december 2015

Definancing good "keeper" properties

Make a plan to work your leads, but you should also work your network


When I first got into real estate, I was fortunate enough to have somehow come across Napoleon HIll's Think & Grow Rich. While there is plenty of good and actionable information in the book that can and will help you succeed, being new to the real estate game at the time, I realized I didn't have a network at all and that was most important for me to foster. I started traveling to every real estate club in Southern California (that was actually worth going to) and listening for names of local real estate celebrities that I could network with. That is part of the reason why I am currently located in the Inland Empire, but that is story for another time.


The biggest game changer for me, and I am no fan of that saying, but it is quite relevant here, was my participation in a weekly luncheon of high level investors. Imagine being able to surround yourself with a private group of investors that actually had the ability to take 2-3 hours off every Tuesday and sit around talking shop!


Coming from a tech background, I knew there was more to be obtained from this group on the days we didn't meet and I knew how I was going to make that happen. I decided to create a Google group for us and collected everyone's email address. I restricted the group to active investors located in the Inland Empire, Orange County and a few from Los Angeles. We shared lots of contracts, contacts, experiences and did quite a bit of group think helping to solve each others problems on all sorts of real estate related issues. I do believe that group helped get myself and a lot of other investors through the rough times of 2007-2009.


I am also a big believer in "Ask and you shall received." Not in the theological sense, but more Universally. I seriously believe that if there is something you need, it is in your network and it can be provided to you, but you have to ask! I will add that sometimes, just thinking about this want enough is the equivelant of asking as well. We'll call it the "subliminal request."


I have a great duplex in downtown Riverside that I owed $108,000 to a local hard money lender. The original note was for 8 years, 9.9% interest only and the balloon was rapidly approaching. So, in late 2014 I put on my 2015 Goal List to refinance the property. Late summer 2015 was pretty good and I had a few meaty rehab/flips going so I thought I might just pay the whole loan off. However, I wasn't real keen on liquidating $108,000 in cash and essentially investing it at 9.9%. I knew one rehab/flip could produce a much better return. I mentioned this to my adopted mentor and he said that he doesn't trust himself with cash so whenever he accumulates a substantial pile of it, he pays off a loan. This was some interesting food for though. I had the money, could use it to produce more money, but one bad deal and I could get stuck. Then I'd have no money and would be putting my keeper duplex at risk. What to do??....


It wasn't long after, a fellow member of my private mastermind group posted that he had some private money available; $55,000 at 7% for 7 years. I immediately reached out to him. The only problem I really foresaw was that some private lenders outside of the IE have this incorrect idea that the whole of the IE is a bad place to plant their money. I had to dust off my best sales pitch to be sure that out of the 60 investors who received that email, I was the one who would secure that loan. Here is the (slightly redacted) email I sent;


I have (some money) sitting in the bank and 2 rehab/flip deals in escrow on the sell side which means I'll have more money sitting around doing nothing. I was thinking about the best use of this cash and after talking with (adopted mentor), decided to definance some of my better properties. However, I'm not 100% sold on the idea when I have people like Jimmy Napier and Clyde Wilson saying, "When you borrow money, try to never pay it back." (Go for the longest term possible, not actually don't pay it back.)


So, instead of burning all my cash paying stuff off, I was planning on paying off this duplex and possibly one other property or at least paying them down. I borrowed $108K from TNG 6 years ago and I've been paying 9.9% I/O on that 8 year rental program. This property is one of those keeper properties I'll probably gift to my daughter (oh, I had a daughter 2 weeks ago) in 20 years. I've thought about doing a 1031 with (the property), but the thought of selling such a simple cash machine and I can't bring myself to put it on the market.


Your lender's $55K makes me more comfortable with the idea of definancing something in terms of not evaporating $108K of my cash in one go, but testing the idea out and just using $53K to see how I like the concept. Now I get the best of both worlds; I get a lower rate and pay down some debt, but I still keep some of my cash around for that next killer deal that is just a phone call away. I'll put my $53K into escrow and with your lender's $55K, I can take out TNG and put your lender in a new 1st position TD.


The address is (Riverside). Property is very clean and stays rented. I get $1,825/month out of it and that is below market. I could easily push that to $2,000, but my tenants have been there for years and keep their units very clean.


Please let me know if your lender is interested and for how long. I have just under 2 years left on the TNG loan so if this lender isn't up for it, maybe you'll come across another and we can do business then.


Three days later, I received the following email;


Hey Aaron,
I got the green light for $60k 1st TD, 7yrs @ 7% interest only.
Let me know if you have any questions, I will get this going on Monday for you.
Thanks,


That worked out better than expected! I would only have to take about $50,000 out of play and my monthly payment would go from $891 to $350. That is a nice jump in cash flow. $891-$350 = $541 increased cash flow per month x 12 months = $6,492 per year / $51,502.67 (the actual amount I wired to escrow minus my refund) = 12.6%. Not a bad return on my money either!!


What are you doing to cultivate your network? Please leave any comments below, share this post with others and head over to my blog for more insights on investing in real estate.

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