Tag: #financingproperty

BRRRR – What is it

Posted on | by Allison Zuck

Renovation shows on HGTV are really popular right now. A home owner is living in an outdated house, and they want something more modern. In swoops a team of home renovators who fix up the home and it’s perfect for the family’s needs!

BRRRR is a little like that. BRRRR stands for “buy, rehab, rent, refinance, repeat.” A real estate investor buys a property that is outdated and undesirable, and then fixes it up! Now, the investor has a desirable property. While he or she could sell it and turn a profit, they rent it instead, creating a stream of passive income. If the investor needed a loan to fix up the property, the revenue from the rent pays for that, and once that is paid off, it’s a steady stream of income.

BRRRR is a cyclical process. First, buying a home and fixing it up (making it more valuable). Next, finding a tenant (which should be easy if the renovations went well). Then, a loan to cover costs (if you don’t have enough cash to cover it). Then, finally, a stream of income from the tenants, and you’re off to find a new property to revitalize.

Here are some things to know while considering BRRRR:

  1. Consider getting a short term loan to purchase the property and fix it up, but then refinance the property at the bank to build equity and pay back the loan
  2. Banks typically only refinance up to 75%, so make sure that you are fixing the property up to be worth more than what you paid for it

BRRRR can be a confusing topic, so we’ll jump into more details in the next few blog posts!

 

Check out this article that inspired this post to learn more: https://www.biggerpockets.com/blog/brrrr-pros-and-cons

Renting Your House

Posted on | by Allison Zuck

There are a few reasons why you could be interested in renting out your home. It can turn your property into a financial asset, while also paying for itself. If your rent is the right price, you can pay off your house expenses while still making some money. Renting a house is also a great option if you had to relocate temporarily and know you will be moving back into the area. Therefore, renting can be a great option. If you want to avoid the stress of managing it, a property manager is always a great option to do much of the on-the-ground work. Here are some tips for some of the details of that process.

Tenants

The first issue you run into, though, is finding possible tenants. It actually isn’t as hard as it seems! Craigslist is quite popular for this (just remember to not put the exact address on the listing), or, if you want to go the old fashioned route, just put a sign in the yard.

Tenant Information

As people apply then, you look at their information. Before you meet them in person, you should make sure they meet a set criteria, which usually includes employment, gross monthly income of 3x the rent, and a few other specifications. This way you can easily discount some unfavorable candidates.

However, do not discriminate when it comes to giving prospective tenants the application. Make sure you require an application fee (this should cover the background check), but don’t bother with the background check if the candidate does not meet any other criteria. Your application should ask for information including the applicant’s birthday, social security number, previous addresses, phone number, as well as other information. Each application should be viewed on a first-come, first-serve basis.

Learning About Your Tenants

The next step will be background and credit checks. You ultimately get to decide what you will allow each of the limits of these histories to be, but make sure to consider a few different things. For background checks, look for felonies and other criminal history. For credit checks, call their current employer and verify their job status and claims. Another resource is former landlords. Be sure to check with landlords from the previous 5 years. Make sure that there aren’t any landlords that your possible tenant did not list on their application.

When you reject a tenant, put it in writing and very clearly state your reasons for rejection. However, when you accept tenants, you can give them a call and let them know they’ve been approved.

Rent

There’s no set amount you should be charging for rent. The easiest way to figure out the range you are working with is to search houses in the area and see their rental rates. Make sure that you are viewing properties that are similar in size, location, and condition. In addition to rent, the security deposit is usually around the sum of one month of rent. Hold the security deposit in a separate location, so that you can return it to the tenant when they move out. States can limit the amount you can charge on a security deposit, so make sure you look up that information before finalizing your amount.

Leases

Your lease can vary in the time amount it binds your tenant to the property. You are also allowed to make your own stipulations in the lease. Just make sure you have all the information necessary in the lease, such as: rent amount, security deposit, laws, fees, any restrictions, etc. It can be helpful to walk through the lease with your tenant. That way you make sure they understand your conditions, and they sign each place that they need to.

Other Things to Consider

Make sure you have a property inspection before your tenant moves in. Both you and the tenant should note the condition of every room, so that when the tenant moves out, it is clear if they caused any damage to the property. Requiring renter’s insurance is another way that you can protect yourself.

 

For more information about renting out your house, check out the article that inspired this blog: https://www.biggerpockets.com/blog/how-to-rent-your-house

 

 

Financing Doesn’t Have to Start at a Bank

Posted on | by Allison Zuck

While the most common way to finance a property is through a mortgage loan, you can also creatively invest without ever working with a bank. There’s nothing wrong with working with a bank, but it is good to have different techniques in case a mortgage is not the best option.

Here are a few reasons working with a bank alone can sometimes hurt your business:

  • The best property deals happen in market down cycles, and that is when the bank lends the least amount of money.
  • You take on most of the risk, and the bank takes the least risk possible.
  • You cannot control what funding the bank will offer from week to week. Their policies could change and negatively affect you at any time.
  • Bank loans often are very slow, and could cause you to lose out on a great property while you’re waiting to hear back from them.

So, what is creative financing then? Below is a quick summary of five of the most common types of creative financing. While each of these are useful, it’s important to remember that you should not try to learn all of them at once. Instead, pick one or two that work for you and research them until you know all the details. Then, start incorporating it into your business when appropriate.

1st: Seller financing. 

Seller financing just takes the bank out of the picture without adding in any other players. In this equation, the seller agrees to let the buyer pay for the property in monthly installments. While it isn’t common, that doesn’t mean it won’t work best in certain situations.

2nd: Private Loan from a Self Directed IRA

This tool requires lending, like a traditional mortgage, but it is based off an IRA instead of a bank. Note that you cannot borrow money from your own IRA, but you would find an interested party who is willing to use their funds to invest in the property. A potential investor may be willing to help a fellow investor work towards the same goals, since they are not able to use their IRA funds to invest in their own property.

3rd: Private Loans (not IRA)

This is in essence the same as the last tool, except the money is outside of an IRA. You can often meet people at real estate events who are willing to invest their finances privately in property. These people may even turn out to be mentors and friends who can help you in your career, and because you are controlling their investment, they have a more invested interest in you.

4th: Master Lease with Option to Buy

If a landowner is renting a property and finds themselves not motivated to do work on the property or find new renters, a savvy entrepreneur can come in with this option. She can offer to pay the landowner what she is getting now, put in some maintenance on the property, and fill in the empty spots. The landowner is responsible for taxes, insurance, and major costs, but the entrepreneur covers all the costs associated with rent (vacancy, turnover, etc.). This means the landowner still receives the amount he had, while the entrepreneur is able to make money additional to that, because of her ability to fill the property and gain money from those additional renters. 

The option to buy would allow the entrepreneur to buy the property after a set amount of time. Whatever she had invested in the beginning will act as a credit towards the purchasing price. There are a few options for an exit strategy:

  • The entrepreneur can save for a down payment and look for financial partners.
  • She can do a 1031 exchange, where she essentially just turns a different rental property in for this one, and defers taxes on the difference.
  • Finally, she could just sell this option to another investor and walk away with that profit.

This option means less risk for the entrepreneur. She only risks her time and whatever investment she put into the property at the beginning.

5th: Master Lease + Option (with a Credit Partner)

If you want to purchase a property, and just don’t have the money, a credit partner can come in and purchase the property with a mortgage. Then, you master lease the property and take care of it. The credit partner does no work and pockets the rent minus the mortgage fee, while you get the rest of the profits. 

There are a variety of exit strategies that could be used here, including the ones listed above, but another option is purchasing at 50% interest in the property at 50% of the original price. That way, each partner could choose to purchase the property from the other, or just eventually sell it and split the profit. 

Each of these tools are good in certain situations. Getting to know one or two extremely well will work better in the long run, rather than trying to use them all right away. Hopefully, with more options than just traditional financing, you will be able to invest in a greater variety of properties.