Starkville, MS · Member since 2014 · 6 posts · 1 vote
I have gotten to the point where I now have a pretty solid plan on what kind of investment home I want to buy and the area where I will buy. Unless housing prices sky rocket in the next year I will have saved enough for a 20 percent down payment on my first investment property.
The first property seems easy to get. I was wondering if anyone would be willing to share their strategy for acquiring more buy and hold investment property. On paper it appears that if I continue my current savings and don’t touch the cash flow from my property I will be able to purchase a second property (after building a cash reserve) in approximately two years.
I have read about people acquiring a new property every year. I am curious about how this is done. Is it possible to do when you have to come up with a 20% to 25% payment every time you buy? I know there are other sources than banks (hard money…etc) but I don’t think I currently understand enough about creative finance to make it part of my plan. Any advice or recommended reading will be appreciated.
Lender · USA · Member since 2015 · 212 posts · 53 votes
10y
. I started like you ... I am now at 24 properties... Here is the "secret"... If you buy properties 75% of retail value you are set
-You Spend 75 for a house that is worth 100 (probably you buy it for 45 with 30 of works)
- you refinance it... it appraises for 100... You get 75 mortgage and you get your money back
- You make money in the spread between rent and mortgage and you have 75 to invest again
- every 6 months you buy a property reinvesting and refinancing the same 75
- meanwhile the properties you initially purchased increased in value and your mortgage balance decreased ... 1 to 5 years later (depending on the market increase) you can refinance again on the same houses... Soon instead of 75 that you turn every 6 months, you get 150 ... Allowing you to buy 2 houses every 6 months
- meanwhile your friends hear what you are doing and want it too.. You offer partnerships where they invest their ira and you give in your experience... You start leverage that money too
- as your income and credit score increases, you start qualifying for unsecured line of credit
- by this time you are buying one property per month...
This is where I am now... Please remember though that the key of large wealth in real estate is to buy below market... Which takes a lot of time and effort... Probably for every property I buy, I saw 10 ... For every 10 I saw I considered 100... For every 100 I considered I read / received calls of 1,000...
in order for my system to work:
-When you start, try starting with deep pockets... In order to get real deals you need cash ... If you are handy, maybe start with a major fixer upper of you are short of cash... Getting a property for a large discount needs either lots of cash or lots of time... If you have time look on boggerpockets at all tecniques to get properties off Mls
- do not give up... Sometimes a bad tenant or deferred maintenance you did not catch at the inspection thraws you off... Keep going ... This plan works... Just expect few bumps right after you buy the property... Ensure you have always 5-10k cash reserves as unexpected things can happen (if you are handy and have time 3-5k reserves are enough)
Fort Wayne, IN · Member since 2014 · 18 posts · 7 votes
12y
Brian- I am using a HELOC on my main home so I can pay all cash for my rentals then I do a cash out refi on the investment property to pay the home equity off. Then I repeat the process over and over. I have 5 rentals 4 are free and clear. They cash flow $3,100/per month so its like a snowball effect.
Real Estate Investor · Buy & Hold Investor from Seacoast, NH · Member since 2013 · 63 posts · 15 votes
12y
@Mark McKibben Can you explain this strategy a little more? I assume that the reason for the HELOC and cash buy is to give you a stronger position when negotiating purchase price and the ability to act more quickly vs. obtaining financing. But if you are eligible for a cash out refi already, then aren't you essentially paying fees for two loans? Does the stronger position when purchasing make up for this cost?
@Brian Mathews I have only purchased 1 so far so I can't really help. But I know that many people look for "portfolio" loans rather than standard mortgages. I think you need a couple of properties first to demonstrate that you know what you are doing, but this type of loan typically means a lower down payment among other things I think. I am hoping to start searching for a portfolio lender soon.
One thing I have done to expand my rental portfolio is save diligently. My wife and I have always lived on the lower of two incomes and saved the higher one for investments. We really haven't withdrawn any significant money from our RE Investments and have pretty much reinvested everything back into buying more properties.
Most of the properties we currently own are free and clear with majority loans getting paid off in next 3-4 years.
So # 1 thing for us have been reinvesting the RE income into buying more rental properties.
Fort Wayne, IN · Member since 2014 · 18 posts · 7 votes
12y
@Adam K Yes I am a stronger buyer all cash my equity line is only $125.00/month on $35,000. I buy the house below value do some fix up so when I do a cash out refi it cover most of my equity line depending on the appraisal. My a real estate appraiser full time so that helps when it comes to comparables.
Fort Wayne, IN · Member since 2014 · 18 posts · 7 votes
12y
One of the huge benefits of doing this is the ability to reinvest the cash again after you refinance it out, providing you get a good deal/appraisal going into it.
Investor · Omaha, NE · Member since 2014 · 37 posts · 7 votes
12y
@Brian Mathews , I'm also a fan of fixing up a property and then using a cash out refi to pay for the next property, or down payment on the next, depending on the size of the next project.
Oh the joys of being a local in the mid west ... you can stay right on top of your rentals NO PM .. this is a great strategy for locals. its the out of state investors that get hammered.. and then you local guys pick up the spoils am I right ????? :)
Real Estate Consultant · Lancaster, CA · Member since 2014 · 423 posts · 223 votes
12y
@Mark McKibben: How long do you have to wait after your all cash purchase to do the cash out refinance and at what LTV are you able to get the cash out refinance loan?
Fort Wayne, IN · Member since 2014 · 18 posts · 7 votes
12y
@Jay lol never thought of that.
Michael I have 4 rentals that are paid off so I can cash out refi one of my other rentals with no seasoning. 75% LTV if the refi/appraisal does not pay off the HELOC I have $3,100 cash flow coming in every month off my rentals to help pay that off. My average price range is $35,000 to $45,000 in my area that will get you a starter home in a nice area. The typical rent in my area is $650 -2 BR and $725-3BR
Soldier · Colorado Springs, CO · Member since 2013 · 24 posts · 4 votes
12y
Ok let me see if I'm getting this correct you used or use your personal home's equity to buy your investment rental(s) then refinance your personal home? The reason I'm asking this is because I have the opportunity to buy one of my mother's homes cash as I have the 21k saved up. The CMA says its worth 40k. She has another three I want to buy from her and she wants to sell to me and she doesn't care about the equity she has in them as we are family.
Wholesaler · Spring, TX · Member since 2014 · 89 posts · 21 votes
12y
if you are new to investing and only on your personal home. Why are you paying 20% down? You know you can buy up to 4 properties with the the personal 5% down 30 year loans before you have to start the investor rates/rules. I didn't find out about it till I had 6 properties, so it was too late for me but I have heard of others that started this way.
Now this may be a misunderstanding but I have a friend who was able to buy 3 rentals properties at 5% down, low interest 30 year loans. These became his big cash cows! He then had to start doing the 20% down, 5%, 25 year am, 5 year balloon.
I would ask your local bank but I think you should look in to this path if your just starting.
Lender · USA · Member since 2015 · 212 posts · 53 votes
10y
. I started like you ... I am now at 24 properties... Here is the "secret"... If you buy properties 75% of retail value you are set
-You Spend 75 for a house that is worth 100 (probably you buy it for 45 with 30 of works)
- you refinance it... it appraises for 100... You get 75 mortgage and you get your money back
- You make money in the spread between rent and mortgage and you have 75 to invest again
- every 6 months you buy a property reinvesting and refinancing the same 75
- meanwhile the properties you initially purchased increased in value and your mortgage balance decreased ... 1 to 5 years later (depending on the market increase) you can refinance again on the same houses... Soon instead of 75 that you turn every 6 months, you get 150 ... Allowing you to buy 2 houses every 6 months
- meanwhile your friends hear what you are doing and want it too.. You offer partnerships where they invest their ira and you give in your experience... You start leverage that money too
- as your income and credit score increases, you start qualifying for unsecured line of credit
- by this time you are buying one property per month...
This is where I am now... Please remember though that the key of large wealth in real estate is to buy below market... Which takes a lot of time and effort... Probably for every property I buy, I saw 10 ... For every 10 I saw I considered 100... For every 100 I considered I read / received calls of 1,000...
in order for my system to work:
-When you start, try starting with deep pockets... In order to get real deals you need cash ... If you are handy, maybe start with a major fixer upper of you are short of cash... Getting a property for a large discount needs either lots of cash or lots of time... If you have time look on boggerpockets at all tecniques to get properties off Mls
- do not give up... Sometimes a bad tenant or deferred maintenance you did not catch at the inspection thraws you off... Keep going ... This plan works... Just expect few bumps right after you buy the property... Ensure you have always 5-10k cash reserves as unexpected things can happen (if you are handy and have time 3-5k reserves are enough)
Atlanta, GA · Member since 2016 · 2 posts · 1 vote
9y
Great info. Curious if anyone has insight into the underwriting small banks use for a rental portfolio (i.e. what metrics do they use). Do they cap the net income? base it on Debt coverage ratio? Or is it more about the retail comps?
Real Estate Agent · Louisville, KY · Member since 2015 · 33 posts · 24 votes
9y
@Scott O'Halloran Small banks look at a number of items when underwriting a rental portfolio:
1. The debt/service coverage of the project
2. The global debt/service coverage of the companies portfolio
3. Value of the collateral (LTV, what is their exit strategy should it become non-performing)
3. Personal Financial Position of those involved (LIQUIDITY is huge!, Credit, Personal debt/service, etc.)
From working as someone that approved these types of deals at a local bank, I'll say that no two deals are the same. Depending on the banks appetite for loans, overall balance sheet, recent history or losses with investors, these things can change throughout the year.
