Alright, for those that aren’t familiar with my story, I’ll give a brief rundown. I’ve studied REI for the better part of a year now. College student, 19, no current job, 700-750 credit score, 5600 in student loans, ~3k in cash on hand.
My endgame is owning many rentals for cashflow. The way I see it, my plan is 3-staged.
Stage 1 is the beginning stage. REI has not yet completely taken over my life. Spending time: ~40% REI + continuing education, ~40% College/Co-Op, ~20% Everything else.
Stage 2 is the midgame. My REI income will be greater than my probable “career” income. In all probability drop the job and continue growth.
Stage 3: I should be in control of enough properties that it is no longer feasible to be my own PM (100+). Start cleaning out the mortgages, only obtaining new loans for 1031 exchanges in upgrades and new properties.
Right now, I’m focusing on Stage 1. I wanted to give you guys the outlook for the end goal of my REI ventures. Right now, I’m trying to decide how to begin. There’s two major entrances I can make into the REI world. I need to either choose of the two, or combine them in a sense. I’ll try to give what I see as the good/bad for each approach, on both a personal and a impartial view. Some things are usable for both entrances, so I’ll include these first.
Obtain NoD list weekly and mail to find motivated sellers. (60% FMV max, pref <55%)
Continue REI education, attend REIA meetings, establish a relationship with a good realtor + attorney.
Visit every bank, especially local ones, and establish relationships with the decision-makers. Find their policies on REOs, various loans, find out what my loan numbers would be. Show my business plans to them to show them my seriousness. (Obviously must decide plan of action prior to this.)
Straight Options + Assignment of contract + My tweak
- Plan of action would be:
- Find bank willing to be flexible to issue loan on spot. Same for a closing agent (attorney on state bar). More on this later.
- Find property + motivated seller combo
- Obtain an option to purchase + make sure assignment of contract clause is in deal
- Advise seller on what improvements to make house more sellable. Help them if they are willing to let me. Otherwise prepare house for open house + auction.
- Advertise. Targets: Rentals around area: Mail to them/place flyers on their windshields. College campuses.
Focus: Never thought you could own a house? It’s easy, same-day on-site closing. Etc. etc. - Day of auction/open house: Pack off owner’s into a hotel, paid by you. Get contact info (including price range they’re looking for, Bed/bath, credit score, job, etc.) of all people coming in.
- Same day, hold auction, close, all same-day. Assign the contract, pocket the difference, and look through lists of motivated sellers, and do three things.
a. Repeat all steps, but now you have a group of banks, agents, etc that can help you make future deals faster and smoother, and have bigger lists of interested home buyers.
b. You can now match interested home buyers will houses that will fit their needs, for more efficient open houses/auctions.
c. Weaken your future opponents. (Hehe, just playing.)
Notes: If winner of auction can’t get the loan from the bank, second best will get the opportunity, etc. etc.
Advantages
Good risk to reward ratio. Really, the only things at risk are your time and option fee. If option doesn’t make you cash or enough cash, just don’t assign the contract. They can’t buy it from you if you don’t own it. You are the only one who can buy it. You’re not putting much of your own money in, and really none of your credit. You’re not holding a loan.
Get some experience with the closing process and REI in general.
Flexible (time-wise).
Very repeatable.
Disadvantages
Sort of keeping you from your goal of getting into rentals. You’re getting experience in a very different subset of REI.
Hard to find lenders that will be willing to do on-site closings.
Hard to find sellers that are open to options.
Flipping is viewed on a very bad light nowadays.
Nothing but Rentals.
1. Find out probable rates, terms of loans you could get.
2. Find motivated seller, good property combo.
3. Get deal + due diligence, appraisal.
4. Check ownership history, get title insurance etc etc prep for transaction
5. Start advertising, looking for renters (need help with this step, if you’re up for posting some. Newspaper? Bulletins in public places? How to get renters?)
6. Obtain the property
7. Rehab, spruce up
8. Start renting out (use help of attorney to make lease)
10. Rinse repeat
Notes:
- Same criteria on properties, <60% FMV
- Work on getting cash back on closing + ~30% equity in the deal, buy getting a 70% FMV loan if at all possible. Use cash obtained to rehab to get newer properties, + some on hand.
- Use the Profits >= 1/3 mortgage, etc formulas.
- Start with SFHs, they are more liquid, better tenants, etc. Work up to duplexes, eventually to commercial.
- Basically follow much of propertymanager’s plan.
- Be my own property manager for much of it.
Advantages
More closely aligned to my future plans. Much experience can be gotten from many parts of it.
Downturn in economy means more renters (especially in my area)
Get some cashflow
Build some equity, so increase paper wealth
More traditional, so can work with more sellers + banks etc.
Disadvantages
You’re more at risk. Responsible for a loan, etc Can scar credit, other things
More involved, less flexibile time-wise.
Or I can somewhat combine the two. How would that work? I’m not sure. It seems like it would somewhat be worse.
Q. So… what do you think I should do?
A: Straight Options Plan
B: Nothing But Rentals
C: Both.
D: You’re not ready for either. Quit now. (Just kidding.)