Today we’re going to look at the possibility of using your existing house (or acquiring your first) and turning it into a multi-property investment portfolio. Basically, I’m going to show you how to leverage what you have — and turn it into something much bigger.
The concept is simple — start with a small flip and grow it into multiple assets, leveraging only the value you currently have access to.
People usually claim that credit or cash issues are the cause of their real estate investment business not getting off the ground — but the reality is that creativity, strategy and knowledge are the real holdbacks. Let’s look at ways to overcome those hurdles.
Where’s Your Starting Point?
We aren’t all in the same place financially, and we’re not all in the same place regarding knowledge and experience — that’s a given. So let’s place all that aside and first ask, “What are my existing resources?”
- Do you own your current house?
- Do you have money saved for a down payment?
- Do you have credit available?
- Do you have experience with plumbing & electrical systems?
- Do you have experience installing doors, windows and trim?
- Do you have experience painting?
- Do you have experience working with title companies, real estate brokers and mortgage companies?
The reason we’re asking these questions is, you need to know exactly what you can contribute yourself.
The old saying is, “You can get it done fast, cheap or right…pick 2!” This means that you can have it fast and cheap, but it won’t be done right — or you can have it done right and done fast, but it won’t be cheap.
If money is a factor in your investment options (and it always is) then you have to be creative on how you fund your first flip. The more you can personally contribute (financially as well as sweat-equity), the less you’ll be relying on hard-money lenders or banks.
That said, this article will assume that you own the house that you’re currently living in — or that you’re getting ready to make that first purchase and want to go into it with the mindset that you’re flipping it.
What I’m going to help you do is take that initial investment and leverage it to grow your flipping business quickly, and profitably.
Your First Real Estate Investment Purchase
Hindsight is 20/20 so if you already have your first house, I’m going to be sharing a lot of information that’s likely to depress you — don’t worry though, there are always exit strategies for every scenario.
The secret is to use past experience and combine it with newly acquired knowledge. Do it right, and you’ll be well on your way to growing your real estate investment portfolio. Do it wrong, and you’ll be paying the price in the form of financial loss.
When you buy your first house, you go through one of the most challenging ordeals consumers face today — learning the buying process! When you SELL your first house, you’ll go through even more challenges. Take all that newly acquired knowledge and combine it with an investor mindset/strategy so that you enter every contract with a clear purpose.
Home Equity Line Of Credit
If you’ve been living in your home for at least two years, and you’re really itching to get your real estate investing business rolling, consider putting the property up for sale.
Selling your only property might put you in limbo for a short time, but it also gives you access to critically-needed funds.
Once your existing mortgage is paid off and the real estate agents have received their commissions, you can use what’s left over to fund your next flip — but this time you’ll do it with some experience under your belt, and you’ll have the right mindset.
Now, if you don’t like the idea of selling your house, there are other ways of leveraging that equity — a home equity line of credit (HELOC) is one.
So on one hand, you sell your home and use the funds to finance a potentially profitable, distressed property — or on the other hand, you have enough equity to get a line of credit. You’ll then use the line of credit to fund your first flip.
HELOCs give you instant purchasing power without having to wait for your home to sell. Here’s how to calculate what you have access to and whether it’s worth the effort.
- Get your homes current market worth — use Realtor.com or some other real estate app and locate comparable properties in your area, you’re looking to get an accurate average selling price of your property.
- The HELOC loan-to-value (LTV) is going to be around 75%-85% of your home’s selling price. So multiply the retail value of your house by 75% (you may be able to get more but let’s look at the low end first).
- Now deduct what you currently owe on your mortgage. The remaining funds are essentially what you’d have access to.
Let’s look at an example:
- Your current house would sell for $250,000.
- You owe $125,000.
- $250,000 X .75 = $187,500
- Deduct your mortgage debt: $187,500 – $125,000 = $62,500
- You could qualify for $62,500 in HELOC credit.
A HELOC will keep you in your current house, but give you access to cash.
Depending on the condition of your house, you could do some remodeling and boost it’s value, then sell it and recoup the upgrade costs. Or you could put the money into another property, for example, locate a distressed property for $50k, snatch it up quickly, then wholesale it to a flipper for instant profit.
HELOCs aren’t the only answer though, and they aren’t always the best answer.
You could also consider doing a full-on refinance. This could get you access to even more cash, and if you have a steady income, the increase in your monthly mortgage payment might be an acceptable tradeoff.
It’s All Business
If you’re going to start a rehab business, you need to change your mindset. Literally everything you do, every decision you make, needs to revolve around this new mindset.
You can no longer afford to spend time and resources on things that don’t directly effect the marketable value of your property. This is where profits are made, and lost.
Every decision you make now has to go through a financial filter — and you’ll have to mitigate the tendency to let emotions dictate your decisions. This goes both ways.
People are usually stressed out by the idea of debt. Our society tells us that credit is a good thing (as long as you don’t need it) and debt is a bad thing. In truth though, debt simply needs to be managed, and leveraged properly. That’s where most people get tripped up.
If you let fear (an emotion) make your decisions, you’re going to find your business growing (if at all) very slowly. But it’s not just fear that you have to worry about.
Another emotion we face, involves the house itself. Whether it be sentimental attachment, or just an irrational admiration, you can’t think of your house as anything other than a real estate investment. Here’s why.
You should never purchase a home. People get attached to homes. What you’re buying, is a house. It’s a building with specifically functional rooms — and nothing more.
When you approach every transaction with this mindset, it dramatically helps you focus on the task at hand.
For example, maybe you think a new built-in entertainment center would look fantastic. If you’re buying a home, you’re thinking of yourself sitting in a cozy theater-style chair, viewing your favorite movies. If you’re buying a house, you’ll realize that the $10,000 invested on the entertainment center won’t boost the value of your real estate investment and as a result — you won’t invest money that you can’t recoup when the property sells.
So any repairs or upgrades must raise the marketable value of your property — or they simply don’t happen.
You’ve got to keep your eyes focused on the end-game. You want to grow from that one, first flip — to a huge real estate portfolio with multiple properties. So from now on, you don’t buy homes — you buy houses.
This is especially important when you start renting out properties.
Lots of investors get caught up in the quixotic notion that your renters will appreciate the little nooks you’ve built in, or that they’ll love the fountain you put in the back yard. Sure, you can make your house stand out from other rental properties, but will it be enough to garnish higher rent? Probably not.
On the other hand, if an upgrade DOES put your house into another rental bracket, then by all means, give it consideration. For example, kitchens and bathrooms are important areas to both buyers and renters. Kitchens contain features that renters don’t have any control over — such as existing appliances, sinks/faucets, counterspace.
In the living room however, renters control literally everything except the paint and carpet. It’s basically an empty room and they bring their own furniture and appliances (like a TV) — that’s why you don’t need to do much to a living room outside of making it clean and attractive.
The bottom line here is, if you have the equity, look for ways to leverage it and acquire another property.
What If You Don’t Have Equity?
So now let’s talk about first-time flippers who don’t have an existing line of equity to tap into to.
First, the mentality is the same. Even though this is your first house, don’t look at it with your emotions. Look at it as a simple business transaction.
Lot’s of folks have great success buying a distressed home, and living in it while they rehab it — but that isn’t for everyone. I can’t tell you how many couples I’ve known over the years that went into one of these projects with a great personal relationship — and ended up divorced before the property hit the market!
Countless others have bought distressed properties with the notion that they’ll do the rehab, put it on the market and close the deal in 90 days — only to find themselves still living in that incomplete, uncomfortable, distressed property, 365 days later.
Don’t get me wrong, it’s a great strategy for some, but again, you have to approach it from a purely business standpoint — and everyone needs to be on board. Otherwise, emotions will get involved and trouble will stir. Rest assured though, I’ll tell you about another solution — one that is much less stressful, at the end of this article.
For my first house, I paid slightly less than asking price — and the entire process was handled over email! I didn’t even visit the house personally until two weeks after closing — because I was out of the country at the time.
I had experience as a contractor, but absolutely no experience as a real estate agent.
It is nearly impossible to purchase a house for anything near retail value, then dump in some improvements and walk away with a net profit when you sell the property.
The proper approach is to find distressed properties — then use a combination of sweat equity and properly leveraged funding (cash on hand, other people’s money, HELOC, etc…) to raise that value to something marketable. That’s where profit is made.
Consider this path: You find a distressed property for $50k (yes, they’re out there). You provide a down payment of $3k and over the course of 6 months, you put another $5k into it.
Now, if you do all the work yourself, that $5k can amount to a substantial addition of overall value to the property. Sure, it takes 6 months (remember you can pick two, fast, cheap or right), but you’re doing this on a budget.
If you’ve found a distressed property that has ‘good bones’ and you focus on only those things that will directly effect the sale price (or rental value) of the property, your first flip could fund the next project.
The Easy Way Out
Now, let’s talk about an even easier solution.
I’ve already mentioned that living in your first flip, while you perform the rehab, can be stressful. Some distressed properties are simply not livable and you’ll be devoting a considerable amount of time and finances, just to restore minimal functionality.
That can be quite stressful on relationships, so if you’re going to be tackling that approach with a significant other, you need to know that from the start. You’ll need clear timelines and dedication (to one another as well as the project itself).
You also have to consider your available time. If you’re a weekend warrior, the rehab is going to be slow going. If you’re living at another property with additional monthly financial obligations (mortgage, rent, etc…) then things could go even slower because now you have TWO payments to make — all the while trying to put money into the rehab.
Minimal Effort, Maximum Gains
What if there was a less stressful option? Turns out, there is — and this one is particularly attractive to investors that would like to slowly work into the industry without adding stress into the mix. In fact, this is about as ‘hands free’ as investing can get.
So let’s rewind here for a minute and say you’ve got $5k sitting in the bank. You want to get started in real estate investing but you don’t have much equity or credit. Let’s even go so far as to say that your ability to do rehab work is limited (perhaps by your experience or free time).
You can actually enter the industry by using an investment collective.
A real estate investment collective can help you realize profits, build your portfolio, and limit your risk. It’s a great opportunity all around — and because of the way collectives work, it could happen much more quickly than if you tried to flip your first rehab yourself. Let’s see how.
A collective pools investor resources. Instead of you having to fund $100k to purchase a property, then dump another $30k into the rehab (which now makes you indebted to the tune of $130k), you would put your $5k into the collective.
An experienced project manager then takes those pooled resources and purchases a suitable property, performs the rehab, and flips the property — dividing any and all profits amongst the members of the collective.
It’s a win/win for everyone involved and the best part is — you are adding to your own personal portfolio!
Not only have you made money off your first investment, but you’ve gained experience:
- Finding suitable distressed properties…
- Focusing on what factors are important to rehab…
- The timeframe involved in a rehab flip (even if the money and personnel are there)…
- Working with budgets, tracking timelines and getting a feel for the market…
When you work with a collective, the project is essentially ‘hands off’. You don’t have to worry about any of the details — yet you get access to critical information that is going to help you later when you branch out on your own.
Some people even choose to continue using this model and opt-out of doing any rehabs personally. Why? Well, because it really is zero-effort.
I work with investors that started out with a collective (with the intention of gaining experience and then moving out on their own projects) but then later decide to continue using the collective because of the simple fact that they’re able to get involved with more projects, without increasing their workload.
If you’d like to know more about real estate investing with a collective, checkout the Poston Investment Collective.
The bottom line is that investment opportunities are out there — you just have to choose which strategy to use, based on your available resources.
Use your existing home’s equity, purchase a small distressed property, or join a real estate investment collective.
To get started and discover more about real estate strategies, sign up for the FREE OPM Secrets Webinar.