This week I was able to get rental property number 12 under contract! I purchased rental property number 11 over six months ago, which is way too long for me to reach my goal of 100 properties. I was hoping to buy six rental properties in 2014 and I only bought three. There are a number of reasons why I fell short of my goal including market changes, fix and flips and running my team. I hope to buy seven rentals in 2015 and I have a number of new techniques I am going to implement to reach that goal.
The details on rental property number 12
Rental property number 12 was a MLS property and REO. We have had a huge decrease in REO listings in our area, but there are still a few coming up for sale. This home is located only a few blocks from where I bought my first house that I lived in for seven years. I ended up selling that house seven years after I bought it for a loss, because I bought at market value and our market decreased. The rental property is a 4 bedroom, 2 bath house with a 2 car attached garage. The home will need a fair amount of work including paint, carpet, windows, doors, appliances and a few closets put in.
I figure it will rent for $1,400 a month after it is repaired and I will require $10,000 to $15,000 of repairs. I am buying it around $130,000, which is higher than I usually buy houses that need this much work. The problem is there have been almost nothing for sale in the last six months similar in price and condition to my previous rental property purchases. One reason I am okay paying more is this house is worth at least $180,000 after it is repaired. I could flip it, but I really want to add some more rental properties, because of the passive income they create.
Future rental property plans
I have been busy so far in 2014 in regards to rental properties. I made an offer on another rental property last week that I was beat out on in a highest and best situation. I made another offer on a potential rental property yesterday that I am waiting to hear back on (low offer on a new listing so I am not getting my hopes up). I have decided I need to start looking at buying more expensive houses if I want to reach my goals.
When I buy more expensive houses I still want to buy below market value and I still want them to have great cash flow. However it will be very tough to reach 20 percent cash on cash returns with higher priced homes since more cash is needed to buy each property. On rental property 12 I only come up with a 15 percent cash on cash return, but I am gaining $30,000 in equity or more. I think earning 15 percent cash on cash is better than sitting on the sidelines and waiting for deals that may not come. The offer I made this week that I am waiting to hear back on, was actually on a more expensive house, but it needed much less work and will rent for more.
That 15 percent is also at the top end of what I would get if I were to buy a turn-key rental property.
How will I get more cash to buy rental properties by flipping less?
One reason I have not bought more rental properties is I have been short on cash. For most of 2014 I had ten fix and flips in my inventory. I was really focusing on flipping and it showed in my business. Flipping can provide great income, but it can also take a lot of cash. I use some private money and a line of credit to help with the flipping expenses, but it still takes a lot of cash to flip that many houses. I sold one flip yesterday and another one is selling this week bringing me down to 6 flips. I have another flip I am buying next month and one more selling next month.
I think having five to seven flips at once time is the sweet spot for me. Anymore than that and it takes too long to get contractors to repair them and ties up too much cash. I also may look for more private money so that I can flip and buy rentals.
How will I buy more rentals by refinancing properties?
I refinanced two properties a couple of years ago, but since then I have relied on income from my real estate team and flipping to buy more rentals. I am considering refinancing a couple rentals and using that cash to buy new properties. Thanks to the crazy appreciation we have seen in my area and buying houses below market value, I have close to $100,000 of equity in some of my properties.
I can refinance at 75 percent of the loan to value ratio with my portfolio lender, which means I could take out $50,000 or more from each property. I would decrease my cash flow on the properties I refinance, since my payment would increase around $300 a month. Thanks to rent increases my cash flow has increased to over $600 a month on the rentals I am considering a refinance on. I spent about $30,000 on these houses to buy and repair them, which means I would make $20,000 off the property and still making money every month on the cash flow. I could use the refinance money to buy more properties which would increase my returns even more.
I will write another article when I buy rental property 12 with the numbers and I will post another video when the house is repaired. With less flipping and more refinancing I hope to have many more articles in 2015 about new rental property purchases and get closer to my goal to buy 100 rental properties!