All Forum Posts by: Joseph Hennis

@Aaron Cullen Putting together a refi packet is a great idea. Giving comps to the appraiser is a common practice for Realtors. I was taught to do that when I worked for Century 21. If you don't, you risk that the appraiser will miss the comps and the value will come in too low.

@David Hendry There is a guy here on bigger pockets, Chris Mason, who does conventional loans at 4-5% interest rate. There are plenty of others, you just need to look around.

FYI: the seasoning requirement is a LENDER overlay, not a Fannie Mae requirement. So you need to shop around lenders and find out what their overlays are. Overlays can change drastically from lender to lender. One lender I am working with now, the way he calculates rental income from my properties is ridiculous and makes all my properties look like they are negatively cash flowing. All other lenders I have spoken with have calculated my cash flow as positive.

This is because of differences in their overlays. Overlays can reduce risk, and I have found that lenders that offer very good rates usually have the most overlays (this isn't a hard rule, but think about it, overlays reduce risk even more than fannie mae requirements, less risk = cheaper money) Companies like the one Chris Mason works for don't have lender overlays.

@Natalie Kolodij Cash flow vs. appreciation... I would require greater cash flow in an area that doesn't appreciate, and less cash flow in an area that does appreciate. That's why there is some discrepancy among investors on whether it's a 1% rule, 2% rule, 50% expense rule, etc. 

Ideally, your portfolio should contain both areas that appreciate well and areas that cash flow well. When looking at appreciating areas, just be sure to avoid negative cash flow. That's a skilled investor's game and can be high risk.

I would really look into BRRRR (Buy, rehab, rent, refinance, repeat). It makes a lot of sense in your situation. With your income, you could probably qualify for 100k conventional loan. Buy a property for 50% of ARV with hard money, fix it up, rent it out. Then refinance it to take your money back out of the property.

The biggest thing is to educate yourself. Books from the library. RE classes (can even get a RE license). BP podcasts. etc. Whatever you can do to get more education. Your situation is not insurmountable with the right strategy.

Have you considered doing some flips? Find a wholesaler in your area (or do your own mailings) to find you a property well under ARV. Use your cash and hard money, or other private investors, to fund the flip. Use the profits from the flip to fund more flips and long term rentals. If you are doing the BRRRR strategy you can use the rent from the property to qualify for the conventional loan and your income doesn't need to be that big.

My wife and I did plenty of investing on just her income of 35k at the time. We could qualify for a 150k conventional loan for our own house, but it didn't matter for the rentals because the rent is used to qualify for the loan.

@David Faulkner I would +2 that post if I could. :)

I'm an engineer. In engineering, we use simplified models to understand what a system is doing at a fundamental level. Then we add back in all the complexity later.

I do that here with debt, leverage, etc. Say you buy a house for 100k cash, it goes up in value 10% to 110k in one year. You have a gain of 10% of your initial investment.

you buy a house for 100k cash, it goes down in value 10% to 90k in one year. You have a loss of 10% of your initial investment.

You buy a house for 10k cash, 90k loan, it goes up in value 10% to 110k in one year. You have a  gain of 100% of your initial investment.

You buy a house for 10k cash, 90k loan, it goes down in value 10% to 90k in one year. You have a loss of 100% of your initial investment.

So what effect does debt have on the system? IT MAGNIFIES returns. That's it. Simple.

As investors, we should strive to have the largest returns possible. Especially when we don't have much money in the first place. If you are a billionaire, you will probably have to take lower returns. Getting high returns would be difficult with that amount of capital. However, as a new investor, your goal should be to maximize returns as much as possible.

Now adding back in all the complexity with loans... and there is a lot of complexity. The biggest point to hit on with that complexity is additional cost. Loans will add in a bunch of additional cost, lowering your returns. Your returns will still be higher, but not as high.

To give you an example of the kind of returns you can expect, I will use myself as an example. I started investing in 2009. I have invested 50k in RE in down payments and repairs. I took out loans for everything I purchased. I now have 500k in equity, 8 years later. That's an annualized return on investment of 33.7%. A 900% total gain.

Now, to calculate my ROI if I had bought those same properties cash... I get an ROI of 6.3% and a total gain of 62% over the same time period. I would have done better in the stock market...

That's not to say there isn't a time and place for buying cash or owning free and clear. It may be that you aren't interested in building wealth and you are more interested in wealth preservation and cash flow. That's when you own free and clear.

@Jesse Flores I wouldn't plan on keeping them for 10-20 years. Remember monopoly, buy 4 green houses, trade them in for a red hotel? That's a good strategy in RE too. If you buy 10 houses cash flowing at $250 a month (cash flow is after you pay mortgage and all expenses), you are making $2500/mo. Let's say you started with $10k down payments on each of the 10 properties. Now, 5 years later they are worth $40k more each, on average. That's $500,000+ in equity that is only making you $2500/mo in cash flow. Sell them all and use that money to buy a 20 unit apartment complex or a few four plexes. Your cash flow will increase.

@David Faulkner I do see that a lot, that people generalize what has worked for them to everyone. There are many pitfalls, no matter where/how we decide to invest. We all have different perspectives. I appreciate yours. What you said about finding deals is spot on.

@Christopher Gomez If you do decide to go outside California, really get to know an area first. I go on city data.com and other websites to research market conditions there. Look at crime rates, incomes, and job market diversity. Contact real estate agents, property managers, and others to find out where are the good parts of town and where to avoid. Find out the average rate of appreciation and a graph of what that market has done recently. The market may not fit your strategy. For instance, you may accept a lower cash flow in an area that will appreciate, but in an area that is flat, cash flow is all you have so it better be good.

You also need to have a good team of professionals to help with purchase and management.

FHA loans are not just for first time home buyers. They are very similar to conventional loans but only require 3.5% down. You pay for that lower down payment with a higher interest rate.

@David Faulkner Thanks. It's been 10 years and I am richer because of it.

Real estate is VERY local. We tend to hear the news about the RE markets going up, going down overall. But the truth is that there are little pockets going down even in an up market and little pockets going up in a down market. That's because of how localized market conditions are in RE. If you want to find the right market for your strategy, you need to go outside your area, and then really get to know the area.

Yes, you are right, you could change your strategy and adapt to local conditions. There is more than one way to succeed in RE.