The below steps outline the process that we took over two years period to generate more than 400K of equity and $42,000 passive income and more than 50% Cash on Cash return. Here are the steps .
1) Look for Deals Like a Wholesaler
The best way to get great deals is to look for deals like a wholesaler. That essentially means eliminating the efficiency of a transaction in the willing seller/willing buyer marketplace. I have discovered that many people use agents because they don’t know how else to get access to sellers. The next layer that many investors use is buying from wholesalers. That’s when I started my own marketing campaigns to get deals directly from the sellers. That methods gives the deepest discount.
To recap, to get the “normal” deal, buy it from MLS using realtors. Buy a better deal from wholesalers, and to get the best deals, we need to buy directly from sellers. Time and effort is inversely proportional to the discount of the deal in this case. Buying from a realtor will take minimal time but gives the worst deals; meanwhile, doing your own marketing will cost you the most time/effort but gives you the best deals.
2) Buy at Wholesale Prices
Not all deals from all direct sellers are great, but they give the best possible opportunities for a direct buyer to get the deepest discount. When you do direct marketing, you will be getting tons of responses from different types of sellers. Most sellers will want to test the water by asking how much you want to offer them. That will be their primary objective when they call you. You need to weed out the tire kickers from the motivated seller. When you find that motivated seller and after getting a price from them, you need to be able to determine the after-repair value (ARV), estimated rehab cost, and potential rent for that property. Keep in mind that you want to buy at wholesale price. If you have worked with wholesalers in the market, they will be able to tell you the ARV of the property that they are getting. In general, you can subtract $10K from that price and determine the actual purchase price. Of course, some wholesalers make $5K, and some even make $20K depending on the type of deal. As a direct buyer cum landlord, if you can purchase the property below 66% ARV (purchase price + rehab), then you can give zero out of pocket at the end of both closings. This is assuming your hard money lender gives 70% of ARV and your conventional loan lender refinances at 75% of ARV. In short, look for deals below 66% ARV. Even if you get a deal at higher than 66% ARV, such as 76%, your cash out of pocket is still much lower than buying from a realtor or wholesalers. Less cash out of pocket simple means you are buying at wholesale prices!
3) Do the First Closing Using Hard Money
A hard money lender is a “hard asset” money lender. They are lenders that provide loans for houses that need repair. The best hard money lenders provide loans 70% of ARV. The 70% is for purchase and rehab costs. If you can find hard money lenders who are investors as well, that would be great. They would be able to help check your ARV by doing their independent comps. Usually, hard money lenders charge 3-4% of points with 12-14% interest per annum. Make sure there is no prepayment penalty. Since you are expected to do the rehab within 1-6 months, the hard money lender is only a temporary measure. Don’t be too worried about the high interest rates. If the numbers work, hard money lenders are the best option to leverage your cash out of pocket.
4) Rehab the Property
After closing with hard money, start rehabbing the property. To do the most efficient rehab, ensure the scope of work is written clearly. All bids should be based on the same scope of work to make it easier for comparison. To get the optimum rehab cost vs. leveraging of your time, you need subcontractors for independent work using GC for interdependent work. Examples of independent work are foundation, roof, fence, landscaping, electrical, windows and AC. Examples of interdependent work are painting, drywall repair, cleaning, kitchen, and flooring. When you use subcontractors, you need to ensure that you use only the contractors that specialize in that field. You will often get a plumber who claims he can do electrical or a fence contractor who claims he can do landscaping. Limit their scope to what they specialize in.
5) Lease It Out to a Qualified Tenant
Once rehabbed, we can start looking for tenant. To ensure that we have a smoother landlord experience, it’s important to screen, screen and screen tenants. There are many tenant screening portals that are available out there. Apart from screening the tenant, you must talk to the tenant’s last two landlords and current employer. If you can’t find the right tenant, go ahead and reduce the rent price. A lower rent is better than choosing a wrong tenant. In my experience, you get a higher quality tenant when the property is listed in MLS and a tenant is represented by an agent. Open houses give the worst tenant exposure and usually waste your time.
6) Refinance into Conventional Loan (Second Closing)
Upon completion of a property rehab, the property qualifies for a conventional loan. The conversion from hard money to a conventional loan can be done almost immediately. There is no seasoning period. The refinancing using a conventional loan is based on a maximum 75% of ARV. Keep in mind that hard money was 70% of ARV, and now, it’s 75% of ARV. The 5% difference will absorb or reduce the conventional loan closing cost. You will get a 30-year fixed interest rate, which is the best type of loan for single-family homes.
The six steps above simplify the whole process. There are many details contained within them, but it’s good enough for someone to emulate what we have done.
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