I read an article today online which was called “5 Ways To Get Started Investing in Real Estate”. This article had some really bad advice for new investors.

So I thought I would record this podcast episode on that topic of how to get started investing in real estate.

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The Article That I Read Recommended These 5 Things.

1. Buy REIT’s (I don’t recommend that)
2. Online Real Estate Investing Platforms (I don’t recommend that either)
3. Buying rental properties (I recommend that you learn how to buy rentals)
4. Consider learning how to flip houses (I recommend that you learn how to flip houses)
5. Rent out a room (recommended if you are on a budget and need to come up with more money to invest)

As far as getting started investing in real estate, I only agree with two of the above strategies. Learning how to flip houses and buying rental properties. If you are thinking about getting into real estate investing, then you have probably considered learning more about how to flip houses and you are most likely interested in investing in rental properties. Of the two strategies, If you have a job and decent credit I would highly recommend that you learn how to buy rental properties.

Buying rental properties is the easiest strategy to learn – especially if you have a full time job.

Learning How To Buy Rentals Only Requires You to Have 3 things:

1. A Job
2. A Paycheck
3. Decent Credit

Since most of my audience and students who are listening to this podcast have a job and have a paycheck, and I assume that many of you have decent credit, learning how to buy rentals is hands down the best strategy to focus on.

WHY IS BUYING RENTALS THE BEST STRATEGY FOR BEGINNERS?

There are many reasons why you want to focus on buying rental properties. The long term appreciation potential, the wealth building effect of owning real estate, the tax deductions, the amortization and principal loan paydown, and of course the cash flow from the rental income which increases over time. Those reasons are well known to many aspiring real estate investors. But what is not so well known is the secret way that you can use the Buy, Repair, Rent, Refinance Method to acquire these properties without having to use any of your own cash.

Let me explain how this works.

When you go to a mortgage broker, and tell them you want to get approved for a mortgage on an investment property they tell you that you need to put 25% down. That would mean you would be required to put down $50,000 on a $200,000 investment property. That would be great if you had $50,000 but what do you do if you don’t have $50,000? What if all you had saved up was $50,000 and once you purchased that one rental property you had no money left to buy another? This is where understanding the BRRR Method becomes so important. This is also where many aspiring real estate investors quit and say “I will get started when I have saved up $50,000”. That is not the right approach.

If you understand the BRRR Method and you really understand how the Buy, Repair, Rent, and Refinance Method works then you will understand that you don’t need to have the $50,000 to begin with.

That mortgage broker who told you that you need 25% down probably omitted to tell you one very important detail. And that detail is that if you refinance an investment property, they will also lend you 75% of the appraisal value. Why would they not tell you that? Because you asked them about getting a loan for purchasing a property (not refinancing). Since you don’t already own a rental, why would the topic of refinancing even come up in the conversation? And that is where you miss the most important fact which is that banks will lend you 75% of the appraisal value of an investment property.

So the question is, is there a way for you to get the bank to finance your investment property without coming up with the $50,000. And the answer is yes. If you can buy a property at a deep discount to what it would appraise for, then you could potentially refinance it and have the bank put up the cash for you. To simplify, if a bank will lend 75% of the appraisal value, then if you could purchase a property at 75% of the appraisal value, then when you went to refinance you would not need to have any money since the bank would lend you all of the money.

Let’s use a real life example of a house that I purchased. A motivated seller in Seattle inherited a property from their dad that passed away. This individual was not on good terms with their dad and had not spoken to them in almost 20 years. They were very surprised to learn that they had inherited their dad’s house. How did I find this motivated seller who inherited his dad’s houses? I purchased an “inherited list” which is a type of motivated seller list. You can learn more about motivated seller lists by clicking on this link here

Motivated sellers are people who want to sell their house fast for cash. In this example, the son wanted a fast cash offer. He called me from a postcard that I had mailed to him which was mailed to everyone that was on the “inherited list” that I purchased. He wanted to know how much I would offer him for the property. I told him I could only give him an exact offer amount after I saw the property. However, he had no keys or any way of gaining access to the property. And he was in Seattle so he could not show me the property. I Ultimately had to get a letter from him proving that he was the owner and had to get a locksmith to open up the property for me. When I saw this property, it was not in great shape and had been neglected. But for a rental property, it just needed some paint and some cosmetics and it would make a decent rental. I figured that after I did that and had a tenant in place it would probably appraise for $200,000. Market rents in this area were around $2,000 per month.

The typical real estate investor would try and buy properties like this for 65% of what they estimated the Appraisal Value would be (less the repairs). We call that estimated value “After Repair Value” or ARV. It’s the amount that the house would appraise for after we had repaired it. So if an investor would pay 65% of the estimated appraisal value of $200,000, that investor would offer around $130,000 (less the repairs). I estimated that this property needed around $10,000 to make it rent ready. So that would put my offer at around $120,000. To give myself some room to negotiate I started out by offering $100,000 for a quick cash close in 21 days. To my surprise, the seller accepted my offer and did not counter me.

In the real estate investment business, there are individuals known as “private lenders”. These are people who lend their own cash to other investors where the property is collateral in exchange for receiving interest. Sometimes these lenders charge points and fees too. The typical interest rates of a private lender is around 12%. These private lenders would lend using the same ARV Formula that I described above. ARV x 65% Less Repairs. So in this example, a lender would be willing to lend $120,000 since that is 65% of the $200,000 ARV less the $10,000 in estimated repairs. But I was buying this for $20,000 less than what the lender would be willing to lend. In a scenario like this, the lender typically wants you as the buyer to put down some money (usually at least $10,000). So the lender agrees to a loan amount of $90,000 on a $100,000 purchase price. This would require you as the buyer to put down $10,000.

Let Me Show You How The Math Breaks Down:

Purchase Price $100,000
Loan from a private lender $90,000
Down Payment $10,000
Closing costs and fees $5,000
repairs to make it rent ready $10,000
Cash out of pocket Needed $25,000

The house had a good roof and central air that was in decent condition. It was a solid CBS House in a decent rental area. I figured that if I replaced the carpets for laminate flooring, resurfaced the kitchen cabinets, and reglazed the old tile in the bathroom I could get away with making this house rent ready for just $10,000.

Cash Out of Pocket on This House: 

Down Payment $10,000
Closing Costs $5,000
Repairs $10,000
Total Cash $25,000

Now you would not necessarily need to pay all cash for it. You could purchase materials on a Home Depot Credit Card. You could pay your contractor or handyman with a credit card. So you would only need to come out of pocket on the $15,000. If you did not have this $15,000 cash you would be able to find maybe a family member who would be willing to help out or you could get a partner in the deal who put up the cash in exchange for a return when you refinance. The key thing to understand is that you must not make a lack of cash an obstacle to buying your first rental.

So let’s say you purchased this house and market rents in this area are $2,000 per month. After the house was ready to rent, you found a tenant that paid your first last and security deposit which was a total to move in of $6,000. Your out of pocket cash would now be only $9,000 ($15,000 less $6,000).

Now that the house is rented to a tenant, you call your mortgage broker and tell him that you want to refinance your private lender loan with the private lender who is charging you 12%. The private lender loan is a non amortizing interest only loan at a high interest rate of 12%. Your goal is to refinance into a fixed rate mortgage where your payment is fixed and where the loan is also amortizing where your principal balance is going down every month. So you would want to get a 15 year fixed rate mortgage or a 30 year fixed rate mortgage. I recommend the 15 year fixed rate mortgage.

The mortgage broker orders an appraisal and the house appraises as you expected for $200,000. Remember that the bank is willing to lend you 75% of the appraisal value. This is the secret to this Buy, Repair, Rent, Refinance Strategy. 75% of the $200,000 Appraisal Value is $150,000. That is how much the bank is willing to lend you on this property.

Let’s assume the bank refinance fees are $5,000 so you get $145,000 and not the entire $150,000. You need to pay off the $90,000 loan to the private lender, so after the lender is paid back you are left with $55,000. You pay yourself back the $10,000 you put down, and the $5,000 in closing costs, and the $10,000 in repairs. You are still left with $30,000.

At this point, you have $30,000 cash in your account which is $30,000 more than when you first started with this house. You have paid yourself back all of the expenses. And you also have a house that has equity of $50,000. You have just increased your net worth by $80,000. And how did you do this? By finding a motivated seller who was willing to sell you their house at a substantial discount to market value. So how much of your own money did you ultimately have to sink into this house? Zero. And not only did you not use any of our own cash but you got $30,000 in cash back.

If you had purchased this house for $120,000 (instead of $120,000) then your cash back would have been zero. But it would still have been a no money down deal. And you would still have equity of $50,000 since the house appraised for $200,000 and you have a mortgage for $150,000.

So the key thing to understand is this, stop focusing on how you don’t have $50,000 to put down on a $200,000 house. The problem with that thinking is that it is negative and allows you to stay in your comfort zone by saying to yourself “When I get the money I will do this”. Instead, focus on the fact that you could buy a house from a motivated seller for no money down. That pushes you out of your comfort zone and makes you realize that you could buy a rental property now. The only thing stopping you is finding a motivated seller who will sell you their house at enough of a discount for the BRRR Method to work.

If you want to buy rental properties, your goal should be to learn how to buy houses from motivated sellers for 50% or 60% of ARV or appraisal value. If you can do this, then using the Buy, Repair, Rent, Refinance strategy, you can effectively refinance and buy unlimited rental properties with no money down.

Your attention should be focused on learning how to buy rental properties by implementing this Buy, Repair, Rent, Refinance strategy. Once you understand that, the focus on learning how to find motivated sellers, and how to market to these motivated sellers with direct mail. Ultimately your goal is to buy houses from motivated sellers for 50% or 60% of market value. This is what I teach my students to do in my real estate training program. My student Dale purchased a house that appraised for $195,000 for $94,000 using this Buy, Repair, Rent, Refinance Strategy. And on his purchase, I loaned him $80,000. How did he find the house? By mailing postcards to lists of motivated sellers.

You can do this too. You can absolutely buy your first rental property employing the BRRR Method. The only thing stopping you is understanding the BRRR Method, and learning how to market directly to motivated sellers.

If you want to get started with buying your first rental property or to learn more about the Lex Levinrad Real Estate Training Program call my office at (561) 948-2127 and speak to one of our Student Support Managers.

You can complete an application to apply for my real estate training program  at www.lexlevinrad.com/application

Do you want to learn how to buy bank owned properties for pennies on the dollar? Don’t miss the Foreclosures and Bank Owned Properties Boot Camp that is coming up. Foreclosures are sky rocketing and the banks sell some of these bank owned homes for 50% to 60% of Market Value.

Learn how to buy these bank owned homes directly from the bank at the Bank Owned Properties Boot Camp. You can learn more about the Bank Owned Properties Boot Camp at:   www.lexlevinrad.com/foreclosures-bank-owned-properties-boot-camp/

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