan term versus something larger (i.e. what is typical I guess I would ask). As noted in my post to the other individual I personally would struggle in seeing the benefit of doing a 30 year in that for most you would never really see the benefits (i.e. larger profit margin). 

As far as vacancy rates and repairs at the moment that is problem my main barrier that I am approaching in that I am trying to be very selective in the location and specific property I purchase. Although I am sure it will affect me at some point I am trying to find locations that I have personal knowledge of the market saturation, overall market, and we do a evaluation of the property before purchase forecasting things that are more common maintenance issues. The current property we own was a cash purchase at a tax sale and we literally replaced everything except the foundation so we have a general forecast from there.

Jared

Jaysen,

Thank you so very much for your well thought out response. If you don't mind a few questions? 

The profit margin you described, what loan terms is that usually based on? On a 30 year loan the aforementioned property shows a net profit of $245/month (i.e. before calculating for vacancy/maintenance/etc...). If most models are based on a 30 year loan term how does that make sense in that for most that means they will be well into retirement before they see full profit and a good likelihood that they paid double for the house over that term due to the interest.

Are most people reinvesting the earnings into the business; saving it as a reserve for the property it is coming from to create a savings for maintenance/vacancy; or using for personal use. (i.e. This question may not be so much of what are people usually doing as that may be variable from person to person but more so what is best)

I would love to get into MFHs but in the areas I am looking in the only MFHs in price range are in areas that for now I would like to avoid while I begin to build my portfolio but long term I am sure I will be in these areas. (i.e. These areas are typically lower rent and harder to rent due larger rent market in the area and generally more "depressed" areas. MFH in the area's I prefer usually go for $70k which at that point I see more general profit for having (2) SFH versus (1) MFH)

I agree regarding the long term ROI of having multiple properties instead of (1) thus why I am looking this route I guess I just fear the potential headaches that I may incur to make little to no money for 10 years before they start paying substantial dividends.

First ten years at $200/month * 5 units = $12,000

After ten years at $700/month * 5 units = $42,000

My long term goal would be to have a large enough financed portfolio so that I can begin to buy (1) SFH/yr in cash with the net profits. But on 10 year loans assuming the numbers I crunched in the first post are pretty relative to all the purchases I would (100/month profit) that would mean I would need 25-30 houses financed just to make 1 cash purchase per year.

Hi,

I am new to BP and generally new to real estate investing although I have some family members to lean off of who have a handful of SFR. My original investment strategy was built off of buying county tax sale properties at very low prices in cash. While I am still continuing down this path as I think cash purchases make the most sense from a profit margin perspective the growth plan is also slow. Thus this brings me to what I have come up with as a modified BRRRR strategy.

This being said as I am new to this I am wondering if there are things that I am missing and looking for guidance on how the largest short term profit can be recognized. The one major struggle I have right now is how to balance the Cash Out Refinance Loan Term versus the profit margin to determine what the best answer is (i.e. The earnings per unit after debts/taxes/insurance come off to me that you need a substantial portfolio to make any decent money per annum). 

This is meant to be a 10-15 year portfolio in which I plan to make no gains but reinvest the money into additional property purchases. Currently I have $30K working capital and I am working about a (3) county spread in which rentable SFR are easily obtainable on a decent frequency for between $20-40K. Depending on location rent can be expected from $600-800.

My current investment plan is as followed:

House 1: Purchase Price $25,000 (listed for $29,000 and bank owned so assuming this is manageable)

Taxes/Insurance: $2200/$500 (would plan to have taxes reassessed)

Rehab: $5,000 (grossly overestimated as I have been in the house)

Estimated Appraisal: $55-60,000 (i.e. maybe more but being conservative)

Cash Out: $30,000 on 10 year = $333/month @ 6%

Estimated Rent: $650 * 12 = $7800

Estimated Net Profit (not including repairs/vacancy) = $7800 - $500 - $2200 - (333*12) = $1104 or $92/month

The plan would then be to take the $30K cash and redo the same process. My problem is the net profit almost does not seem worth the hassle except that in 10 years when the loans are paid of you now have assets turning full profit. What am I missing?

The alternative is buy first property but don't refinance. Then you would be making an estimated yearly net profit of $5100. This is essentially the equivalent of managing 4 to 5 properties under the BRRRR model to make the same yearly profit which then means your taking on the extra hassle of 3/4 houses from vacany/tenants/maintenance to make the same money I don't see the benefit other than once you hit that 10 year mark then you will be making some good money because at that point you will have bought 5 houses in 2019 instead of 1 (i.e. larger portfolio).

Hopefully the length of this post does not scare anyone away and I greatly look forward and appreciate any responses I get. 

Jared

Wow the irony. I literally just signed up to pretty much ask this same scenario. To avoid starting a new topic. If a property was paid for in cash based on what I am reading you should be able to find a lender willing to provide an immediate Cashout Refinance (i.e. maybe not all of them). This is crucial because I will be the one investing the $30,000 cash so I am trying to understand my liability.

What is the expected period between when the cash is withdrawn for the property purchase and when I receive the check for the cashout? (i.e. Is it conceivable to have a 30 day turnaround)

Any advice as far as doing this process?

ex. Do I get an appraisal completed prior to buying the property or do I wait until my offer is accepted?

Also can I just use a standard mortgage calculator for the loan terms being that I am not technically refinancing a previous loan?