This is a guest post from Nick Ruiz. He is a TWICE self-made real estate entrepreneur that came up from scratch in his late teens and AGAIN from bankruptcy after the big real estate crash in 2008…He blogs about his journey and strategies for real estate entrepreneurship at AlphaHomeFlipping.com.
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How the real estate crash wiped me out
I am not the biggest fan of leveraging my properties to the hilt anymore. I did this on my first go at real estate entrepreneurship and it worked for a while, but the crash of 2008 wiped me out. If you want my full story, you can check it out here.
I started the “old school” way. I bought a duplex, borrowed against it to buy another and so forth. I ended getting up to almost 70 properties at the peak of it all. I had fully mortgaged all of these properties for the sake of constantly growing and it worked for a long time…
What types of loans allowed me to buy 70 properties?
I just want to take a minute to explain the types of loans that I was getting and how they were structured so you can recognize this stuff when you talk to your bankers.
When I was buying these properties in the early and mid 2000’s, you could only have 10 loans on the secondary market. This simply means that those loans were bought by Fannie and Freddie and I could get 30 year fixed loans on them. I loved these loans, because I was locked in for decades at decent interest rates.
Once I went above and beyond those 10 loans, I had to go to local banks that offered portfolio/in-house loans. This simply means that they were lending money from inside of their bank and keeping the loan in-house (not selling them off to the secondary market). Most of these local banks can’t afford to offer 30 year fixed loans and rock bottom rates so they offer ARMs or balloons with a 3 or 5 year term. This is definitely not as favorable as what I was getting before, but it was the only way that I could keep growing. The rates were higher and the time frame was much shorter. The loans were still amortized over 20-30 years though.
I wasn’t in love with these loans, but there was no other option for me to buy more then ten properties.
Why I liked using portfolio loans
The one thing that was GOOD about these loans were it became “true relationship based” banking. I would get in good with the vice president and he would lend money based off of phone calls because he got to know me. They would skip the appraisal and do me other favors that a large bank would never do. They would let me pull out extra cash that I could just put in my pocket. It was good for a while.
Portfolio lending was not as great when the crash came
BUT, when the huge crash came, everything changed quickly. My banks stopped lending, they started calling loans due, and basically went to an extreme of not lending. On top of that, I owed much more than these properties were now worth since the values collapsed.
Listen, before I go ahead, I want to make something crystal clear to you…I am NOT saying that getting mortgages on your properties is wrong. What I AM saying is that OVER-leveraging all your properties for the sake of pulling out tons of cash for growth is NOT a good idea. I am a perfect example of how that doesn’t work. It only works when you are in a hot market like the early and mid 2000s were. When the steam of the market is let out, you won’t like where you’re standing with all of that debt.
Warren Buffett has a very relevant expression that applies well here – “When the tide finally comes in, you’ll be able to see who was swimming naked”
How I changed my strategy after the housing crisis
Since recovering from my bankruptcy scenario, I’ve become very creative and strategic on how I acquire rental properties.
The primary way I do it is to take a certain amount of money from my flip profits, and pay cash for single family rental properties. It works like a charm and it’s a great feeling to put that rent check in the bank knowing there is no mortgage to pay. Believe me, I know all about paying mortgages. At the peak of my rental portfolio before the crash, I had $50,000+ in mortgage payments every month.
You got that?
Why I like to pay cash for my rental properties
Flip as many properties as you can in a year, and use as much of the profits as you can to pay cash for your rentals. It doesn’t take many to generate a real income when they are free and clear.
Now, if you are able, you can take it to the next step and not draw any income out of that rental account and let the rents accumulate. Pretty soon the rental income will stack up to where, after a certain period of time, you can buy another one and it can become exponential. Now you have a rapidly growing FREE AND CLEAR rental portfolio. It doesn’t get better than that!
I’m not saying that this is the be all, end all…there are tons of ways to cut the pie in this business, BUT doing the smartest things with the flip and rental income that you are currently generating will take you to a very favorable outcome! I promise…
I’d love to hear your thoughts in the comments 🙂