How I bought ten homes in 2.5 years

How I bought ten homes in 2.5 years

Investor · atlanta , GA · Member since 2012 · 287 posts · 148 votes

Hi everyone, I’m still relatively new to Bigger Pockets, and I had a recent colleague request ask that I post this to help others out. The question is, how did I go about purchasing ten houses in 2.5 years. I wish there were a magic formula I could give everyone, but as many of you know, it’s not easy once you hit that four house limit with Fannie and Freddie. Our first four houses (including personal residence) were a breeze. We were able to get great loans with great interest rates fixed for 30 years. But, as soon as we purchased number four, no one wanted to work with us anymore.

I had used the same real estate agent for a few of the first four deals. When I told her about our dilemma, she pointed me in the direction of a local community bank that her other investors were working with. By the way, real estate investing is all about relationships and networking. My real estate agent knew exactly what to do. Now, the pros and cons of community banks. First, the pros: They’ll lend money on just about any amount under 50,000, whereas the bigger banks won’t touch anything under 50,000. The community bank will also consider a large portion of the rents received as income immediately, without having the tenant in the house for a year or more. The community bank that I work with keeps telling me, “buy more, buy more.” They need to make loans, and I need more inventory. Those are the upsides.

The downside to working with community banks: They will also require a hefty down payment of 20% to 30%. Mine requires 20% (but remember, if you’re buying a 30,000 or 40,000 home, 20% isn’t too bad with those amounts). The terms are generally much shorter with a community bank as well. The bank I work with will only do 15 year loans, and the rate started at 6.25, but recently has dropped to 5.75. Most community banks will not escrow either. So, at the end of the year I’ve got to go around to several county tax offices making multiple payments.

For me it just came down to I needed and still need more inventory, especially in Atlanta where prices are at rock bottom. So, I’ve decided to keep working with my community bank, but I have a bit of an exit strategy. I’m in the process of refinancing a few of them with Guild Mortgage. They are a nationwide direct lender, and they’re not overly concerned with how many homes I have. Their more concerned with our credit score. By the way, they’re also doing cash out refi’s on a couple of my properties. I learned about them through another real estate podcast. ***education is paramount***

I know the 20% is hard to come by for many, but I did whatever I had to do, to keep buying houses. That included taking a loan against my wife’s 401k (which is really good because it doesn’t show up on your credit report) and I took advantage of multiple credit card lines. If I needed cash for the 20% down, I would simply tap a credit card line just before the closing date. The bank never asked to see proof of funds, so I wouldn’t pull the money until the closing was close, just to keep the credit report clear. Now, the big key here and this is super important, pay off that credit card ASAP. Don’t fall into the trap of being saddled with bad debt. I would always pay back the ten or twelve thousand dollars before pursuing another house.

The key is, find money wherever you can, and don’t stop investing. Don’t listen to bankers or mortgage brokers when they say, “You can’t do that.” I’ve been turned down by pretty much every major bank you can think of. I’ve sat in more bankers offices with my hand out, only to be turned away. But, don’t let that stop you. When it comes to money, there are multiple ways to make money happen. (Thank you Robert Kiyosaki) Whether it’s through a bank, hard money, or private money lenders, see what’s right for you.

One other tool that I employed was using multiple community banks. I’ve got a property that has a ton of equity in it. I was able to pull out 30,000 from that property in the form of an equity line. Never stop thinking of ways to raise money, use what you have, and knock on as many doors as you can. Don’t forget about those relatives also. That’s pretty much the long and short of it, I hope this helps others who may have run into a wall. When someone says “You can’t do that” I become more persistent. Good luck.

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Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
13y

Thomas Williamson,

This is actually referred to as ROBS: Roll-Over as Business Startup.

You open a solo 401k for your new C-corporation and you fund it with your rollover account. You have to be very careful not to drain the business's funds with salary as the IRS frowns upon.

If you can use those funds to make more money then that is wonderful.

-Steven

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  • Investor · Cincinnati, OH · Member since 2010 · 1k+ posts · 928 votes
    13y

    Perhaps he didn't provide all the context, if that is how it was stated. There are income thresholds as I gave, below which the tax does not apply. Here is but one of many articles on line, this one from mid-Jan.

    http://dvf-pllc.com/what-is-the-new-%E2%80%9Cmedicare-surtax%E2%80%9D-that-i-hear-about/906/

    Not to quibble on this, I applaud what you've accomplished, keep it up! It's a pain to deal with banks, but you've shown that it can definitely yield fruit if you keep at it.

  • Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Thomas Williamson,

    Didn't Robert Kiyosaki just file bankruptcy? That is the first mistake.

    The tax affects only individuals with more than $200,000 in modified adjusted gross income (MAGI), and married couples filing jointly with more than $250,000 of MAGI. That is for passive income. If you are active in the business it is not subject to the tax.

  • Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
    13y

    Steven Hamilton III believe Kiyosaki's bankruptcy was one LLC involved in one particular business and not a general one. Correct me if I'm wrong but the 3.8% tax is on net passive income, not gross? I was corrected earlier in the year on this point in another post.

  • Accountant, Enrolled Agent · Grayslake, IL · Member since 2011 · 5k+ posts · 2k+ votes
    13y

    Dennis Tierney,

    Here is it direct from the IRS:

    12. What investment expenses are deductible in computing NII?
    In order to arrive at Net Investment Income, Gross Investment Income (items described in items 7-11 above) is reduced by deductions that are properly allocable to items of Gross Investment Income. Examples of properly allocable deductions include investment interest expense, investment advisory and brokerage fees, expenses related to rental and royalty income, and state and local income taxes properly allocable to items included in Net Investment Income.

    http://www.irs.gov/uac/Newsroom/Net-Investment-Income-Tax-FAQs

    -Steven

  • Rental Property Investor · The Woodlands, TX · Member since 2014 · 345 posts · 288 votes
    12y

    @Thomas Williamson 

    I'm researching the ROBS and came across this topic. You mentioned using the C-corp/401k with Guidant. Now that some time has gone by, can you give some perspective based on your experience with the product ... I am planning to leave my full time job and would like to access the funds in my 401k to purchase rental property and become a full time landlord.... I am commited to the point of being okay with paying the taxes and early withdrawl penalty if necessary... However, if the ROBS is a workable option ... all the better  

  • Investor · atlanta , GA · Member since 2012 · 287 posts · 148 votes
    12y

    @Jeff Wallace 

    Hi Jeff,

    I guess the first thing I would ask would be the amount that you have in the 401K (I mean think about it to yourself)  and figure out if it's worth it over the long run (many year's to come) to pay the taxes and penalties for early withdraw now, or pay the maintenance fee for the life of the company.  We had 70,000 plus in my wife's 401K when we worked with Guidant to create a new company.  

    I can say without hesitation that Guidant is a great company.  They really delivered on everything the said they would.  The attorney they provided us in Atlanta was outstanding. He knew this subject backwards and forward.  We paid around 5,000 to set up the new company (Guidant did everything, all the filings with the state etc.) and we pay them 119.00 per month to continue to be the custodian of the account.  We of course have to provide them with documentation from time to time to make sure we stay in compliance with the IRS.  That tells me that Guidant is really on the ball, and they are concerned with making sure we're doing what we're supposed to.  That's something else you need to consider, is remember the funds from the real estate (rents) must be paid to you in the form of a check (as in that's your salary).  You can't simply take the proceeds and deposit them into your checking account and spend as you wish, as we do with our other properties that are not purchased with the 401K funds.  Oh, also you have to maintain a separate checking account for the ROBS funds and rents received, and the rents that come in have to go into that same account.  There can be no co-mingling of funds from other properties, or personal money.

    It is somewhat labor intensive in the beginning to set all of this up, but in my opinion it was well worth it.  After the rollover was complete, we took the funds and paid all cash for a 4 BR 2 BA home in metro Atlanta in March of 2013.  Not long after closing, we were able to put a mortgage on the property and get most of that money back and moved on to the next project.  We still own that property and make a very nice profit on it.

    Again, I think it will come down to how much money you have in the 401K (if it's smaller than say 50,000 then it may be better to just pay the taxes and penalties) but that's something you'll have to decide. I can also tell you that when I speak to lenders about our companies (we had an LLC before the ROBS rollover) the bankers are extremely impressed with our strategy of the ROBS rollover to purchase real estate. Because many lenders have no idea (as most people outside of this space) that you can do that.

    There's a little hesitation when we tell bankers that my wife doesn't work, then we explain our strategy and what we did with that 401k, then they're on board again.  We continue to strive and move forward, and the ROBS was a great strategy that helped us to keep moving forward.  Good luck, and let me know if you have any other questions about it.  

  • Rental Property Investor · The Woodlands, TX · Member since 2014 · 345 posts · 288 votes
    12y

    @Thomas Williamson Thank you. It is reassuring to know that it has been a positive experience for you. I am on the fence with this decision. Although it would be GREAT to access my entire savings ($350,000) without penalty or taxation, I know the limitations accessing the proceeds will handcuff me regarding what I can ultimately build.  Common sense says the choice should be a no brainer....

    I would like your take on two follow-up questions ...

    - Another BP member advised against holding passive income producers in a C-corp based on tax issues related to C-corps paying higher taxes on passive income... 

    - I have also heard that in the given scenario, taking all of the profit from the Corp in the form of a salary would be frowned upon by the IRS... basically, a corp with income based on assets rather than production should have a low percentage of profit paid as salary...

    Thoughts?

  • Wholesaler · Atlanta, GA · Member since 2012 · 243 posts · 103 votes
    12y

    @Thomas Williamson Congrats!

    I understand that you use community banks as your money partners, but do they also give you funding for the rehab? That waste assuming that you had to rehab at all, Did you have to rehab any of your rentals? if so where did the funding come from?

  • Involved In Real Estate · Marietta, GA · Member since 2014 · 15 posts · 1 vote
    12y

    @Thomas Williamson 

    Thanks for sharing the success story and multiple tips on financing and real estate. Networking is truly paramount in the real estate business.

  • Lima, Lima · Member since 2014 · 59 posts · 11 votes
    12y
    Great post Thomas! You mentioned that the smaller community banks really want to give loans....I easily have 20 percent for most properties I am interested in, great credit and a 20 year work history but no income right now. I am assuming the no income is the kiss of death, even for the banks you are working with. What do you think? Wish the iPhone app made it easier to cut and paste or bring down the @ sign!
  • Bristow, VA · Member since 2014 · 5 posts · 0 votes
    12y

    Great wisdom Thomas, I really appreciate you passing it on.  Best of luck in growing your business!

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