How We Bought Houses 2 and 3
Another way to do a deal, and the way we did our second and third deal, is to save up the 20 percent down payment and plunk it down on a rental home. We bought a slightly distressed property and then drained the rest of our savings on repairs for our second deal. We worked overtime and penny-pinched. We used the Dave Ramsey plan and paid for things with cash out of envelopes. It was tough. But it worked! The bank said that after a couple more of these, we’d actually need a larger downpayment-25%!!! We could see that this was going to take a while to build a portfolio of any size.
We could have continued using this method but it was slow growing and we sacrificed a lot. We only shifted away from this when we discovered the BRRRR method which we have talked about quite a bit already. But it is essentially where we create equity instead of buying it. We improve the houses and increase the value and avoid leaving so much of our money tied up in the deal. But we would’t have gotten to BRRRR if we hadn’t already proven to ourselves that we wanted to own rental property. And we proved that through the method outlined in the previous post where we just moved out of our house and turned it into a rental and then saving up for our next two rentals. This got us through rental number three. And these helped us prove our concept. This was also what gave us the confidence to accept private money from people. We knew that it worked now and we talked about what we were learning with friends and in networking groups which attracted private money lenders. This was a huge shift in our business.
Buying or Investing?
There is nothing inherently wrong with the method outlined in this post but I see it more of “buying” houses that “investing” in real estate. The difference to me is that in buying, you have cash and can put it down on any reasonable deal. If the cash flow isn’t great, just put more cash into it and then it will cash flow! But this isn’t truly real estate investing. Investing is about finding and creating opportunities to add value or transition a property from one use to another. It is about creating equity to either harvest by selling the property or keeping it, but having the ability to take your own cash back out while retaining the equity you created. A really smart investor could truly get going with no cash but tons of hustle. This is an exciting thought to me. I do, however recommend having solid personal finances and savings before getting started. Investors use creativity to create value.
When people ask me how I sleep with so many mortgages, I explain that although I don’t have much cash invested in each deal, I do have equity. It is the equity we created by finding houses no one wanted and by fixing them up. We are able to recoup most of our money and still we retain minimum 25% equity. This is because the banks are only loaning 75% LTV (loan to value) on investment property for cash-out refinances. This was a reaction to the careless lending that preceded the housing crisis of ’08-’09. The government felt it had to protect us from our own greed.
Consider this: when I put 20% down on a house by “buying” it and the market dips by ten percent, I have lost 10% of the value of the home, but 50% of my investment. The savvy investor who does a BRRRR loses 10% of the value of the home but zero of their own investment. The market would have to drop another 15% before it they were upside down. This means they have options! Options equal safety to me.
This is method of buying real estate with traditional down payments is a legitimate way to get started in real estate investing. It may not be as sexy as the ones that the podcast guests tout that helped them buy 100 units last year. It may not be the best, most efficient way, but it may be what it takes to prove the concept and to get a deal under your belt! Deal number one is, as I always say, the hardest. After you have the confidence of getting this one under your belt, you will feel much more confident moving forward. You may get more creative or take bigger risks. Our first property felt to us like we should be on HGTV for our massive renovation at the time. Looking back, we essentially did paint and carpet. We’re still open to an invite by HGTV; to be clear. As our confidence built, we were able to do major foundation jobs and full rehabs. But we needed that first renovation to build our confidence. A couple of years later, after “renovating” this house, we were able to do a refinance because of the forced and natural appreciation. This essentially became a “slow BRRRR” deal. We pulled equity and used it for growing our portfolio.
Which Way is Riskier?
When we began, this method felt like a safer route because we had money in the deal. As we have learned more and gained confidence, it actually feels riskier because we risk more of our own capital for a similar amount of equity in the end; as compared with a BRRRR deal. But without house number two and three, we may not have had the confidence to seek private money; and that was a game changer.
I hope this has helped you see one more way to get started. We’ll continue this series over the next few weeks. Feel free to offer me your feedback or ask any questions in the comments section. The goal is to give you the information you need to get started. Work hard and always learn but most importantly, “Keep the main thing the main thing.”