The way I found that about the deal it was actually through my property manager/realtor. It is no secret that I have rental properties in Alabama, and so what happened was he reached out to me one day, and he said, “Hey, I have this whole complex of 17 properties that the seller is trying to get rid of because he wants to use that money and buy something bigger.” I was like, “Wow, how nice. What’s the deal?” He went ahead, and he gave me the numbers, the rentals for every month, and it all turned out to be over that 10% ROI. It was actually above 30% if I’m not mistaken.
For those who don’t know, ROI stands for Return On Investment, and for a deal to be worth it, it has to be at least over 10%, and it has the cash flow, after all, expenses, it has the cash flow, at least $100 a month. That’s the bare minimum. How do I achieve these numbers? That’s going to be a topic for another subject, but we will stick to these numbers.
I figure, “Okay. That sounds good. I like the numbers, but how do I come up with the down payment?” The asking price was over $500,000, so you can do the math, I needed a big down payment. When you are purchasing a deal that is so large, it automatically becomes a business loan. For those who don’t know, properties from one to four units are considered residential. Anything five units and above is viewed as a business.
What you need to start purchasing your properties
What I needed to do is to qualify for a business mortgage, a business loan, and the numbers work a little bit differently. As opposed to needing 5% or 20% down, I needed at least 25% down. For simplicity purposes, we’re going to stick to $500,000. When a deal costs you $500,000, you would need $125,000. I was like, “That’s a lot of money.” I could sell my car. I could work like a crazy madwoman. There’s no way I’m going to come up with $125,000 in three months because that’s what I needed to do the closing.
I started getting a little creative, and I, of course, went on YouTube, did some Google searches, went to a bunch of local REAs, attended some of the Elite symposiums for Elite students. I started picking on people’s brains and sharing my story, “Hey, this is what I’m trying to do. Do you have any idea how it can achieve that?”
It wasn’t until I came across one of the mentors. Some of you might know it, Vicky Green, and she suggested, “Why don’t you do a cash-out refinance.” For those who don’t understand what a cash-out refinance is, I’m going to explain it to you at a very high level, but I’m also creating another video to cover cash-out refinances. A cash-out refinance is or a cash-out refi like some would call it, is equity taken out of your properties or any property in exchange for cash or money.
Most lenders typically have a 25 to 75 LTV, loan-to-value. What that means is that you get to keep 25% equity in your property, and the bank is willing to finance up to 75% of the total market value on that day, for a loan. Let’s say, for example, if your house, for simplicity purposes, is worth $100,000, what the bank is going to be willing to give you is $75,000, up to $75,000 as a cash-out refinance.
Now you know you’re going to have $75,000 available for a down payment. For some type of purchases, that might be enough, but I needed at least $125,000. $75,000 wasn’t enough. A couple of months earlier, I took out another cash-out refinance without knowing that it was called a cash-out refinance for my first condo to purchase the second one. I was running out of choices.
What I did was to try to get engaged with more lenders to see what else could be done, maybe with the least amount possible. I kept the contact that Vicky gave me and reached out to him to see what could be done, and he was willing to do both for me, the cash-out refi-ing, and the financing of the property. Meaning, I would have two mortgages, one for the refinance, and two for the actual purchase of all of those 17 properties.
The exciting thing is, where will I find a property that’s willing to give me up to at least $125,000 to make a down payment? What do I offer those people? What incentives do I have to give someone or an investor that’s going to let me take that money out to invest and maybe provide them with some interest in exchange? How much exactly?
Trying to find more answers led me to another website that’s called scotsmanguide.com. It is a repository of every lender for any type of loan you can ever need for a real estate investment. They offer hard money lending. They provide commercial loans. They provide residential loans. It’s a great tool. It is a repository that it’s going to tell you about every single lender that’s out there in all 50 states.
Ads
All you’re going to do is just to go to a one-stop-shop, take a look at the lenders that are available out there, and start reaching out to them. You can find anything from a hard money lender, a conventional residential loan, commercial loans out there, and learn about their terms. You’re fortunate if you found someone that can give you a 25/75.
Most lenders, last time I checked back in April 2018, we’re asking for a 40/60. Meaning the most they were willing to give you was a 60% cash value on your property. Just to make it clear, before you proceed to any cash-out refinance, let’s say you have a property that you have available and you’re willing to take out a cash-out refinance, you have to make sure you have at least 25% equity in there.
For example, let’s say you’ve owned a property for a couple of years, and you pay down $40,000 out of the $100,000. That means you only have 40% equity in that property. The most you’re going to get out of it is 15%, which translates to $15,000.
You don’t get to decide how much your property is worth. You have to go to the bank, and they’ll bring someone in, and they’re going to assess the value of the property and decide how much it’s worth.
Credit
Now, we’re going to talk about credit. How did I manage to bring my credit within one month, just so I could qualify for the best rate possible for the loan, cash-out refinance, and just qualify in general to bring my credit? Given that I’ve recently opened up many credit cards a couple of months back, my score suffers slightly. What happened was, I was, I believe, at a 620 in my FICO score, and I needed to bring it up to at least a 750, an average of 750 with all three, TransUnion, Equifax, and Experian.
It’s just amazing how much you can learn by talking to people. You realize that the answers are always in front of you, but it was more of a matter of putting the pieces together and understanding, “Oh, I can make something out of this.” I had some money in my 401(k) saved, I think it was $40,000 or something like that. That was precisely the amount of money that I was owing to my credit cards at the time. What I did, I took a loan in my 401(k), I paid down all of my credit card debt, all within a week from my cards being due. I knew that I had exactly one week before the banks went ahead and reported to the credit bureaus.
I waited for two weeks, and literally, my score went from 620 up to 750. I called the lender, and I said, “Hey. I’m ready. You can go ahead. Just run my credit because I want to make sure I can lock in the rate.” I was able to get the lowest rate possible. Once I got that, I did the same trick. I leveraged Venmo and Plastiq again. I also managed to open two new more credit cards at 0% APR. I did the balance transfer, paid my rent with it, and did the Venmo thing, and I repay that money. Voila, that’s how I managed to repay that 401(k) loan again.
The purchasing part that was quite stressful because there was a lot that was happening beyond my control. I just wanted to share with you what exactly to expect. Every situation is going to be different, but I had to deal with appraisals in my case. When you’re doing a cash-out refinance, you have to pay for appraisals because they need to know how much precisely each of the properties worth, the market value, and how much equity you have in it. You have to produce a lot of paperwork, not just for that, but also on the buying side. They have to allow the bank to go in on this other side to figure out, “Okay. What’s the market value today for all of your 17 properties?”
That way, they can determine whether they were willing to sell it or not. It was a learning experience. Up to before that time, all I did was to own single-family rentals. I’ve never owned 17 properties in one sit. The rates are very different from when you handle a commercial loan. Prices are a lot higher when you’re doing anything commercial. If you’re doing business, chances are you have more money rather than the average who’s trying to save up and buy a house.
Ads
Again, I had to deal with appraisals. I had to deal with flood insurance. You have to do everything yourself. When you buy a rental property, the bank takes care of everything for you. All you have to do is just give them the paperwork, provide them with the contact, and only reach out to the insurance company. At least in my experience, every bank works differently, but my bank makes me act as the bank’s broker.
I was representing the bank and myself. It was quite interesting. I ended up using credit cards all over again to pay for the appraisals that were, on average, about $700 per property because also they’re commercial. Once it’s all taken care of, you get a report. From that report, the bank is going to say, “Okay. We’re going to give you this much. We’re going to give you that much,” and voila, you’re going to move on to closing.
Attorneys
Luckily for me, Alabama didn’t require an attorney, but the properties I was refinancing happened in New York. I met a couple of really understanding investors, and they were interested in what I had to offer. We negotiated a reasonable rate. I was able to arrange the refinance, the term I was going to take to give them the money back for the value of their condo.
New York is an attorney’s state, so I needed to hire an attorney, and I had to pay for attorney’s fees. In Alabama, I didn’t have to worry. It was a small town, so the seller knew the attorney doing the closing who happened to own a title company. I didn’t need to hire an attorney, but he just happened to be an attorney, so it just worked out for the best. Then you have to account for reserve money. I forgot what the percentage is, but it was more than the 125,000 that I needed. I think I needed to have a total of 200,000 so that way, they can see the reserves. They can account for any additional cost, any attorney fees, and stuff like that.
That entire process took three months to take care. There was a lot of back and forth. I also learned that the lenders wipe out every single email that they have. Make sure you keep a copy in your email account because chances are, if they wipe it out the night before, and they didn’t get to that email, you’re going to have to resend it back again the next day. That’s definitely not fun, but thankfully, I’m very organized, and I leveraged this baby right here.
Every time I got a text from the lender, all I did was just to forward. I went out to my inbox, and I just click resend, and voila, he got it right there in there. In a nutshell, that was my experience. It sounds relatively simple, but again, there was a lot of back and forth, so you have to polish your public speaking skills and negotiation skills. In the end, it’s an experience that is well worth learning. That put me closer to a total of 24. I was able to get $300,000 out of the refinance. Because as some of you know, the properties in New York are relatively high.
I use $100,000. I think up to $140,000 for the 17 properties. Then I took the difference, and I went to Florida, another state that I invest in. I ended up buying two-family houses with that. That put me for 24, including the ones that I owned before pursuing the 17-unit complex.
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