All Forum Posts by: Ryan Shaw

Line item budgets from a GC would be the bare minimum in my opinion.  You should get line item budgets from each subcontractor as well, especially if you yourself are acting as the GC.  

A solid 10-15% contingency reserve that you DO NOT tell any of the contractors about is a must.  If they know you have extra cash allocated to the project they are more likely to come back to you with their hand out at the first opportunity.  Don't let the GC control the contingency fund, unless that GC is you.  If you get everyone signed up of a project that everyone agrees is to be completed for no more than say $20k, you should have several extra thousand dollars on hand to bail out the inevitable problem(s).  

In terms of getting fast and accurate pricing, nothing beats being able to run the numbers yourself.  Try and build up a cheat sheet that applies to your target market.  If your typical kitchen costs $15k, know that and pencil it in.  This can be done more accurately as your experience grows, especially if you develop a "standard" model that you can repeat on each project, i.e. same cabinets, same appliances, etc.

Whether or not you can successfully refinance the property is completely dependent on finding a lender willing to do the deal.  You should definitely have someone lined up who knows your numbers and is on board with your plan, even if it does end up taking several months or longer for the property to season before they'll do the refi.

On the surface the numbers look workable in that you meet the 1% rule with the purchase price (though not the ARV, assuming it would also be around $300k, which is admittedly less important from a brrrr perspective) and could conceivably get all your money out with a clean refi at a realistic LTV ratio.

Is the property listed on the MLS? If so I'd be wary of why an apparently rental ready property advertised on the MLS hasn't sold in 30 seconds flat when priced at 50% ARV.

Have you lined up a financing plan for the initial purchase?  Assuming you'd need about 20% down, that 25k personal loan won't get you in the door by itself, and you'll definitely need yet more cash on hand after closing to make sure everything gets rental ready and to handle the inevitable repairs/vacancies.  Round figures assuming 20% down on 150k, I'd say you should have your hands on at least 40k in liquid funds to pull the trigger.

As inglorious as it sounds, until you have the necessary cash on hand, the best (and realistically only) thing to do is sit and wait while you build your bank roll.  If you jump in the second you have just enough for the down payment, you'll risk going belly up at the first bump in the road and you certainly can't count of the refinance until it's said and done. 

To restate a post form a different thread, you can sometimes get as big a boost (or bigger) to you effective monthly cash flow by paying off debt you already have like car or student loans.  Taking out a new loan in order to make the down payment on yet another loan is a slippery slope if you don't read lightly.

Cody,

My vote is for knocking out the student loans and car payment first before building the brrrr bankroll. 

That's exactly the place that my wife and I are in right now. We actually have remarkably similar numbers, i.e. about 50k in consumer debt and two properties, including our personal residence,with minimal equity. 

My reasoning is that by reducing our mandatory monthly payments, our life gets more flexible. Killing off a $500/mo truck payment feels very similar to bringing an investment property online that cash flows $500. 

Daaimah,

I think you commitment at an early age is to be wholeheartedly commended.  The earlier you can complete the penny pinching, self-taught education and networking necessary to begin investing from scratch, the better.  

Best of luck.

Amy,

The HELOC has to get paid every month regardless of your cash flow because it's a loan that's secured by your primary residence (thus the ulcer). It does therefore get paid back eventually, according to whatever terms you agreed to. Ideally you can scrape together enough money to pay the HELOC without any help from your rental properties if you have to. If you're like me some examples with numbers will help to illustrate the point.

Lets say you do a HELOC or cash out refi on your house and get $70,000 dollars cash to invest. You then go buy a property for $60,000 and put $10,000 into it for an ARV of $100,000 (sounds simple but that's actually the hardest part - finding the right deal). You can then refinance the investment property at 70% LTV (this transaction is completely separate from your original HELOC/refi on your personal residence) and get your $70,000 back out. This money is then free to be invested in another rental. Make sure you have identified a lender who will be able to do this cash out refi before you commit to this strategy

Throughout this process you'd have to be making monthly payments on the HELOC/refi loan. You can think of this cost as an increase to the mortgage payment you make each month for your personal residence or you can consider it a "business" expense and try to fund it with a portion of your rental property cash flow. At that point is just a personal accounting preference.

After one, two or fifty rental properties, you should still have your $70,000 thanks to the latest rental property refinance. Once you're done acquiring properties, you can simply take the cash and kill off the balance of your HELOC/refi loan, possibly with a good bit of cash left over. Once you do that all the loans are either paid off or covered by cash flowing rentals (at least that's the theory).

For me the SFR (single family residence) vs multi debate is trumped by the quality of the deal(s) that you find. If you have a great opportunity of a triplex, do it. If the next property is a SFR, that's just as good. If the math makes sense and you're confident that you can get it rented quickly to QUALITY tenants, then go for it. As a counter to your neighbors point, it's generally easier to sell SFRs at retail prices once it comes time to cash out. There's a larger pool of buyers for SFRs. Fred is right in that multi-family spreads your vacancy risk out over more tenants but it only takes one great tenant to get an SFR locked down for years. With multi-family you'll have to face turnover/vacancy more frequently.

If my only major assest to leverage for real estate investing was a large pool of equity in my personal home, I'd look into the following:

- Can I sell my current residence, buy something less expensive and pocket the tax free gain for use with investing? In this strategy, there is no HELOC or refi loan to worry about

- Can I sell my current residence and buy a multifamily to "house hack" by moving into one of the units? This can allow you to but an otherwise unaffordable multi-family unit thanks to owner financing if it's 4 units or less

- Can I get a HELOC and/or cash out refi and use the money to pay down my other personal debts (which are potentially at a higher interest rate) and thus free up more of my regular monthly income (assuming you have a w2 job) to build a cash bankroll over time

The last strategy of paying down other debts first is what I'm personally doing and something that I consider to be good financial discipline.  By reducing my effective cost of living, I can maximize my ability to absorb setbacks in my real estate investing.  I'm ok driving a car that's 10 years old and having a TV that's not Ultra HD when it means that every month I can put thousands of unused dollars in the bank.  In the end it doesn't matter where it comes from, cash is still king.

As someone who works as a commercial GC for my day job, I'd say it's certainly possible to substitute yourself as the GC.  The most critical part is finding the correct subcontractors to make your GC role successful.  

The podcasts have mentioned several times that it's a good idea to show up at your local Home Depot and/or Lowe's at 6am and see which contractors are there.  These guys are typically doing real jobs and are actually active in doing work (as opposed to guys you give bad estimates and/or never show up).  Get some business cards printed up and hand them out as you see fit.

Be slow to hire and quick to fire.  Ask for pictures of recently completed work and/or tour current jobsites if possible.  The highest quality guys have nothing to hide.

Always get quotes in writing and clarify the scope of work to an agonizing level of detail.  Even the best subs can't read your mind.

Require a release of liens before issuing payment, and never pay in cash.

As far as leaving things to the professionals, I agree when it comes to work that requires a trade license (electrical, plumbing, HVAC) but tend to lean more towards DIY on the remainder (flooring, painting, etc.) because of the sincere cost savings and "on the job" education.  Nothing beats being able to call a sub out on a BS quote because you know better through your own experience.

Phil,

My wife and I did the same a Pari in that we rented out our first residence (not paid off) two years after we purchased it when we moved to a new home.  This was our first and currently only exposure to real estate investing and being a landlord.  Some additional thoughts to consider that you may already know but which I discovered in the course of doing this myself:

- From an income tax perspective, if you sell a home that you've lived in for two of the last 5 years, any profits you realize are tax free, up to I believe $250k if single and $500k if married.  Just something to consider if you want to rent the house out for 2-3 years and then sell without capital gains taxes.

- You typically can not count the rental income from your first house towards your debt-to-income ratio for calculating what you can afford on the second house (assuming you don't have prior experience as a landlord). Obviously if you do a HELOC or refi to buy in cash this doesn't matter.

- Do whatever you can to get the best tenant(s) possible.  This becomes all the more critical as you increase the distance between the two properties assuming you'll self manage.  We've been landlords for 10 months now and have had exactly zero maintenance / complaint calls.  This is a combination of having a well kept property (no differed maintenance) and sincere tenant screening.  If you're on the fence about doing preventative maintenance to your house before moving, I'd lean towards bulletproofing your property.  Also don't be afraid to actually call references and collect an application fee that pays for a background check/credit report.

"I get that finding a house at 75% of ARV is hard, so why shouldn't I use what I learned from my wholesaling course and direct market to motivated sellers? Probate, absentees, Junkers - all houses with high equity..."

I think you've hit on a potentially good compromise here. You could take money out via the HELOC, set aside say 5-10k to do direct marketing (budget perhaps 1k per month) and use the leads you generate to find the best deals for you own personal investments. There's nothing forcing you to wholesale the leads you generate. Really it's not too hard to imagine that you'd find a deal that was 10k better than whatever you'd find otherwise, thus making back you direct marking investment. Obviously you could then wholesale your additional leads and or buy multiple properties depending on your strategy.

As you say the trick is to find the right properties that give you the ARV needed to cash out properly. However, this quality can actually be independent of a properties ability to cash flow (obviously getting both a good ARV ratio for the refi and good cashflow is the goal) so be sure to confirm that the market rents will cover your long term costs (i.e. a loan for 70% ARV, plus taxes, insurance and everything else). It doesn't do you any good to get all your money back out if the property can't be rented profitably.

To attempt to answer part of your initial post, once you've gotten the HELOC on your current home, you can do whatever you want with the money. If you happen to buy a home free and clear with that cash, that's totally fine. You could then take the property you own free and clear and get a mortgage that will hopefully (if you've done your homework correctly) pay off the HELOC and/or fund your next property.

Basically it takes a wad of cash to keep the buy, renovate, rent, refinance, repeat train going.  That cash has to come from somewhere.  If you don't have it in a liquid form, you'll have to have some kind of loan on your books at all times in order to keep the money in your hands.  

The most simplistic strategy would be to have the original HELOC get you property #1 which is refinanced to get property #2, which is refinanced to get property #3, etc. The monthly payments on the HELOC would be your cost for maintaining access to the bankroll of funds.

As a hands on individual who lives at the outer edge of a major metropolitan area, I'm curious if investors from the "big city" who are looking for more affordable markets would find benefit in the assistance of a fellow investor native to the area (to help vet properties and/or act as a property manager).  I'm sure the case by case answer to that question will be "it depends" but it seems like a good opportunity for someone with a larger investment capacity to find a partner that could bring something to the table other than initial capital.  If nothing else, it would save them from making a multi-hour round trip to visit a dud property.  

Is there a term for this kind of relationship?  Is it common/discussed on BP frequently? How would two such persons go about connecting?

Thanks to all for the warm welcome.  It's certainly true that price points eventually come down to earth once you get far enough from DC, though the rental rates obviously follow.  At about 70 minutes from the beltway. Winchester is still within commuting distance and yet is much more accessible for first time investors.