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SHOW NOTES FOR EPISODE 256: ASK BILL! INVESTING WITH LEVERAGE, FLIPPING PROBLEMS & FINDING A MENTOR
This is our monthly Fun Fact Friday “Ask Bill!” episode, where Bill answers specific real estate investing questions received during the month from e-mails, in-person conversations, phone calls or through online portals such as BiggerPockets.com and Quora.
One of our goals here at the Old Dawg’s REI Network is to help to educate/enlighten fellow real estate investors, to share what little knowledge we have by answering your questions, and to help other investors to broaden their understanding of real estate investing and to, hopefully, avoid some of the mistakes that can cost you later.
In this month’s “Ask Bill!” episode, Bill answers question from a 40 plus couple who are new to real estate investing and are concerned about starting later in life and they also want to help their 17 year old daughter to invest as well. Also, a newbie flipper in Washington gets stuck with an a over-priced house she can’t sell and a new investor in Ohio is concerned about getting started without a W2 job and finding a mentor.
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QUESTION #1 – Getting Started Later in Life and Using Leverage
My husband (42) and I (44) would like to start investing in real estate rentals for passive income and retirement. I feel that we’re too late to get in to this but hoping there’s still time. We used to do online selling until it didn’t do well. We have 200k saved up but the problem is that we both don’t have W-2. My husband just started working in July of this year. We want to use leverage instead of paying in cash if possible. What’s the best strategy considering our situation? Would you suggest we start buying in cash? Or wait until my husband has worked for 2 years?
I also would like to ask about our 17-year-old daughter, she’ll be 18 in March and has been working part time at a tutoring center for 2 years. Can she start purchasing rental property once she turns 18? We hope that she could start investing in rental properties as early as possible.
Your advice is greatly appreciated.
Sincerely,
Fahnee
ANSWER TO QUESTION #1
Want to invest in real estate rentals for passive income and retirement. Used to do online selling but it didn’t work so well
- I had an eBay business and the same thing happened to me
- That’s when i moved into REI
Feel’s like they’re too late
- It’s never too late
- I started at 59
- I’ve had lots of guests who started after 50 and did great. Here are two:
231: California Teacher Builds $7 Million Real Estate Portfolio in 7 Years
253: Old Dawg Investor Creates Retirement ATM Machine in Just 2 1/2 Years
Have $200K saved up
- Great way to start
- You could use smaller amounts for down payments – could buy 4 $50K homes, pay all cash and have no loans and bigger cashflow
- You can leverage later on
- A market correction will hit fairly soon so you don’t want to get stuck with 4 mortgages
- Here is an episode where I share how to be financially independent in 5 years:
Don’t have W2 jobs (Husband just started new job in July)
Want to borrow but afraid they won’t qualify
- Don’t need W2 to qualify for loan. It may be easier but it’s not necessary
- But, if you pay all cash for the properties you don’t have to worry about the loans
Want to use leverage
- Wait for your husband to have some time on the job
- Use leverage when market prices are lower to take advantage of the deals (cash-out re-fi on 4 $50K homes)
What’s the best strategy?
- Start buying with cash
- Wait 2 years so husband has longer job history
- Leverage the 4 homes you won outright
Has daughter 17 that will be 18 in March. Want her to be able to buy rentals.
- If she can house hack, she can get an FHA loan
- My son Elijah got approved for an FHA loan at 18 with a part-time job (working barely 20 hours per week)
- She can buy before 18 if you co-sign
QUESTION#2 – Flipping Troubles
Hello Bill,
I’m writing in hope to have your feedback and advise . I’m a newbie in WA flipping houses , I recently finished my last flip. Unfortunately this one was filled with unexpected expenses. It’s a 5 bed/ 2.75 bath home purchase in a foreclosure sale. We had planned to spend $100k in rehab unfortunately we spent approx $160k. We had to pass plenty of inspections and the price keep adding up. The condition of the house we bought was terrible, filled with mold and missing trusses, and we got it with a hard money loan of 90% . Now, finally, the house has been on the market for 25 days and we are not getting any offers. In hopes to at least break even we put it on the market at $547k , we lowered the price to $527k and still nothing. Market here in WA is has been really slow and houses around are lowering prices too. At this point I can’t keep lowering the price since I already accepted a loss of approx $15 k with the price is now . Do you think I should refinance and rent it? I can’t get anymore extensions from hard money lender and interest rates are rising and home prices keep dropping.
Thank you ! Patricia
ANSWER TO QUESTION #2
Dear Patricia,
Thank you for your question.
First off, let me say, before anything, I have never flipped a house before so I am by no means an expert. But I have known lots of flippers and have had some of the best on my show.
I am very sorry about the dilemma you are facing. Unfortunately, flipping has a certain degree of risk, especially in markets that may be near or at the top of the bubble in terms of the real estate cycle.
Washington has been a hot market for a while. And while some markets are still going up, others are cooling off and prices are going down. Flipping in that kind of market increases risk substantially.
When the market is cooling it just takes longer to sell homes. What sold in 30 days before may now take 60-90 days. It’s tough to say. You may be able to market the house a bit more aggressively. I know one flipper who puts plastic pink flamingos all over the yard, gives away prizes for all that are there and packs the house for the open house to create a buying frenzy but I’m not sure that approach would work yet. If the price is not right, then it could mean it doesn’t matter what you do. You may just have to take the loss.
Unfortunately, you encountered some of the most common mistakes newbie investors encounter. But don’t be discouraged.
- Scott, who was a guest on episode #109, and who wrote the best selling book The Book on Flipping Houses, had a similar experience when he first started out in flipping. It was with a lower priced property than yours but the situation was similar. He had over-paid for a property by at least $10,000 and he underestimated renovation costs by about $15,000. He also over-estimated ARV – the price to sell the house for. When it wouldn’t sell, he decided to hold on to it and rent it out. He ended up holding on to it for 2.5 years. During that time, he tried lease options but couldn’t get tenants to qualify for re-financing. He did more renovation and eventually ended up selling it after 3 years. He made a $1,000 profit. He had basically made every mistake you can make on a flip – over-paying, underestimating rehab costs and over-estimating ARV.
- But, he wasn’t discouraged and he kept plowing forward and ended up buying, building, rehabbing, selling, lending-on and holding over $40 million in properties. Today, he is very successful and his focus is more on buy ‘n hold multifamily investing.
So, don’t be discouraged by this temporary set-up, go for the re-finance, rent it out and try to make the best of it until prices rebound or you can maximize your return son it as a rental.
I would also recommend you contact J and see if he might have some other suggestions. Here’s his email: j@123flip.com.
I hope it works out well for you.
Best,
bill
QUESTION #3 – Starting REI without a W2 job and Finding a Mentor
Hello,
I’m a new investor in the Columbus, Ohio area and am seeking guidance on what path to take with my first property. I have some money saved for a down payment and am not working a normal w-2 job currently….so I’m leaning towards multifamily, in the hopes that I can get financing without a ‘normal’ job. I’m feel like a good mentor would be super beneficial to me and am seeking that person….do you do any type of coaching or mentoring? Would love to speak with you.
Thanks,
Matt
ANSWER TO QUESTION #3
Hey Matt!
Thanks for writing!
Congratulations on your move into real estate investing! Columbus is a great market and I think you will do well. Also, multifamily is a great route to go. If you purchase 5 units or above, it is considered a “commercial property” and the lenders look at it differently. They will still look at your credit scores and income but the biggest factor is the business plan for the property. Having a W2 job is not as important. If you can present a strong plan showing how the property will become profitable, they will weight their approval based on the plan. Commercial lenders look at your property investment as more of a business than just a property. It’s not like a single family home that is considered primarily as a residence.
The key is to find a good local lender that you can work with – not a big chain bank like Chase or Wells Fargo but one that would be considered a “portfolio lender” – a smaller local bank – that is a little more flexible to work with you and can help you in your future purchases and your whole real estate business as well. I would network around your community, attend local REI and service club meetings and go on BiggerPockets.com to see who some of those lenders are in your area.
Also, regarding a mentor, you are definitely doing the right thing by seeking a mentor before you buy your first property. This is something I can’t emphasize enough. A good mentor will help you and save you from costly mistakes. You’ll still make mistakes but you’re less likely to make the big ones with a good mentor.
I don’t do coaching or I would help you. It’s not because I don’t want to but I really had to make a decision what I wanted to be and a coach wasn’t one of them. Plus I still consider myself a newbie in many ways. Also, the reality is I’m just way too busy looking for deals, managing my properties and running the Old Dog’s REI Network podcast and website. There are plenty of mentors out there. You just need to be picky.
There are basically two types of mentors:
- Ones that cost you money (ranging from a few thousand to $20K and above) that have formal coaching programs with boot camps, seminars, webinars, training videos, booklets, and provide coaching services.
- The other type is someone that is local real estate investor who you can regularly meet with who can help you learn and get started. You find these types of mentors usually at a local REI meeting, through coffee meetings (maybe making contact first with investors in your area through BiggerPockets) or you do some research, find the big investors in your area and you seek that person out. When, you meet with local potential mentors, you can offer your skills in exchange for training, consultation, etc. If you are an engineer, for example, you might offer to help them with their computer system, develop/refine spreadsheets for market analysis or property analysis. Graphic artist. Web designer. Make prospect calls. Drive for dollars or file papers. The idea is that you are not expecting something for nothing. You need to be willing to give to get.
I personally like the later – a local mentor – if you can find one, but it does take a bit more work.
Here are some links to articles and podcasts that will show you how to find a mentor. We also have some coaching program links in our resource section of the Old Dawg’s REI Network website under Resources and then under Services.
184: Ask Bill! Finding a Mentor, Multifamily Investing, Common REI Problems
Well that’s it for today…
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