All Forum Posts by: Lucas Mills

To your original question, one example I know about is Kevin Bupp.   He purposely headed into the down market with a large portfolio of buy and hold and lost it all anyway

https://www.biggerpockets.com/blogs/4430/53887-les...

"Leading up to the crash, Kevin and the investment group wanted to mitigate their risk, so they committed to purchase SFR rental properties for no more than 65% of market value. When the financial crisis occurred, not only did property values plummet, but the rental market crashed as well. Homebuilders who had built brand new homes were unable to sell, so they were forced to hold on to them and rent them out. Unfortunately, these brand new properties were renting for the same price as the 20 to 30 year old homes Kevin and the investment group owned. As a result, they ended up giving 90% of their properties back to the banks."

I thought it was an interesting lesson, because if you listen to a lot of people they think buy and hold would be relatively immune from a downturn if you just hold through the valley and don't take the paper loss.   But his story proves that rent can go down, which can cause the cash flow to turn negative.   It is an interesting, if singular, data point.

I know last 13 years I know no seller will sign up for lease-option..... This is northern CA.

The reason is simple the buyer defaults the seller sinks with the buyer together. If there is lease option that means it is way overpriced.

Bottom line-no loan docs. You are a gardener. At flea market a fast talking loan/realtor talked you into buying a rental w/ no down, interest only 3 years loan. How much you make? $40K a year. No, the appls will show $150K a year. Sign it here. Congratulations. You want 3rd home? Most failed during the interest rate increase with ARM, interest only(most risky) if borrowers have no income. These are schemes created by MBA students to bring the banking industry down.

Since then all applications have been carefully scrutinized. Loan agents now need a license. Before anyone not in jail can be one. Wall Street says a recession is ripe in 18 months or so.  But the massive default is unlikely to repeat.  

Advice: Do not over extend yourself. Have 6 months reserve or have HELOC if you are out of a job or tenants can not pay.

There is a guy in Silicon Valley who was let go went shot his manager, CEO and HR. "Oh, my God my 4 rentals, and ARM mortgage due next month? Had he been less greedy he would do fine. This is pre-medidated murder over greed. 3 lives. If you try 0-low down getting multiple rental it is same as march to a repeat. Highly discouraged. Home prices are unlikely to be much higher. It is close to the apex so you can buy it high and count negative equity and kick yourself.

 Ageed. That is *exactly* why buying with owner financing and selling to Tenant Buyers makes so much sense. 

For one, you aren't using up 20% of your capital to buy the house. The seller has already done that for you.

Two, when you take over their loan, and you sell to a tenant buyer, you are putting the $10,000 to $25,000 the Tenant Buyer gives you into the bank as reserves, You are actually in a better position.

Three, there are now three people who have an interest in making sure that loan gets paid. The Tenant Buyer has a very real interest. He will lose his down if he defaults. You have a real interest because it is your investment property and your responsibility to make sure it gets paid. The original seller has an interest because they want the owner financing payment. Don't underestimate the value of having multiple people wanting things to be successful. 

Fourth, you are qualifying the Tenant Buyer using Dodd-Frank rules, so you have less to worry about them defaulting.

@Lucas Mills Check out The Big Short either as a book or the movie, both were excellent.  People weren't "suddenly unable to pay"  they were NEVER able to pay from day 1.  

You might ask yourself, "Why would someone be able to borrow hundreds of thousands of dollars without being able to ever make a single payment"  That would be a great question! 

So, from an objective perspective, this thread seems to have gotten off track.  Maybe we can all take a step back and put some perspective on what Lucas is proposing...

For starters, he isn't "flipping" these properties himself, so he's not actually doing out of state property flips.  He is apparently lending his money in a Gap Financing position to this woman (or her associates) from the sound of it.  So we're assuming she's going to lever up as much as she can with a first position loan and then utilizing Lucas' $30K to gap the down payment and/or repairs.  Does that sound about right @Lucas Mills?

If that is the case, then okay, she is offering you what appears to be solid 'pref' and a taste of the profits, which is standard for a passive gap lender. It's also not unusual for flippers doing deals in volume to use Gap Lenders and giving those lenders sizable returns for their risky investment. These types of JV structures happen between flippers and lenders all the time...but it's important to know that is exactly what we're talking about here, because if it's anything else, then yes, it would raise many concerns.

And even if this IS what we are talking about, then you're going to want to feel extremely comfortable with her as a flipper, and more specifically, as your partner., because that's really what she is here.  This is a Joint Venture of sorts, which makes you partners, especially since you are participating in the profit.

Strongly suggest you take that four hour drive, meet her in person, meet the entire team, see her previous flips (numbers on those flips) she has completed, and know exactly what you are getting yourself into.  AND make sure you collateralize your money appropriately if you ultimately decide to move forward with her.

Best of luck!

@Lucas Mills I think you're missing the point. It's an extrapolation of the expected returns. This woman is telling you that she has some system for giving you a 25% ROI and you can roll this investment over every couple of months. *If* this woman is truly successful at this, has a system, and your posit is correct (there is a point of diminishing returns) then she doesn't need your money. And she certainly wouldn't give an annualized ROI for 100% (your $30K -> $60K example) in exchange for that money. That's what doesn't make sense. You have two lanes:

1.) So, if there a finite supply of these $50K homes and this partner has a team, is successful, etc. then she doesn't need your money.  She would have her own money in the deals and would have local investors lined up to get an annualized 100% return on their money.  

2.) If there isn't a finite supply of homes (and hence can use more capital) then you get into my hyperbolic example of returning nearly $2 million at the end of the 6th year.  Heck, you can cut the return in 1/2 and say that you'll have $900K at the end of 6 years and it still sounds hyperbolically irrational.

Maybe I'm wrong, maybe this is the deal of the century, how the heck would I know.  But just think this through:  If someone out-of-state called you on the phone...tonight...right now...and told you about an out-of-state investment opportunity that was (using as much of your posted data as possible):

a.) A "great, passive way to quickly gain capital"

b.) Could give you a 25% ROI in a couple of months

c.) Would allow you to reinvest your capital to get a 100% compounded ROI in 12 months

What would you do?  Would you...  

i.) Ask to hear more.

ii.) Sign a check and mail it the next day.

iii.) Hang up on them but if it sounds too good to be true...then...you know the rest.

Anyway, I don't know if this particular deal is good or bad.  Go for it if you believe in it.  All I'm saying is that it (on it's face) just sounds like an American Greed plotline...