BP for 2015 flips or passive cash?

39 Replies

I want all you guys opinion. Are you going after more flips abundant short term cash or a steady passive income?

What are your 2015 goals?

Love gaining knowledge from you all.

My goals are in line with Brandon's - vacation rentals is first on the list for 2015. My wife and I just rehabbed one of our long-term rentals and are converting it into a vacation rental. And we are actively looking for similar properties to do the same with. We're in central Austin, where the demand for vacation rentals is increasing and looks to be strong for the foreseeable future. 

And of course, we're sticking with our longer-term plan of flipping to generate income to acquire more buy and holds. 

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I would love to find a couple of houses to flip to get some short term profits.

My problem is that when i find a good candidate for a flip, I find its an even better candidate for a rental and can't let it go.  

I'm currently at 32 houses right now (got #33 under contract last week - and its a doozy). So my goal is to see if I can get to 40 this year. 

But I just can't seem to want to part with any decent deal I find so I don't think I'll be flipping anything. 

I'm curious to see what other feedback you get on this topic as well. And how a buy and hold investor is able to part with a flip deal when they know the numbers would work even better as a rental than a flip.....

As for the vacation rentals, you can clearly tell brandon has reached that next level on his investing. He's now got so much cash flow, he can afford to play a little monopoly with it and find something fun - even if it is a bit more risky than his typical bread and butter investments.   But there's nothing wrong with having a portfolio in podunk.   Just not as interesting as a couple of condos in florida and/or hawaii I guess. :-)

I think the trend for 2015 will be all about sub market specialization. What I mean by that is that the general US population used to move as one. i.e. market went up market went down by asset class across the US as a whole. Since 2005 this has not been the case. Increasing market volatility and asset class specialization is driven by three things: 1) Consumer demand, and 2)Banker options, 3) Regulatory climate.  

To the first point, areas such as downtown Denver, Houston, have lots of tourism demand, but an area like Dayton Ohio is better served by value add rehab. 

To the second point, wherever the banks "feel" the demand is is where they are more apt to lend. Low cost lending drives investor behavior. If you can get a 0 down 3.5% 30 year fixed to buy a rental that is much more attractive than 20%  down 15% interest fix and flip loan. So as banking loosens up investors will be driven to invest in product that the bank favors. 

to the last point, the regulatory climate has a large impact on investment strategy. For example, I won homes in Sedona, AZ. While this would be a GREAT market for Vacation rentals  the city has strong policies (and consequences) against short term rentals. On the other hand I have units in Puerto Rico where the government gives tax invectives fro condo  vacation rental in the way of only taxing 10% of my total income form the units.  These factors impact the overall strategy. 

To have success in 2015 I suggest starting by CLEARLY defining your goals and then evaluating the specific sub markets you are looking to invest in and drill down to a strategy that makes the highest and best use of that market. 

Lastly, no matter what strategy you use make sure you diversify. your portfolio should have various asset classes as well as geographical exposures, and EVERY deal you do needs to have three exit strategies or DONT DO IT. What I mean by this is your vacation rentals should also cash flow if they had to be long term rentals, and they should be purchased for a price that could be flipped for 5-10% under market if you needed to exit. 

My plan is buy and hold with the possibility of out of state investments. I had a talk with an investor yesterday that has made a TON of money on vacation rentals so I plan on exploring that option as well. I do have a condo that hopefully will close within the next 4-6 weeks and I do intend to flip that one because they only allow rental 4 months out of any 12 month period.

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@Michael Noto   

Thanks. Yea. I think my first rental purchase was in Sept 2008 so its been about 8 years now I think. It was 3 a year like clock work for the first 6 or so years. Then I went on this crazy run where its going at about a pace of 10 or so a year.

As for how I'm doing it. Its hard money. With the right hard money lender, you can borrow 100% of the purchase plus rehab and then only have to pay the points and closing costs out of pocket. But you also get to apply the property tax credit against that so it comes out even less than that. Between 3k to 8k per deal depending on the numbers.

Remember, the only way the lender does 100% is if your deal comes in at 70% LTV. Sometimes I'll go a little over that to continue to grow so thats why its been up to 8k per deal.

The key benefit there is that once I have that hard money loan for the full purchase plus rehab, I then only have to go to the banks for a rate/term refi to get out of the hard money loan. And sometimes, they'll let me tack on 1k or 2k too to help get a little bit of my money back as well.  

My goal every time is to get to as close to no money down as possible. When I first started, the hard money lender I was using then would let me roll in the purchase, rehab and points/closing costs. But their points were about double (8 instead of the 4 I'm paying now) and its hard to find deals at the price. Plus, now that I'm bringing in all rental income, I figure I can afford to use it to pay the points out of pocket anyway and save myself the money. The business is essentially feeding itself.

But its the one way I could find that allows me to continue to grow yet preserve my capital. And now that I've ramped up to this many houses with this income, the business can simply feed its own growth which is even better.

If anybody has a better solution to grow a portfolio without having a couple hundred grand in the bank, let me know. But, for me, this seemed to be the most logical solution. And its worked rather well considering what I had to start with and where I'm at now.

Not that I think I'm a big investor, thats for some of the companies out there that are really just incredible deal makers. I like to think of myself as a true mom-and-pop type investor. Just happen to use the power of OPM and time to grow my portfolio. But if someone like me can do it, believe me, anybody out there can - and probably better....

I knew absolutely nothing of construction (and still can't do anything) or homes or anything remotely connected to investing.

Mike H. Fantastic strategy of utilizing HMLs then conventional loans to get out of the contract with HMLs.. Is this strategy a well known strategy, or something unique? I'd love to hear more about it. I'm still a newbie to the site, but feel this strategy would work great to net positive cashflow.

When I first started, I was refinancing out of the HM loans into conventional. Then I hit a certain number (4) where it became much more difficult to get conventional. I still did a couple more but they were so onerous, I gave up. I think I have 8 conventional loans now. But everything I do now is refi into commercial (i.e. portfolio loans) with a handful of local banks.

And I'm constantly finding new financing. First Midwest Bank has a great HELOC option with some nice reates. I recently (as in 2 weeks ago) refi'd one of my existing loans into the HELOC so I could pull 20k out to help me continue to grow and pay down some other debt I incurred when I went on this crazy run.

As for whether its well known, I would assume so. For me, I did it out of necessity more than anything else.  If people aren't doing it this way, I have no idea how they're growing.  Putting down 25% plus paying the rehab costs for the houses in my price range would basically mean coming out of pocket 40k to 45k on every deal.

I'm guessing they're floating that money until a year or some time period where they can get a cash out refi with a bank. But I have never had enough money to float that money AND then qualify for the refi.  If I took 45k out of my bank, that would be the only deal I could do as I'd need to keep the rest of my reserves in the bank to qualify for the refi later on.

Instead, I keep all my money in the bank (well, almost all) this way and it makes it much easier to qualify for the loan. My reserves are in the 60k to 70k range at any given time. And I'm coming in to the bank asking for rate/term refi. Banks like to hear rate/term refi far more than "cash out".  Although they are getting more open to doing cash out refi's. 

In fact, I'm about to close out two cash out refi's (75% LTV) on two houses I recently completed the rehab on. So both of these are less than 6 months seasoning. And the bank was actually the one that asked me if I wanted to do cash out. I didn't even propose it.

Still, this strategy works great for preserving your capital so you can grow and so you can qualify for loans. There's obviously a cost to it (4 pts and the higher rate).  But remember, the HM rate is only meant to be temporary. So what are you really paying for a HM loan?

4 pts plus 12% interest (which is actually about 7% MORE than if it was a standard loan).

So on a 100k loan, you're paying 4k in points and, if you turn the rehab and refi around in 4 to 5 months, you're paying an additional 3k in interest.  But I also view that "additional interest" as being paid mostly by my tenant since I typically have a house rented in about 2 to 3 months of the closing.

So maybe an additional 1,500 total in interest.  5,500 total to use HM? At the end of the day, thats basically costing me about 30/month in profit per deal. But I'm able to add 10 houses in a year instead of 1.   So would you rather have 10 houses making 450/mo gross profit or 1 making 480?

Again, if the pace you want to go at is 1 houses every 2 years or so, I'd probably say don't bother with the hard money loans. You can wait for the seasoning and do a cash out refi to get your money back so you can do your next one the following year.  If, however, you want to grow a portfolio or even to go at a pace of 1 or 2 a year, then I don't know of a single thing that would come close to letting you do it other than this way - other than, say, partnerships or something along those lines.  Private money would be another.

But, for me, I just think its easier to find the deals and use the financing thats out there and the rules of the game, then to try to find money partners or private money.

Yes, I am using the same one these days. But only for convenience and because they tell me that they will fund ALL my deals. They even will tell me to get more. 

But there were 2 other ones I was using before and they were at 100% as well. One would even let me roll in the points and fees.

Are they easy to find? Not as easy as they should be. But I have to believe that there is one or more of these types of lenders in most areas.  I know that areas like texas and georgia have them for sure.

In my city, prices are up, so the buy and holds are not 'quite' as sweet as 18 months ago. I am doing more flips for 5-10k per, about 4-5 per year. The goal is to save that dough for more buy and holds. Returns on my buy and holds now are down to about 12%, used to be over 15% but the out of staters seem to be discovering our city and driving up prices. 

Originally posted by @Account Closed :

I want all you guys opinion. Are you going after more flips abundant short term cash or a steady passive income?

What are your 2015 goals?

Love gaining knowledge from you all.

Great questions Ardie,

When I initially started investing in Real Estate I was looking to buy, fix, flip and hold every 4th or 5th property.

As time has passed, my circumstances and strategies have changed.

At the end of the day, the end goal for most should be buy and hold as many as they can and as quickly as possible :)

Just my opinion.

Thanks and have a great day :)