Hello… I have been working for quite some time on raising some capital to get started in real estate investing. I have always known that I wanted to invest in residential 1-4 family real estate properties in philadelphia… There are great deals out there just need to know the best, repeatable process to grow a rental with the cash I have. I want to buy, rehab and refi into a 15 year loan
Well, I finally got the money and I have a few options… I want to make the best choice to get monthly cash flowing as soon as possible. Here are my options:
I have been working with a hard money lender and have a preapproval letter to start buying… Pros, little money out of pocket with the right deal, repeatable, can acquire a lot at once, and can do multiple deals at once. Cons, very short term loan… 9 months, to refi out of this, property must be seasoned with a stable tenant for 6 months, this doesn’t leave any wiggle room for error.
Buy a property with a conventional commercial loan… Put 30% down and pay for improvements out of pocket. Pros, no short term to try and refi to worry about, gives us more freedom. Cons, ties up a lot of cash and can probably only do one or two deals at a time, aka 2-4 deals a year. Might be worthwhile when working with multiple units!!!
Take a different route completely, pay cash for some really dirt cheap properties in low income neighborhoods… Put minimal money into rehabbing and just renting them out. After a group of around 5 homes are properly seasoned, take them to the bank as a package refi, get our money out of it and repeat… Pros, very repeatable, can do a lot of deals at once, no short term dictated by a lender, more freedom to operate. Cons, ties up all our cash, risky if can’t refi or hold consistent rent for 6 months…
Do nothing, roll up into a ball and die.
Please give me your feedback… What would you do and what’s the best choice here??
Seller financing will make that cash go alot further. If you want to buy and hold look for tired landlords…many of them will seller finance with a much lower down payment than you would need for a bank loan. Let the tenants pay it down and then refi in 3-5 years with a bank.
I believe in cheap houses. The rate of return is better. Easier to get started.
I would buy a couple of cheap houses, get them rented, then go to a bank and get a couple of home equity loans on your paid for houses. They will do a realtors BPO and loan up to 80% of the market value. You could probably get $70 or 80 thousand in equity loans. Then buy 3 or 4 more.
Then repeat until the bank wont do equity loans any more. Then get a commercial loan to finance the whole deal. that should geve you cash to buy some more. Repeat, repeat, repeat.
Within 10 years you will have 58 units in a combination of sfr’s, duplexes, and small appartments.
It depends on how much risk you are willing to take. If you like to take risks, then go with option 1 and 3. Going with option two is the most reasonable if you are trying to get cash flow. I’ve actually been selling some brand new duplex’s that you could put that $50K in and get a 16% cash on cash return each month. But again, it all comes down to your risk level.
[QUOTE=arlanj;887339]I believe in cheap houses. The rate of return is better. Easier to get started.
I would buy a couple of cheap houses, get them rented, then go to a bank and get a couple of home equity loans on your paid for houses. They will do a realtors BPO and loan up to 80% of the market value. You could probably get $70 or 80 thousand in equity loans. Then buy 3 or 4 more.
Then repeat until the bank wont do equity loans any more. Then get a commercial loan to finance the whole deal. that should geve you cash to buy some more. Repeat, repeat, repeat.
Within 10 years you will have 58 units in a combination of sfr’s, duplexes, and small appartments.[/QUOTE]
Hi Arlan and everyone, I am new to this board, I too have the same question as Dram Brothers regarding what to do with my savings.
I have a full time job, so I cannot devote a lot of time doing real estates but I do wish to start as I will very probably need to rely on real estates for my retirement.
Objectives: steady cash flow for life
Questions:
Does it make any difference whether someone has $50K or $5M (hypothetically) in savings? For example would you invest differently or use a different strategy with $1M+ in cash?
Among the three options that Dram Brothers suggested, the one that I would feel comfortable with is probably option 2 and option 3.
Option 3 sounds intriguing (ie: buying dirt cheap houses and renting them out), however if you have accumulated a portfolio of 50+ units, does it turn into a full time job managing all 50+ units? I suppose all 50 units would be scattered over different buildings and locations, so you will probably need a team of people to manage each property for you? Will there still be money left for me after all the management fees? Also, how do you manage 50+ leases? You almost average a lease renewal every day during the year.
[QUOTE=arlanj;887339]I believe in cheap houses. The rate of return is better. Easier to get started.
I would buy a couple of cheap houses, get them rented, then go to a bank and get a couple of home equity loans on your paid for houses. They will do a realtors BPO and loan up to 80% of the market value. You could probably get $70 or 80 thousand in equity loans. Then buy 3 or 4 more.
Then repeat until the bank wont do equity loans any more. Then get a commercial loan to finance the whole deal. that should geve you cash to buy some more. Repeat, repeat, repeat.
Within 10 years you will have 58 units in a combination of sfr’s, duplexes, and small appartments.[/QUOTE]
This is what we are leaning towards. I have found a guy looking to unload some properties at almost $10k each in decent rental areas. Planning on working with him to buy a group of these (3-4), put some money into improvements (new carpet, paint, repairs) pretty much sprucing them up and renting them. They don’t need to be palaces, just livable properties for someone to live in…
Never thought of the home equity loan… That’s a good option since we’ll have no debt. It seems very repeatable and can keep us buying for a long time. Don’t expect property values to go up too much over the years but the positive rental income is really what we’re after.
As far as managing the properties… We have a few properties now and managing them is probably our least favorite thing… Going to get set up with a good property management company and focus our time and energy into acquisitions and let the pros worry about managing the day to day… I understand this requires some supervision and we’ll probably require quarterly inspections of all the properties to ensure there are no issues.
I hate owing anyone money or listening to anyone else’s demands (hard money lender) so this option sounds the best for us… Any other advice?? I’d love to hear it…
You could also refi out into a portfolio loan with a regional bank. A portfolio is essentially a commercial loan. The issue I have with portfolio loans is they can adjust the rate at a pre-determined date in time, typically 5 years. I suspect rates will go up a lot 5 years from now, so be aware of that.
MJ - Theoretically there is no difference between $50k and $5M. What changes is the amount of work and moving parts to keep a lot of money working and creating great returns.
There are good opportunities for investing smaller amounts of money. As an example I recently loaned $35k from my self-directed IRA and created a $10k profit in 4 months by joint venturing funds to an investor. That is a very high annualized return. You could also do similar things with options.
If you guys don’t enjoy the thrills of management in the rougher areas of town, you could try and resell the properties and take the position of lender rather than landlord.
I would avoid the hard money at this stage. Based on what I am hearing it is not really needed. If you buy smart and in some cases use seller financing, you can do just fine without the premium the hard money guy will want.
Option 2 is more or less the smart one. More so if you are in a lower priced area with stronger income.
Be careful about low end properties as some lenders will not be interested even if you package them up and ask for commercial financing. Before diving in, spend more time with conventional lenders. Pick out some local banks who retain the loans on their books. Get to know what they like and what they will completely avoid. Then pick your strategy to match the financing that is possible.
At the same time as all of the above, start talking to private people you know to see if they want to provide working capital or long term financing. Building your list of private lenders in parallel to your list of preferred local lenders is the top strategy.
As it happens, I am south of Philadelphia visiting relatives. I live across the pond. Given the family connection I get back to the area on regular basis. It might be fund to see what you are investing in if there is time for a road trip.
Hi Dram, how is the Philadelphia market performing? As a Temple grad I know the real estate market is hit or miss depending on the neighborhood. Do you work in the city or the Manayunk/western suburbs area?