Welcome!

Posted on March 24 by Alexfelice

Broke

Definition: having completely run out of money

Synonyms: penniless, moneyless, bankrupt, insolvent, ruined, down-and-out, without a penny to one's name, without a cent, without one red cent, without two pennies to rub together; poor, poverty-stricken, impoverished, impecunious, penurious, indigent, in penury, needy, destitute, cleaned out, flat broke, strapped (for cash), bust, busted, hard up, stone broke, as poor as a church mouse

Welcome!

My name is Alex

I made this site to tell my story about real estate investing and hopefully, encourage others to join me.

I've been investing for a few years now and it's starting to grow quite rapidly! I've had a long journey, learned a lot, and I'm excited to share my success and mistakes with you. I also like to have a place to talk about myself, people in real life will only listen so long.

Rental #5 This is getting easy

Posted on March 20 by Alexfelice

I had just finished my last house refinance and received the funds on February 12th, wasting zero time I started to bid on units the next day. While going through the process there were a few unique situations which I thought would be valuable to share with those who want to buy rental properties. I decided to document the process as detailed as I could, a change from my usual ranting about high concept abstract topics.

The hard part of home purchasing for beginners is that it’s easy to learn the concept, but the details and the day-to-day operations aren’t often talked about. Houses aren’t lined up on a shelf like at a store; you have to HUNT for what you’re looking for, beat out competition and, and most times fit what’s available to what you’re trying to do.

Hopefully, this story will give some insight to those interested in what it looks like to go from search, to purchase. As the house is completed I will add that section and another for the lending portion.

February 14th
Bid like a madman

I bid on 7 houses today, a few that I really think will be great and a few that I’m just feeling out the activity on the property. I fully expect the good units to come back and ask “highest and best price” which is common, and most I’ll just never hear about or find myself passing on as new information come in.
My realtor is GREAT and an invaluable member of my team, she sends me properties as often as she can, but I still spend a good chunk of time looking on my own. I’ll email wholesalers or other investors and see if they have any leads, I’ll check websites like bigger pockets, Zillow, Trulia, realtor sites, craigslist, and anything else I can think of. When in buying mode I like to be aggressive.

February 15th
Highest and Best….and Pass

One of the houses I bid on came back with a “highest and best” response. The property looked great on photos and I really liked it, the numbers looked good and the location was good, but when I called my PM he told me it was a 3/2 and could not be converted to a 4/2. This is a BIG DEAL for my strategy because we use a lot of section 8 tenants, and section 8 pays by the number of rooms. So we convert 3/1.5 to 4/2 when we can to get more rent in case we use section 8. 4 bedrooms just commands a higher price point as well for a very low conversion cost. This house would rent for $900/month as a 4/2, but as a 3/2 we would only expect $750, that’s a HUGE difference and enough for me to pass on the unit. It’s important to develop a plan and then work the plan, not deviate out of excitement or fear. If I had gotten emotional (since I really like the house) I may have overpaid or made a poor decision. Hold steady and trust your strategy and your team.
On to the next deal….

February 16th
Hold on the current bid, don’t get stupid

Living in Las Vegas has a really small but impactful benefit that I often consider myself lucky for: time zone difference. When my people get to work and start doing business at 9am east coast time, I’m starting my work day at 6am thanks to the time zone change. While going to work at 6am doesn’t SOUND great, I see it as an advantage that I can start working 3 hours earlier than my Vegas peers. Plus I find nothing more motivating than waking up to text and email with information that can help me make money.
So 6am I get an email about a house I had bid on that said: “highest and best on Walnut”. Houses move quick, no time to delay. I bring up Walnut on Zillow and start looking at details to see where I want to be, I also text my PM for his thoughts on the unit. I loved the area of the house, the price was decent $34,000 list and rehab would have been about $15,000. I figure the house would be worth $80,000 when we are done and it could rent for $700-750. These are close to my numbers, this is a deal I would be willing to do, but I could tell my PM wasn’t very fond of the area, and I know that $80,000 ARV on this house could be a stretch, any lower than that and it can start messing with how much money I can pull out of the deal afterwards. Bank will only lend 75% of value, and no less than $50,000, so an $80,000 house gives me a $60,000 loan, not much room for error. Based on these factors I figured I could bid up to $36,000 but I didn’t feel much reason to stretch so I held at $34,500, and I expect not to win the bid

February 20th
Having no results is boring

President’s day made for an expected slow weekend, so, it also seems that most houses drop onto the MLS on Sunday night or Monday morning. Since this week started on a Tuesday after a vacation weekend, I didn’t get a lot of opportunities to bid on new units this morning that said I did find one small house I was interested in. It’s on Rim Road and I know this is a popular location, and very popular for rentals. It’s a straight shot to the military base, but far enough away to satisfy those who may not want to live close (this is common) or those who have no affiliation to the base as well. The unit was a bit smaller than I would like, I can’t convert it to a 4/2 and the ARV will be a lower than I usually like, regardless of all that I know this is a GREAT location for my strategy. I bid on this house at asking price, which may have been a little high honestly, but I would love to own a unit in this area and I want to be bidding on everything that’s even CLOSE to my goal. The name of the game for me isn’t “get the best deal of all time” it’s “get all the profitable deals I possibly can FAST”. Competition has been higher and increasing over the last 2 years here as well, so it’s not as wise for me to hang on and wait out for the best deal, it may never come. This one will make money so I bid on it.

February 21st
Slow week, keep prodding

Had a long weekend and a bit of slow period here, not much action or conversation for a few days. Things got back in the groove this morning with an email for another house on street I had bid on a similar house earlier this week. I came across a house on Bemwick that I got excited about but quickly remembered that Bemwick had a house we bid on last week and ultimately passed on because the floor plan wasn’t what we wanted. Considering this house is only 2 doors down from the last one, I can safely assume they are similar designs, so I passed on this one. I was also told that I’m still in the running for the Walnut dr house and I still think that one will be a decent deal if I can snag it.

February 22nd
Patience is not my strong suit

My realtor texted me this morning and let me know we are still waiting for the Walnut property. I liked this unit but wasn’t too excited about it, but that’s to be expected when looking at ~40K beat up forec

losures: hard to fall in love with them.

February 23rd
Moment of truth

Got one! The email came through that my offer on Rim rd was accepted. As I started diving in to see what commitment I’ve actually just made I start to realize I probably should have bid a bit lower. I call my PM to see what he thinks, he saw the property last week like I did and looked through it already. He does this a lot because myself and other friends of ours are always buying houses so stay on top of what comes on the market in case he ends up doing the rehab or PM for one of. This allows him to help us make good and fast decisions, and it’s invaluable to me since I’m across the country. Regarding the deal, he says the same thing I thought: I probably paid a little too much, but it’s still a good deal as I expected.

Before I could even print out and sign my offer letter, I find an email from the selling agent saying “thank you!” Open it up and I find the offer agreement already has my initials and has been sent to the seller agent, the realtor must have done it for me. This is the value of GREAT people, my realtor did all my paperwork for me and my property manager already has been through the unit and has an expectation of rehab costs. The value of finding and relying on great partners cannot be understated.
Next thing I did was call my lender. I want to use a program through Fannie Mae called “delayed financing” and to do it the way I want requires some critical steps to be taken BEFORE I purchase the house. Getting your team in order early and ahead of your moves is an important albeit undermentioned strategy. I don’t want to buy the house and then go to the lender 3 months later only to find out he says I can’t do the loan for some reason. Get them involved early and often to strategize both short and long-term.

February 26th
The devil is in the details

We are set for a 20-day close, starting on the 23rd. Lots to do in that time.
One key to real estate (maybe all of life) is to get AHEAD of your problems as early as possible. This means planning and lining up WORKING on everything you have to do as far ahead as you can.

• Pay EM (earnest money) immediately
• Prepare my settlement sheet with rehab included and get it to my lender to approve
• Talk to my rehab partner to make we have a solid estimate, and he can start as soon as the house closes. Idle time is expensive. If you don’t have a contractor lined up, waiting until you have a house to get one is a mistake!
• Speak with my photographer friend about taking GREAT after photos. This is not something that everyone needs to do at this level of rental, but I happen to find value in it. It helps make units look nicer on advertising and it’s great for before/after photos for the blog
• Get insurance estimates and prepare to have service started on the day of closing. Also, I will add this cost to the settlement sheet
• Start advertising for a new tenant IMMEDIATELY. It takes time to find tenants; I like to start telling them the unit will be available as soon as we start work on it. Sure not everyone will be willing or able to wait for it to be finished, but many will be! This is an easy and small benefit that costs nothing and can only help.

Once all this stuff is done we will close on the house. The rehab will start immediately and I expect it to take about ~6 weeks. In the meantime, I’ll be working with my lender to ensure a smooth underwriting process. Hopefully, this informal but thorough blog is useful to anyone who may be curious about the day-to-day of the closing process. It’s probably a boring one for most, but in my opinion, that’s a good thing. Closing on a house SHOULD be boring because nothing boring is scary and fear is what prevents people from moving forward on investments. So if this process seems mundane or easy then I consider that to be a success.

March 5th
Is it easy? Yes. Does it go smoothly? Never.

I was waiting patiently for our closing date. I had spoken to my partner about getting invoices for total rehab which we needed prior to closing to use delayed financing. I had my HVAC contractor get me an estimate on a replacement system since the house had been gutted of the nearly the entire system. Things were going smoothly and I was feeling confident that this deal would go smooth

Then life came around and smacked some sense into me

This happened in the form of an email from the law firm who is closing the deal telling me they found out that the local water utility company will be doing some sewer infrastructure work to the unit in the future and it would cost approximately $5,000. OUCH! Time to damage control!
I emailed my realtor and asked if we could either

A. Bail from the deal completely
B. Re-negotiate our purchase price

This house had been on and off the market a few times in the past, this certainly gives me leverage. If I bail on the property I’ll lose $1,000 which is painful but not the end of the world. Far better to lose $1,000 now than get a property that doesn’t make money each month for the foreseeable future. If I can get the seller to eat the $5,000 then life is great, a really good middle ground would be if the seller will meet me halfway and eat $2,500 and I’ll eat the rest. This keeps all parties in fair circumstances and we get to keep moving.

After I did some research this expense doesn’t seem to be so painful. First, it’s scheduled for the future but at an unknown time, and the longer the I can stretch the deferment the better for me, in fact, I wouldn’t pay for anything until long after I’m dead if I could!! Defer Defer Defer! I also found out it’s not a lump sum charge but instead can be made in installments, and I don’t really have to get this paid until I sell the property, not that I would take this long, but it does mitigate the risk quite a bit. As I learned more about the situation I became less worried. I told the realtor my thoughts and we are hoping to come to an agreement once we find the sellers’ position.

March 7th
Renegotiate to win

The seller was easy to work with and offered to split the $5,000 future expense with me by reducing the price of the home. So my new purchase price on the house is $38,500.
If I had bailed on this deal it wouldn’t the end of the world, this deal isn’t even that great. That said I didn’t want to bail on it I want to get it done, get it making money, then go find the next deal. Having worked this out with the seller allowed me to make a fair compromise and keep moving, happy to do it again.

Also on this day, my rehab guy sent me an invoice for the work to be done. This is a crucial step in delayed financing because I want the rehab costs on the HUD statement so I can pull the cash out of purchase price AND rehab costs later. I sent this invoice to the closing attorney so she could have it put on the HUD.
The last email of the day was a group message from the realtor and the lender advising me that we are set to close Wednesday, March 14th. Hopefully no more hiccups

March 13th
Last step

I made this post probably longer than it could have been, but I wanted to express how laborious the process can be. Every deal is always one unexpected phone call away from falling apart, and keeping it together requires TENACITY and perseverance. Everyone will move along just fine and forget about you if you give up on deals or can’t see through to close. You must be diligent in solving problems as they arise, and you must be willing to always be the sole advocate for your success.
Today was simple, I got an email with the HUD early morning and I sent it to the lender
THIS IS A CRITICAL AND UNDEREMPHASISED PART OF THE DELAYED FINANCING STRATEGY
My lender and I have an aligned goal: get Alex as much of his cash back from purchase as possible so he can buy more. As soon as I sent the HUD over he told me to include a cost of insurance, good call too!
For full transparency I have placed the ACTUAL HUD here, also called a Settlement Statement, this will come with all your real estate purchases.

I have to come up with $58,553.36 and remember, I want to get as much as the possible back of this cash as soon as a tenant is placed. So if I think the house will be worth $85,000 when I’m done, and I know I can only borrow 75% of that. With delayed financing, the rule is you can pull 75% LTV or 100% of HUD whichever is LOWER. So I want the LTV number to be higher than my cash input, but not much higher because that means I’m leaving money in the deal.

ARV: $85,000
75%: $63,750
HUD: $58,553.36

Difference: $5,196.64What this difference means is that if I waited for 6 months of financing I could pull out 75% of that additional $5,757 or $3,897. It would be a little less actually since this takes into account taxes and other costs. Point is, I sacrifice a little capital (~$4,000) to get my money back in 2 months rather than 6: WORTH IT!
So with the HUD updated, lender happy, insurance quote in place, and lawyer set to close in 2 days, I expect my next update to be as boring as possible.

March 14 & 15th
ALWAYS BE CLOSING

The closing attorney sent me the docs to sign for the house. I filled them out, ALL 4 OF THEM, sent them back and wired the money. It’s 10x as much paperwork to buy a cell phone than a house!
On March 15th I got an email saying they had recorded the deed, I’m an owner. EASY

I will update this blog to include the rehab process and financing as they occur.

House #2 First house hack

Posted on March 12 by Alexfelice

In 2012 I started learning about real estate, and when I say I started learning I really mean that I became obsessed.

I crammed education for almost 2 years when my girlfriend and I decided to move in together. I considered this a great opportunity to turn my knowledge into profitability. So around 2014 when we moved I was better equipped to make a good financial decision rather than just find a house I liked.

We house hacked

House hacking basically just means some variation of living in your investment. Sometimes people do this with a duplex, they live in one side and rent the other. Sometimes it’s done as a live-in-flips, I did it by living in a foreclosure that I turned into a rental later. My plan was to buy a foreclosed house that was move-in ready, had a lot of value-adds, and I could use the FHA 3.5% down program.

Why this is valuable:

Buying a foreclosure means the purchase price is depressed, I can get in cheaper
Value-add is a term that describes a house that will respond well to a capital investment. Upgrades have a large swing in increased value
The Fair Housing Authority (FHA) is a loan program that will allow owner-occupied homes to get loans with low down payment

The combination of these things allowed me to move into a house with a lot of equity potential, without putting up a lot of my own cash. It takes time to search for great deals that fit in this category, and not everyone will be willing to move into a distressed home with lots of work to do, but I highly recommend it for anyone who can put it together.

We went hunting for homes and after a few weeks of looking, Nikki found this listing online:

This was no mansion, but not a bad little house and it fit everything we needed economically. Nikki and I wanted to move in together and even though it wasn’t new or fancy it was plenty fine to live in! We chose to make a small sacrifice and not buy a big expensive house that stretches our budget. Instead, we lived in this fixer-upper that cost us FAR LESS than our peers and friends were buying. It was rewarding and profitable, it also allowed us more freedom and sense of accomplishment afterward because of it.

We paid $54,500 for the house, but I knew it was way underpriced and with a little work it would be worth much more. We put a little money into improvements, a fence in the backyard, hardwood floors (self-installed), fixtures, etc. 18 months later we went to refinance and the appraisal came in at $115,000. Because of the equity, I was able to refinance to a conventional loan and drop the PMI, this new loan was also .5% cheaper. So with the discounts from lower interest and no PMI

I was able to cash-out $20,000 and keep my house payments the same.

This was a big deal for me, and was part of the reason just 2 years later I paid for a rental house in cash. Also, I want to note that what I SHOULD have done was finance this house to the maximum the lender would allow me to which would have cost me a little bit more per month, but I could have cashed-out a lot more capital. I didn’t do this because I was scared of a perceived increase of risk. Instead, I have more equity in the house that I can’t use, the opportunity cost is far more than the monthly payment would have been.

Purchase price $54,500

Downpayment $3,000

Rehab $5,000

Total Invested $62,500

I currently have it rented for $950 per month, the total projected expenses with a mortgage is around $750 per month. Thankfully because I have a great property management and rehab parter my expenses have historically been far lower than projected. While this has allowed me to expand my business faster, it’s still important to project expenses properly and not be biased because of a good year or two.

I had to spend a few hundred dollars on repairs before we closed in order to satisfy the lender. This should not be taken lightly. Repairs were done to a house you don’t own can be risky, if you spend the money and still don’t close you won’t get that money back. I was confident this would satisfy our last closing requirements and it was a small amount so I moved forward.

House #1: Accidental landlord

Posted on March 3 by Alexfelice

When I was 27 I only knew one thing about real estate: owning was better than renting,

Now it turns out that isn’t always true, but it did set me on a course to buy my first house.

I had a good job at the time and went out to put a house purchase together. I got prequalified for to spend $270,000 which was more house than I had any business owning by a large margin (newsflash, retail banks won’t help you make good decisions). I looked at condos because I was a single guy who didn’t want a lot of maintenance and I figured I could spend a little less than buying a full house.

I assumed at the time I could turn it into a rental down the road when it was time to move.

I ended up only spending $65,000 on the condo, far less than my peers were spending on their first houses. Looking back I am so happy I didn’t spend a ton of my house because houses are a big responsibility and any money tied up in them is difficult to get out. This means buying a house can be valuable, but it can also be an anchor and this purchase was mostly an anchor for me.

Low overhead = more freedom

Luckily since I had spent so little my mortgage was low which as time went on helped more than I had considered. Ever hate paying your bills each month? Ever think they are too much and wish they were smaller? Who made the choices to get those bills? The smaller your monthly spending requirement is the more flexible you are to invest. My total mortgage each month is only $398 Mortgage+165 HOA = $563 total payment, this worked out perfect too because less than 2 months after closing on this house I lost my job!! A job I never thought I would lose, remember this when you sign a loan commitment and assume nothing in your life will change. If your life was vastly different 5 years ago, I guarantee it’ll be vastly different in the next 5, give yourself room to grow, don’t cripple yourself with high overhead. Real estate can make your life fun, productive, and flexible, but a mortgage that’s so big you struggle to make is only going to cause you problems.

I used a VA loan to buy this house so it required very little cash of mine to buy it. The VA has zero down products which I used on this loan so the only thing I had to pay for was the $1000 earnest money which I received back at closing. Certainly, not everyone has access to a VA loan, but most people have access to the FHA loan program and that only requires 3.5% down payment which is still really low. On $65,000 using FHA a person would only need to pay $2275 in down payment. Anyone can work hard and save this amount of money, which means anyone can work towards profitable home ownership (even though this particular house isn’t very profitable)

About 3 years later I moved and decided to rent it just like I had planned. This is when I realized that myself along with most new investors calculate profitability really incorrectly. Like many people, I was under the assumption that rental income minus my mortgage payment would be my profit. What I wasn’t accounting for was all the other stuff that happens in a rental: maintenance, vacancy, capital expenditure, property management. So the house rented for $650/month and my cost was $563, this seemed good when I purchased but now that I know better this is terrible. Let’s look at the detail

Rental Income $650

Mortgage (Principle/Interest/Taxes/Insurance) $398

HOA Fee $165

Vacancy (8%) $52

Maintenance (10%) $65

CapEx (5%) $32.5

Property management (10%) $65

Total Expense and debt service $777.5

This results in a cash flow of -$127.5

You sure you still want to take advice from me??? Losing money is rarely a long-term viable strategy and to be thorough I’ll say that losing money in the short term isn’t ideal either. Now the good news is that historically my capex, maintenance, and vacancy expenses have been lower than I anticipated which helps. The margins are still razor thin on this property and that’s not great. Last year I also raised the rent on the newest tenant to $750/month which is a big help but not life-changing.

What can learn from my mistakes and what to do better:

I still recommend buying real estate (obviously) but it’s important to buy smart from the very beginning, and most importantly: BUY WITH STRATEGY. If you’re buying because you think it might make money, or you really like it, that’s a mistake. Buying the right asset to later convert into a profitable rental is a financial move that can create massive wealth for almost anyone. Buying the wrong asset can also be a massive hindrance or even possibly catastrophic to your future financial situation. I recommend a few ways to maximize your first home purchase to buy better than I did:

Learn about real estate! If the entirety of your real estate knowledge happens a few weeks before you buy a house and then you never look into it again that’s fine, that’s what most people do, but that’s why most people don’t make much on their house.
Buy a house that can be turned into a rental later or sold for a significant profit.
Buy an inexpensive house. Stretching on first home purchases can be a financial kiss of death. Don’t buy something so expensive that you’re tied to it like an anchor. A house is an asset that works for you if you buy it right, and it’ll fight against you if you buy it wrong.
Learn to calculate the details of a rental income transaction and apply it.

Why it’s good to use debt for real estate

Posted on February 27 by Alexfelice

There are plenty of horror stories about people with debt and the troubles they go through over it. Dave Ramsey has made a career telling people NEVER to use debt and he’s become so famous that people think this is a hard and fast rule. Being debt free is not a completely unwarranted position to have, but that doesn’t make it ideal for growth nor does it necessarily reduce risk. Using debt to grow a company instead of relying on cash is done by all of the greatest companies we know about, it does sound a bit counter intuitive but may also be more common than people may notice.

The concept I use may be somewhat complex in the details, but overall it’s very simple.

1. I borrow money to pay for an asset
2. That asset produces income
3. The income covers the cost of the debt, plus the interest, plus profit

Once a person understands that debt created to make money is good, and it’s not as risky as it sounds, then it’s much less intimidating. It’s common not to understand debt and how it can be used to advantageously when someone has only been exposed to consumer debt (credit cards) which IS bad debt and aren’t usually very helpful usually.

The stock market works on debt as well, shares of a company are a debt which a firm sells to the market. The sold shares are debt then they take the income from the share sales to reinvest in their company at a higher yield. They raised capital from sold shares to shareholders, and then made a profit from consumers and repay shareholders in equity price increases or dividends. Now, I’m certainly no large-scale public operation but the economic principle is identical.

Using cash is slow. Now slow and steady might sound nice, but slow is really bad because it requires trading the most valuable resource: TIME, in exchange for money. Money is supposed to CREATE time buy working passively, debt allows cash to be leveraged and be used to control much larger assets and the income that comes with them. If you had an infinite amount of time, then I would advise using cash.

PLAN A

If I have a house worth $100,000 and it rents for $900 per month

900 * 12 = 10,800 / 100,000 = 10.8% cash-on-cash ROI

10.8% is good but now we have zero cash and the equity is sitting in the house not making any money. It also has a payback period of 9.25 years which means we won’t be able to buy another one for almost a decade! Paying a rental property off for the cash is a common goal but this blog doesn’t advocate for common returns, We can do better!

PLAN B

This time let’s use a conventional loan with 20% down payment.

$100,000 – $20,000 = $80,000
The mortgage will be at 5% for 30 years.
The loan is $80K so the payment will be $420
(900-420) = 480 * 12 = 5760 / 20,000 = 28.8% cash-on-cash ROI

This formula is: rental income – debt service = cash flow * 12 months = 5760 gross yearly income / 20,000 cash invested = cash ROI

So do we prefer a 28% ROI or a 10% ROI? Sure there is less cash flow per month using plan B, but remember when using the 20% down, we still have the $80,000 remaining in the bank! We could repeat this 4 more times using the same capital as plan A, make far higher returns, and much higher cash flow. The payback period here is only 3.4 years as well so in less than have the time as Plan A we can recoup our initial investment and still make some cash flow each month. Debt is looking good!

PLAN C

Here is the plan I personally use, the numbers will be slightly different than real numbers for consistency and ease of explanation, but the overall math is the same. Let’s say I buy a distressed house at a major discount. After the house is purchased and repairs are complete I have 60K in the house

$65,000 my total cost
$100,000 value the bank says its worth
$75,000 is what the bank will lend on this house. (75% loan-to-value)
75K-65K = $10,000 (I get this cash back right now)
100K -75K= 24,000 is the amount of equity I still have in the house
$402 is the monthly payment for this loan (75K for 30years @ 5%)
$900 is the monthly income from this unit
(900-402) = 498 x 12 = 5976 / 0 …….. Wait it’s not possible to divide by zero.

This is what is sometimes called “infinite return on investment”. When you try to divide the cash return, by the amount left invested in the deal, but all the money invested in the deal has been cashed out with my loan. This results in a house that makes $5976 per year and not only is there nothing remaining invested in the property but it’s also already made that $10,000 in cash right at the start.
Also, let’s not forget about the original 100K we started with.

plan A: Use the entire 100K, make 10.8% yearly and then wait 9.25 years for it to come back to me
plan B: Use 20K cash, still keep 80K and good cash flow each month. I make 28.8% ROI and it only takes 3.4 years to be repaid
plan C: Keep the 100K, an additional 10K in cash, plus good cash flow each month. Infinite CoC return and instant payback period.

So which do you want?

$10,000 per year income with ZERO cash
Or
$6,000 per year plus $110,000 in cash?

It must be noted that none of these examples include ancillary and overhead costs, so the returns won’t be this extreme in real life. In fact, the real world numbers would be even less favorable towards paying cash since that 10.8% would likely drop to a return that is closer to low-risk stock market gains. Regardless of this information, the basis for how the money works out is identical. If I added a 40% expense ratio to each scenario, the total returns will fall, but relative to each other would be the same.

Paying cash is actually the riskiest part of my business

The method I use to buy houses requires me to pay for houses with (someone’s) cash, and then get a mortgage on them usually around 6 months later. It wasn’t until I paid cash for my first investment property that I not only learned the lesson this post tries to teach but it also really made me FEEL the risk of being cash poor. Being cash-strapped and running a business is not fun, and it creates a risk where there wasn’t any before. I’ve heard plenty of people say being debt free gives them peace of mind but a much safer peace of mind comes from keeping $100,000 cash in the bank. It will protect against a lot of unexpected costs and a lack of cash opens up to 2 kinds of risk, opportunity risk, and emergency risk.

Let’s say we use our $100K to pay the house off. On $100K the principle and interest payment will be about $540 each month, so once the house is paid off we save that $540 per month but what if something comes up that is unexpected and expensive? By letting go of all that cash we have gotten rid of the REAL safety net and the peace of mind people claim they so desperately want! Once the house is paid off and some unexpected $10,000 expense for (anything) comes up how are we going to pay for it? Will we borrow against the house, which is possible but not easy? Wouldn’t that be ironic, to “save money” by paying off a house only then to loan back to it going back to square one? Also, loans are nowhere near as easy to put together as writing a check is. Houses are very illiquid, meaning spending the equity is not easy, this is why the saying goes: cash is king.

Also we must consider opportunity risk, which might be the most expensive cost of all. means, the cost spending money is all the other opportunities that were available. If I spend $100K on a house, and the next day a GREAT deal comes across my desk and I don’t have the cash to close, that’s my opportunity cost. I can’t afford to do that deal because my money is tied up in dead equity. Paying cash literally costs me money! The cash I use isn’t usually tied up for long thankfully, but if I left the house paid for in full I would miss out on a lot of opportunities. This is why I mortgage everything and I do it as quickly as possible.

But Alex, you’re paying so much in interest!

Am I?

Seems like most people are one of two ways lately, lousy with money, or anti-debt.

How much is the interest really?

$100K loan @ 5% interest, again, $536.82 monthly

$536.82 * 360 = 193,255 Total payment

193,255 – 100,000 principle loan value = $93,255 total interest paid.

Admittedly $93,000 sure is a lot of money (well, for me it is, you may think it’s chump change!) but people act like this interest is a fee they aren’t willing to pay no matter what. It’s important not to look at the costs of doing business as an unfixable problem, it’s much more valuable to look at the upside. Why worry about a measly 93K when this house could make me $500,000 over the same amount of time or maybe better. Think about what will happen over the next 30 years: The tenant is going to pay that interest, plus profit, 92% of the time (I factor in an 8% vacancy and it’s calculated before profit). This means as the loan gets paid down I gain equity, which I could borrow against again down the road if I want. Another thing that is going to happen, and is very commonly overlooked is inflation. Inflation makes future dollars worth less than today’s dollars so that $93K is going to scale down in buying power relative to what money can purchase at the time. Also, I intend to keep growing for the long term, 93K is going to be a much smaller portion of deal size as time goes on as well, making the 93K cost less burdensome. Lastly, inflation helps me on the income side as well, what happens to rent prices over time? What happens to all goods over a long period time? The costs of goods go up and rent will be no different, the $900 rents now will be $2000 or better 20 years from now. All these small effects compound over time to really add up, and it was still profitable from the start! Worrying about the interest compared to how much wealth that can be created is a mistake, chase the HUGE upside and don’t let the fact that someone else is going to pay all these costs bum you out too much.

Ive tried to explain this topic clearly and thoroughly but it can be hard to grasp at first because sometimes it doesn’t FEEL right. It’s important to always trust the math, and to understand the process as deeply as possible. I was very opposed to using debt when I first started but it was simply out of fear, not logic. As i’ve learned the process more clearly and had experience to show me which is better ive learned that debt is a valuable tool, and hope to help other people understand it better as well.

Money isn’t that important

Posted on February 16 by Alexfelice

Money isn’t important

It doesn’t take long to realize that I talk about real estate and finance a LOT. I certainly take the topic seriously, and have even known to write blog articles about it! Recently I was speaking with a friend about mortgages and he became quite irate with my comments. He ended our conversation quickly and summed up his thoughts on the interaction with “Money isn’t that important”.

This isn’t anything new nor is it a profound statement, but when used one way it is absolutely true; money isn’t important. When used another way it can be used as a defense mechanism to justify a poor financial situation. I thought it would be interesting to analyze the usage of this phrase and the context behind it.

Money is a means to an end

“Money can’t buy happiness” is the other common phrase of similar position to “money isn’t that important”. Also true! plenty of people are happy and plenty of people don’t have much money, I was a happy guy when I was poor, and I’m a happy guy now that I’m less poor. That said unless your definition of happiness is swimming in a giant vault of gold coins, and your name is Scrooge McDuck, you probably want money to solve problems, not create happiness. This is the center of all money needs really, to solve problems, so how much you need is determined by how big a problem you want to solve.

My friend who said money isn’t that important might actually believe that for himself, but to assign that to everyone is short-sighted. Obviously, money is important to SOME people and situation! This guy likes to spend time with his family, they don’t like fancy clothes or nice new cars, and they have inexpensive hobbies, Him and his wife both bring in a good income, and they live in a low cost of living area; their needs are all met. He really doesn’t need any more money to solve his problems. It sure SOUNDS like the dream right? It is if you have similar interests and ambitions and don’t plan to ever get sick or have unexpected costs.

It’s easy to say money isn’t important when you have enough, don’t have unquenched ambitions, and don’t have any large problems to solve.

For everyone else on the planet though, who doesn’t have their life needs met, haven’t satisfied their ambitions, and want to leave their mark on society, money is of the MOST importance. How many people have a job they hate and can’t afford to quit? How many people are drowning in debt and are constantly overwhelmed with not having enough money to solve basic needs? What about people who have huge dreams but can’t afford to fund them? Majority of us think to ourselves, “I could use a lot more right now” several times a week, or even throughout the day. For those people who think money is important, can solve problems, and remove stress from life it’s important to learn how to properly manage and maximize economic resources. To disregard it is to ignore one of the most valuable resources we have.

To say money isn’t important AFTER you have enough is pure arrogance. Money was important to get him where he is now, but now that he’s comfortable he gets to look around and say “money isn’t important, a family is”. Sure, everyone would agree, but he only gets to enjoy his family because he has a stable life with a rock-solid job and low overhead. He would care much more about the value of money if he was in need, and my point is that there is a lot of life left to live. Things will change, the economy will change, needs will change, and unexpected costs will impact your life,

Freedom is what’s most important, and it’s for sale

My friend says money isn’t important, but he and I are both at work Monday morning. Now we may both enjoy our jobs, but I know I would rather be hiking, at the gym, taking photos, spending time with my fiancé, talking to real estate investors, traveling, etc. Plenty of stuff we could be both be doing, but instead, we are both at work so we can earn a paycheck….seems money is a LITTLE important then huh? Maybe he’s working hard now to pay his house off, reduce his overhead, then retire with a low cost of living and have enough on just his retirement. Sounds nice, a common approach, but then he’s beholden to that retirement amount. No new fancy car, no house upgrades, no expensive toys, now maybe he doesn’t care about that stuff because he won’t have a choice. He can’t afford to care about that stuff because he certainly isn’t going back to work after retirement, he’s going to quit early, quit with JUST enough, and then his life is confined to that income he chose to rely on. People say money isn’t important, but that’s only true once you’ve adjusted your dreams and ambitions to fit into the economic conditions that you’re used to.

Imagine if you could stop working, forever. You could afford a nice house, you had enough money to fix all your house problems, pay all your debts, fix your credit. You could have enough for your significant other to stop working, the kids won’t have to work, you could pay for their college as well. Even better than that you would have enough not to worry about health problems or changing the economy. This requires a LARGE volume of resources but it’s not impossible, it’s just hard. It’s far easier to just say “money isn’t important” when dealing with the struggle of not having enough is quite a bit harder. People who say money isn’t’ important are vastly undervaluing how much they will need in the future, and how much more they could do with their life if they maximized the efficiency of their money spent. I’m not advocating to get a second job or higher income or work until you die, I’m simply advocating to respect your resources, use them to maximum efficiency, and take your economic situation very seriously.

It’s my dream house/car and I deserve it

Think about your dream house and think about how big it is, what it looks like, what amenities it has.

Marble floors?

Infiniti pool?

Giant backyard?

Helicopter pad on the roof?

15 bedrooms?

Staff suite to house your full-time cook, a landscaper, and housecleaners?

Ok is 15 bedrooms and a full staff too much? Probably, but why? Is that not a dream you have, or is it not a dream you bother with because it’s unrealistically expensive? Are we talking about dreams or realistic goals? See this is the problem with saying “money isn’t important”, or “this is the dream house I’ve always wanted”. We say these things and it blends the lines between our wildest ambitions and mundane reality. Therefore every person who has stretched their income to buy a house because It was their ‘dream house’ has lied to themselves. That isn’t your dream house, that’s just the nicest house you can afford and if you could afford more you would buy more! If your dream house costs $150,000 and then you won a 10 million dollar lottery, I’m willing to bet you will upgrade. People are so impatient and so willing to give up on their ambitions that they will buy a barely expensive house, stretch their income to get there just so they can buy it while it restricts them from investing that money and buying something really big later. Buying your ‘dream house’ early is helping to kill your dreams, not fulfill them.

Now to my all time favorite self-delusion: “I deserve” it, well let me be really clear: You already have more than you deserve.

In fact, if you live in America and you have a low income, you already have more than you’ll ever deserve. Americans have been born into the greatest infrastructure of all time. The amount of money spent over the last few hundred years here have made social and economic mobility easier than ever. We hit the geographic JACKPOT just by being born here and to think anyone deserves more than that is insulting to the billions of people who didn’t get as lucky. If you earn $34,000USD/year then you’re in the top 1% of global earners, should be pretty clear that you got more than you deserve just by pure luck, enjoy it and say thanks to your parents; They have done more for your financial opportunity than you ever could.

I sold cars for many years, this rationalization is used by both parties and it’s the same disservice to both. People would buy cars they can’t afford and say “but I deserve it” and when I had trouble closing a deal I would say the same thing “you deserve it” (yes, I feel a bit sleazy about it). This happens so often but is it true? If you work hard and have the resources to buy a new car, does that mean you deserve it? Of course not. Here is what people deserve: exactly what their choices have given them. Also, I like to think what people really deserve for working hard is to look towards a day when they don’t have to work AND don’t have to stress about money. If you work hard at your job, isn’t what you deserve is for one day it to be OVER??!? When you buy a car what you’re really doing to yourself is pissing money away, money that could have been invested, compounded and then funded your (perhaps early) retirement. Instead, you’re guaranteeing that you will have to work longer and harder for that retirement and during that time you’re going to watch that car you love and deserve lose value, rapidly, it’s going to turn into an old car you hate right before your eyes. Your emotional attachment to it will be long gone, along with the money you spent on it and you’ll be so frustrated with it one day you’ll go to a car dealership and buy something new to make that feeling go away. The next car will also be too expensive, you’ll say “I’ll drive this one till the wheels fall off”, and you’ll stretch to buy and repeat the cycle while telling yourself that ‘you deserve it’. No friend, you deserve freedom, don’t rationalize out of it just for a shiny piece of metal.

People love to overspend on a fancy car and say “but it’s my dream car”. Really??!? That fancy new Camaro is your dream car? Sure it’s nice, but it’s a slightly above-average mass market mid-sized car, it’s special in no possible way. How long has it been your dream car, the one you bought is a new model that just came out this year? If you want just wanted “A CAMARO” you could have spent a lot less. You only said it’s your dream car to rationalize a HORRIBLE financial decision, you stretched to get it, and if all that wasn’t bad enough in a few months it won’t be new anymore, It’ll be dirty, the new car smell will be gone, and it might not be your ‘dream’ anymore. Next year’s model will be your new ‘dream’….wait, that doesn’t’ sound like a dream, that sounds like dangerous consumer capitalism. How about this example, take your dream car and buy the same model but 15 years old. Would you buy a 15 year old Camaro and be just as happy? No you wouldn’t because a 15 year old Camaro is old, ugly, and not fancy, you just wanted a new car and you used “it’s my dream car” to rationalize it. That new car is going to be old, ugly, and not fancy before you know it. The marketing machine by the auto industry is vast and convincing; don’t let them help you make a bad decision. Stop telling yourself you need a nice car, what you need is freedom; the rationalization to buy one is not profitable or helpful.

If you had more money, your dreams would get bigger!

This happens because money is REALLY important, and it dictates our lives far more than most people give credit for, and certainly more than dreams. That’s why people change their dreams to fit their economics. Pretend for a moment that you agree money IS important (difficult scenario to imagine I know!), now what real problems do you want to solve, what ambitions could you fulfill with a large volume of economic resources.

Own a ridiculous house

Pay for your kid’s college

Have enough money to self-insure against future sickness and injury

Travel the world

Buy your parents a ridiculous house

Buy your in-laws a ridiculous house as well

New cars for the whole family

Donate to charity

Donate to community

Donate to humanity

Now, this plan might not be for everyone, but I figure this is a general enough ‘Dream plan’ for most people to agree to. So how much money do you need to get down this list and accomplish it all? I know if you asked people how much it would take to get that list done, most would look at the list, mentally give up, and say: “Money isn’t’ that important Alex”. Money itself isn’t important, but technically neither are a person’s dreams, what’s important is what you can actually accomplish, and for that, you’re going to need a fat purse.

Stop telling me you don’t have money to invest

Posted on January 23 by Alexfelice

I ask people all the time to invest with me. From small amounts to large, it doesn’t matter what I propose and it’s rare that I actually get into details before I hear this common reply: “I don’t have that kind of cash”

It’s amazing how many times I don’t even get to say a dollar amount and still hear people tell me that they don’t’ have it. When I used to sell cars I would hear a similar response: “I’m just looking” I wouldn’t have even heard the person’s name yet and already they are refusing to deal with me. I can understand more in the car business because people generally hate buying cars and a car purchase is a guaranteed way to lose money so I don’t blame people for not being excited about it. What about investing though? People don’t want to make money either? And why default to thinking it’s a shortage of cash?

I asked a friend recently to learn about real estate with me. He replied that there is no point to learn about real estate because he doesn’t have the money to buy any real estate. This is such a common default position, and while I’m not sure what causes it I know that it’s fundamentally misguided. Imagine the opposite:

If someone dumped a large bag of cash on your lap today, would you be a successful investor?

OF COURSE YOU WOULD!!! You’re brilliant with money, you would be responsible, and you would make good business decisions. Just like you do now right? RIGHT?

Unlikely, the more probable scenario is that you would treat that windfall cash the same You would blow through and waste that money faster than you’ve ever wasted money before. How can I be so sure? Let’s look at other people who have run into windfall cash:

Lottery winners – well known to be awful with money and bankrupt soon after winning
Professional Athletes – These guys go broke so fast after leaving sports it’s depressing
Inherited youths – Just watch an episode of “my sweet 16” to see how family money can help young people make really responsible economic decisions
Famous movie stars – Depp, Stallone, Snipes, Mike Tyson,

So cash didn’t help these people, in fact, cash is what hurt them. People say “you need money to make money” but just because it’s a common phrase doesn’t mean it’s correct, or complete. What you really need if you want to make money is knowledge. You need to understand how systems work; you need to instill confidence in the people you deal with that you can pull it off.

What would you do with $100,000?

If you don’t already have a concrete plan of action, then it’s most likely you’ll just blow it. This is what everyone already does; consider how people spend bonuses, raises, or tax returns. People don’t have a money shortage problem; they have a money implementation problem. If you can’t properly invest your $3,000 tax return, why would you be so arrogant to think you could properly implement a $100,000 cash windfall? Have you ever said or heard the phrase “I’ll save more when I make more?” this one is also total nonsense. When you make more you’ll just buy a fancier car and nice new clothes because “you deserve” it.

Start saving and learning immediately.

Let me provide some perspective on my own story. I was broke for years and thought the same thing “I would love to invest if only I had some cash”, and when I thought that way I never did have cash. When I started reading about personal finance once of the things it taught me was that successful people aren’t created from windfalls, they are created from grinding out small returns until they grow into massive portfolios. The reason people don’t do the hard little stuff is that they don’t think it works, and it’s really not fun at all. The important part here though is that grinding out small returns, when you can’t really afford to invest much, is what will make you a great investor. It’s too easy to blow through large volumes of cash, but when your balance sheet is tight it forces you to become efficient. You have to learn this by grinding and when you do it’ll stay with you forever. If you get a large handout of cash you’ll be too tempted to pay for your inexperience with excess cash, you’ll be able to afford to lose money and subsidize your business, You’ll have to ask you won’t know any other way.

Here is some good news though; it’s unlikely that anyone is going to drop a big cash payout on you anytime in your life. So you’re going to have to grind out small savings, learn to invest small amounts and grind out small compounded returns until they do become large amounts. While you’re doing this you’re going to learn a ton about maximizing return on investment and protecting your hard-earned portfolio. So when the time finally comes that you do have a large swath of cash, you know what to do with it and the knowledge is by far more important.

You can buy a house right now, with zero cash.

You really don’t need cash for real estate. Now I just explained how the lack of a large cash account isn’t’ the biggest problem (but you should save for it anyway), however, I want to explain how much more valuable the knowledge is over having cash. So let’s assume you have $0 to spend towards investing, but you had a deep understanding of the economics and infrastructure of real estate. I’m going to use my last deal (READ: DEAL #4) as an example of how to accomplish this:

Say I borrow $60,000 from a person
I find a foreclosure for $36,000, and it costs $24,000 to rehab. I’m all in for $60,000
I get a tenant and rent the place out.
I got to a bank and ask for a loan, they say the house is worth $95,000 and will give me a mortgage of $71,250
I pay back the original $60,000 and keep $11,250 in my pocket
The house pays the mortgage back, short/long term expenses, and then I’m still left with $200/month profit and have nothing invested (free income!)

Sounds easy right? It’s not a trick, it’s just easy. So if you don’t’ feel like you can pull this off, there must be another reason besides money, because we just showed that YOUR money isn’t’ needed.

Can you find someone to loan you money? No? That’s because you probably aren’t a good investment. If you know this process like the back of your hand, you’ll find someone to take a risk on you. Like this whole blog has said, you need to be better first, and then the money will come.
Can you find cheap foreclosures? Shouldn’t be too hard, they are everywhere in markets all across the United States. If you haven’t seen any, its’ because you haven’t spent much time looking.
Do you know what the bank is going to look at when considering a mortgage? Do you know how they are going to evaluate the unit and what they will lend based on that? If not, you’re just one loan broker phone call away…

So in a few short minutes, I’ve displayed how possible it is to buy a house with no money, make it profitable, and put you in a position to do it again. There are certainly obstacles to this process, but that’s business, it’s not hard but it does take effort. If the only hurdle between you and financial freedom is knowledge, you must ask yourself if you’re going to let learning be the thing that keeps you poor. There are many other ways to buy houses without money as well (owner finance, joint ventures, etc) and there are even more ways to buy houses when you have a LITTLE bit of cash. I’ve bought 3 houses with small down payment products now, one of them I bought with only $2,500 and it made me $20,000 the next year!

What to do while you’re learning

Have I convinced you that real estate investing is not a money problem, but an education problem? I hope at least partially! I would like to explain this phenomenon worked for me in a real-world situation. When I first started I didn’t have any money or know-how, so I set out to accumulate both the slow and hard way. I started listening to podcasts and reading blogs every single day, while doing this I was simultaneously savings money as much as I possibly could (READ: HOW I SOLVED THE MONEY PROBLEM). After some time went by I learned that I could buy a foreclosure with 3.5% down, well that was only a few grand and because I had started saving I had already accumulated the whopping (#sarcasm) $2,500 I needed. If I had waited for a large unexpected cash payout to buy, I would have waited forever, if I simply saved money and didn’t’ educate, it would have taken much longer, but since I started on the education immediately it was easy. I could have certainly found someone to lend me the $2,500 at that point as well, so the only factor that really was necessary was the knowledge.

The reason you aren’t investing isn’t due to a lack of capital, its because you don’t know how. If you knew how you could get started immediately and if someone dropped 100K in your bank account you would still need a few years of learning to properly deploy it. If you want to start building wealth, start educating immediately, that’s the real thing that’s holding you back. Not having money is just an easy excuse similar to “I’m just looking”, it may be socially acceptable but it’s not helping you make any money.

Rental #4 or, how I bought a house from across the country that I couldn’t afford, and still made a profit

Posted on January 12 by Alexfelice

In 2017 I was antsy to buy another rental, a bit too antsy.

I had bought my previous deal the Summer before in 2016 and I was waiting to cash out on that house before I bought the next, at least that had been the plan. Patience is far from a strength of mine and luckily this hasn’t gotten me in too much trouble, actually, when done right moving fast is quite valuable.

I looked at all my finances and decided that I spent every dollar I had in both my business and personal accounts AND leveraged my HELOC to the max I could scrape by and buy another house. This is also assuming the rehab stayed cheap and no other large expenses happened in the meantime, which is never the case.

So I contacted my realtor anyway and told her I was in buying mode. The leads started coming in and it only took a few short days before I came across a deal I thought I could put together. I saw a few pictures of the property through email, I looked at the numbers and the area and decided it could work. From the pictures the house was awful but the neighborhood was decent

Usually, this process takes 2-3 days at the most. I’ll put an offer in, and I’ll know whether it was accepted quite quickly, so when I didn’t hear anything back (which is common) I assume I didn’t win the bid and went about my business waiting for the next deal. This turned out to be for the best because a week later I had an HVAC failure in one of my units that needed a full repair and some upgrading (it was a very old unit), so $6400 later I was really happy my bid wasn’t accepted because I was so tight on that deal I would no longer be able to afford it. Then OF COURSE about a week goes by and I get a call from the realtor letting me know I won the big, we close in 30 days.

Mistakes have been made.

I was terrified, but I took some time to really look at the situation. but I knew I could still afford to write the check for the house if I had to so I kept moving forward. It’s important in real estate to always move forward on deals. If you run away at ever hiccup you don’t get ahead and you don’t learn how to overcome. I learned a TON by moving forward no matter what and learning how to solve problems rather than bailing. The house was a deal, and I knew I had refi money coming in a few weeks. I had exit strategies

Ok let’s see where I was at this point:

House bid was mine, I intended to close
House was 2600 miles away, contractor hadn’t seen it yet
I was ~$6500 short on this deal IF the rehab came in at my lowest expectation.

Here was the strategy I built to get me out of this mess:

IDEAL:

Get my rehab contractor over there immediately to get final rehab costs
Start talking to lenders about getting a mortgage for House #3 and use those funds to pay for the costs of this house
Look for partners/friends/everyone/loan shark who would lend me the fund to bridge the costs
Use refi funds from house #3 to repay
Install tenant, make fat stacks

LESS THAN IDEAL:

Close on house, then sit on it until I build funds to rehab
Wholesale the house as-is. Basically, I would sell it to a fellow investor to do what I couldn’t
Bailout of the closing

These are the things that were swirling through my head. As I had spoken with my lender more it seemed that doing a refinance for the last house HOUSE #3 was going to get done smoothly. This gave me some confidence AND provided me some additional risk mitigation when asking for private money.

I had never borrowed private funds before

This was a big deal for me actually as I had never borrowed money from a private source before and it’s there isn’t a massive demand to take the first chance on a guy like, especially when the ask is “hey can you loan me money for this great deal I locked down but didn’t find out I couldn’t afford it until AFTER”. People would probably describe me as arrogant, obnoxious, and intense, these are not qualities that make new investors want to fork over cash. Maybe this is a bit of an exaggeration, I’m not totally polarizing, more of an ‘acquired taste’. In all honesty I did have a few things working in my favor:

I spent a few years in sales and I got pretty good at it
The deal I had was solid
The loan would only be for a short-term
The amount I needed wasn’t an unreasonable amount,
I had skin in the game, so I set off to ask around.

So with this in mind I prodded and poked a few people I thought might be interested with zero success until I got to Frank. Frank and I met online at www.biggerpockets.com about a year ago. We had become really good friends through the site and hanging out in person, I introduced him to local resources and we met regularly to talk real estate and personal finance. I explained to him the numbers on this deal, the risks, and my exit strategies, just like I did in this post. He knew I could pull it off, and he trusted me since I had just helped him lock down a similar unit earlier this year and I didn’t ask him for any fee. Just from our conversations I knew he probably had a bit of cash he could part with at least temporarily so I pitched him the idea and he was quite receptive. We negotiated terms, he agreed, and he wired me $20,000 in a few days. This was both a big step for this deal, but also for what I started thinking I can accomplish next. The ability to raise private capital could open all new doors of opportunity.

The Rehab:

This house was such a dump. It was ugly, beat to hell, and it had very few positive characteristics. As the pictures started coming in I knew it was worse off than I had originally thought, but I was feeling better that progress was being made

Where is my deck?!

YOU SEE THIS GROWTH INSIDE THE HOUSE!!

The house needed all of the standard stuff I knew about and that we do with most houses. Paint, floors, cabinet painting, landscape, etc. What it also needed was a whole new HVAC, new roof, new driveway, and we converted it to 4/2 rather than keeping it the 3/1.5 that it started. This is going to set our rehab WAY over budget. This is bad news in the short run but not terrible news in the long run as long as I can still come out profitable. I don’t mind paying for capital expenditures up front if I have to, but if I can defer costs that’s always ideal. Why pay today for an expense today when I can pay the same for that expense down the road where I’ll be in better financial condition to absorb the cost.

Wrapping up:

The house was purchased for $36,000 and ended up needing about $26,000 for repairs. This is WAY over what I had expected to pay out, and it’ll all be ok. First off the bulk of the unknown cost came from CapEx that I knew weren’t far out to replace anyway. Basically, when I bought the house I knew it would need a roof and HVAC and I was HOPING I could defer these costs for ~24 months or so, this would allow me time to receive rent income ahead of the expense. Sadly I had to replace both during rehab, this means for cash outlay I had to put out more now, but this also means no roof/hvac/capex costs for a LONG time down the road.

I paid Frank back in 60 days exactly, I was able to do this because I had done a cash-out on the previous house HOUSE #3

during this rehab. Worked out perfect, he was happy and I paid him a big bonus for the help and now I’m poised to ask him for more the next time (and coming soon hopefully!)

This wasn’t a great deal, to be honest; it was a good one but not a great one. I certainly paid a premium for being so far away and moving forward so arrogantly. I plan to fix this with the next deal by including my contractor much closer in the process. I’m thankful that my contractor’s goals and mine are closely aligned (not by accident, by design) so it’s in his best interest to make sure I’m as profitable as possible. If I had been a little more diligent and strict on this deal I could have saved money or found a better one. That said, I would do this deal over and over again if I had the chance.

Buying a house for many people is terrifying, buying one across the country must be worse, and buying one across the country and then finding out you can’t afford it should be debilitating right? Hopefully, this story makes it seem less scary. Fear is usually fear of the unknown, but this can be largely mitigated by KNOWING what can/will happen. Education is a valuable way to mitigate risk because thoroughly understanding a situation makes you less scared of it and also allows you to more accurately account for and deal with potential hazards. This is why I wasn’t too scared to get this deal done, I knew the risks and how to account for them. Next time you’re scared of taking a risk, just learn as much as possible about the situation and you’ll be surprised how much more confident it can make you feel.

What’s next?

So I bought a house I couldn’t afford and I’ve never seen from 2600 miles away. The deal not only worked out, it’s profitable. I’ve written my 2018 Goals in depth but the basic premise is to repeat this deal 3 more times this year. The cash from this deal plus hopefully being able to raise more private capital than last year should allow me to buy at least 3 units, maybe more!

How I’m going to maximize my 2018

Posted on December 29, 2017 by Alexfelice

In 2017 I purchased 2 houses. 1 was a primary (which I don’t recommend) and the other is a rental home which will be quite profitable. These houses came with challenges to close, they were both purchased long distance, and they both required creative underwriting. While looking back on 2017 I realized I should have done much more. While this is always true of hindsight I want to use what I’ve learned this year to make the next year more productive.

The goal:

Buy 3 houses in North Carolina

Raise $60,000 in private capital

End the year prepared for a well prepared 2019

The plan:

My original goal with real estate was to build a portfolio that would support me regardless of my career. This year I intend to add both a large chunk of free cash flow, but also a large increase in net worth. Here is the blueprint of what type of homes I look to add:

Purchase price: $35,000

Rehab cost: $20,000

Total cost: $55,000

After repair value: $95,000

Rent Income: $900/mo

Cash Flow: $250/mo

Equity: $40,000

These estimates are similar to the deals I have done in the past and a bit better. Each deal I do I learn a little more, I get a little better at it, and they are each a little more profitable than the last. There are lots of reasons to think I still have room for me to improve and continue to close better deals. If any of these numbers are off, it’s the equity I’m being too ambitious on, as the cash flow figures are quite reasonable.

The financing:

First let’s break this down into 2 parts: Purchase financing, and long-term financing.

Purchase financing: It’s almost a necessity to buy foreclosures with cash. All the other buyers are buying with cash since it’s easier to close, and I can’t afford to be at such a disadvantage. So, I need to close in cash but luckily, it doesn’t have to be MY cash. Not to say I won’t spend some of my own cash this year, but last year I spent some time learning how to raise private capital and found myself lucky to be successful at it. It wasn’t particularly easy, but it’s a valuable task to learn. With that said in 2018, I plan to raise more private capital for short-term purchasing. My current goal is to raise $60,000 from at least 2 sources.

Long-term financing: Having cash (mine or private sourced) sitting as unused equity in a house is not a good method to make money. Sure, there is cash flow, but not enough to sacrifice all possible liquidity. The cash used to purchase is a tool that makes my purchasing more competitive, but I want the cash back as soon as possible to use on the next property. Having a paid off house is not something I have any interest it, I want to expand. To do this quick loan turnaround I will use a program called “delayed financing”. This allows a user to put a loan on each property as soon as a tenant is in place for the total amount paid for the unit plus rehab. The downside to this is that I cannot cash-out on any increased equity I’ve created. The upside is that I can put a loan on the house as soon as it’s rented and avoid a common 6-month seasoning rule.

SWOT analysis:

Strengths: I look to refinance a house I bought in 2017 immediately beginning the new year. This will free up about $70,000 in cash I had spent on the house earlier this year. In fact, I have already spoken with my lender about my plans for 2018 and we have a strategy in place, and the refi of my last house is already in the works. The cash from this house plus cash I have saved and money from a HELOC I own should allow me to buy 2 houses before the need to raise any private capital. The private capital I do intend to raise has already is something I have discussed with potential lenders. My goals, strategy, and previous experience should allow me to provide investors with above-average market returns, diversification, and confidence in my ability.

Weaknesses: Early portfolio expansion comes with lots of difficulties. Underwriting can be difficult when only a part of new rental income can be used towards DTI (debt-to-income) and thus the more houses that are acquired the more likely a bottleneck situation can occur. While I have spoken with lenders about solutions to this problem, it is a considerable problem. The crucial factors to help mitigate this bottleneck are a continuous increase in spending capital, and to ensure each deal will cash flow heavily. We must ensure rental income on new units stays at a level that generates excess cash flow to be more than solvent when considering new debt service requirements.

Opportunities: There are still lots of homes for purchase in the designated area that fit my purchase criteria. Mortgage rates are still low, and stock market volatility has people worried about an impending correction, these factors tell me that the time to strike is now. People will want to diversify a portion of their investment into real estate without having to learn the niche or take all the direct risk. I can give people this exact option: a passive way to both diversify their portfolio with tangible real estate assets without requiring them to learn the details or take the risk of learning a new market.

Threats: Competition in my main area of purchase is getting stronger, and the cost of foreclosures is on the rise. I assume this is due to a combination of cheap homes, continuously low interest rates, 8 years of stock market gains, and the inconvenient trend of HGTV house flipping shows. Some people are willing to buy assets above market price just to get in, this makes finding deals more difficult than in the past and emphasizes the importance of buying great deals based on analysis rather than emotion. Another threat to consider is increasing of federal reserve interest rates. This will increase risk-free rates for safe investors, and I have to compete with these changing rates by incentivizing investors with returns high enough to endure the risk and lack of liquidity.

What’s next:

Planning for the upcoming year is important. Most people don’t plan anything, and they get exactly that. The next important plan is for 2019 and depending on what I want to get done then determines how I want to end this current year. In 2019 I want to move forward with plans to JV (Joint Venture) on a large apartment building. This will require a lot of my own personal cash, and lots of cash from outside sources, therefore my 2018 plans include raising private capital as such a primary objective. I don’t necessarily need much private capital to buy 3 houses (though it will help), the main reason for this goal is so I can get better at raising private capital in large amounts for the apartment purchase. It will also show people that I can take down big deals, pay them good interest, and that I’m a reliable partner going forward. Using lending as a means for both parties to make a profit will allow me to build great long-term relationships for even bigger deals in future years to come.

I’m also using this delayed financing plan to make sure I pull all my capital from each deal, ensuring I have the maximum amount of equity extracted at years end. If I want to ask people to invest with me in the future, it’s important that I always have “skin in the game”, meaning I have a vested interest in my deals and I’ve put my money where my mouth is when asking other people to invest in my ideas.

Summary:

This is a rough outline of my 2018 schedule. I know there is variance in what can be accomplished and plans always change once the rubber hits the road but it’s important to get things down on paper. It’s important to talk about your plans so you find objections or obstacles, it’s important for people to listen when people tell you why your plan sounds risky, or it can’t get done. I also wouldn’t be able to do as much because solving large problems is not easy to do without diligence. This formula is my diligence. I’ve spoken to investors, lenders, my property manager, my realtor, and I’m posting my plans to the internet. The only thing left to do is execute

Why I chose real estate

Posted on December 20, 2017 by Alexfelice

This might be the easiest post I’ll ever write.

Real estate isn’t really something I chose it was more the product of my realizing that I had little talent, an average work ethic, I was flat broke, and I was arrogant enough to think I could still get rich despite these weaknesses.

Again, let me state the checklist of things I had going for me when I found out real estate is perfect for me:

I had little to no money.
I had no business I could think to open
I didn’t wan’t to do full time sales
I had no service to offer
I consider myself lazy

In addition to these clearly advantageous personality traits…. I wanted something that would fit into a box that would require me not to change. So my adventure had to be:

Low risk
It had to work in the long term
I wanted it to be passive.

I had read Rich Dad Poor Dad years ago almost by accident. Luckily, it taught me that passive income was the most efficient. I had thought about opening a business for years; Restaurants, bars, gyms, supplement stores, and self storage were all ideas that I had considered. So as I’m going through these options I’m realizing that all of them have similar negatives that I wanted to avoid:

All of them have high overhead
I needed buildings, inventory, employees, utilities for all of them
They all were owner-occupied. Meaning I had to go work on this every day. I needed something I could start on a part-time basis
They were all hyper competitive, and the these industries are saturated. You know what the failure rate for restaurants is? How many supplement stores pop up and then are gone in a blink. I didn’t want to follow a trend, I wanted a long term solution.
These businesses are all cash intensive. One of the main reason businesses fail is under-capitalization. I didn’t have any money to start with so I didn’t want to go into a business that I would need large sums of cash to float the expected hardship of early business.

Enter residential real estate

Real estate has required me to make almost zero compromise on any of the features I listed. I actually believe it would be perfect for a lot more people if they would just take the time to learn more about it. Let’s look at how it fit my goals:

It doesn’t take much capital. My first house I had bought with a VA loan and put no money down. While that’s not possible for everyone, if you owner-occupy a house for 1 year you can buy a house with an FHA loan and only takes 3.5% down. A year after learning about real estate investing I did exactly that and moved into a house (that I would eventually rent out) with only $2,000. As I’ve gotten better I’ve learned you really don’t need much or any money to make a living in real estate.

Little to no money

It requires no new ideas, no new business, and no service to provide. It’s been done to death, it’s tried and true, and it works. The returns are great, the risk is far lower than I had originally thought, and you don’t have to be very smart to pull it off.

No business ideas to create

It’s passive. I don’t know my tenants I only have to deal with my property manager and he’s 2600 miles away. My entire portfolio is run over the phone, and some of my rentals I’ve never even seen.

Can continue to be lazy

Let’s see if it coincides well with things I was opposed to in other businesses:

You have to buy the building and upkeep it, but that’s all. With a restaurant I need a building, employees, marketing budgets, inventory, permits, etc. All this means less risk during economic low points, and certainly allows me to sleep better at night. Also, my real estate is a purchase of an asset, not a moving system. Once the house is bought, there is little continuous overhead that isn’t directly paid for by the tenant in real time.

Low overhead

As I mentioned before the tenant lives in the unit, but I never have to go there. It doesn’t require much of my time and that allows me to continue to leverage my human capital to make money from other flows of income. For instance, my tenant pays me on the 1st of the month, but so does my employer. I have essentially bought more time.

Non-owner occupied

Real estate isn’t’ a scary as I first thought. In fact it’s more boring than anything. My tenants pay rent on the first, like clockwork. People ask me all the time “what if the tenants don’t pay” as if they are terrified of this risk and instead of learning how to mitigate it, they run from real estate investing completely. The fact is, people pay their rent, homes don’t decay abruptly, and interest rates can be locked in. My business is systematic, consistent, and boring.

Low volatility

The only investor who can rent my property out for profit is me. There is no possibility for somebody else to box me out of my rentals, and there is no shortage of houses that I have to fight very hard for the next one. There is definitely competition in the buying process, but once you own the unit, you don’t have to fight the market for tenants. I need one tenant and I don’t have find a new one every day.

Not hyper-competitive

That’s all there was too it. I wanted to create wealth and I wanted to do it fairly low-risk, with low startup funds, and not have to spend my active working time on the daily business tasks. It sounds like every pyramid scheme pitch I’ve ever heard! I did have to spend some time getting educated, learning the details, and understanding how the systems work, in the end I got what I wanted though. Real estate has given me economic freedom and stability with a very hands off lifestyle, much lower risk than I had expected, and it’s been far more profitable than I had originally thought. I ask one of my investing partners all this time:

Welcome!

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February 14th Bid like a madman

February 15th Highest and Best….and Pass

February 16th Hold on the current bid, don’t get stupid

February 20th Having no results is boring

February 21st Slow week, keep prodding

February 22nd Patience is not my strong suit

February 23rd Moment of truth

February 26th The devil is in the details

March 5th Is it easy? Yes. Does it go smoothly? Never.

March 7th Renegotiate to win

March 13th Last step

March 14 & 15th ALWAYS BE CLOSING

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We house hacked

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Low overhead = more freedom

What can learn from my mistakes and what to do better:

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PLAN A

PLAN B

PLAN C

Paying cash is actually the riskiest part of my business

But Alex, you’re paying so much in interest!

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Money isn’t important

It’s my dream house/car and I deserve it

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Mistakes have been made.

What’s next?

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The goal:

The plan:

The financing:

SWOT analysis:

What’s next:

Summary:

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Enter residential real estate

“This is so easy, why don’t more people do it?”

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February 14th
Bid like a madman

February 15th
Highest and Best….and Pass

February 16th
Hold on the current bid, don’t get stupid

February 20th
Having no results is boring

February 21st
Slow week, keep prodding

February 22nd
Patience is not my strong suit

February 23rd
Moment of truth

February 26th
The devil is in the details

March 5th
Is it easy? Yes. Does it go smoothly? Never.

March 7th
Renegotiate to win

March 13th
Last step

March 14 & 15th
ALWAYS BE CLOSING