Flip Single or Multi-Families Part-Time and Earn $25-$50k Per Flip

You do not have to be a full-time real estate investor to do well in real estate investing.  You can do this part-time, keep your job if you want, and make as much or more than you may be making in your full-time job!  Why keep that full-time job then?  Well, it is up to you.  Do you get good medical benefits?  Does your employer match or help you with funding your retirement?  Do you get to travel in your job to places you may not otherwise be able to see?

There are a variety of reasons you may want to stay employed, but real estate investing can open new doors and give you options.  See my video discussing flipping houses and multi-families and knowing the cost in buying and holding before you decide to flip or hold that rental property.

https://youtu.be/akVOgqGX8N0

How Much Rehabbing is Necessary to Make a Flip Profitable?

The amount of money and effort you should put into rehabbing and renovating in order to sell fast (flip) and make a profit can sometimes be somewhat of an art.  Something you must be careful of when flipping houses is not to overdo the rehabbing.  You must find a happy middle ground of fixing up the house so you do not under or over repair the house.  Often this boils down to knowing the neighborhood and having the experience of rehabbing to gain a sixth sense about flipping. 

Bathroom and kitchen overhauls are a must and should “pop” to become a big selling feature.  The bathrooms and kitchens are the two biggest selling features in the house.  Redo those areas from top to bottom.  Get new appliances.  If the kitchen, bathrooms and appliances do not stand out, you may have a deal killer.  Hardwood floors are great, but often you can substitute laminate flooring for less money.  There are also tiles that look very much like wood that can be used in kitchens and other areas.

Carpeting in bedrooms is fine.  I often feel that carpeting in upstairs bedrooms works as noise deadening.  It also looks good.

Painting all the rooms is a must and should go without saying.  A good neutral color is what I like to see with a bright white trim semi-gloss to give character and contrast. 

A new roof must be factored in if needed, but do not spend much on a garage.  Other items to look for include the heating and cooling systems.  A new furnace or boiler, hot water heater and air conditioning system can be big ticket items.  These are great selling features, but if you do not have to replace them don’t.

The exterior of the house is what makes a first impression.  Landscaping, a clean looking exterior and a sealed driveway go a long way to adding great value to the property. 

Know the neighborhood and rehab accordingly.  Don’t be the Ritz in a Motel 6 neighborhood.  These concepts hold true for rental property as well.  Don’t overdo the repairs and renovations for rentals.  It should always be clean, comfortable and meet codes, of course.  But you will only get a certain amount of rent in a particular area no matter how glamorous you make an apartment.

 

THINGS TO CONSIDER WHEN STARTING YOUR BUSINESS

THINGS TO CONSIDER WHEN STARTING YOUR BUSINESS

There are a number of things to consider when you are first starting out.  You want to look and act professional.  There are things you can do in order to develop and maintain the appearance of being a business person and being professional in your chosen trade.

To begin with, set up an actual business.  Working under your own name is not necessarily the best way to go.  Including your name as part of the business name may be OK, but consider other ways of promoting yourself through the business name.  You must establish a legal structure.  Not only for the professionalism of having a business, but for legal and liability issues as well.  Most new businesses are going the LLC  (Limited Liability Company) route these days as opposed to a corporate structure.  It is fairly easy to establish an LLC in most states, and it protects you as a business owner.  The LLC should have a Operating Agreement and Membership Certificates prepared to cross the t’s and dot the i’s of the LLC requirements.

You should consider a separate email address that ties in with the company name, and also a website and logo as you begin to grow.  Many times I will also suggest things like tee shirt or hats with the company name and logo included.  Of course, a business phone number is a must (consider google voice) and business cards are essential.

Looking and acting professional goes a long way in helping your business.  Try it, you will like it!

IS FLIPPING WITH LITTLE OR NO MONEY POSSIBLE?

I am often asked if flipping with little or no money is actually possible.  I use to think that it was not really possible to flip a house with no money.  I felt that it was necessary to have some of your own money invested, either during the purchase or during the rehabbing.

Recently I have been working with another flipper who frequently uses a hard money lender.  A particular hard money lender he uses did not allow second mortgages on the property being flipped.  The lender wanted to see that the flipper had some “skin in the game.”  It is not unusual for a hard money lender to write into their note/mortgage that no second mortgages are allowed.  So, when this flipper found a great house to flip, and had his money with other projects, what did he do?

Well, we figured out of way of getting 100 percent funding for the flip.   We had to provide some security without putting a second mortgage on the property.  What did we do?  We found another investor who normally funded flippers, but he also usually wanted a first mortgage with no seconds.  After showing him the past experiences and successes of my flipper friend we made him an offer that he could not refuse.  

We offered to put his LLC on the deed as part owner of the property.  The property was quitclaimed to him after the closing.  He was then 50% owner.  Now, in order to secure his funding, and put him at lower risk, a note was prepared which indicated the amount of his investment and the interest rate that he would receive.  The investor was not participating in any income or loss from the sale of the flip when it was completed.   He was getting his principal back with an agreed upon interest rate.  Since that time I have worked with flippers who have also been able to do this.  So, as you can see, finding the right investor and using this tactic can lead to flipping a house.  This shows it can be done with little or no money of your own.  As long as the numbers work, it can be worth doing.

TRANSACTIONAL FUNDING FOR WHOLESALERS

Transactional funding for wholesalers has become more and more prevalent when a double closing is needed to wholesale a deal to an end buyer.  Essentially, transactional funding is a short term loan which funds a real estate closing for a short period of time.  This allows a wholesaler to actually buy the property from the original owner first.  Once that initial closing is completed the wholesaler then sells that property to the rehabber/flipper by having a second  closing within a short period.  This is usually referred to as a double closing.  Both closing take place with little time passing between the first and second closing.  Often they are done back to back.

The transactional funding party will generally take the appropriate steps to verify that the end buyer has been approved for closing and has the required funds in place before they will fund the first part of the deal.  The fee charged by a transactional lender is usually between 3 and 4 points (the percentage of the principal amount of funding).  Generally if the deal extends beyond a 24 hour period you will find that there will be a pretty steep interest rate charged to the wholesaler, in addition to the points, which will cover the number of days that the loan is outstanding.  Interest may be as much as 12 to 14 percent in many cases, which should inspire the wholesaler to get the deal done very quickly.

Transactional funding of a wholesale deal is not uncommon.  It seems like the concept of this type of lending has become more prevalent since the collapse of the real estate market.  Traditional lenders became more weary of certain types of funding once the real estate market situation changed.

The bottom line is this, if transactional funding is the only way to close a deal and you will make money by using this source of funding, do it.

Please visit propertycoach411.com and find me Property Coach on Facebook.

 

FLIPPING OR HOLDING MULTI-FAMILY PROPERTIES

A positive result of rehabbing a multi-family property is that you have an automatic “plan B.”  Once you are done you can decide whether to flip it for an immediate profit or hold it for rental income.  There are a number of considerations and calculations you must examine when making that decision.

There are calculations such as cap rate, cash on cash return, rent as a percentage of purchase price, rent percentage of purchase price plus rehab cost and the ratio of operating expenses to operating income.  Debt service coverage ratio becomes particularly important if you are thinking of conventional financing through a lender or refinancing after some experience with renting the property.  Be aware that any multi-family less than 5 units would not be viewed as commercial property by a conventional lender.  That generally means that you will have to show the lender that you are capable of handling the debt by disclosing your personal income and source of funds.  In a commercial transaction you can usually get the lender to consider the income producing property as a stand-alone business without you having to worry about what your personal income is.

Let’s look at some of these numbers.  Cap rate (capitalization rate) is calculated by dividing the annual net operating income by the purchase price of a property (or possibly market value).  So, if a property net operating income is $20,000 (which does not include any mortgage or debt used to finance the purchase of the building) and the building is selling for $200,000 then the cap rate is 10% or 10.  $20,000 divided by $200,000.   For smaller rentals I personally do not pay attention to cap rate.  If there are 6 or 7 units in the building I will ponder it, but if it may not be a deal killer.  In areas like Manhattan or Fairfield County, CT you will find very low cap rates 2, 3 or 4 may not be uncommon.  Buyers of these properties are often looking more toward appreciation then what their return in current income is going to be.  Cap rates in less affluent areas will normally be in the double-digit ranges for good deals.  But again, it is not the only thing to consider.  Generally it is felt that the higher the cap rate the better the deal you are probably getting.

I think cash on cash return should be a consideration in a multi-family buy and hold situation.  After all, if you only get a 3 or 4 percent return on your money then there are probably better secure investments for you.  I calculate the cash on cash by taking the actual cash flow on the property and dividing that by the actual cash you use to purchase the property.  So, if the net operating income on a cash basis is $20,000 in the first year and you then deduct your loan payments, let’s say $10,000 for the year, you have $10,000 of cash flow.  If you had to come up with $40,000 cash to get the building, then your cash on cash return is $10,000 divided by the $40,000 you needed to get the building, or 25%.  That looks like a pretty good use of your cash.

I consider rent as the percentage of the purchase price and the purchase price plus rehab to be a “must compute” type of calculation for analysis and holding rental property. At a minimum, I am looking for the monthly rent to be equal to or exceed 1 percent of the cost of the property.  At one percent I am not crazy about the deal, but if the current rents are too low and I think they can be raised or increased by getting new tenants I would consider the building.  If you can get a 1.5 to two percent rate I think you are doing very well.  So, let’s look at the calculation.  Again, we will say the cost of the building is $200,000.  Let’s say we get $3,000 in rent each month.  The rent as a percentage of the price of the building is $3,000 divided by $200,000 or 1.5%.  This, for me, is acceptable.

I do not like to see operating expenses being more than fifty percent of the operating income.  I include it that calculation a reasonable estimate for vacancy loss as well as a reserve amount.  This calculation with the rent loss estimate and reserve amount included in expenses is probably too conservative for many multi-family investors, but that is a personal preference and I am always willing to consider the pros and cons of this calculation given current market considerations and longer term projections.

The last calculation I will mention is the debt service coverage ratio.  As I mentioned before, if you are looking for conventional refinancing or a bank loan this is an important calculation to a lender along with the cash flow.  Most lenders that I have talked to are looking for a 1.2 or 1.25 ratio.  Some may go with a lower ratio, but plan on a 1.2 or1.25 minimum requirement.  The debt service coverage ratio is the net operating income amount divided by the loan payment amount.  So, if we have $20,000 of net operating income, (which must consider vacancy loss, which should automatically be accounted for when using actual numbers), and our annual loan payments total $15,000 the ratio is $20,000 divided by $15,000 or 1.33, which is acceptable. Presented on a monthly basis, the monthly net operating income is $1,667 divided by $1,250 which is 1.33.  This would be considered an allowable ratio.  So, if the lender was confined to a 1.2 ratio or better, and wanted to see what the maximum monthly allowable loan payment is, the lender would take the $1667 monthly net operating income and divide that by 1.2 to say the maximum allowable loan payment allowed would be $1389 per month.  In this example the monthly loan payment of $1,250 is perfectly acceptable.

Using a spreadsheet when considering multi-family properties before you make a deal allows you to properly estimate your annual income and expenses and then calculating these rates, ratios and numbers. This will help you make a more informed and intelligent decision when considering your alternatives before purchasing a multi-family property that needs work.

Please visit propertycoach411.com for more information on real estate investing and coaching.

TRAINING ON HOUSE FLIPPING: A SYSTEM FOR FLIPPING HOUSES

Visit https://www.propertycoach411.com/ for information on training.  One on one, group training or training materials.  There will be live group training in Connecticut on October 14, 2017 from 9 in the morning until 6 in the evening.

Please visit this website   https://www.propertycoach411.com/

to get information on  developing a system for flipping or wholesaling properties.

On Amazon for Kindle or in Paperback

 

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CALCULATING OPTIONS FOR MULTI-FAMILY OWNERSHIP

There are a variety of calculations and numbers to think about when considering your options as to whether you should retain or sell a multi-family property that you are rehabbing.    It is always good to have a variety of exit strategies, and multi-family rehabs can give you that without much thought.

So, there are calculations such as cap rate, cash on cash return, rent as a percentage of purchase price, rent as a percentage of purchase price plus rehab cost and the ratio of operating expenses to operating income.  Debt service coverage ratio becomes particularly important if you are thinking of conventional financing through a lender or refinancing after some experience with renting the property.  Be aware that any multi-family less than 5 units would not be viewed as commercial property by a conventional lender.  That generally means that you will have to show the lender that you are capable of handling the debt by disclosing your personal income and source of funds.  In a commercial transaction you can usually get the lender to consider the income producing property as a stand-alone business without you having to worry about what your personal income is.

Let’s look at some of these numbers.  Cap rate (capitalization rate) is calculated by dividing the annual net operating income by the purchase price of a property.  So, if a property net operating income is $20,000 (which does not include any mortgage or debt used to finance the purchase of the building) and the building is selling for $200,000 then the cap rate is 10% or 10.  $20,000 divided by $200,000.   For smaller rentals I personally do not pay attention to cap rate.  If there are 6 or 7 units in the building I will ponder it, but if it may not be a deal killer.  In areas like Manhattan or Fairfield County in Connecticut you will find very low cap rates 2, 3 or 4 may not be uncommon.  Buyers of these properties are often looking more toward appreciation then what their return in current income is going to be.  Cap rates in less affluent areas will normally be in the double-digit ranges for good deals.  But again, it is not the only thing to consider.

I think cash on cash return should be a consideration in a multi-family buy and hold situation.  After all, if you only get a 3 or 4 percent return on your money then there are probably better secure investments for you.  I calculate the cash on cash by taking the actual cash flow on the property and dividing that by the actual cash you use to purchase the property.  So, if the net operating income (cash basis) is $20,000 in the first year and you then deduct your loan payments, let’s say $10,000 for the year, you have $10,000 of cash flow.  If you had to come up with $40,000 cash to get the building, then your cash on cash return is $10,000 divided by the $40,000 you needed to get the building, or 25%.  That looks like a pretty good use of your cash.

I consider rent as the percentage of the purchase price and purchase price plus rehab to be a “must compute” and analyze type of calculation for holding rental property.  At a minimum the monthly rent must equal or exceed 1 percent of the cost of the property.  At one percent I am not crazy about the deal, but if the current rents are too low and I think they can be raised or increased by getting new tenants I would consider the building.  If you can get a 1.5 to two percent rate in moderate income areas I think you are doing very well.  So, let’s look at the calculation.  Again, we will say the cost of the building is $200,000.  Let’s say we get $3,000 in rent each month.  The rent as a percentage of the price of the building is $3,000 divided by $200,000 or 1.5%.  This, for me, is acceptable.

I do not like to see operating expenses being more than fifty percent of the operating income.  I include in that calculation a reasonable estimate for vacancy loss as well as a reserve amount.  This calculation with the rent loss estimate and reserve amount included in expenses is probably too conservative for many multi-family investors, but that is a personal preference and I am always willing to consider the pros and cons of this calculation given current market considerations and longer term projections.

The last calculation I will mention is the debt service coverage ratio.  As I mentioned before, if you are looking for conventional refinancing or a bank loan this is an important calculation to a lender along with the cash flow.  Most lenders that I have talked to are looking for a 1.2 or 1.25 ratio.  Some may go with a lower ratio, but plan on a 1.2 or1.25 minimum requirement.  The debt service coverage ratio is the net operating income amount divided by the loan payment amount.  So, if we have $20,000 of net operating income, (which must consider vacancy loss, which should automatically be accounted for when using actual numbers), and our annual loan payments total $15,000 the ratio is $20,000 divided by $15,000 or 1.33, which is acceptable. Presented on a monthly basis, the monthly net operating income is $1,667 divided by $1,250 which is 1.33.  This would be considered an allowable ratio.  So, if the lender was confined to a 1.2 ratio or better, and wanted to see what the maximum monthly allowable loan payment is, the lender would take the $1667 monthly net operating income and divide that by 1.2 to say the maximum allowable loan payment allowed would be $1389 per month.  In this example the monthly loan payment of $1,250 is perfectly acceptable.

Using a spreadsheet to estimate your annual income and expenses and to analyze a deal before you acquire a multi-family property is a must.   Then calculating these rates, ratios and numbers based on your findings will help you make a more informed and intelligent decision when considering your alternatives before purchasing a multi-family property that needs work.

OPTIONS FOR MULTI-FAMILY HOUSING NEEDING REHAB

Let’s talk about multi-family housing that needs rehab work.  Obtaining a multi-family that needs work gives the investor a variety of options for both financing the property as well as deciding to flip, buy and hold or buy and hold for a period of time then flip.

METHODS OF PURCHASING MULTI-FAMILY HOUSING

You can always take the conventional route when buying multi-family properties.  By that I mean you can get a mortgage from a lender.  If the property has enough units to be considered a commercial real estate deal (generally more than four units is considered commercial) you can usually get a mortgage based on the income the property generates on its own, without having to prove your own personal income.  If you are buying the property that is in disrepair or has vacancies you will probably not be looking at conventional financing.  If you are not sure if you want to flip or buy and hold, this may not the best way to go.  The expenses of appraisal and closing costs are far too high to consider this economically feasible.  In addition, you may find that a conventional lender will insert a prepayment clause which will make a quick turnaround prohibitive.

There are some hard money lenders who will be willing to finance multi-family properties whether you decide to flip them or hold them.  Again, the rates on these loans may make it prohibitive.  The best sources of funds for buying these properties then boils down to your own cash, private lenders or OWNER FINANCING.

You can often sell your idea of owner financing by simply putting the right information in front of the current owner.  For example, you can make a cash offer at the low end of the spectrum.  You can make an offer subject to obtaining a mortgage at a little higher amount.  Finally, you can make an offer that cannot be refused, by offering asking price or higher, but that offer is on the condition that the owner finance a major portion of the purchase.  You can show the owner how the interest rate you are offering is better than most investment returns he will get elsewhere.  He will have a first position mortgage on the property that will allow him to take back the building in the event of default, and you can have the owner give you a long-term repayment schedule (say 20, 25 or 30 years) with a balloon payoff to the owner after five or ten years of payments.  Show that information to the owner on paper.  Let them see that, in fact, he or she will be making more than what the actual purchase price is because of the interest being collected over the five or ten years of repayment.  If you decide to flip the property there is nothing lost in the transaction, and you have minimized your cash outlay by getting the owner financing in place.

Of course, all of this is predicated on running numbers for both flipping and buying and holding before you even get into the idea of buying the property.  So, we have previously discussed some things about running numbers in the event of flipping.  In a future blog we will look at some numbers and calculations you must be aware of in order to make a decision on a possible buy and hold option.

There are a number of additional and traditional calculations to take into account when considering a buy and hold option on a multi-family rehab project.  I personally do not give the same amount of weight to the importance of some of these numbers as others often do, and I will try to cover that as I discuss each item and the importance of each calculation in my next blog.

You are already ahead of the game by purchasing a multi-family property below market.  The planning for this rehab should generally be a bit different than what you would do for a single-family home that you would be selling to homeowners.  Rental property generally should be viewed with a bit different perspective.  For example, do you put in granite countertops?  It is not likely that you would do that.  Likewise, you may want to use linoleum where you might otherwise tile, or use a variety of flooring instead of hardwood if the hardwood is not already there.