Advice: Ways to Diversify Investment Portfolio/Find connections/Develop partnerships

[ndwilli6]

What kind of mortgages are you getting? It's tough to do conventional paper after eight.

I haven't made it to 8 yet but try Finance of America. They have a commercial side too! If you place properties in an LLC you can use a line of credit to purchase properties and they only require 10% down and finance all rehab.

Once I reach 10 I'll try to bundle a few at a time...how many do you own?

[AnotherReader]

Looks like those folks are borderline hard money lenders for these product lines.

You are buying below market with small down payments, getting a commission on the sale to yourself, rehabbing the properties, and then generating rental income. Your lender is using some of the net income from the rentals to approve you for additional loans.

What rent are you getting on those $70k houses that you do $10k of improvements to with your $80k mortgage? The assumption is you are significantly cash flow positive, because you are able to use some of that income to qualify for the next property.

Not paying for property management (DIY) certainly helps your cash flow. Maybe if you showed actual numbers for a specific property, the people here would better understand what you are doing.

[disneysteve]

I own 5 homes. 4 rentals. (Earned $18,516.00).
Home #1: Worth $162k—owe $133k, 29k equity
Home #2: Worth $148k—owe $111k, 37k equity
Home #3: Worth $120k – owe $84k, 36k equity
Home #4: Worth $120k – owe $96k, 24k equity
Home #5: Worth $78k – owe $49.5k, 28.5k equity

You have almost $475,000 in mortgage debt

The mortgage debt is incorrect-- I have $401,500.00 in mortgages.

You listed $473,500 in mortgage debt. If that isn't correct, then you posted incorrect figures.

Thankfully, Brian posted in another thread and explained how commercial lending works which was very helpful in trying to understand all of this. I was thinking in terms of normal personal lending and there's no way someone making 50K could get 475K in mortgages. Clearly, lenders give rental property owners far more leeway and let them take on a whole lot more risk.

[AnotherReader]

You listed $473,500 in mortgage debt. If that isn't correct, then you posted incorrect figures.

Thankfully, Brian posted in another thread and explained how commercial lending works which was very helpful in trying to understand all of this. I was thinking in terms of normal personal lending and there's no way someone making 50K could get 475K in mortgages. Clearly, lenders give rental property owners far more leeway and let them take on a whole lot more risk.

The rental properties contribute to the borrower's income so more more can be lent on the total borrower income. The added risk is generally reflected in higher interest rates and more conservative terms. It's not necessarily commercial lending, rental properties can be financed with conforming loans that are bought by Fannie and Freddie.

I had a lot of mortgages at one point before Fannie and Freddie imposed limits. I sold a couple of properties along the way and paid some mortgages off with the proceeds and paid others off through accelerated payments. During the downturn, I bought several foreclosure and short sale properties for cash.

If you are knowledgeable about real estate and understand risk, you can build a nice portfolio and a solid income with leveraged rentals. It's a business, not a passive investment portfolio, and you are compensated for the risk if you run your business correctly. Most people that buy a rental do not know what they are doing and many of them lose their shirts.

If you want to see someone that has done it right and isn't trying to sell you something, read the "No Nonsense Landlord" blog. Or look at Rachael's "5 Years to Freedom" here.

[disneysteve]

The rental properties contribute to the borrower's income so more more can be lent on the total borrower income.

I understand that, but OP still owes nearly 8 times his income in mortgage debt even when you include the rental income. That's way higher than what's allowed for buying your personal residence.

I would hope that anyone doing this maintains a much larger emergency fund since there are so many things that can go wrong pretty easily.

[AnotherReader]

I understand that, but OP still owes nearly 8 times his income in mortgage debt even when you include the rental income. That's way higher than what's allowed for buying your personal residence.

I would hope that anyone doing this maintains a much larger emergency fund since there are so many things that can go wrong pretty easily.

I think you misunderstand what the OP is saying. The $62k includes the NET income after all expenses, including the mortgages. He is not doing a very good job of explaining what he is doing, which is why he should post a formal income and expense statement to show the cash flows from the rentals.

As an aside, he may be overestimating his net income if he is not allowing for vacancy and collection loss and capital improvements and repairs. A formal I&E statement would allow more scrutiny of the profitability of his business.

[disneysteve]

I think you misunderstand what the OP is saying. The $62k includes the NET income after all expenses, including the mortgages. He is not doing a very good job of explaining what he is doing

I'm glad I'm not the only one who thinks so.

That's why I asked what I thought was a very simple question: How much do you earn? But he has yet to actually answer that in an intelligible way.

I'd love to know his gross annual income. Before taxes. Before mortgage payments. Before property taxes. Before anything. How much income is there? He originally said about 45K. Then 62K. Now you're suggesting that the 62K figure is after a bunch of expenses and mortgage payments are deducted, which means it's actually a lot higher than that.

[bjl584]

OP is leaving out some info.
I'm not sure he has everything recorded on spreadsheets.
If he does, I'd like to see it so we can see exactly what these properties are cash flowing after all expenses are accounted for.

I'm sure that the income he is generating isn't going into his pocket either.
Hopefully he is building some cash reserves for each property that he owns or he is paying some of the loans down faster. He could run the risk of over leveraging himself.

[ndwilli6]

I'm glad I'm not the only one who thinks so.

That's why I asked what I thought was a very simple question: How much do you earn? But he has yet to actually answer that in an intelligible way.

I'd love to know his gross annual income. Before taxes. Before mortgage payments. Before property taxes. Before anything. How much income is there? He originally said about 45K. Then 62K. Now you're suggesting that the 62K figure is after a bunch of expenses and mortgage payments are deducted, which means it's actually a lot higher than that.

Hey, I've said it multiple times.

Salary (full time job) is approximately $40k.
Two part-time jobs, which brings total around $48k-52k depending on hours I decide to work. The 62k is netting after expenses of properties.

Rental properties income (before taxes/maintenance/etc) is $49,564.00.

If you look at it that way before anything is taken out I earn approximately $97,564.00-$101,564.00.

Subtract mortgages: $30,708.00

That leaves me with $66,856.00-$70,856.00. That's before taxes! Now deduct my taxes (15%).

Leaving me with $56,824.60 - $63,770.40.

Deduct my living expenses ($12000.00 personal mortgage/$1200.00 gas/car/$2400.00 food/$1200.00 personal care).

That leaves me with $40,024.00-$46,970.40. I pay car insurance too which is another $2400.00 annually. Need to find cheaper but honestly haven't looked.

Now you should see how I am practically saving my employment income.

[ndwilli6]

I think you misunderstand what the OP is saying. The $62k includes the NET income after all expenses, including the mortgages. He is not doing a very good job of explaining what he is doing, which is why he should post a formal income and expense statement to show the cash flows from the rentals.

As an aside, he may be overestimating his net income if he is not allowing for vacancy and collection loss and capital improvements and repairs. A formal I&E statement would allow more scrutiny of the profitability of his business.

That's using 25% as losses on each property I own.

[ndwilli6]

OP is leaving out some info.
I'm not sure he has everything recorded on spreadsheets.
If he does, I'd like to see it so we can see exactly what these properties are cash flowing after all expenses are accounted for.

I'm sure that the income he is generating isn't going into his pocket either.
Hopefully he is building some cash reserves for each property that he owns or he is paying some of the loans down faster. He could run the risk of over leveraging himself.

Depends on what you mean regarding 'my pocket.'

Rental deposits go into my business checking account...for instance one property I own is rented for $1200.00. Mortgage is $706.00. I earn $494.00 monthly from this property. I place into business savings account $123.50 as this is 25% (loss according to lender and housed for safe keepings).

Other $200.00 goes into business checking account.

And, $170.50 is transferred into my personal checking account. And, sometimes personal savings account.

My entire savings (included) business and personal is currently at $86,952 and some change.


Long story short if I wanted I can pay one property ($49.5k off) if wanted but that would capital suicide to me. I leverage others' money to profit.

Depending how I purchase price I receive cash-back as I am an agent.

[ndwilli6]

Looks like those folks are borderline hard money lenders for these product lines.

You are buying below market with small down payments, getting a commission on the sale to yourself, rehabbing the properties, and then generating rental income. Your lender is using some of the net income from the rentals to approve you for additional loans.

What rent are you getting on those $70k houses that you do $10k of improvements to with your $80k mortgage? The assumption is you are significantly cash flow positive, because you are able to use some of that income to qualify for the next property.

Not paying for property management (DIY) certainly helps your cash flow. Maybe if you showed actual numbers for a specific property, the people here would better understand what you are doing.

My rent for the $49.5k home is $752.00/I'm going to refinance and try to receive a $60k. Use those funds to purchase an additional property which I suppose to close on 1/31 this month.

Doing my own property management absolutely does. Instead of paying 8% to someone else why not pay the 8% to yourself...especially when you only receive 1 phone call a month (and sometimes not one). I've received 3 lately because of freezing temperatures hitting NC.

Whatever I'm paying in interest for mortgage w/LOC and/or hard money lender I push for rental amount being 25% more than that or a little more. This way on paper it shows I am earning a profit or at 0 until I refinance.

I ran into that problem with the 1st house. The mortgage was $1000.00 but rent was only $1200.00, so on paper it showed I was loosing money according to lender. Now, all of them are showing profits. And, I need to keep it that way.

[AnotherReader]

Standard Rental Operating Statement for the OP's Property

Scheduled Gross Income: $14,400
Vacancy and collection @5%: (720)

Adjusted Gross Income: $13,680

Operating Expenses $5,472
Taxes
Insurance
HOA
Property management
Repairs and Maintenance
Utilities while vacant
Advertising and lease fees
Reserves for replacement

These typically run 40 to 45 percent of AGI, depending on taxes and how you reserve. Since OP self-manages, call it 40 percent.

Net operating income: $8,208

The net operating income is what pays the lender and the owner. OP has a mortgage payment of $706. Assuming the taxes and insurance are included in that payment and not knowing the principal or the interest rate, let's guess a $70,000 mortgage at 6 percent for 30 years. P&I payment is around $420 a month, or $5040 per year. The difference, $3,168, is what he is likely to net, given the assumptions. If the $706 is just principal and interest, then over time the OP will lose money. $8,208-($706 x 12)=($264)

Not sure what the OP is accomplishing by taking 25 percent of the rent minus the mortgage payment and putting it in business savings. Apparently his lender is counting 75 percent of the rental income for determining his income for lending purposes.

[LivingAlmostLarge]

How do they allow you to pull out so much cash on a refi? Are there no fees involved?

So you are clearing from the rentals $20k/year. That you are using to leverage more properties. How do you qualify for $400k in mortgages though assuming $50k/rental income 75% = $38.5k income plus $40k income and part time $10k/year.

That still means you are "making" according to bank $100k/year and $400k in mortgages and still buying more? Isn't that the top end of leverage?

Does it never get capped? Does the bank never question it? That you couldn't carry it if something happened? Do they let it get assume to $900k in mortgage and $150k "income"?

[disneysteve]

I earn approximately $97,564.00-$101,564.00.

Ah! That makes a lot more sense than 45K. So your 473.5K in mortgage debt is only 4.6 times your income. That's still a fair amount of leverage but not nearly as much as it seemed based on your earlier posts.

Thanks for clearing that up.