All Forum Posts by: Johnny D.

I've maxed out my conventional loans, but when I had access to them, I was in a similar starting position as you based on the information given. As long as you always pay your bills on time, your credit score will decrease some at first but should still stay high enough to qualify for the best rates and terms with most lenders. 

For me, I could care less if my credit score is 730 or 830 as most lenders give the best terms if you have a 720 or above...although I have noticed some giving slightly better terms for 760s and above.

If you choose to do the traditional route of saving up for buy-and-hold properties in the beginning (this is what I did), all you really need to do is buy in your personal name and save up for the next down-payment while having enough reserves should something major breaks. The question then becomes how soon you can save up for your next down payment.

If you purchase enough properties this way, you should eventually build enough equity where you can either sell some properties or do cash-out refinances to free up enough capital to start doing BRRRR deals. This is definitely where better growth happens, and it is a good time to start looking at getting properties out of your name and in an LLC.

As to buying multiple properties in a year, this depends on how much income you are generating from a W2 job, other investments, or a combination of both. Most people buying multiple properties a year the traditional buy-and-hold route have built up enough capital to allow this. It takes more time if you don't have a strong starting point. It also helps if you are buying within a market with access to more affordable homes.

I will gladly take the extra headaches of additional calls from my property managers for now, although once someone has enough money that they can comfortably live their lifestyle however they want, I definitely understand removing as many headaches from one's life as possible. 

If you purchase a $100k property in cash that appreciates 3 percent a year while inflation goes up 3 percent, then you really didn't make any money, at least from an appreciation standpoint.  If you purchase the same $100k property with a mortgage with a 20% down payment ($20k), then your property appreciated $3k from a $20k investment which means you had a 15% return on the cash invested and outpaced inflation by 12%. 

If the same property cash flows $800 per month ($9,600 per year) without a mortgage then it returned 9.6% compared to the $100k investment.  If it only cash flows $300 per month ($3,600 per year) with a mortgage then it returned 18% compared to the $20k cash investment.

If you purchased the property in cash, you don't benefit from mortgage pay down.  Meanwhile, a 30 year mortgage should return about 6% in mortgage pay down each year compared to a 20% cash investment.

These are the main reasons why purchasing with leverage is so much better.

The BRRR strategy is much more cost efficient long-term than flips due to the tax savings.

@Jessa Batylin It definitely depends on your goals. I personally prefer using a HELOC for the purchase and rehab as HELOC's usually have no to very little closing costs and you can borrow the exact amount you need exactly when you need it. I then recommend doing a cash out refi on the new investment property on the refinance portion of BRRR to pay off the HELOC which would allow you to draw against the HELOC again during the repeat portion of BRRR while once again avoiding closing costs.

If you do a cash out refi of your primary to fund the purchase and rehab, you likely will have a large amount of closing costs, and since it could take a month or more to be approved, you likely wouldn't be able to take out the exact amount needed which means you will be paying extra closing costs and additional monthly interest charge that could have been avoided with a HELOC. For example, say you do a cash out refi for $300k, and it takes you another couple months to find a great deal that only requires $200k between the purchase and rehab. With a HELOC, you could simply take out the $200k right before the purchase, but with a cash out refi you'd had already withdrawn $300k meaning you paid origination fees on an extra $100k that wasn't needed and you have interest charges for an extra $100k over the two months while you were waiting.

I personally prefer not using hard money lenders as I don't want to be stuck with high interest amounts if I could avoid them with a HELOC, but I know many other investors who use them regularly without problems. The key is being spot on with your ARV estimates and avoiding leaving money in the deal. HELOCs are a million times better than hard money lenders if you aren't able to get the entire purchase + rehab amount back out as the rates are much lower.

@Mike Kedziora First, I'd recommend comparing the monthly cashflow you currently receive with the opportunity cost of what you would receive if you sold it and then reinvested the profits.  With $700 per month you are making $8,400 a year which is 12% of $70k.  Therefore, the first question is whether you would be able to comfortably reinvest $70k in an investment plan that provides more than a 12 percent return each year.  If you can, then it might make more sense to sell it.  If you can't, it would make more sense to rent it out.  

If you don't feel comfortable with being able to get more than a 12% return, I would recommend what several others have mentioned in doing either a cash out refinance or HELOC to take out as much cash as possible and reinvest that amount, and if possible, you'd want to do this while it is still your primary property. If you do it this way, instead of needing a 12% interest for it to be a better deal, you merely need to get a higher return on your investment than the additional loan cost which should be fairly easy to do if investing in more cash flowing properties.

In reality, you have three solid options:

Option 1: Sell and reinvest the earnings for as much as possible but definitely more than a 12% return

Option 2: Rent at a 12% return of the potential profit amount if you were to sell

Option 3 (the best option in my opinion): Do a HELOC or cash out refi for as much as possible and reinvest that money for an amount greater than the loan cost

@Lexie De Stefano

This would depend greatly on your plan of action. First, I am assuming neither of the HELOCs that you are describing are fixed rates but are both variable rates (one with a 5 year draw period at a lower interest rate than the one with a 10 year draw period at a higher rate) since it is rare to ever find a HELOC with a fixed rate other than only for a short initial teaser period if offered, but those normally only last for 6 or 12 months.

My recommendation, and the strategy most people who use the strategy you are describing for BRRRRs, is to use the HELOC funds to buy and rehab the new property and after getting a renter in place, then do a cash out refinance on the new investment property to pay off the HELOC debt before repeating the process on a new BRRRR property. If you utilize this strategy, the length of the HELOC's draw period should normally not matter (except as described in my next paragraph) as you will be paying it off after each cash out refinance (assuming you are able to get all of your money back out of the deal!) which would make the lower interest rate for the shorter draw period normally the better option. In my mind, the longer draw period at a higher rate would normally only be a better option in the case in which you are planning to slowly pay off the HELOC on your own and want to avoid paying more than interest only for as long as possible.

The one thing you mentioned that would change my recommended action is that you mentioned to keep in mind that house #1 would no longer be my primary residence. If that is the case, you would want to talk to the HELOC lenders to see if you can still draw against it if this happens, as I know my HELOC lender on my primary residence required me to give permission to my home insurance agency to notify them if there were any changes to the policy in the future such as switching from a regular homeowners policy to a landlord policy as they would no longer let me draw against it in the future should it no longer be my primary residence. Depending on their response, this could greatly hinder your plan. If you are able to continue to draw against the HELOC in this situation, then the longer draw period at the higher rate would likely be the better option since you'd still be able to draw against it for an extra 5 years.

@Chris C. I'm not sure what rates you are seeing and what lenders you are talking to, but if you haven't already done so, I recommend making a list of all of the small, local banks and credit unions in your area and calling each of them (should take about ten to fifteen minutes per call) to discuss their rates and closing costs.  This could take a bit of time to call all of them, but it can save many thousands of dollars between closing costs and mortgage payments over time.  I've bought houses in many locations, and I've yet to find an area that didn't have at least one local bank or credit union with great rates, but the key is finding who that lender is for your area.  If you are reaching out to large banks, the rates will often be a fair bit higher.

Great question.  If you are just starting out and still have a full time job, turnkeys are often the best option.  You won't make as much money long-term with turnkey properties than properties with high forced appreciation potential, but they tend to be more passive (nothing in real estate is truly passive) and can help you learn the ins and outs of real estate while you gain more skills and knowledge.  As mentioned by others, one of the most important things with turnkeys, as well as anything in real estate, is whether the numbers work.  Ideally, this would involve a high cash on cash return while also being in a safe neighborhood.  Just keep in mind, it is much harder to find good deals with turnkey properties, particularly in a seller's market.  

On your question with whether there has been any success with turnkeys, they absolutely have been.  Plenty of people buy nothing but turnkeys and live very comfortable lifestyles.  They are great when properties are appreciating, but keep in mind they don't provide much cushion when properties depreciate.  Also, it takes a very long time to acquire them as you have to constantly keep saving up for the next down payment.  For example, the most recent turnkey that I have held for at least a year earned 20% cash on cash return for the last 12 months, 6% in principal paydown, and 37% in appreciation (it would normally be much less than this, but last year was obviously a crazy year). 

Even though those numbers look great compared to an 8-10% profit in the stock market, If you are able to BRRRR a property to where you get most or all of your invested cash back out, the profit is infinitely higher. Here is the difference why BRRRR is much better than turnkeys - if I don't refinance or sell the turnkey property I mentioned, it would take me five years to buy another property if that was my only savings. With a BRRRR property, I am able to buy another property in months instead years, and thus, maximizing the profits on multiple properties much more efficiently.

The cash on cash return is done by dividing the total cash tied up within the investment by the cash income earned for the first year. If the BRRRR process goes how it is meant to go, you should receive all of your invested cash back once you refinance making the math pointless as a zero should be in the numerator portion of the formula and zero divided by anything will always result in zero. If the appraisal comes in low and leaves cash tied up, then you can calculate cash on cash return.

If the BRRRR goes the way it is meant to go, there should be no reason to measure cash on cash return. The key is for it to still cashflow, and preferably to cashflow for as much as possible.

If they currently have a lease in place, you would normally need their lease to expire before increasing their rent.  If their lease is from month to month, you would need to know how much notice (usually 30-60 days) you have to give for your state or community before increasing the rent, and I am hoping you are in an area that doesn't have any limitations on how much you can increase rent.  If they are all on month to month leases, I'd recommend increasing rent for one tenet at a time so that you don't run the risk of them all leaving at once.  

Every tenet is different.  Some will be happy with the renovations taking place, and some will just want things (particularly the rent cost) to stay the same no matter what.  If the first tenant decides to move out, I'd recommend finding a new tenant to replace them at the price point you are seeking (or even a little higher) prior to increasing the 2nd person's rent as this will tell you whether your rent increase is justified by the market.

In my personal experience, if the rent increase is reasonable and the current rent price is below market, most tenants end up staying.  However, every market is different and if there are alternative, cheaper options available, some will leave.  The good thing is once they leave you can replace them with tenants vetted by your standards as there is no telling what standards the previous owner used.  To me, I'd rather have tenants staying an average of 3-5 years at a fair market price than long-term renters below market price, but every landlord is different.