Find the Money. Make The Offer.

There are varying opinions and schools of thought when it comes to funding any project. I am going to discuss the approach I am taking for the first one…Conventional Funding. As of now, I have gathered information on various financing options, whether it is conventional, hard money, portfolio, it doesn’t matter. My goal is to identify my level of affordability before placing offers. Based on cash on hand, I know I have the 25% down required for a $125K-150K purchase. This information along lets me know exactly what market I should look into before finding a property. I know my target range and it sits well in my business plan for marketing areas. If this criteria wasn’t met then I would continue to save funds to reach this goal.

For lenders that serve conformed loans, which are in line with industry guidelines set by Fannie Mae and Freddie Mac, it’s important to understand friction points in the loan application process. These rules are strict due to the issues that arose during the sub-prime mortgage issues in 2008. This situation gets complicated when the property targeted is no longer a single-family house. So if you are like me and choose a duplex, 3-unit, or 4-unit property, the simplicity of a conventional loan for investment property comes with additional interest and inquiries from the bank. They are likely to tack on penalties, restrictions, and insure you have more liquid assets.

At the minimum most lenders want assured that you have proof of funds for the following:

25% down payment
Closing costs (not covered by seller)
3-6 month cash reserves
Debt-to-income ratio below 43% for qualified buyer

Note: I don’t bring up credit score, because you should focus to be in the mid to high 700’s. I highly recommend focusing on building your own personal credit before going any further. Higher credit scores bring instant credibility with any lender and will make them work harder for you. Just like someday your hard money will work harder for you.

Debit to Income Ratio

“Don’t live beyond your means. Don’t buy more than you can pay for. Don’t expect to get rich quick. And don’t confuse salesmen for friends or advisers.”

-Charley Reese

Your debt-to-income ratio should be affected predominantly by current mortgages and be mindful banks are required to adjust the ratio based on number of family members in the house. At the end of the day, the bank wants to make sure you can make the payments of the investment property and your critical bills without starving. It is good to know that the new mortgage is added in this valuation. If the income from current tenants in the new property is required, it will require additional paperwork provided by the seller to substantiate steady occupancy in order for underwriters to approve based on the new debt-to-income ratio. This valuation is much easier in larger multi-family houses because there are typically extensive income/expense statements associated with those properties.

Without throwing shade at specific lenders, I will say that I reached out to a couple big name mortgage lenders in hopes of receiving an investment loan. I received pre-approvals, but then I found a 3-unit which was no longer supported by the same investment property. After working with my good friend and Real Estate Broker, he and his wife (Real Estate Team) provided contact information for local mortgage lenders. I immediately reached out to one and noticed a significant shift in the personal approach to the conversation. The local lender explained the minutia that halted the big company, but found a way to get the pre-approval letter I needed to move forward with my offer.

The Offer

The offer is for a 3-unit property. Two tenants occupied and one vacancy with some tenant roll information to understand current net income and possible income with full occupancy. After walking the property, I have identified three key areas to raise appraisal value (equity) in the property. At least one area is a maintenance concern which justifies a reduced offer price of $10,000 below asking. Additionally, the property has sat on the market for nearly a year which for most is concerning, but for me isn’t based on potential improvements and increased cash flow. So the current offer is focused on the Seller knowing these items:

conventional loan
25% down
Seller provides max 2% closing costs
$1,000 Escrow

The offer requires working with the seller/seller agent to insure the purchase agreement has the appropriate information and the right format. For instance, this property the seller “prefers” a commercial agreement over residential due to the level of detail in the document. However, due to the lender and loan type being used a residential agreement with additional provisions is the only way the offer can be submitted. Now let the negotiations begin!

Getting Started On The First Deal

Whether it’s a podcast, a book, an eager business-minded friend, or your own ambitions, the message seems abundantly clear – “Make the first deal, and don’t give in to the tough times.”

For most aspiring entrepreneurs, making the first deal is more than half the battle. I have found myself hoping for some luck in the form of a great deal to get me off and running, but luck isn’t reliable, dependable and lies outside of anyone’s “sphere of influence.”

Right now, I find myself saving in order to build up reserves and find more ways to leverage money to meet the demands of a 25% down payment and up to 20K in rehab costs. All of this with the BRRRR (Buy, Rehab, Rent, Refi, Repeat) strategy in mind, a means to leverage banks to Refi and push all of those funds back my way for property number 2.

So how do I plan to leverage my own money? Two ways, the first is with a loan on a Thrift Savings Plan (Military speak for 401K) that holds a 2.5% interest rate with a 5 year pay off period. This account has received a steady 6% input over the span of 10 years. The second is with a good ole’ fashion HELOC (Home Equity Line of Credit) on my primary residence. I have nearly 5 years of equity on a VA loan in a neighborhood that provided already up to 50K in appreciation based on the comps locally.

Now for possible deals. It is spring, near a major military installation, so there are more homes on the market than the winter months. The number of foreclosures continue to populate the MLS and my broker continues to encourage me with the comps on properties of interest. For my first deal I am torn between the slow cash flow route of a Single Family Home (SFH) with moderate repairs or a Duplex or a possible Triplex in a less popular area.

For the first deal I am concentrating on the following:

Cash Flow (Goal: $300 a month per unit)
Appreciation through Rehab/Land Value
All-in ARV < 75-85% for Cash Out Refi (After Rehab Value)

In the coming days, I plan to visit 3-5 local banks and compare small-business banking options, escrow services, and mortgage products. Be mindful, that I have a full-time job (not Real Estate related), so everything is orchestrated in my off-time. These engagements will hopefully contribute to my current plan, or educate myself on areas that need improvement in the current business plan. And naturally, a follow-on meeting with my CPA to discuss tax implications, breaks, etc.

I remain in line with my main goals by focusing on establishing systems and relationships with SMEs (Subject Matter Experts): Broker, CPA, Banker. One of the key tasks on my list is to find a solid Real Estate Attorney in order to better understand local laws for contracts, leases, etc.

With each passing week, I reexamine each one of these incremental steps taken. The original plan has seen subtle tweaks, but we are ever so closer to pulling the trigger on our first deal.

Note: This are simple micro steps needed to fulfill my macro goals. Each little task is a micro goal, but these micro goals are well nested with my desired macros.

“Fail to Plan, Plan to Fail”

In the military this quote holds true as planning is the bedrock of any military operation. We all know that planning is only the beginning, butexecuting the plan is the key! Too often people fall in love with their plan and can’t adapt or the other extreme occurs in which the plan is dismissed from the very beginning. Before taking any major action, having a solid plan is important, but don’t fall prey to “Analysis Paralysis” into a steady state of inactivity.

Patience is a virtue, at the early onset of this adventure I forced friendly reminders to myself that this is a marathon and not a sprint. The intention is not to seek “millionaire status,” but to become financially independent. In order to seek that independence from the “rat race” of life is to have a plan, a means, and goals to pursue. The plan…

Of all the important pieces of my coveted plan, I emphasized a lot on education and self-improvement. There is a laundry list of Real Estate Investing and self-help books, podcasts, Youtube videos, etc in which we will be discussed in future posts. In an age of information, subject matter experts and people with experience are readily available to get started on your quest. I did just that. And here is how I approached my plan.

Step 1: Write your life goal. What is it that you truly seek? Do you want to be financially independent within a certain number of years? Do you want to break away from your 9-5 work day to enjoy other things in life? Do you value wealth beyond currency and monetary value?

My Plan – My life goal is to achieve financial independence and the ability to leave more for my children. I want to focus energy on Real Estate investing because it is tangible and in my opinion one of the more exciting asset classes to invest in.

Step 2: Understand yourself better than anyone or anything else. My career in the military has emphasized this more than anything else whether it is through rigorous and arduous physical testing or battle of wits when emotionally and physically exhausted. I am not saying go on a “spirit quest” to know yourself better under extreme pressure, but simply highlighting the importance of knowing the “true you.” For example, are you introverted/extroverted, are you detail-oriented/abstract, etc. These tests are readily available on the internet, such as the Carl Jung/Isabel Briggs Myers’ test.

My Plan – My strengths reside in analytics, networking, discipline, and hard work approach to complex problems. I am mostly extroverted, externally stimulated, but razor focused when honed in on a task.

Step 3: Outline/Frame Your Strategy. Treat this is a brain storming session and fact-finding. Outlining or Framing your strategy in a way that makes sense to you initially, but be prepared to refine it for others to understand. This step is important as a backbone to your 1-minute “Elevator Pitch” or articulating the gist of your business. Further, it may highlight your own education shortfalls and weakness. I encourage to do an initial draft and seek out answers to your “information gaps” and then refine the outline. Start with a company statement and answer the “WHY” question for your business. Then write down your short/mid-term goals such as 2 and 5 year goals. You may want to write longer term goals, but may likely see your goals shift on an annual basis. Afterwards, focus on the tenets of your business: finances, management, acquisition, income streams, legal, etc.

My Plan – I followed this step by step approach over the span of 9 months (with a “work trip” in the middle). After I felt comfortable in my ability to convey my plan I sent it to my mentor for scrutiny. Since then I have reworked my plan several times to its present day status. I view this as a living document that will evolve as my business and reality involves. Like Bruce Lee once said, “Be formless. Shapeless. Like water.”

Step 4: Reflect and Educate. At this point information gaps will either be obvious or slowly illuminate. Whether it is lack of understanding of financing your projects, sourcing lead pools, interviewing contractors/property managers, or even seeking legal advice, these are all in support of laying a solid foundation of a longer adventure. Immerse yourself in education through reading, podcasts, videos, sitting with mentor(s), and network to fill those gaps. Remember to play to your strengths and seek others to assist with your weaknesses. You may not have enough time to fix your weaknesses, so focus a majority of your time on sharpening your strengths. So learn to leverage the help of others.

My Plan – I immersed myself in podcasts such as “Bigger Pockets” and “Passive Real Estate Income.” For building my financial acumen, I grew up listening and reading the advice of known entities such as Zig Zigler or Dave Ramsey. My educational philosophy is to remain open and well-rounded. If I can learn various techniques, understand, and exercise some or most then it will make me a better Real Estate Investor. And now for more cliches, it’s all about getting “more tools in your toolbox.”

The Bottom Line is that your plan is what you make of it and the output is only as good the inputs. Ultimately seize your fate, chase your goals, and grow in the process. Most people will say it comes down to making that first deal and simply taking action, but having a sound plan is vital to taking the right steps along this incredible journey.