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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.

What do you think ? Give us your feedback.

One of the biggest expenses for any parents is funding their children’s college education. The most well-known education fund is a 529 plan. What not many people know about is something called a Coverdell Education Savings Account (CESA).

The CESA fund is much like a Roth IRA fund, but it was established for education-related expenses rather than retirement. The CESA fund can be used to invest in real estate and grown tax-free.
What I am going to share in this article is my experience in researching and opening a CESA with the company called TrustETC. I will detail how any CESA holder can invest passively in apartment buildings to grow their CESA balance significantly. (Note: I am not a CPA or financial advisor. Please consult your own CPA/financial advisor regarding any specific CESA-related information and how to use the account in any apartment investing.)

Simplified Features of CESA

Advantages

1) Contributions are not tax-free, but the money that grows in this fund is tax-free.
2) The account can be open with any Roth IRA custodian.
3) It can be used for elementary, middle, high school, college education and beyond until the child is 30 years old.
4) Funds can be withdrawn at any time after a contribution is made.
5) Apart from real estate, you can use a CESA to invest in other investments, such as stock, mutual funds, bonds, etc.

Features, Limitations, and Disadvantages

1) There is an income limitation that is imposed for contributing to a CESA. The limitation is the modified adjusted gross income (MAGI) of $110,000 and $220,000 if filing a joint return.
2) The maximum amount is $2,000 per year per child. Anything beyond that will be taxed with a 6% excise tax penalty. Anybody can contribute (e.g., grandfather, relative, etc.).
3) Contributions can only be made before the child turns 18. This does not apply for special needs children.
4) Money must be taken out before the child reaches the age of 30. Beyond that, there is a 10% penalty and taxes on the earnings. A workaround for this is to transfer to another child’s account before they reach the age of 30.
5) The contribution period for a calendar year is from Jan 1st to April 15th of the next year. For example, you can still contribute for year 2014 before April 15, 2015.
6) With the TrustETC IRA custodian, fees to open a CESA are $50 per account and $195 for three years ($65 per year). One cost-saving measure is to open multiple account at the same time because TrustETC only charges a $50 fee for opening a “family” account for CESA/Roth IRA.

Using CESA and Apartment Investing to Grow Your CESA Balance

Scenario: A parent uses three CESAs to invest in an apartment deal. The apartment appreciates after two years, where the apartment gets refinanced. The refinance amount is distributed back to investors.

Let’s assume a parent has three children. Each one of them has $20K each in CESAs. An investor invests in all three CESAs (a total of $60,000) and makes it part of syndicated deal of apartment investment deal by joining with other investors. Usually Apartments are bought with 25% cash down payment while the balance 75% of purchase price is financed by Banks. For example, for a $4 million apartment building, with 25% total cash down payment from investors and the balance 75% is financed. That would be a $1 million (25% x $4 million) cash down payment needed from all investors. A $60,000 CESA investment out of a $1,000,000 down payment in cash will be: $60,000/$1,000,000 = 6% equity investment. That means the three CESAs will own 6% of the apartment building. Let’s assume that after two years, with good apartment property management, the building’s value appreciates from $4 million to $6 million. With a refinancing strategy, there is $2 million in value distributed back to the investors. The three CESAs, which own 6%, will have: 6% x $2 million = $120, 000 in profit. That $120,000 will be distributed to the three CESAs tax-free, as there are no taxes owed on real estate refinances.

Let’s not forget that apartment investing will also generate a cash flow of 8-15% cash on cash per annum and Bank loan pay-down by tenants. I am not going to count that as profit for now in order to simplify the CESA growth message.

With $60,000 in initial Investment, your cash on cash return percentage is: $120,000/$60,000 = 200%. That is $120,000 in tax-free profit for your children’s education, and you still own 6% equity in the building and still have monthly cash flow.

Of course, for this scenario, we’re assuming a $20K investment per CESA. That could easily mean a parent would start investing $2K each per year per child for 10 years. You can always start early from age 1 of a child to have more money in their CESA for investment. The other way to utilize more from an IRA is to combine children’s CESAs with the parent’s self-directed IRA. That will create a bigger equity percentage and profit in a value-adding apartment investing deal.

All the profit from appreciation and cash flow will go back to the CESA/IRA. The account can be used repeatedly for other apartment deals. With this way, a parent can save for their children’s college education tax-free using apartment investment techniques.

IRS website link for CESA: http://www.irs.gov/publications/p970/ch07.html

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