Today’s “guest post” comes from my good friend, Jim Galvanek. Jim is a real estate investor here in Washington, DC who has been extremely successful in rehabbing single-family homes and currently manages multiple rental properties. I snapped this photo of Jim giving advice to real estate guru, Ron LeGrand, down in Florida. Or maybe I have that backwards...?!
Jim’s lesson for us today is on financing – and he tells it like it is! I apologize in advance if this article leaves you begging for more information, but eal estate financing is quite an in-depth topic. If you're lucky, I might be able to persuade Jim to write a follow-up to this article. Leave a comment if you found this helpful...or send us your questions. Enjoy!
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Options to get cash or leverage your existing cash:
Basically, banks leverage their money by making money in the yield. For example they get their money from you in your savings paying you 1.5% and then lend it out at 4.5% to 24.5% and I have even seen higher. Credit card companies are evil when it comes to this. They take advantage of the uneducated many.
When asked what he would have done differently, Sir Richard Branson (Virgin Records, Virgin America Founder) answered, "I would have gone into more debt." Meaning he would have leveraged more money or borrowed. This would be called good debt.
Cash flow for me as a landlord is easy. I have 2 mortgages on my houses and whatever rent I collect extra I keep. Now to get here I had to leverage one house against another. But, more recently banks have been afraid to lend money to what they call risky investments. Now, I am paying 10-12% to friends and family if they invest with me on my house flips. I then take the money made and put it into rental properties that CASHFLOW.
Remember, you need to make your money on the purchase and not on the back end or relying on housing prices going up. This could be a 3 day seminar but basically after I collect rents, and pay principal/interest, taxes, and insurance, I cash flow about 1,200-1,500 (depending on expenses) a month. My plan is to get that 1,200 to 10,000 in the next 4 years. 10k or residual income will retire me. Also, by making sure the houses will cash flow, meaning the rent is more than my expenses I really don't care if the house loses value.
On another note, I also get to write off the depreciation and if I make less than 100k a year at my day job I can show a loss to the IRS. The tax laws are set up for the small business-- Get paid before you are taxed vs. an employee who is taxed before receiving their paycheck.
I also use my home equity accounts on my houses which is at 2.76 and 3.3 (interest only) which is an amazing lending price. The other game I play is with my credit cards to fund my projects. This I don't recommend to everyone because, well, like my tenants cannot handle a garbage disposal without breaking it, they will screw it up. For example my home depot card has no payment for 6-12 months with 0% interest. When I do a rehab, I am usually in and out of a deal within 6 months. I have had to roll my credit card on occasion but it's a lot easier than going to a bank that's going to charge me 8% and a point. Or hard money at 14% and 5 points.
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