In 2017 I purchased 2 houses. 1 was a primary (which I don’t recommend) and the other is a rental home which will be quite profitable. These houses came with challenges to close, they were both purchased long distance, and they both required creative underwriting. While looking back on 2017 I realized I should have done much more. While this is always true of hindsight I want to use what I’ve learned this year to make the next year more productive.
Buy 3 houses in North Carolina
Raise $60,000 in private capital
End the year prepared for a well prepared 2019
My original goal with real estate was to build a portfolio that would support me regardless of my career. This year I intend to add both a large chunk of free cash flow, but also a large increase in net worth. Here is the blueprint of what type of homes I look to add:
Purchase price: $35,000
Rehab cost: $20,000
Total cost: $55,000
After repair value: $95,000
Rent Income: $900/mo
Cash Flow: $250/mo
These estimates are similar to the deals I have done in the past and a bit better. Each deal I do I learn a little more, I get a little better at it, and they are each a little more profitable than the last. There are lots of reasons to think I still have room for me to improve and continue to close better deals. If any of these numbers are off, it’s the equity I’m being too ambitious on, as the cash flow figures are quite reasonable.
First let’s break this down into 2 parts: Purchase financing, and long-term financing.
Purchase financing: It’s almost a necessity to buy foreclosures with cash. All the other buyers are buying with cash since it’s easier to close, and I can’t afford to be at such a disadvantage. So, I need to close in cash but luckily, it doesn’t have to be MY cash. Not to say I won’t spend some of my own cash this year, but last year I spent some time learning how to raise private capital and found myself lucky to be successful at it. It wasn’t particularly easy, but it’s a valuable task to learn. With that said in 2018, I plan to raise more private capital for short-term purchasing. My current goal is to raise $60,000 from at least 2 sources.
Long-term financing: Having cash (mine or private sourced) sitting as unused equity in a house is not a good method to make money. Sure, there is cash flow, but not enough to sacrifice all possible liquidity. The cash used to purchase is a tool that makes my purchasing more competitive, but I want the cash back as soon as possible to use on the next property. Having a paid off house is not something I have any interest it, I want to expand. To do this quick loan turnaround I will use a program called “delayed financing”. This allows a user to put a loan on each property as soon as a tenant is in place for the total amount paid for the unit plus rehab. The downside to this is that I cannot cash-out on any increased equity I’ve created. The upside is that I can put a loan on the house as soon as it’s rented and avoid a common 6-month seasoning rule.
Strengths: I look to refinance a house I bought in 2017 immediately beginning the new year. This will free up about $70,000 in cash I had spent on the house earlier this year. In fact, I have already spoken with my lender about my plans for 2018 and we have a strategy in place, and the refi of my last house is already in the works. The cash from this house plus cash I have saved and money from a HELOC I own should allow me to buy 2 houses before the need to raise any private capital. The private capital I do intend to raise has already is something I have discussed with potential lenders. My goals, strategy, and previous experience should allow me to provide investors with above-average market returns, diversification, and confidence in my ability.
Weaknesses: Early portfolio expansion comes with lots of difficulties. Underwriting can be difficult when only a part of new rental income can be used towards DTI (debt-to-income) and thus the more houses that are acquired the more likely a bottleneck situation can occur. While I have spoken with lenders about solutions to this problem, it is a considerable problem. The crucial factors to help mitigate this bottleneck are a continuous increase in spending capital, and to ensure each deal will cash flow heavily. We must ensure rental income on new units stays at a level that generates excess cash flow to be more than solvent when considering new debt service requirements.
Opportunities: There are still lots of homes for purchase in the designated area that fit my purchase criteria. Mortgage rates are still low, and stock market volatility has people worried about an impending correction, these factors tell me that the time to strike is now. People will want to diversify a portion of their investment into real estate without having to learn the niche or take all the direct risk. I can give people this exact option: a passive way to both diversify their portfolio with tangible real estate assets without requiring them to learn the details or take the risk of learning a new market.
Threats: Competition in my main area of purchase is getting stronger, and the cost of foreclosures is on the rise. I assume this is due to a combination of cheap homes, continuously low interest rates, 8 years of stock market gains, and the inconvenient trend of HGTV house flipping shows. Some people are willing to buy assets above market price just to get in, this makes finding deals more difficult than in the past and emphasizes the importance of buying great deals based on analysis rather than emotion. Another threat to consider is increasing of federal reserve interest rates. This will increase risk-free rates for safe investors, and I have to compete with these changing rates by incentivizing investors with returns high enough to endure the risk and lack of liquidity.
Planning for the upcoming year is important. Most people don’t plan anything, and they get exactly that. The next important plan is for 2019 and depending on what I want to get done then determines how I want to end this current year. In 2019 I want to move forward with plans to JV (Joint Venture) on a large apartment building. This will require a lot of my own personal cash, and lots of cash from outside sources, therefore my 2018 plans include raising private capital as such a primary objective. I don’t necessarily need much private capital to buy 3 houses (though it will help), the main reason for this goal is so I can get better at raising private capital in large amounts for the apartment purchase. It will also show people that I can take down big deals, pay them good interest, and that I’m a reliable partner going forward. Using lending as a means for both parties to make a profit will allow me to build great long-term relationships for even bigger deals in future years to come.
I’m also using this delayed financing plan to make sure I pull all my capital from each deal, ensuring I have the maximum amount of equity extracted at years end. If I want to ask people to invest with me in the future, it’s important that I always have “skin in the game”, meaning I have a vested interest in my deals and I’ve put my money where my mouth is when asking other people to invest in my ideas.
This is a rough outline of my 2018 schedule. I know there is variance in what can be accomplished and plans always change once the rubber hits the road but it’s important to get things down on paper. It’s important to talk about your plans so you find objections or obstacles, it’s important for people to listen when people tell you why your plan sounds risky, or it can’t get done. I also wouldn’t be able to do as much because solving large problems is not easy to do without diligence. This formula is my diligence. I’ve spoken to investors, lenders, my property manager, my realtor, and I’m posting my plans to the internet. The only thing left to do is execute.