Buy and Hold cash: How Far can you Leverage the Property?

Question

Hello All,

Chris from Arizona here. I just joined BP recently and introduced myself just a few days ago. Was looking to flip my first property with cash, but now I'm curious about the option of buying a distressed property, rehabbing it and renting it out.

But my question is, if I do this, how far can I leverage this property to get the next one (assuming 100% equity).

Wether this discussion is a basic formula or your own success story on what you've done, I'm trying to get an idea of what my best approach is to grow the fastest.

Thanks

Charlie Fitzgerald · Answer

The best way for a buy and hold investor with a 100k in cash to build a rental real estate portfolio is to buy 4 asset using the power of leverage, in my opinion.  The thing that people miss is that although having a debt free real estate portfolio would certainly be nice, the vast majority of large scale investors (yes even the millionaire ones), do not have debt free assets.  What they do have is assets that are cash flowing sufficiently to cover the entirety of the debt and other expenses associated with the ownership of the asset, and a ROIC (return on invested capital) that meets the desires and fundamentals of the investor holding the asset.  That #, may be and should be different for almost all investors.  We all have different goals and desires, and fundamentals.  Invest based on these that you establish for yourself.  Start with establishing your "Why?"  Why are you even investing.  Responsible use of debt is NOT a bad thing in a business (I'm sorry Dave Ramsey...I love you but it's the facts and for every 10 millionaires you have that are debt free, I'll show you 10,000 that are bigger millionaires that are not...and 100's of billionaires in the same position.

Brent Coombs · Answer

@Chris Stedman, the trick to wisely investing your $100k cash is to buy property that's ALREADY worth $130k+ ie. equity/profit from day one!

Then, by using "delayed financing", apply for immediate cash out, up to the FULL purchase price (but not likely including rehab costs). https://www.fanniemae.com/content/guide/selling/b2...

..."The new loan amount can be no more than the actual documented amount of the borrower's initial investment in purchasing the property plus the financing of closing costs"...

Or, as @Charlie Fitzgerald suggested, 25% down on 4x $100k properties to begin with (but, in accordance with my suggested "trick", each should already be worth $130k+)!

If you go the 25% down route, just wait 6 months seasoning to get all your cash back!

So, after that 6 months, you still have 25% equity in 4x $130k properties, AND, you have your original $100k back in your pocket! What to do next?

Hint: REPEAT is the 4th R of BRRRR. Cheers...

[Oh, and to answer your original question: I don't recommend leveraging MORE than 75%].

Penny Clark · Answer

@Chris Stedman, Welcome to the BP Community! Although there are many on here who believe putting in the least amount of cash to own a property, I agree with @Charlie Fitzgerald. Investing 20-25 percent of your own money provides some equity which helps cushion the leverage (in addition to any improvements you make to force appreciation) and it eliminates the need to pay private mortgage insurance. This will prove important when you are acquiring your third or fourth rental using conventional financing.

Charlie Fitzgerald · Answer

We recommend 20-25 percent of your money in the purchase.  That gives you sufficient leverage and gives us the opportunity to do the best we can for you to see that you are in good shape to exit our loan.

Account Closed · Answer

Any money you put into a property wlll generally be harder to get back out and will probably cost a considerable amount to get your own money.  That is why pre paying a mortgage is usually a bad idea.

Another problem you will have is that most lenders will want to see a rental history sometimes as long as two years and will generally also give you credit for 70% of the rents even if you have 100% occupancy.

Chris Stedman · Answer

Hello All,

Thanks for the info but I want to clarify the above information. Are you stating that if I invest 20-25% of my cash into a property, that I can then use that property to buy another one with 20-25%, and so on?

In terms of figuring, say I have 100k cash and I'm looking at properties that are 100k. I put down 25%, then leverage each one to get as many as 4 properties...each worth 100k (this would essentially spend all 100k cash).

As a second option, lets say I choose to put all 100k cash directly into a 100k property. What would be the best route later to leverage this property and how much could I pull out if i refinanced (also 75% or 75k cash)?

Sorry just trying to see my plan of attack on this and to make sure I understand. Thanks

Buy and Hold cash: How Far can you Leverage the Property?

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