How I Bought 11 Rental Units in 13 Months Using OPM (Other People’s Money)
I'm going to share how I acquired 11 rental units in 13 months using NONE of my own money.
Today, I want to share how I was able to acquire 11 rental units across 3 properties in as little as 13 months.
For this story to make sense, we have to rewind all the way back to the Fall of 2018 when I attended my first Real Estate Investing Seminar.
At that event, one of the keynote speakers asked the audience a series of questions to kick off his speech.
For context, the audience was somewhere between 2-300 people.
First, the speaker asked, “By a show of hands, how many of you have yet to do a single real estate investment deal?”
A little more than half the audience’s hands went up.
Then he asked, “Now by a show of hands, how many of you have invested in 2 deals or more?”
It seemed like the remaining audience members raised their hands.
He then asked one final question, “By a show of hands, how many people here have invested in just ONE deal?”
Maybe 3 people raised their hands.
The speaker spent the next few minutes talking about something many real estate investors commonly refer to as the "Law of the First Deal".
The law of the first deal states getting started is more valuable than waiting to find that perfect first deal.
The speaker went on to say the odds of getting rich off your first deal are practically zero, but you get something far more valuable than money in return.
- You build your confidence &
- You generate more opportunity.
If you can manage to get over the hump of uncertainty, defeat analysis paralysis, and close on your first property... your second, third, and fourth deals practically fall into your lap and are typically much more lucrative.
This is pretty much exactly how it happened for me.
First Deal: 4-Family Home
I bought my first property in January 2020.
It was a 4-family home in Southwest NJ.
I bought that property with the help of a wholesaler I met on Instagram.
We actually hit it off so well we decided to partner on that deal, and many more down the line.
The purchase price for the 4-family home was $240,000 and our renovation budget was $160,000.
We used a private money lender for the 20% down payment and construction costs and a hard money lender for the 80% balance of the purchase price.
It took about a year to renovate that property unit by unit as we waited for leases to naturally expire.
All the while, we used the rental income to service our debt.
Once we finally renovated and re-rented each unit at market rate, we refinanced the property into a 30 year mortgage at 4.25%.
We spent $400,000 on the purchase price and rehab and received an appraisal for $589,000.
We took a new loan for 75% of the appraised value, which came to just over $440K.
We paid off our private and hard money lenders and had a few dollars left over after also paying our closing costs.
We kept the proceeds from the loan in the deal as an emergency fund.
As we were working on turning that project around, our general contractor let us know one of his friends was looking to sell a 3-family home a few miles down the road.
The second reason I prefer buying rental property in an LLC is because the financing doesn't depend on my personal income.
It took me 6 months and 6 different banks to realize Traditional Lenders Hate Me.
No matter what I did, I couldn't get a loan in my personal name for any of my investment properties.
From what I gathered, there were two main reasons for this:
First, I was self-employed. Banks prefer borrowers with W-2 jobs that provide a consistent paycheck.
Second, my tax returns looked like I didn't make any money.
Although my top-line gross income was decent, I utilized a lot of write-offs that made my net income negative or as close to zero as possible.
That was a problem because traditional lenders use a metric called Debt To Income Ratio to decide whether or not a borrower can afford a loan. Most banks won't lend to a borrower whose monthly debt service is greater than 40% of their monthly income.
Since my monthly net income was close to zero, I wasn't going to qualify for a loan even though the rental property could be self-sufficient.
Just when I was about to give up, I found a DSCR lender that only funded LLCs.
DSCR stands for Debt Service Coverage Ratio.
The formula my lender uses for DSCR is Rent / PITIA, which stands for Principal, Interset, Taxes, Insurance, and Association Fees.
A DSCR of more than 1.5 is required to get preferred terms.
Anything between 1 and 1.5 gets standard terms.
The lender I use to finance all of my rental properties provides a 30 year fixed rate loan with an interest rate as low as 4%.
That’s comparable to what you’d get financing rental property in your personal name.
I can get up to 10 loans or $4M in combined loan amount as long as the property pays for itself.
The best part is the DSCR lender doesn't require any personal income documentation to make the loan.
Second Deal: 3-Family Home
In September 2020, we bought our second deal: a 3-family home with one vacant unit that was recently renovated.
Once we rented that vacant unit, our total rent roll for this 3-family home was $3,750 per month.
We bought that property for $215,000 and our renovation budget was $35,000, which brought our total all-in cost to $250,000.
Since the monthly rent was 1.5% of our cost-basis, we found a private money lender willing to finance 100% of the deal.
We are currently in the process of refinancing this property into a 30 year mortgage at 4% to completely pay off our private money lender.
We anticipate the appraised value of this 3-family home to come in around $330,000, which will let us obtain a new loan of $250K assuming 75% of the appraised value.
This will likely be a rate and term refinance so there won't be any proceeds from the new loan.
Not great, but not bad either considering we created roughly $75K in equity that didn't exist before.
Third Deal: 4-Unit Mixed Use
Finally, the seller of the 3-family home introduced us to someone who wanted to sell their 4-unit mixed use property.
This building had a commercial office space on the first floor and 3 residential apartments on the second floor.
There was also a 2.5 car garage on the property and a basement with its own separate entrance.
After walking the property, we made a cash offer of $315,000.
The seller, however, wanted closer to $375,000.
Since we were so far apart, my team and I transitioned to something called a "guaranteed offer"
We helped the seller list his property at $375K and at the same time told him he could exercise his option against our $315,000 offer at any point.
After a few months of crickets, we bought his property for $315,000.
When we originally asked the seller why he was selling, he said he needed $200,000 to buy another property.
Since we knew he only needed $200 of the $315K, we asked if he would consider seller-financing $100,000 towards our purchase.
The seller agreed, and we found one private money lender to fund the balance of the purchase and another private money lender to fund the $45,000 renovation cost.
We are now all-in to this project for roughly $360,000.
When we took over this property, the monthly rent-roll was about $3,250.
Today, we are collecting $5,700 per month.
We were able to almost double the rent because we monetized the basement and garage as storage units and brought the residential units up to market rate after some cosmetic renovations.
We're in the process of refinancing this project as well and expecting to receive an appraised value of $600,000.
We will then take a new loan of $450,000 assuming 75% of appraised value.
After paying off our existing loans of $360,000 and closing costs, we should have anywhere from $50 to $75,000 left over to put into our pockets tax free.
If all goes according to plan, this third deal will be our lucky charm.
Not only will we be into this deal for no money and create $150K of equity, but we will also be able to walk away with some cash proceeds from the new loan amount.
It took 3 swings, but this is the home-run we were looking for.
If we continued to wait for a deal like this, it may have never fell into our lap.
If you told me a few years ago that I would be able to buy 11 rental units across 3 properties in as little as 13 months using NONE of my own money, I would have called you crazy.
But I can now confidently say that the law of the first deal holds true.
My first deal lead me to my second deal, which ultimately lead me to my third deal.
Getting into the game was hard, but staying in the game has been easy.
More recently, we've started wholetailing and wholesaling properties because we're coming across more opportunities than we can chew.