Strategies for buying over 10 homes - Posted by Luke Hoppel

Real Estate Investing Real Estate Law
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Posted by Natalie-VA on May 11, 2006 at 08:01:52:

Luke,

You’re right about it being difficult sometimes to interpret the intention of someone’s post. Not only do we not know that person, but we don’t have the opporunity to see their facial expression. Mike is probably (like me) a really matter of fact person who just likes to get to the point. His experience and willingness to share it has been a great value to this board.

KJ, on the other hand, has the talent of diplomatically making a point without offending the other party. This is a talent I don’t have.

We all need to keep an open mind and try not to take stuff too personally. I know that some newbie called me a cutthroat investor on the legal board the other day, and it didn’t sit real well with me. I should have just considered the source and let it go.

Best wishes in your investing.

–Natalie

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Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 08, 2006 at 09:05:12:

I’m just starting in this biz and am curious on what strategies you use for buying over 10 homes. I understand that most lenders have a cap at 10 homes.
For this purpose let’s say each home throws off $100 cash flow each month.

Sure you could get a blanket mortgage but lets say you buy 10 homes in your first two years and you pay 90% of FMV so you only have about 15% equity in them. Blanket mortgages generally want around 65% of FMV.

The other option I suppose would be to find a lender that isn’t so concerned about how many homes you own. Is it easy to find such lenders?

So basically what I’m looking for is strategies you have used or even heard of people using, or read about that would help a single individual buy a lot of homes.
What I’m not looking for is people that want to tell me, I should never buy for 90% of FMV or I shouldn’t own a lot of houses, or any of that type of feedback. Just what strategies you know of that enables one to buy multiple homes.
Thanks for your time and advice,
Luke

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Re: Strategies for buying over 10 homes - Posted by Mike-OH

Posted by Mike-OH on May 09, 2006 at 06:35:24:

I’m going to try one more time.

“Blanket mortgages generally want around 65% of FMV.”

That is correct. I have several blanket mortgages and the bank will normally want the borrower to have about 30% equity. The reason is that the bank wants to loan a max of 70% LTV (loan to value) is that they want security. They know that loaning 90% LTV on multiple investment properties is not a good business decision for a variety of reasons. First of all, they know that the vast majority of newbies fail and those that pay 90% of market value for rentals will almost certainly fail. (Hint) Banks know what the actual costs of running a rental business are. Throughout the United States, operating expenses (including capital improvements) run 45% to 50% of gross rents. The gurus don’t teach this although this is universally true and the banks know it. Most newbies are in denial about the actual expenses. Banks know that it is nearly impossible to pay retail (or close to it) for a house and then make a profit renting it out. So, when you attempt to borrow 90% of the value of multiple properties, the banks know that you are going to fail and they aren’t going to make the loan.

“The reason I wrote in my intial post, not to tell me that I should never buy at 90% is bad is because I knew everyone would.”

I wonder why everyone would tell you that you should not buy at 90%? (Hint)

“If you could buy 10 houses that threw off $500 cash flow a month, you would go out of business?? In my mind, making 5K a month doing very little seems like I’m doing alright, not great, but alright.”

That sounds great - doesn’t it? Make $5,000 a month doing very little. You don’t even have to look for a good deal - just pay retail. I would say that this is guru nonsense, but not even the gurus recommend paying retail for their houses. (Hint)

“Or say my business model was to make money on quick deals and buy brand new homes to rent out with the money I made on the quick deals.”

So, let’s see if I understand this. You’d run a successful wholesaling business (or whatever quick deals means) and then blow the profit on a business that loses money. So, you run one business to support another. Why not just run one successful business and eliminate the losing business? (Hint)

“Do you see where I’m going here Mike?”

Yes - broke! (which is exactly where every other newbie with a terrible plan ends up) (Hint)

Good Luck,

Mike

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Re: Strategies for buying over 10 homes - Posted by DCO

Posted by DCO on May 08, 2006 at 22:59:17:

Greenpoint Mortgage just funded my 11th mortgage loan. It cost me an extra quarter point in interest.

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Re: Strategies for buying over 10 homes - Posted by David Krulac

Posted by David Krulac on May 08, 2006 at 22:13:48:

its one of the more stupid rules there is in residential mortgage lending. But on the bright side it used to be 4 mortgages. It has to do with selling mortgages on the secondary market and their standarized underwriting rules.

For example lets say Luke has 10 mortgaes of $50,000 each on properties worth $100,000 each. LTV =50%

And lets say Matthew has 5 mortages of $95,000 each on properties worth $100,000 each. LTV =95%

Who is the better credit risk? who is the better qualified person to lend money to?

Or lets say Mark only has 1 mortgage worth $600,000 on a property worth $500,000. LTV= 120%

Its an arbitrary rule that doesn’t consider LTV, or even the total credit and loan picture of the loan applicant.

OK how do you get around it?

  1. The rule is 10 per person right? If married put 10 properties in your wife’s name and have her get 10 more mortgages. Now you have 20 mortgages.

  2. The rule only applies to mortgages sold on the secondary market. Borrow the money from a bank who will keep the loan in house and not sell it. This is called a portfolio loan.

  3. Buy non-residential properties like 5 unit apartment buildings, commercial and industrial building or vacant land. These are not subject to the stupid rule.

  4. Use seller financing, again not subject to the stupid rule.

  5. Borrow money from private parties. Not subject to the stupid rule.

  6. Borrow money from self directed IRAs, Keoughs, Simple, Sep, retirement plans, etc.

If you do all of these you’ll have over 100 mortgages and you won’t care anymore as lenders will be asking you to borrow money from them.

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Re: Strategies for buying over 10 homes - Posted by Mike-OH

Posted by Mike-OH on May 08, 2006 at 16:22:09:

Luke,

Don’t worry about buying over 10 houses. If your plan is to buy rentals at 90% of FMV, you’ll be out of business before you ever get to 10!!!

Mike

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Re: Strategies for buying over 10 homes - Posted by dealmaker

Posted by dealmaker on May 08, 2006 at 11:37:26:

In my experience the best way to do what you describe is to use seller financing, or non traditional lenders. IIRC you’ll run up against the FNMA/GNMA/FHA/VA underwriting rules before you get to 10 loans, particularly if you’re that thin in them.

I’m often considered to be very liberal with my lending policies, but I can tell you that I’m going to PAUSE for awhile before I lend anyone who’s got that thin a position, in that many ppties, acquired in that short a time.

I didn’t say I wouldn’t do it, particularly if the ppty you want to borrow on has a much better ratio. But in my opinion, folks who continue to buy at 90% FMV aren’t going to be around long!

dealmaker

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Re: Strategies for buying over 10 homes - Posted by David Krulac

Posted by David Krulac on May 09, 2006 at 22:04:11:

I’ve gotten blanket mortgages at 80% on non owner occupied investment properties no problem.

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 09, 2006 at 14:14:54:

Mike,
Thanks for the helpful tips there. That, I can appreciate.
I understand what you are saying but I just bought a duplex at full retail because it gives me $600 dollars a month cashflow, that’s after the bills and putting some money aside for maintence. Granted maintenance could be higher but I think I’ve judged it fairly close.
Also my goal is not to run one business to support another. My goal would be to do short term deals to enable me to buy and hold.
I think it’s pretty clear that people make the most money holding real estate long term.
It’s basically the same idea as having any type of business that invests some of the profits in real estate. My business just happens to be a real estate business that reinvests some of the profits in RE.
My goal is to be making money even if I happen to get injured and and am unable to do anything for several months. If I only do quick deals and hold nothing then If I don’t work, I don’t have cash coming in.
I like combining the short term money with the long term cashflow.
Why do you say that having a rental house is loosing money?
“So, let’s see if I understand this. You’d run a successful wholesaling business (or whatever quick deals means) and then blow the profit on a business that loses money. So, you run one business to support another. Why not just run one successful business and eliminate the losing business? (Hint)”

The point wasn’t supposed to be the 90%. I was trying to avoid that and make that clear but here I am writing about it. No one would ever disagree that you should try to buy houses for as little as possible, but I don’t think everyone would agree that you should never pay 90% for a rental house.

One other thing, you mention that banks
Ok I’m going to finish here with a simple yes or no question; If you could buy houses at %90 FMV that gave you $500 a month positive cash flow after bills and putting aside money for maintenance, would you buy a couple?

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 08, 2006 at 23:24:07:

Thanks, I’ll check them out.

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 08, 2006 at 22:18:10:

David,
Thanks for the very insightful post! I like the idea of putting them in your wifes name…that’s it I’m getting married tomorrow, or maybe I’ll wait until I run into that problem. :slight_smile:
The idea of buying from banks using portfolio loans is exactly what I was looking for. I didn’t realize the rule was due to secondary market underwriting. I guess it makes a little bit of sense from a lending point of view.
Once again, thanks for all your help!
Luke

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 08, 2006 at 22:07:05:

See I knew someone would go there regardless if I insisted that wasn’t what I was looking for. So many people are so quick to immediatly find what they think is the negative and then claim “Well, I’m helping him not fail”. That’s ridiculous. The reason I wrote in my intial post, not to tell me that I should never buy at 90% is bad is because I knew everyone would.
I also think your post is absurd and useless to me or anyone else reading these boards. What did you contribute?? Absolutely nothing! So why bother?
If you could buy 10 houses that threw off $500 cash flow a month, you would go out of business?? In my mind, making 5K a month doing very little seems like I’m doing alright, not great, but alright.
Or say my business model was to make money on quick deals and buy brand new homes to rent out with the money I made on the quick deals. This gives my very low maintenence to worry about and perhaps a little cash flow.
Do you see where I’m going here Mike? Perhaps you would go out of business becuase that’s not your business model but as I said before, that’s not a correct post you wrote.
I think anyone would agree!
Luke

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 08, 2006 at 14:11:40:

Thanks for your response dealmaker. Quick questions, what is IIRC? I’m not familiar with that acronym.
Next point is exactly what I didn’t want to get into but pretty much realized it was inevitable; why do you think people that buy at 90% of FMV won’t be around long? If they have the cash to support any negative cash flow and vacancies, why would this matter?
I’m talking about a buy and hold strategy. Just curious why you think this.
Thanks again,
Luke

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Re: Strategies for buying over 10 homes - Posted by Joe Kaiser

Posted by Joe Kaiser on May 11, 2006 at 21:50:28:

Luke,

You said, “If you could buy houses at %90 FMV that gave you $500 a
month positive cash flow after bills and putting aside money for
maintenance, would you buy a couple?”

And the answer is “no.”

Here’s my question . . .

If you could by this house for 90% of value, or the exact same house
across the street for 70% of value, which would you buy?

And that’s the big dif. Investors make deals, Bill and Sallys pay retail.

When things turn for the worse, you need plenty of room and paying
90% of retail means you have no room.

Saying this is a buy and hold strategy, and holding for 12 months, are
not the same things at all, btw. If your plan makes any sense, it’s likely
a 5 or 7 year plan, but it’s definitely not a 12 month plan.

It makes no sense to rationalize and to pick and choose pieces of
different strategies to justify a deal that 98% of the investors on this
board would not do . . . and there’s a reason they wouldn’t.

Still, you did a deal and that says something.

Joe

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Re: Strategies for buying over 10 homes - Posted by Mike-OH

Posted by Mike-OH on May 09, 2006 at 16:34:15:

Yes, I might buy a couple if I had plenty of equity in other houses to keep a safe cushion.

You said that you just bought a duplex at full retail that gives $600 per month positive cash flow. Why not post the numbers and let everyone take a look?

Mike

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Re: Strategies for buying over 10 homes - Posted by Amos Goodman

Posted by Amos Goodman on May 08, 2006 at 23:33:37:

Instead of getting married so you could double the amount of mortgages, it might be better for you to form an LLC for your properties. That way its not tied to your personal credit.

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 12, 2006 at 02:17:25:

Thanks for your input Joe. It is appreciated!

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Re: Strategies for buying over 10 homes - Posted by Luke Hoppel

Posted by Luke Hoppel on May 09, 2006 at 19:45:39:

Ok, “equity hunter”, just for you, I will.
Here ya go.
I’m still in the Marines for those of you that don’t know. I get out in Nov of this year.
I was home during Christmas break and was getting bored so I decided to look around at real estate in the area. I grew up in Watertown, NY.
It’s been a high cashflow, low appreciate area in the past but I thought if I did some work to the house, I could hold it for a year and still make money. Also there was word that the local base, Ft. Drum was moving a lot more people in.
I looked at one house, and it was way overpriced. I did use a buyers agent since I wasn’t too familiar with the local prices. She mentioned had another one listed so I went and looked.
It was a duplex, 2300 sq ft. It was an older house that could use a little work. Actually the whole house was run on one furnace and one hot water heater; I’m not sure why anyone would rent a place where your heat is controlled by someone else.
The price was 72K. This is upstate NY mind you. I asked the agent if they have had any other offers and she told me they just turned one down for 68,500. So I ran the numbers, went ahead and paid 72K for it, added a furnace and hot water heater and set another meter so they could pay their own gas bill. I had it repainted, carpet and linoleum cleaned, new mailboxes, mostly cosmetic stuff minus the furnace and new hot water heater.
All in all I put about 7,500 into it.
The reason this place rents so high is because the base and lack of nicer apartments.
So to make this long story short, I pay the water bill which the previous year was 2K for the year, $170 a month. I allotted $100 for maintenance per month, which may be on the low end but I think I took care of all main stuff and the inspection report showed everything was good and I only plan on holding for 1 year anyways.
The PITI on a 100% 80/20 loan is a little under $700.

So here it is easier to read.

Monthly gross rents (850& 650): $1,500
Minus
Water Bill: $170
Maintenance: $100
PITI: $690

Cash Flow: $540

I guess I was wrong, you got me, I was $60 off.

Ya know, what happened to someone getting a good deal and someone else saying, “congrats and I wish you the best on future deals”
Know I’m resorting to “prove it” to total strangers for no reason yet maybe to save some credibility for other random posters on an online message board.
Looking at what I just did, I must say it’s kind of pathetic and from now on, I will never do so again and I also resolve from this point forward when someone tells me about a deal that they have done, regardless if it sounds crazy to just say “congrats and I hope you find more”.
Who’s with me?

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Re: Strategies for buying over 10 homes - Posted by Natalie-VA

Posted by Natalie-VA on May 10, 2006 at 07:58:02:

Seems like a lot of different opinions on this one.

I have mortgages in the name of my LLC.
I had to guarantee them personally.
They are not tied to my personal credit.
They are not backed by the secondary market.

These are commercial loans with local banks.

–Natalie

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Re: Strategies for buying over 10 homes - Posted by David Krulac

Posted by David Krulac on May 09, 2006 at 22:01:00:

Amos,

The LLC doesn’t help here as most banks want you to sign with personal liability, therefore your LLC or any LLCs that you have could not have more than 10 mortgages per FNMA rules.