Originally posted by @Bill F.:
Originally posted by @Jeff C.:
Originally posted by @Shiloh Lundahl:
@Jeff C. Thanks for your honest feedback.
I do run a meetup in Mesa, Arizona where around 200 - 300 different people have come through from experienced investors to brand new newbies. Some of them get interested in our model and others like more the straight rentals or flipping or the commercial side of real estate. Some lend to us and we put them in on our WhatsApp group and do lunches with them and make ourselves available to them to analyze deals with them. But I wouldn't say I am a guru in real estate investing. I have been to guru courses and paid seminars and expensive year-long trainings. We don't do that. We just give private money lenders a return on their money and let them learn as much as they are interested in learning from us.
But to be honest with you. Several of our properties do get infinite returns because we were able to get all of our money out of the property at the refinance by just following the model that has been explained on BiggerPockets for the last several years.
Seems like after years of infinite returns you should have plenty of money to fund your own rehabs and not be sourcing "$10-40k" private loans then doesn't it? I myself would have absolutely zero interest in putting together a loan for ten grand, or tens of grands. It's an insignificant amount of money for a business like this. Not even worth the paperwork or accounting. You need to be quite careful about the solicitation of investors, by the way.
I'm being super pedantic here, I know, but the term infinite returns is misleading and in most cases wrong. The real term is infinite cash on cash return.
Infinite CoC is all well and good, but it is simply not all that useful for deals lasting longer than 12 months (the commonly understood time frame) and does reeks of a guru sales pitch.
Based on the info Shiloh provided in this thread, I threw together a quick model to see what the yield is in these deals taking into account the time value of money. I used middle of the road assumptions and still know I have gotten things wrong, but this is an acceptable base case for our purposes. Purchase price is 75% of ARV/contract price, It takes three months to reno/rent out the unit, all loan assumptions are for the refi, and the contract price is the ARV +2% a year for the life of the option. No transaction costs assumed. I didn't have enough info to make any assumptions about the HML portion of the hold, so I modeled all cash purchase for yr 1.
30%+ IRR is excellent, and nothing to scoff at, but its not infinite. Plus these numbers in no way accounts for the risks associated with this niche. Nor does it answer your question Jeff, what do you do with all that cash you pull out? The LO model can only support so much capital in a given geographic region.
Anyway, I'm off my soapbox.
You've made some pretty generous assumptions here. 3 months to renovate and rent out may not hold up. All cash purchase assumed, when we already know hard money is used, probably at 8-10% and a point or two.. and there will always be some degree of transactional friction on both ends. Shiloh also says the properties rent out for "up to $1300 a month", and you have $1600 plugged in. Not to mention the HUGE assumptions:
The market doesn't move against you over the years.
The currently non viable buyer becomes viable over the next couple of years (this is frequently just not going to happen).
The occupant doesn't wreck the property while occupying it, necessitating rehab #2 before it can ultimately be sold to someone else or rented again.
I also cringe when I see things like "tenant takes care of the repairs".. because they presume that they'll be owners someday. Hah! Do you know how much time my guys spend undoing previous homeowners "improvements" and "repairs"? We deal with it literally EVERY day. You wouldn't believe what people will do to a place, if left to their own devices.
