Real Estate Broker · Kirtland, OH · Member since 2013 · 6 posts · 1 vote
After purchasing 2 rental houses in two years I've learned more than I could have ever imagined. This is clearly the way to create wealth and I am in love with it. I now find myself in a position where I have spent all my "investing money" on the first 2 properties and still have the desire to purchase more. I don't want to wait for the properties to produce enough cash for another down payment. I want to buy sooner, and I have the feeling I will keep wanting to buy at a faster rate as I get better at this. That's why I need to figure out another way to invest without having all the cash up front. I have a handful of contacts that would invest with me, I'm just not sure how to set up the terms and structure this type of deal. What are some ways that people have gone about this and have been successful?
Can you tell us how you purchased the first two deals? Were they cash-only purchases or did you do any financing? How long have you had each property? Has the value appreciated?
Good questions Dawn. Thats exactly what I was wondering. The reason she's asking that is to see if there's any way to get some of your money back out of those properties. You might be able to do a cash out refi on your properties (1 or even both) depending on how much equity you have in them and how long you've owned them.
As far as your option to use these investors. I guess the question there is what are they looking to do. Are they wanting to get a guaranteed return on their money? Or are they looking to participate in the long term profits?
If they're looking to just get a guaranteed return, you could setup private loans with them on your deals. i.e. They lend you 80k to buy a home and you create a mortgage and note that you record with them as the lender in 1st position and you agree to pay them x% interest only payment for x number of months or years until you can refi them out.
Example. You buy a 120k house for 60k and need 20k rehab. You borrow 80k from your private lenders and pay them interest only payments at 10%. You then wait your 6 mos to a year to refi and pay them off as part of your refi (rate and term) so that you can lower your payments and free up their money so they can do another one with you.
Maybe 10% and 3pts for each deal. Just depends on what they're getting now and what the risk/reward is to them.
If you can buy right, you could do with little to money out of your pocket this way.
If they want equity in the deal, then it gets trickier. I don't know what the standard is for that. I'm assuming they would provide the financing (possibly by using their cash or by getting loans on the homes for you) and you're providing the know how and managing everything - from rehab to renting.
To me, if they're doing the money, then they should get a bigger chunk of the percentage. Maybe 60-40 them. But I'm sure you can start with 50-50 and go from there.
That kind of setup would be better answered by someone on here that is doing these kinds of partnerships. I have thought about a few times to keep growing without having to go through all the hoops to keep finding more financing (once you get over 10, its a little more work), but have been able to keep finding the financing just as I need the next one so I haven't bit the bullet on that yet.
Dawn and Mike, Thank you for your quick responses. The first house I paid for with all cash. I quickly rented it and had it about 1 year before I started looking for the next one. I was able to pull out a line of equity on the first house to finance a large portion of my second house. I paid cash for the remainder and the rehab. I have had the 2nd house for about 3 months now. I see the signs that the market is changing and want to get one more great deal before that happens. I also would love to get into a multi-family or self-storage investment but just don't have the funds to do so right now.
I will need to find out exactly what these investors are looking for next time we talk. I would prefer if they were just looking for a guaranteed return but I guess I can't be picky at this stage.
I appreciate you explaining the scenarios to me Mike. That helped and painted a clearer picture for me. You mentioned 10% and 3pts for each deal... expand on this, why did you pick this? Is there a standard range for these types of deals that people operate within?
Also, is there a way for an investor to get the loan and then I come in and assume it? This sounds like too much risk for an investor but has it been done?
talk to a lawyer since you have people that would invest with you. offer them a low apr in return so you can make money too.
i know exactly what you are talking about since i missed on great deals since the bank account was depleted. i am glad that's not the case anymore, but the great deals are long gone.
Again thanks for all the replies. After some digging I've discovered I can take out a second line of equity on my newest rental but since it hasn't been 12 months I can only pull out 75% of the purchase price. And as a good investor, I bought it under valued. I also believe I can pull cash out of my residence at the market value since I've lived here for a year. Again bought under valued. So this might give me more money.
The issue I'm having in my mind is that after paying the debt service, taxes, and insurance plus other misc things I will probably only be making $200-$300 per month. It's not bad but my goal is to have financial freedom one day. I am still a beginner and may sound like an impatient child but even after getting 3 rentals it seems like I am still so far away from cash flowing any real money. How many does it take? And how do I continue investing after I pull out all the cash from my current properties? What are some good strategies people are using that can be repeated over and over until you are truly making some real money?
I buy them in the $30,000 range and don't go above $40,000 with the all in total cost after rehab. 2 bdrm 1 ba gets $750 and 3 bdrm 2 ba gets $925. Netting around $12,000/yr between the two.