Ok, it’s not as simple as that, or else everyone would be filthy rich, and you wouldn’t be reading this article.
Here’s the story. I learned a few years ago that the key to building real estate is not by leveraging money, and houses against houses. It’s about building a bit of a surplus, and using that money over, and over again.
We had a client call us that wanted to sell a condo they have been renting out for years. It was in pretty rough shape… as you’ll see in the photos… (https://www.dropbox.com/sh/s51hqmcgmuqn0of/AACCj7raOHmd0WUjtBpazpcma?dl=0) … smoked in, animals, original carpet….we found a newspaper on top of the cabinets from 1996…
They asked us to do an evaluation, and we both came to the conclusion that the home needed a lot of work. They wanted to list it around $85,000. Well by the time you factor in time, and our commissions, we offered to buy it for $80,000.
Now I want to stop and say that we did offer this deal to a few of our investment clients first. We, as a company, don’t want to just take all the best deals, and then have ticked off clients. But it was around Christmas, and no one wanted to pull the trigger. So I made them the offer for $80,000, and we took possession fast so we could get to work on it.
This is where the technique for this comes in…. and that’s where we will actually have to meet to discuss how it all works. But the long story short is that we need to know what the ARV will be. (After Repair Value). We estimated at worst the value would be $120,000 once fixed up. Keep in mind we paid $80,000 cash so we didn’t have a mortgage on it yet.
Just doing some quick math, if we know that we can get it to appraise for $120,000 once renovated, that means that we can only take out an 80% LTV on it. That leaves us at a maximum input of $96,000 all in. Purchase/Renos/Carrying Costs/Legal Fees… etc…
We budgeted what materials and trades we needed, and then we got started. After a day of demo, and a month of renos, we were able to spend just shy of $12,000. That included a brand new kitchen, floors, baseboards, paint, bathroom, etc… gutted, and put back together over the Christmas “break”.
Then comes the nerve wracking part. You are sitting without $92,000 of hard earned cash… you need that appraiser to come to the table and appraise the home correctly.
Appraisal day came, and we all waited anxiously for the verdict. I think you can guess by the fact I’m telling you this story… it came in good…. $130,000! Above what we estimated. That means two things if you break it down.
Well that part is a personal choice you can make on your purchases. It’s a good way to build your cash holdings up front. But the main goal is to build long term wealth, and I like having no mortgages personally.
In no time, we now have a renter in there paying $1095/month. That mortgage is more than covered, and we have our cash back to move onto the next project.
That’s the story of how you can take $92,000 and turn it into a good investment… and then get your money back.
If you’re looking for more information on finding homes like this, or potentially pooling money in partnerships, we would gladly help.
Feel free to contact me directly at the office or fill out the form below.
--- Justin Myer ---