The BLOG! - MD WV HOMEBUYER
How do we make cash flow out of thin air? The Buy, Rehab, Rent, and Refinance strategy is an amazing strategy for building wealth. This is how I did it in one of my successful projects.
When using Private money to purchase rental property its imperative that you know your exit strategy going in when you purchase it. Exit strategy can mean two things, one what is your end use and two how are you going to release your private money from the deal. In this case we are going to be discussing releasing/freeing up your private lenders money so that you can put it back to work for you.
The velocity of money is a term that refers to how quickly you can move your money from one transaction to another. In real estate the longer it is locked up in one deal then the slower you’ll be able to grow your business. If you can move your money out of each deal in 6 months rather than 12 months you can potentially double your rental portfolio each year!
At this point in my investing career I was using one lender that had a seasoning period of 12 months and I needed my private lender to give me more money to do multiple deals. Its better to move your money out of a deal quicker and put less of a burden on your private lender. Instead of having to borrow more money, you can turn it quicker and make your business and your private lenders money more efficient.
Through direct marketing I found a house, the owner had it in his family for many many years. He was retired and working on it very slowly, he had done many quality improvements. He had repaired the foundation, new windows, new furnace and tank, updated kitchen and flooring. There was only some minor work to make it rent ready which included some trim working and painting. It needed a Fridge and stove. I had tenants lined up for this property. I had made a offer of 50K and he was currently at 70K. We were to far off at that point so I stayed in touch and over the next several months we go closer on price. He said he would come down and sell for 65K and I said I would still be at 55K. A little more time went by and I was still ready to go at 55K, this was a good deal at that price. He said he could do 55K all cash close quick. Having to wait a year to move money around is not ideal so its best practice to find a local lender that can do it in no more than 6 months. I didn't have the money ready to go so I purposed this idea to him I will pay you 30K now and in 13 months I will pay you the other 25K. He said I will do that deal but for 60K. I said you throw in the lawnmower, leave the materials and paint and I will do that. He agreed and that set the wheels in motion for me to get this deal closed.
My comps suggested that the property was worth at least $80,000 and possibly a little more.. At $80,000 I would be able to get $64,000 at a 80% loan to value. Even at $75,000 appraisal I would get $60,000 loan to value, so I would only be in to this property the two closing costs.
We closed the deal, my private lender pitched in the $30,000 and I paid the closing. I had the trim work finished and purchased the refrigerator and stove. The Stove I found on craigslist, it was relatively new, half price and cleaned up well. The tenants agreed to paint the three rooms if I provided the paint. I trusted them to do a good job and they did.
The rent for this home is $800 a month and tenants pay utilities. Its a 2 bed 1 bath. The 2% rule would say that this property should be purchased for $40,000. That was not going to happen and the location and condition of this property made it a good deal at $60,000. This would be considered a 1.3% property but when you consider after refinance I will potentially have zero money in the deal I felt it made sense. I typically like to make sure I purchase homes between 1.5% and 2% rent to ARV ratio.
The monthly payment was $246.39, taxes and insurance are around 1K per year. Cash flow was $470.28 after PITI (principal, interest, taxes, insurance)
The property was cash flowing and after 12 months I started the refinance process. The Bank asks for the lease, my personal finance statement and past tax returns. They will give a cash out refinance at 80% of the appraised value. The one thing to consider is that based on your debt service coverage ratio of your whole portfolio they may have a cap they will lend you on the property. Its important to understand that concept and to ask many questions. They send an appraiser out to the property. I made sure my tenants knew when they are coming and to make sure the grass is cut and the home looks presentable. I usually meet the appraiser there and bring comps that justify my value and you may want to have a list of any major rehab items that have been done by you or the past owner.
The appraisal came back at $84,000 which means that I could refinance $67,200 for the property. This meant I would have no money into the deal and could walk away with a check. I could pay off my private lender who I had the money at 10%, pay off the owner for the other 30K and have zero money in the deal. I chose to pay off all my expenses in the deal and not have to take any money to the closing. The new payment would be $360.28. My cash flow would be 359.39 after PITI.
At closing my seller was super happy and he asked if I wanted any of his newly baby chicken hatchlings. I said I would pass but keep me in mind for more houses! My private lender was happy because I moved that money into the next deal. I was happy even thought I passed on the free chicks and my tenants are happy with their new home. It was one big happy family and I was getting cash flow in the end!
These types of deal make so much sense but it all depends on finding great deals that are win / win scenarios for both the buyer and the seller. If you know of anyone that has a home to sell like this one please have them call me or refer them to www.webuymartinsburg.com! Happy Investing!
Bill is an Investor and Agent working with Investors in Md, WV, and PA.