The Best Way to Buy Rentals
"Attention investors! Are you looking to buy rental properties? Are you wanting to get yourself cash-flowing properties?"
Conventionally, there have been two ways to go about this. First, you buy a house and manage all the issues yourself. You become overly active, driving the project from start to finish, and then spend all your time managing the tenant and all the problems that come with them.
The other option is buy turnkey rented properties- fixed-up rentals with tenants and property management in place. The problem with these is that they often come at retail prices, resulting in less cash flow, less equity in the house, high risk and low returns.
Let me tell you about the best way to buy rental properties. It’s not a trick or a new-found secret, it’s likely not anything you haven't considered yourself, it’s not revolutionary, it’s just the easiest way for you to make great returns without actively having to manage everything. This plan doesn’t have a fancy name, doesn’t have a flashy marketing plan, and it doesn’t have a cool logo. All it has is the potential to make you incredible returns and save you hundreds of hours of work.
Here's how: I will help you buy a house at a wholesale cash price, which gets you the absolute best deal. Once you own the house, my construction team will manage the rehab, updating you as the project goes along. The goal is for you to be all in under 75% LTV (loan to value). Once we have it rehabbed, we turn it over to our rental management company which will get it rented and then take over the maintenance and management of the property. Finally, once all that has happened, you refinance the house for 70%-75% ARV, meaning most of your original investment gets refunded by your loan, and the rent pays the mortgage every month. Essentially you end up paying yourself to buy a house! You truly do get to have your cake and eat it too!
Now I know this all sounds too good to be true, but let me break it down for you using a real house that we are selling right now. Let’s say you start with $100,000 in cash.
You buy this house in Hammond for $42,000. Repairs are estimated at $22,000, and you pay the $1,400 closing costs. Your money for repairs is escrowed at the title company. This helps the deferred refi work and help you to be able to refinance quicker. We rehab the property, which usually takes 3-6 weeks. For sake of the example, let’s say it takes five. Our contractors guarantee all work performed for a year, meaning you shouldn’t have maintenance costs for the first year.
Repairs are based on a scope of work, and while there is always the risk of something unexpected popping up, we are usually within 10% of the actual cost. While buying wholesale means you are assuming all the risk, the fact that we are vetting the house before you look at it greatly decreases that risk.
This particular house with it’s proximity to Chicago will pull at least $1,100 in rent. The utility cost for the time period during which the house is being rehabbed are paid out of the escrow held at the title company. Below is the breakdown of the expenses.
Typical vacancy for this area is about 3 weeks, so within two months of owning the house, chances are you will have a tenant.
After getting a tenant in the house, the next step is to refinance.
As you can see, after refinancing this house for 70% of the ARV, you have only put $370 into the purchase of this home. At this point, your $822 of cash flow covers your mortgage, leaving you with $477 of monthly cash flow. Taken out over the following 10 months, one year after the purchase you will have netted $4,400.35, plus the equity in the house.
One of the most important things in an investment that carries risk is how quickly you can get your original investment back. Once that happens, your returns are actually infinity!
And that, my friends, is the best way to buy rentals!
If you were to get a Rent-to-Own tenant, you could use this strategy, and their $3,000 option fee would end up giving you more than you put into the house!
On top of the returns of doing it this way, you would also be getting all the other benefits you get from owning rental real estate. With today’s 4.9% interest rates on mortgages, it’s almost like the banks are paying you to loan money from them. Plus, you can also defer taxes when you do sell with a 1031 exchange. All this and more is why Robert Kiyosaki calls owning rental properties the biggest unfair advantage in today's US tax code.
This program is not for everyone and I am sure that some people do not qualify for this or do not have the $100,000 in cash to get started; however if you do, I would at least consider this as part of your investment, retirement, and wealth building plans.
