Investor Contracts, Am I Crazy?

Question

Hi Team!  I'm a homeowner with a steady job.  I'm trying to get into this real estate hustle.

I've identified several properties in South Dallas (Gentrifying, 75211 if you're curious) that look like winners.  3b/2ba for $250k ish.

I'd like to get a purse together to make a cash offer.  I suspect many of these homes would go for $220k in the presence of a cash offer.

I can cover $120k with my savings.  I'd like to bring in 2 partners to help with the rest. I'm trying to find precedent for this kind of arrangement. My first stab looks like:

Partners wires me $50k. I buy the house. I improve it - these aren't full rehabs because I'm still new, but I can add value through clever landscaping (I'm great at that), new paint, new siding... easy stuff. Bank re-appraises at $250k. Refinance 80% out through my mortgage guy. Pay back the partners, keep what's left. I get tenants installed. I suspect I can have the house turned around and renters in there in 3 months or less.

Is it a realistic to offer the partners a 10% return in 3 months?  They give m $50k, I go into hustle mode, I give them back $55k? I believe a hard money lender interest-only loan is the closest functional equivalent to this, and their interest-only loans are much different.

All guidance is welcome.  Thanks team!

Bruce Lynn · Answer

I'd use hard money vs using friend's money.  Good way to loose a friendship if it doesn't all work out as planned.

Do one, see if your numbers work out.   Or do one smaller where you can use all your own money.

You have to realize too, that cash vs financing is the same bottom line for the seller.  Maybe you can close in a week vs 30 days with financing, but that is only helpful perhaps if the house is vacant.

Richard Helppie-Schmieder · Answer

@Rusty Haake you can do the same leveraging with a hard money lender and then refinance into a portfolio lender or traditional Fannie/Freddie product. Hard money will only cost you a little over the $5,000 interest you are offering, but streamlines the process on your end with endless capital based on the home. Personally, being in Dallas, I don't think you can get a $30,000 price reduction due to a cash offer vs a financed offer, but want to encourage you to start with one and maybe take it all down by yourself or be a passive partner to learn a little bit on your first investment property before seeking outside capital. Please shoot me a PM if you have any specific questions. I would be happy to help where I can through my experiences.

Rusty Haake · Answer

Thanks for responding! My inclination to this strategy is that it will allow recoup of the seed capital in short order. I could perform this strategy multiple times in a year (it’s basically a watered-down BRRR with partners instead of a hard money lender).

Using the $120k to seed a $480k finance is an appealing option, but would leave me without capital to perform another iteration for quite some time. I also have to chalk up my own humility about my experience level - I’m frankly nervous as hell about all of this, and multiple practice reps feels more conservative in this sense.

I’m all ears though, and open to alternative ideas and strategies!

Mark H. Porter · Answer

I’M going to ask the question that many others will - why are you paying cash when money is so cheap?  Even at a 75% LTV, that $120k you have has $480k in buying power or the power to buy two of those houses with no partners.  You can borrow at less than 4% and it’s common to make 8% return in your investment.