How I Turned $7K into $187K in 18 months

As I explained in my last post "Wanna Get Paid $15K to Buy Your First House?", I was blessed to have been paid $15K to take over (assume) someone else's FHA loan.  I lived in that house for exactly 5 years before my wife and I sold it.  We netted $10K in cash from that sale and me immediately bought a "move up" home.  We went from a 3 bedroom, 2 bath, 1,500 square foot house to a 4 bedroom, 3 bath, 2,000+ square foot house.  It was just me, my wife and our 5-year old son.  So in June 2002 we used the $10K to purchase a $200K house.

During the 5 years since I bought the first house, I had gone through some rough times.  I left my good paying secure government job in May 2000 to run my Internet marketing company full time (both my wife and I quit our stable jobs to work on the Internet business full time).  Unfortunately that was right at the height of the dot-com bubble and I was unable to secure any funding for my company.  I had pulled out my retirement to fund the startup (I'll do another blog post on how I messed that up) and to live off of for the next 6 months until we received funding.  The plan was that if we didn't get a round of funding in the first 3 months, then we would get jobs and have enough money to cover our bills for another 3 months.  So after 3 months of not being able to get funding, my wife and I started looking for jobs.  She secured a job within the 2 weeks.  It took me 9 months to get a job.  We almost lost our house (which now my parents we living in and we were renting another house, but's that's another blog post) because we fell behind on the mortgage.  I eventually got another government job in March 2001 and in June 2002 was able to purchase our next house (had to wait 12 months for the delinquent payments on the credit report to not affect our ability to buy another house).

I thought we had made it; we had arrived.  We had a house that was large enough for our current and future family at a monthly cost that we could easily afford.  We had so much discretionary money that my family would go to Las Vegas every other weekend on short 24-hour trips (Vegas is a 3 1/2 hour drive from Palmdale).  We would leave at 8:00 p.m. on Friday, get to Vegas before midnight, drop our son off at the 24-hour childcare center, check into our hotel (we stayed where the locals play like Sam's Town and the Orleans), go to a nightclub, stay out until 3:00 a.m. partying, wake up and check out by noon, pick up our son from the childcare center, go to a casino with childcare center, drop of our son for 3 1/2 hours at the casino childcare center while we gambled ($200 bankroll playing blackjack at the $5 tables), and then leave Vegas heading home by 5:00 to get back home around 8:00 p.m. on Saturday.  We would budget $500 every other weekend for our excursions.

During this time of having excess money, our house was appreciating at a rate of about $5K per month.  My wife and I always loved looking at model homes, and I had a childhood friend (Greg) and his fiancé (Delila) who would come visit and stay with us often (about every other month) once we got our new spacious home (my parents moved out of the state in 2001, which was the reason why we sold the house in 2002).  In March 2003 we looked at a new housing track in West Palmdale called Pacific Renaissance.  They we're selling 4,400 square foot homes on 1/3 of an acre in a gate community for $400K.  While we were there we spoke with a person (realtor) who had purchased in Phase 3 (we were looking at Phase 4).  He said, and I quote, "They haven't finished building my house and I already have $100K in equity".  Long story short, my best friend Greg and I signed purchase contracts for two 4,400 square foot house right next to each other for $418K (Greg's was over $450K because of his upgrades).

Now I had already bought a house the year before, so I didn't need a new larger house.  This was going to be an investment.  They hadn't even broken ground on the house, so I thought I could get in a low price, wait for them to finish building, then sell it for a quick profit.  Thus the term "Pre-Construction Flip".  Since we didn't intend to live it in it, I put minimal upgrades into it (less than $10K) and locked in the price of $418,500.  I signed the purchase contract in March 2003 expecting them to take about 4 months to build the house and for me to close.  Reality was it took them 18 months to build my house!  In the meantime my wife convinced me to plan on moving into the house.  So in September 2004, they finally finished the house, which appraised for $600K.  I used 100% financing: a set of 80/20 loans where the first mortgage was a 30-year interest-only loan for 80% of the purchase price (80% LTV) and the second mortgage was a 30-year interest loan for the remaining 20% (20% LTV).  All I had to do was to come in with the cash to close the loans, which amounted to $7K.  By this time, my other house had increased in value from $200K to $350K.  I took some of the equity from that house to get the $7K to close on the new house.

All in all, I used $0 of my own money (actually was paid $15K) to get my first house, $10K from that house to buy the second house, and then $7K from the second house to buy the third house.  In September 2004 I owned 2 houses worth $950K with mortgages of about $600K, for a net equity position of $350K without ever putting a penny of my own money into any of the three deals (talk about no risk).

So does this sound too good to be true?  Sound like a once in a lifetime deal?  In the next blog post I will show you how I turned tis experience into a investment model that I did for two friends who turned $10K into $25K and $12K into $50K, respectively, over a 4-6 month period and how at the height of my real estate investment career my family controlled $1.8 million worth of property with only $18K cash with an equity position of over $250K in 4 months.  Until then, God Bless You!