All Forum Posts by: Michael Evans

@Brian Garrett, sorry I didn't see your post.  This is going to be long, so get comfortable.

There are only two types of investments, regardless of the asset class (real estate, stocks, bonds, etc.):

1. Appreciation: Buy low and sell high (real estate flips fall into this category)
2. Cash flow: Buy and hold and receive cash flow (monthly, quarterly or annually)

Let's look at each one.  You can buy a $100,000 asset that will appreciate in value 10% in one year, or you can buy a $100,000 asset that will generate 10% cash flow each year.  Does it matter which one you buy if they both will generate $10,000 at the end of the year?  The main difference are the opportunity costs.  With the appreciation deal, you will get back your $100,000 and have the opportunity to reinvest it in something that may generate more than 10%.  You can always find an appreciation investment that will generate a greater annual return than a buy and hold investment.  It's the nature of the beast (more risk, greater return).  There is usually more risk associated with an appreciation investment, but if you know how to manage and shift risk, you can create a low risk / high reward investment.

It's hard to create a low risk / high reward buy and hold investments.  First, in order to generate the 10% annual return, you must keep your $100,000 invested in the investment. Sure you can borrow against it, but there are costs associated with accessing your equity in the investment.  For real estate, those costs are pretty steep compared to the cost of selling an asset that has appreciated in order to get you $100,000 back.  Plus, you aren't going to get to borrow the entire $100,000 you put into the investment.  Next, your ability to sustain that 10% annual return is based on the rental market, your vacancy rate, and your maintenance and capex expenses.  You also have to look at your return on equity as your property appreciates.  At some point you will realize that your return on equity is lower than the return you would get if you sold the property and purchased a new (to you) buy and hold investment (please Google if you don't understand what I'm saying).

So, appreciation investments will always produce greater returns than buy and hold investments, but they also have greater risks.  Once you know how to manage and shift those risks (and leverage is one of the ways), you create a low risk / high reward investment.

People who trade with stock options (calls and puts) do this every day.  The market is so liquid and the transactions costs (especially compared to real estate) are so low, that appreciation deals are easy to do.  A call option is the perfect example of using leverage for an appreciation investment.  You can buy an "" call option contract for $2.18/share for the SPY - SPDR S&P 500 FTE that closed today at $235.54/share.  That's a 1:108 leverage ratio.  That means for ever 1% increase in the underlying asset (an increase of $2.36/share), the call option contract will increase by 108% (also $2.36/share). It's hard to find greater leverage than stock options (but you can find them in real estate).  Now let's apply this to real estate.

You purchase a $100,000 property using 1:10 leverage (10%) or $10,000.  If the property increases by 1% ($1,000), your equity in the property increases by $1,000 (or 10%).  This is the power of leverage.  It allows your equity position to increase dollar for dollar with any increase in the underlying asset, but since you are levered, the dollar increase is magnified by your leverage ratio.  So how do you combine a leverage ratio of more than 1:100 with real estate appreciation investments? Simple, they are called Pre-Construction Flips.

New home builders allow you to use leverage to control their properties. In CA, you can control a $500,000 purchase contract with only $5,000 down (EMD). It takes the builder 4-6 months to complete the house. Say the value of the properties in the market go up 1% per month (this is happening in many markets across the country, and definitely in southern CA). So in 6 months the value of the contract has increased by 6%, or $30,000. You now have $25,000 of equity in your contract (that's a 500% increase). and you only risked $5,000. How many of you would risk $5,000 to make $25,000 in 6 months? It's all based on your risk tolerance.

You can do something similar when you wholesale and put a house under contract a long closing period (60-90 days) in a fast appreciating market.  But those deals require hard work to find (I don't like working hard, I like working smart).  The first Pre-Construction Flip I did was in 2004, where I put a house under contract for $418,000 in May 2003 for only $3,000 (1:139 leverage).  The builder took 18 months to build my house and when I closed on 9/8/2004 (a day before my 33rd birthday), it was worth $600,000.  That's a $182,000 increase.  The equity in my contract increased by 6,067%, or an annualized rate of 4,044%.  THAT'S THE POWER OF LEVERAGE!

PM me if you have any specific questions about Pre-ConstructionFflips or using leverage in general.

Stay Blessed!

My business partner and I have spent the last two years developing this investment system. We have also developed other leverage investment systems outside of real estate (such as options and judgement liens).

Stay Blessed!

It's based on your risk tolerance and how you manage and shift risk.  I use leverage all the time.  Here's an example:

You can buy a house for $100,000 and it returns $10,000 per year (10% CAP rate) cash on cash. If you use leverage and put in $10,00 cash to buy that $100,000 house, it may cost you $5,000 per year in finance costs. So your returns are reduced from $10,000 to $5,000. But what would you rather do? Make $10,000 on $100,000 (10% ROI) or make $5,000 on $10,000 (50% ROI). By using leverage, you can take your $100,000 in cash and buy 10 $100,000 properties at $10,000 each, with each one returning $5,000, for a total return of $50,000. So now your $100,000 is returning $50,000!

Plus, you have significantly managed your risk.  Instead of putting all of your $100,000 into a single property, you spread your risk among 10 different properties.  Now you can better manage your risk by investing in 10 different markets. This is a basic principle of Money Management (don't put more than 5% of your Total Investment into a single investment position).

Now here is the downside of leverage.  When using leverage for buy and hold real estate investments, you run the risk of your vacancy rate increasing to the point where your monthly income can't satisfy your monthly financing costs.  You run the risk of becoming upside down on your cash flow and not having the cash to pay your debt.  This happened to a Japanese billionaire I know in the late 1980's.  He owned a lot of commercial properties in West Los Angeles using leverage (100:1) and became very rich very fast.  But when the recession hit in 1989, his commercial tenants went out of business, his vacancy rate increased, his monthly rental income decreased and he couldn't generate the cash to pay his debt financing.  He went bankrupt and lost all of his commercial buildings.  He was over levered and didn't setup up his business entities correctly.

I suggest using leverage for flips.  When using leverage for buy and holds, you have to find a way to manage the vacancy rate risk (we've developed a system that solves this risk).  We've developed a system where we use 10% leverage on flips (10:1) and 15% leverage on buy and holds (6.67:1) in order to generate 50% and 10% annual returns respectively.

Stay Blessed!

Do a Google search

https://mymortgageinsider.com/how-much-are-closing-costs-7287/

I'm general, the most profitable commercial unit will be those with low labor and maintenance costs. Look at building a storage facility. They are much more profitable than multi family.

Stay Blessed!

You should look for a multi-unit property (2-4) units.  Live in one, rent out the other ones.  Save the cash flow, and reinvest it into another property. Rinse and repeat.

Stay Blessed!

@Chris Mason, thanks for the idea of securing the DP loan with current equity in another property.

@William Allen So let me set the record straight, since you have some misinformation.  I offered to purchase the property through an assignment agreement as long as the original purchase contract was attached to the assignment agreement.  I don't know how things are done in Florida, but there is no way I would every sign to take over a contract that I never laid eyes on.  I don't know you and I don't know your company.  I have no proof that you even have the property under contract.  Another wholesale company I interacted with this week had no problem including the original purchase contract with the assumption agreement, so why does your company have a problem with it?  I can't steal the contract or the property from you.  If you have investors who are willing to take over a contract without seeing it, then more power to you.

I explained to your employee that we were new to the Florida market and that we had not established local team in this market yet.  Therefore we would need 7-10 days to identify a licensed property inspector and schedule to have the inspection completed.  7-10 days, not 14 days, so please get your facts straight if you're going to try to put someone on blast.  Your employee stated that we could have an inspector come by and inspect the property without signing the assignment agreement. I told him that would put us at risk of spending money for an inspection report and then having the contract sold to someone else.  I was willing to consider that risk (small dollar amount) and discuss it with my business partner, but since your company refuses to provide proof of the original sales contract, the deal was dead.

I want to tell you how unprofessional it is for you to try to put me on blast on BiggerPockets.  I didn't call out your company in my post, but you can be rest assured that you will never have to worry about my company or any of our associated companies doing business with Blackjack Real Estate.  You claim to have values of honesty, integrity and trust, but they sure aren't reflected in your post.  I don't need your properties and you don't need my money.  There are many wholesalers out there who know how to conduct business in a professional manner, so I won't miss not doing business you.  And likewise, there are many investors who evidently don't care about how they conduct business and will assume a contract from a company they have never done business with without ever seeing the purchase contract.  You continue to work with them.

Stay Blessed!

PM me with the actual numbers and if they work out, I can get you the money.

Yes, there are hard money lenders that will give you 100% financing if there's enough equity in the deal. What they do is the lend against the ARV and not the current value. So if you have a property that is selling for $60,000 and needs $20,000 in rehab and will have an ARV of $140,000, you will have lenders that will lend 70% of the ARV, up to the total purchase price and rehab costs. Some may even include your closing costs and out of pocket costs, and even out money into a reserve account to cover your holding costs. In this example, the deal is so rich that 70% of $140,000 is $98,000, which covers the purchase, the rehab, and leaves $18,000 on the table.

The thing most people don't understand is that hard money lenders are all about the deal, and if the deal makes good money, they'll put money into the deal. 100% financing is going to cost you, but there isn't anything like an infinite ROI because you didn't put any money into the deal.