All Forum Posts by: Axel Meierhoefer

@Ellie Narie I believe what you are struggling with is a matter of perspective.

Here is what I suspect you are contemplating: I have the opportunity to buy a house that would be a good rental property. I don't have enough money to put a 20% down payment into a traditional investment mortgage. If I could buy the house as my primary residence, I only need to put 5% down, live there for maybe 6 months and 1 day, then refi it rent it out and start making cash flow. I assume the equity will be such that I don't have to add any more money into the property, just own it as an investment.

I believe you are using the perspective of a buyer who assumes the traditional approach is the only way to go. 

Just hypothetically imagine a rental property that you have already owned for a few years and you have a mortgage balance of $150K. You bought the property for $165K. You believe the current value is at least 25% higher. You estimate you could sell it for about $210K right now. You go to a lender and tell them you want to refi the house. They send an appraiser and it turns out you were right. It appraises for $210K. The bank is willing to give you 80% of the appraised value. That means you will get $168K. As part of the refi, you pay off the old $150K mortgage and keep $18K in your pocket. That's a very typical normal refi for an investment property.

Now take your deal. If you are right that it already has 25% equity and you can show (using Rentometer or similar tools) that you will make a good amount of rent from the property (recommended 0.7% of appraised value for monthly rent), you can get a performance/no-doc mortgage right away. These mortgages/loans look at the value and the reasonably expected lease/rent and if the ratio is sufficient your own documented income is not the driving factor to give you the loan. Same as above your leader would send the appraiser, the value including your expected 25% equity is confirmed and you get 80% of that amount as your loan. Sounds to me like you can pay the seller with that money and start renting right away.

Instead of buying it as your residence and then trying to get out as fast as possible, you could change your perspective and turn it into an investment purchase from the start using a different loan product. That way the minimum occupancy for FHA does not even apply and you can make money from the property much sooner.

@Karrie Jeffries Hi Karrie. Welcome to BP. I am retired Air Force and started my investing in real estate while still on active duty. One of my longest Navy friends is an instructor in Whidbey Island.

I agree with most of what's already been suggested. After I retired I developed a plan to help other people both in the military and outside to follow my OOS TK SFR strategy (Out-Of-State Turnkey Single Family Residence) to reach what I call the Time Freedom Point. I call the steps to get there the IDEAL Investor Journey and would be happy to share it with you.

You are on the right track regarding your VA loan but you would want to apply a small twist. In addition, I recommend the "Hensel & Gretel" approach while on active duty to build a foundation. You can supplement with more REI using available funds and when you finish your commission, you can complete the portfolio and reach your Time freedom Point.

I'll be happy to discuss this in more detail with you. Feel free to DM to set up a call.

@Marco Acosta I am curious: Are you a contractor or have experience flipping houses? Tsipora is right about the funding as one of the options you have. You could also look into 203K loans, although you would need to put some of your money in for that to work. ON the other hand it covers the construction costs, so it would be pretty much the same but probably cheaper than HML.

I am worried for you that you might not have construction experience and you said you are new to REI. The goal to only do this deal to sell with an expected profit that can quickly evaporate is ambitious and appears risky to me. You might also check what the insurance cost for a property like this will be or if it can even be insured. Keep in mind that people in New Orleans are probably extremely aware of the flood risk and if the property is uninsurable or only for extreme prices, you might have a harder time than you expect to find a buyer.

Finally, it is a little surprising that a 20 year old house needs this much repair. You should ask yourself why that is. I realize there could be 1000 reasons, but it is still pretty surprising.

Bottom line, it does not appears to be the greatest deal at first glance. Please do a little exercise that goes like this: How much of the $55K is the cost for labor and how much is for materials? For the time of labor (if you assigned any in your original $55K), apply a reasonable hourly rate and multiply by the number of hours. if you just discovered that the $55K does not include your labor, estimate how much that would be in hours and then multiply with a reasonable hourly rate (most people think their time is worth about $40 - $50/hour). Check if your numbers are still working out to $55K. If not and you are getting closer and closer to your total expected asking/sales price you can see if this is still a good deal. Then think about the risk that something pops up during renovation that you did not anticipate. How much is that for your total construction budget? some people calculate 15%, some 20%, some 25%. You can best estimate this yourself and add that risk factor to your construction budget.

I provide that suggested calculation because I have been offered and asked about a lot of potential flips. Many times when the calculation is done in detail as described above it turns out that basically nothing can go wrong and  our own hourly rate has to remain close to minimum wage to make the deal work at all. I am not saying this is the case here, but when you said you are new to real estate I began to wonder if you calculated this all the way.

I am not a construction expert but for all the turnkey investments I make I always review the renovation plans of the TK provider and have seen many many calculations. For some reason, their estimates are almost always higher than what flippers tell me they need for the same work. Feel free to DM if you like to discuss further

@Travis Hagan Hi Travis

I am happy to help. I am investing in a project in Memphis myself right now but can also support you beyond that. PLease DM me and we can arrange a call to dive further into the details.

@Taylor L. Thanks for the assist :-)

@Ethan M. I agree with a lot of what has been posted here and also agree that I would not buy properties that don't at least break even or have a little positive cash flow.

There is a balance between property quality and cash flow, where quality drives the purchase price. It's not just the building but all the additional aspects of crime, migration, economic strength, schools, etc.

If you follow the foundation of "minimum break-even" as a starting point the strategy comes down to what your goals are.

I and most of my mentoring clients aim for a certain monthly passive income within the residential real estate financing frame (SFR - 4-plex). Ideally, we love newly build properties that meet the foundational cash flow requirement. We currently find these in desirable coastal markets as well as established markets with a good rent level history (i.e. Memphis).

If your goal is to create passive income then you will focus on that aspect. If your goal is to benefit from appreciation at the point of sale (x years after purchase), you focus on that. In our strategy, we don't plan to sell, so the appreciation is nice and can lead to lines of credit to provide down payment money for additional investment, but it's not a focus.

One word about that $1million bay area example. I would always prefer the 10x $100K houses under professional property management (just to counter the kitchen and toilet argument) because it is a form of risk mitigation. People always make it sound like a house in the bay area or Seattle will never be empty. If your $1 million house costs you $6k - $7K to maintain (mortgage, taxes, insurance, etc) and your tenants move out leaving a mess, you pay for those costs out of pocket until things are fixed and a new tenant started paying rent. There is no scenario where 10 tenants in 10 houses will move out simultaneously so you will drastically reduce risk by having multiple smaller properties, everything else being equal. 

I also loved to read that these $1million houses used to be $100K - $150K. You never know which area/location will get hot next, but you can settle on a sound strategy, stick with it and create your portfolio to reach your goals. That's what we do.

I am working with a lot of introverted and I believe one way to be successful in real estate investing (and other areas of life where extroverts dominate), is to find or have a mentor you trust. Being an introvert is not a matter of not knowing enough but a matter of confidence and forceful articulation.
As a mentor on the back pocket of the introvert, it's basically like two people engaging others, a deal, a conversation, etc.
That increase in confidence and subsequently conviction helps the introvert to succeed and slowly gain more individual confidence through practical experiences.
It has worked for me and I am now paying it forward by mentoring and helping others

@Blake Ramsey I am originally from Germany and have often marveled about the pioneering spirit my American friends and a lot of people on BP have. For myself, what has worked well and keeps working well is the learning approach that's applied for all traits in Germany to this day. Here is the sequence:

1. You get fascinated by a topic and decide you want to spend a considerable amount of time exploring it.

2. You start researching and reading about it (similar to what was described in this thread for a student research project).

3. You decide you want to be an apprentice who learns in theory and practice from a master/expert/mentor.

4. You keep learning and graduate from apprentice level to journeyman level (in German "Geselle"). You have learned a lot and gained expertise so you can show some of what you have done to others.

5. You graduate from Journeyman level to master/expert/coach level. Your former master has become a strategic advisor and confidant and you can now help others who post on BP: Hey everyone, my name is Blake and I’m an engineering student based in Springfield, Mo. I’m looking into investing in my first property this year (buy-and-hold sfr). 

As others have pointed out, there is a big difference in investing locally versus 'Out-of-State', which is what I do and mentor others to do. You already decided on "SFR buy and hold". Now you need to determine if you want to do that locally or OOS and then find someone who teaches exactly that strategy and helps you to achieve your goals.

I do that for folks who contact me and we determine after a 1x1 conversation if the strategy and goals align. 

@Account Closed I saw that you wrote about a second home loan. Maybe you already have the financing in place, but if not, pay close attention to the change in G-Fee rules that will take place officially April 1st, 2022, but some lenders anticipate that rates will already start increasing by the end of Feb. I hope you will get your loan funded before these changes hit.

@Account Closed I also agree with the suggestions given here so far. The location of the turnkey has to do with what you prefer in property types and what you can afford. Some of the more desirable locations that draw a lot of new people have also increased in value a lot, making it harder to get good performance out of them. That said, I found a deal in Florida that allows me and my mentoring community to benefit both from appreciation and cash flow.

Your point about "I rather save the money to buy the property" worries me a little. Learning how impactful leverage is will be an important part of your journey. If you ever want to discuss this part of the "addictive world of REI", please feel free to DM me.

In a nutshell:

You buy a $150K house in 2020 and put 20%/$30K down payment in. The property appreciated in value by 10%. That's $15K or 50% appreciation on your money.

I am not saying that you would sell that house to get that money, or refi it, but imagine you had paid the full $150K out of pocket?

Even more dramatic, imagine you used $150K and bought 5 houses, $150K each and they appreciated 10%. That's $75K from those 5 houses (theoretically) versus $15K from the one house you bought cash.

For myself and for the people that reach out to me, we are all working towards a point I call the "Time Freedom Point" where our passive income from cash flow exceeds our living expenses. To do that we don't sell our properties but might at some point get either a HELOC or refi to get equity out. So the point is not to realize the appreciation but to see how much benefit leverage can give you.

If you now add in the increasing inflation we all experience the benefits of leverage get even bigger.

Originally posted by @Noelle B.:

@Axel MeierhoeferI appreciate the thoughtful response. I haven't thought about a build to rent project. Is that pricey these days and potentially risky with the high cost of materials and supply chain issues? Do you currently do this? and if so, where? Looks like you're from SoCal - my husband is from San Diego and I lived there for several years :) talk about a crazy market! 

 @Noelle Yes, I am doing it myself and several of the folks who have asked me for my input are doing it as well. The projects are in Florida, which is a state, together with Texas, that has a huge influx of people. That's why I am convinced that the supply shortage of housing will not be reduced anytime soon. In the deal we are investing in, the difference to most other deals is the ability to benefit from the difference in the building costs and the actual value at the point of completion.

If you think of the traditional turnkey model, you will see that the TK provider will find the "ugly duckling in a nice B class neighborhood", let's say for $40K, put $60K into it to renovate it to a really nice standard and then sell it to you and me for $135K. The idea is that the property appraises at about $135K and then generates cash flow for the investor. 

The TK provider is happy to make the $35K profit and have an investor under contract for property management (probably making about 8-10% of the rent). The renovation team is happy (regardless of whether it was internal to the TK provider or external) because they completed a project and got paid, and in most cases, the investor is happy because you got into a reasonably priced, freshly renovated house that performs at about .8% -.9% and provides cash flow. That's what most investors want to reach what I call "The Time Freedom Point", where you no longer have to exchange time for money and can use your passive income from your investments to cover all your costs of living. That's what they want.

People who know me realize that I always try to find turnkey solutions. I have only seen it possible in build to rent, where you can actually benefit from the appreciation between construction and leasing. Again the builder is happy as they build a house under contract for the asking price. I am happy to get the house for that amount and then make the first profit when the appraisal comes in and I refi using that number. The turnkey project operator is happy because they will have a long-term lease to manage that will have reasonably no maintenance issues or other significant issues as long as they find good dependably paying tenants.

Win-win-win if you ask me.

The only way I know to do the same on your own is if you are a flipper or construction expert, but I don't want all that work and all those headaches - therefore I rather do Turnkey.

As you can imagine there is more to it than this, but it's a really marvelous opportunity. Feel free to DM me if you like to discuss this in more detail.