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september 2018

Capture the Equity

How I Grow My Portfolio of Rentals in a High Priced Market


I actually bought this house back in May, 2017. It was actually a follow-up deal. He had called me earlier in the year, we couldn't come to an agreement, so I put him on a follow up sequence. When I called him again, he said, "Oh, you still want that house?" And I closed his $300K house at $210K. My private lender ponied up the $210K I needed to close, so I ended up with a 1993 built, 3 bed, 2 bath, single story, tile roofed house with a long term tenant, and I was out of pocket for less than $4K.


The tenant was paying $1,650/month in rent. She had a very poor payment record. It took a few 3 day notices, lots of late fees, and then a 60 day notice to finally get her onboard with my program. I also raised her rent to $1,800. So, I have a house with $90K gross equity in it. My payment was $1,750/month. After taxes and insurance, I was losing a few hundred every month. But, I captured the $90K in equity and it would take a long time to eat through that $90,000 at $200-300/month.


A little over a year later, I had a wholesale deal in escrow that was going to produce a $30,000 check. I also had run into one of my private lenders who happened to have $180,000 looking for a home. He gave me a few options with term and interest rate and we settled on 7%, Interest only, due in 4 years. My payment is now $1,050. The return on my $30,000 is quite outstanding. Let's take a look at the math;


Original Loan: $210,000 at 10% interest = $1,750 interest only monthly payment

New Loan:      $180,000 at 7% interest only = $1,050 interest only monthly payment


That is a $700 increase in monthly cash flow. $700 x 12 = $8,400 annual / $30,000 loan pay down = 28% return on my investment. With paying closing costs and other fees, maybe the return is really something more like 25%, but that's still one heck of a return. And now my rental house has increased to $310,000, I owe $180,000, which gives me a gross equity of $130,000.


And that ladies and gentlemen, is how I've grown my portfolio by millions in what many claim is an overpriced market that is hard to find and hold quality rentals. How are you growing your rental portfolio? Are you in a high priced market and think buying "expensive" houses that don't pencil out are bad long term investments?


Leave a comment, ask a question. I will respond and input is always appreciate.