Refinancing low income properties
Rental Property Investor · Richmond, VA · Member since 2017 · 102 posts · 28 votes
Easy solution. Here is what we do. It takes this "challenge" (notice the word problem is not used here ;-), and turns it into a better solution than refinancing. We originally set this up to marry my Michigan cash flow market with the California flip market. They flip and bring their profits here as cash buys for cash flow. This is a modification of our Turn Key model. Here are the "challenges" for each of the scenarios.
Scenario #1: Out of State Buyer
Challenge A: Being out of state, and having to deal with a problem tenant or property
Challenge B: Being out state, and not knowing the market
Challenge C: Being out of state and not seeing the property (could be sold a "dog")
Scenario #2: Small ARV property values...can't finance (buy or refi)
Challenge A: 75% of ARV too small for a REFI loan
Challenge B: Cash used to buy gets burried in property until Cash Flow pays it back. This can take many years, and while this is in place, the money is dead.
Challenge C: Can't use HML to buy/Rehab ...(see Challenge A and B)
Scenario #3: There are many New REI investors that can't get started because of...
Challenge A: No knowledge, experience, or Power Team in place
Challenge B: No time (working at J.O.B. full time)
Challenge C: Very little cash to invest with (maybe $5 - 25k)
Our solution, is to set up our LLC's that own the properties (one for each) with openings for partners. These openings are filled by out of state or limited newbie partners. We can break these partnerships into smaller, but equal, segments. Any new partner can take multiple (all if they want in the case of an OSB) partnerships. This means we have eliminated any Wholesaling from us, and our buyers don't need to use Wholesalers with unknowns. This has allowed us to tap into all three of the above scenarios because of these solutions.
Scenario #1: Out of State Buyer
Solution A: We stay on board as the managing partner
Solution B: By staying on as Managing Partner, the OSB is confident in the project. WE know the markets.
Solution C: By staying on as Managing Partner, we have a vested interest in the deal...and would be the ones dealing with any problems, at a reduced return for us. We're not going to do this if this is a "dog".
Scenario #2: Small ARV property values...can't finance (buy or refi)
Solution A: No loan, no 75% limit, no 6 month seasoning, maximum cash flow splits
Solution B: Cash we put in is returned to us, either all at once or in pieces.
Solution C: No loan to pay back, no credit partner, no cost of money.
Scenario #3: There are many New REI investors that can't get started because of...
Solution A: No need for knowledge, experience, or Power Team...we are those things
Solution B: No physical involvement (meaning no time involved) for the new partners
Challenge C: Partnerships splits are set up between $5 - 25k, depending on the particular property.
Needless to say, this has been very popular with many REI in the above scenario groups. Like I said, this is how we solved the problem of low ARV/REFI...and it ended up solving even more problems than that.
Paperwork is a partnership agreement, and an LLC Articles of Organization...both are templates we had designed. Filing fee in MI for an LLC is $25/year.
We do have a waiting list of buyers/partners from both out of state and within. The size of teh buyin needed is small, so it appeals to the REI that doesn't have the time, the team, the knowledge, and little money...but they can regenerate that money on a regular basis.
I'm don't need to refi, so the small size of the individual loans If I did want to refi) doesn't stop me from getting my cash out. Also, I wouoldn't have to resert to a blanket loan, and then restrict my options on the idividual properties within that blanket loan.
I'm able to do my own "cash outs" like a refi, but I have no seasoning, I can access my funds in pieces, and Ihave 100% equity...so I still have the refi option. I'm not restricted to 75% LTV loans, so I can take less or more. If I want to access my equity/profit (if/when I buy right), I can by setting the total partnership cost higher than my cash I put in.
Ihave no loan, so no loan costs and if I have a vacancy, no loan payment to cover.
@Joe Villeneuve So current ARV is 45K then you sell 80% for 36K in doing so you give up 80% of Cash flow and future appreciation. If current Cash flow is 825 then you gave up 660 per month to get 36K not including what was given up in future appreciation. 660 per month seems like an expensive way to get 36K.
Now I like the creative way to solve many different challenges but it seems like the owner gives up a lot in this solution. The beauty of leverage is that you also leverage your appreciation but in this instance you are giving away your appreciation as well. The original owner would be better of getting a 20 year loan at 12% interest then giving up that much cash flow. The loan would have a lower monthly payment and in 20 years you would have all the equity back. I see why this is good for the Cali investor as they get a good return but why is it better for the original investor than packaging properties together and getting a bank loan?
Not expensive at all...in fact it's far less expensive. Actually, it's free to me. Financing, loans, are just another way to leverage cash...which is what you are actually leveraging. In both cases, the original money comes back to me "with friends" (profit and cash flow). There is more cash flow without the loan (no debt service, and no credit partner).
I'm not giving up 660/month...I'm getting my original money back, with friends...to use again on the next deal, repeated over and over and over and... This is faster (no seasoning), and I can get a higher cash back.out (no 75% limit), than if I went the refi route. That $36k goes right back into the next deal, flipped through cash leveraging, and repeated over and over again. I'm not losing anything...I'm compounding my $36k.
Why would I want to wait 20 years to get anything back? I get it all back right away. If I left that in, even if I used only 20% as a down payment, I have to wait to get my money back through the cash flow. My way, I'm not waiting for anything...and that reduced cash flow you are frowning at, is pure profit...from day one...and, that cash I put in, isn't just sitting there dead waiting for the cash flow to catch up in, what did you say?...20 years? We could have 2 or more 2008's occur within those 20 years, and my "resting" cash and supposed equity build disappears.
If you understand what leveraging does, you'll see that this is in fact just a different way of leveraging...just without the added subtraction of loan cost and credit partner off the top.
If I took that $36k and split it up so that it represented 20% down payments, it would get me $720k in value...and I would be dead in the water until I generated more down payment funds...and, I would have spent that $36k since those funds went in one direction...away from me.
If I took that same $36k and paid cash, then took my route and recovered that cash plus profit (and kept CF), then move my recovered funds plus friends into the next bigger deal, then repeated this over and over again I would be light years ahead.
One more thing. If I take the "spending" the $36k for DP's, how much have I spent and how many uses did I get out of that $36,000? Answers: I spent $36,000 for 1 use.
If I take that same $36k, and "use" it an unlimited number of times, with each time I use it I get it right back with a profit, to use it again, and again, and again...how much have I spent, and how many uses did I get out of it? Answers: I spent NOTHING for an unlimited number of uses.
Wow. genius like. Get infinite cash flow for no reason and get the 36k all in cash back. This is the BRRRR method using low end properties.