I bought my first rental in 1998, while earning only $8/hour at my full-time job, and after one year of study, reading, listening, boring my co-workers to death with my constant talk about real estate investing, and looking at every house for sale within a 3-mile radius of my home.
It was an old frame house that needed very little work. I bought it for $22,000 from a pair of sisters who decided it would ruin their relationship if they kept it any longer.
After a million "what if" questions and nearly deciding to flip a coin, I told my wife I had studied too much and looked at too many houses. The price was right. The deal was right. And if we didn't try it, how would we ever know if it would work?
We tried several banks and finally found one that said if we put 30% of purchase price on our credit card, they would hold a 70% LTV mortgage. Deal done. We tried a property manager for two months (of sleepless nights, nagging questions, and an empty house).
I "fired" the property manager, put a sign in the yard, and filled the house within a week (even though my first tenant was my mom who was in the early stages of a divorce). It went well, and the next year we bought another, the year after that two more, and so on. The hardest part: Getting started!
My story is one of adapting with the times
In the early years, finding bargains was the task--it was like hunting for a needle in a haystack. I probably looked at 100 houses, to make offers on 10, to buy 1.
The first few houses I bought with 30-year and 15-year mortgages. Eventually, most banks didn't like my debt/income ratios, but I found a HELOC with Bank of America. They looked at a house I owned free and clear (bought by borrowing against my previously free and clear personal residence), and loaned me 80% LTV, which happened to be 100% of my purchase price and fix up.
I used that money to buy and fix up another single family house. The BOA HELOC again loaned me 80% LTV, which was again 100% of my purchase price plus fix up. I did 5 of these BOA HELOCs, and was going for my sixth, when a BOA rep said the limit on these loans is three, and I had slipped between the cracks, TWICE. I didn't believe her, until I talked to 8 different BOA reps at 4 different branches.
My pot of gold disappeared. What to do?
After another exhaustive search for financing, I found a bank that did a 30-year mortgage, with limit 10 total mortgages, and my high debt ratio was okay because...
- They kept the loans, thus not having to meet standard mortgage guidelines,
- They could see I paid my debts, and
- They thought my plan was solid.
I did 3 of those mortgages (one being the purchase of our dream home, now married with a four year old and a baby on the way) before hitting the 10 mortgages wall.
Next I got a credit card offer of 2.99% for the life of the balance on a balance transfer. 2.99%!!! Did a little research, turned out I could use it to transfer a bank loan, so I paid off one of my smaller mortgages with it. That planted a seed, and I bought my next few houses using special offers on credit cards (ranging from 6.99-9.99%).
Too much of that, and now nobody liked me because no matter how much I explained that it was investment debt, they labeled me as running up a mountain of bad, risky consumer debt.
Get good, get better, be the best...
I don't want to give the illusion that success just fell in my lap... It didn't. For quite a few years I worked a full-time job and invested in real estate full time as well. Plus, I was following Brian Tracy's advice: Get good, get better, be the best!
I constantly strove to improve my business model. Where can I cut costs? How can I buy better? How can I increase cash flow? What works and what doesn't for getting and retaining the best residents?
I joined my local REIA and made connections. I may not have had a week since 1998 when I didn't read a book, listen to CDs, browse CRE Online, attend a seminar, etc. I love to vacation with my family--but you better believe I won't go without a couple good books to read... I constantly search for ideas that will make me or my business/investments better.
Then, the real estate downturn
This brings me to about 2006, when I quit my full-time job. After a few promotions, I was making $40K/year, and the job was okay, but I was getting very bored with working for someone else.
Really bad timing because the real estate bubble did burst, and for the next 2-3 years I was quite bored, slightly dejected, and doing little to nothing with myself. I watched my home values plummet and lenders froze my HELOCs and credit cards. Wonderful. I need liquidity more than ever, and everybody says, "No more borrowing."
Luckily, I had bought well and managed well, and we were able to hang on through the downturn (often clinging by our fingernails). The plus side: We didn't do much buying. Just watched and waited for house prices to get affordable again.
If I thought my borrowing ability was bad before, it was five times worse after the real estate crash. My values had plummeted, and lenders didn't want to touch real estate. Still, house prices were down to 1998 levels, and rents were about 50% higher now! It wasn't hard to figure out, if it worked then, it will work even better now, but...
The game had completely changed
Now bargains were relatively easy to find, but how to get financing? Even hard money rates would have worked for buy and hold now, but hard money lenders all wanted to be cashed out quickly. (Not much help for my "buy and hold" strategy.)
Even though I could not borrow 50% against free and clear houses, I was able to borrow 80%-90% against my truck (go figure), so I added some cash and turned that into a duplex. Then, I searched high and low trying to find a private lender... Bandit signs, business cards, magnetic signs, word of mouth, flyers. I went after it hard.
8% interest, 100% safe, call Chris!
My pitch for those who would listen:
"I have been investing in real estate since 1998. I have never been a day late or a dollar short with any payment ever (you can see my credit report). I own free and clear houses in Lakeland, Florida. You look at my houses, pick what you want to loan against, and how much you want to loan. I guarantee in writing that if I can't pay you, I will deed the house back to you, so you won't have to foreclose.
I pay 8% interest and need a term of at least 10 years. I want to raise cash to buy more houses."
It took about one full year, but I finally found someone in my subdivision who was interested. We got to know each other a bit, and he seemed really interested, but wouldn't quite pull the trigger. So, I offered 9% instead of 8%, a mistake. I should have asked, "What is keeping you from doing a mortgage with me?"
He latched on to the higher rate and wouldn't let go, but said the real issue was the term. He was an older guy, and was not sure how long he would live. We negotiated to 7 years, and did a $30,000 mortgage on one of my homes, and I bought another single family home. I gave my private lender pre-dated checks for the first year of payments.
A few months later, he called and said he has another $30,000, and wonders if I have another house I want to borrow against. Hello? Oh, yeah!
Fast forward to today
As of May 2011, we have done 10 mortgages together and look poised for one or two more. The deals I am working now are generally small block houses in working class neighborhoods (no war zones), structurally sound, needing cosmetics. Mostly bank REOs with an occasional short sale or FSBO.
Purchase price plus repairs generally under $30,000. Doing 6-8 year mortgages, 8.5-9% interest, and taken as a whole, the properties break even. Rents cover mortgages, taxes, insurance, with enough left over for vacancies and repairs.
Why do all this work to break even? My finances are fine now and in 6-8 years, when these houses are all free and clear, I'll go to a whole new level (cash flow and wealth)! I am still searching for another private lender who will do 10-15 year mortgages because then I can mix in some 3/2/2 block houses in nice neighborhoods (that won't quite cash flow with 6-8 year financing).
The hardest part is getting started
After that, monitor the industry, and adapt with the times. Oh yeah, you also need a "Get good, get better, be the best" mentality! When it was hard to find bargains, that was where I put my efforts--locating deals. I ran ads, bandit signs, drove neighborhoods, did mailers, got on every wholesaler's list, contacted Realtors, etc.
When one source of financing gave out, I found another to replace it. When the market peaked and started dropping, it was time to batten down the hatches and wait for prices to level off at a point where it made sense to buy again.
When deals became plentiful, but financing was scarce, I switched out my "we buy houses" marketing campaign, and started a "loan me money" campaign instead. Adapt with the times.
Constantly, from beginning to end, I turned to CRE Online, books, CDs, seminars, and REIA meetings for knowledge, advice, contacts, ideas, and perhaps most of all, motivation!
Thank you CRE Online and all the experts I have studied and learned from over the years. You have helped me to build a real estate empire I am proud of with a top notch income and retirement plan that I will one day proudly pass along to my sons. (God willing--but they will have to learn and earn just like I did. No silver spoon.)
Chris in FL