Thanks for the great examples @Aaron Mazzrillo
@Matthew Thompson, I'm just beginning in the investor game and not nearly as savvy as the way Aaron is managing his portfolio. I believe you should still plan to leverage conventional financing as part of your $$ strategy, but contrary to your assumption, the income is not your limiting factor, the reserves are more likely to be your limiting factor. As mentioned above, the income from the rental properties should offset the debt from the properties. Your focus should be on limiting the debt you have on things like cars and credit cards and then you won't need much income to meet the banks ratio requirements. The thing that changes is the amount of reserves you need for each additional loan. The banks will require a liquid reserves based on the number of properties you have financed and the amount of the total unpaid balance on those loans. If you want to do this full-time the limiting factor will be fact that once you have 10 financed properties, you won't be able to get conventional financing. Therefore, going back to other financing strategies...
Here is what I'm doing with some properties I'm acquiring.
I approached local/regional banks to ask if they would be interested in financing a number of homes I wanted to acquire from a bank who had foreclosed on them. The first 5 banks turned me down so I'm glad I went to the 6th. Once they looked at my Personal Financial Statement and agreed to work with me, now they will evaluate the deals based on the properties.
For this deal, the bank agreed to finance 80% of the purchase price at 5.125% on a 5 year balloon, with payments on a 15 yr amortization schedule. The properties cash flow with these terms. This gives me a 5 year window to figure out exit plans. Here are a couple strategies I'm considering:
1. Refinance using conventional financing. In 6 months, I will be able to tap into the total ARV for the properties I decide to put them in my long term portfolio. For example, one is a quad that I'm paying $50k to purchase. I'll spend about $50k-$60k on a rehab and the ARV will be $150k. I plan to pull out 75% of ARV or about $110k which means I have the property with no cash in, $2400 rental income, and a 30 year fixed with payments in the $700/mo range.
2. I'm also talking to one of the renters about selling the house to him using seller financing. He has bad credit, but wants to stay in the house. I can sell him the house for $105K, I bought it at $85k and my loan will be $68k. If we can agree to a 8-10% interest rate on the loan, then I'll make the 3+% spread from the bank's money. I'm hoping his credit improves in the next 5 years enough to get a conventional loan so he can buy me out. If not, I'll re-finance the balance using the same bank or private lender.
3. Sell the houses to other investors looking for turn-key rentals. Pays off my loan and gives me cash to continue the process.
