About 3 months ago I decided I wanted to get involved with Real Estate Investing (REI), so I got a book from the library and started reading. It turns out the RE world is a highly complex world! Always up for a challenge, I was hooked.
Next I joined BiggerPockets.com, and joined the forums. Experts there are quick to answer your questions with fancy jargon and confusing acronyms. After a few weeks I decided that I didn’t have the time to be a landlord or to do all the work of rehabbing and flipping a home. Hmmm, I was stumped. How could I make money, learn new skills, and not invest too much time in this fascinating world of REI?
Before giving up, I decided to send out a few emails to a few random but active RE investors in Colorado Springs (found via Bigger Pockets). I asked each person if they were willing to meet with me, teach me, and maybe eventually partner with me. I told them I had money,but no time. About 2 hours later, I got an email from a woman – let’s call her Julie.
Julie agreed to meet me at Starbucks the following morning where she would walk me through some deals she was working, how she analyses a deal, and answer any of my questions. When we met, I learned about RE financing. It turns out there are these crazy people (like Julie) that have dozens or even hundreds of homes at a time – some rentals, some flips. And since they don’t all have millions of dollars in cash sitting around, they are always looking for unique financing options. Banks won’t give someone 50 loans on 50 houses, so other financing options are pursued. One of these methods is finding a sugar-daddy – this is where I come in.
Julie had some active deals she was pursuing, with one being a foreclosure purchase that she wanted to renovate and flip. She had done a complete analysis of the house, the local market, and already had contractors come in and quote the work. All she needed now was cash to by the home. Since I’m writing this post, obviously I eventually agreed to finance the purchase – here was the analysis:
Purchase price was $76K. Various fees for purchasing the house were $500. Next, we calculated $33K in repair costs and $11.5 in closing costs and realtor fees. The comps (comparable houses sold in the area) predict about $145K after repair value (ARV). All told, this venture should net about $24K in 4-6 months. (Realistically $150K is a more likely selling price). We agreed to split the profits 50/50 with me doing 100% of the financing and her doing 100% of the work, so I would then make $12K on a $110K investment. If it takes 6 months to sell, that’s roughly a 24% CAGR. There’s a good chance I won’t make that much, but a very small chance of losing money. I consider this a good investment and compliment to my Brave New Portfolio.
The thing I liked most about the deal is that it has a large margin for error. Even if repairs end up costing $40K, and even if the house disappoints and only sells for $135K, we would still be making a $7K profit (much smaller, of course). Considering this money is the “cash” portion of my portfolio, even a 7K return is killer.
Want to see the
dump house? Keep in mind, we have $33K budgeted for rehabbing – so it’s a little ugly.
I told you, it’s got a lot of work ahead. Fortunately, I don’t have to do any of it. It needs a new roof, new garage floor, new heater, kitchen renovation, new paint work, and a whole lot more. Should be fun to watch it improve. I’ll be honest, when I went to the house the first time, I immediately thought Julie was insane to think this house was worth $76K. But she (and others) really have an eye for improvement. She walked around the house with a contractor explaining the work she wanted done – it was creative, innovative, and artistic. I was blown away! Before we left the house, I agreed in principle to fund the purchase.
We closed on the house last week, so I’m now the official owner. Well, sort of…
In my specific case, since Julie had already worked out the purchase deal with the bank, it was required that she be the purchaser. Of course I don’t want to lend $110K without official ownership, so I needed collateral. For this, I received a lending note and the deed of trust on the house. Now, if she bolts – I would get the house – identical to how a bank owns the note and deed on your house and can foreclose if necessary.
If you decide to do something similar, I strongly recommend you set up a Joint Venture Agreement that states the details of the agreement. In my case, the JVA states how much I’ve paid and how the profits and losses will be split. It has a bunch of other legal jargon, but nothing noteworthy. One thing I learned from Julie is that in the RE world you need to cover your bases. Not that all RE investors are dirt bags, but some will take you for all they can. Others are good people, but incompetent. No different than other areas of life.
For renovations, I decided I didn’t want to set up an escrow (additional fees) so I’m paying as we go. This allows me to check on the work before paying, which Julie agreed to. According to Bigger Pockets, this is fairly customary.
My favorite part of the entire experiment so far was the closing. Technically I didn’t need to be there, but since Julie knows I want to learn as much as possible she invited me along. I walked in a bit late, and Julie introduced me to everyone. The realtor immediately says “You’re the youngest hard money lender I’ve ever met. Usually they are grumpy old men.” I thought it was great – I can add a little spunk to the RE circuit.
I’ll be honest, this has been the funnest side income experiment yet. I’m learning a ton, meeting new people, and hopefully making a few bucks. If this works out well, I’ll be doing a lot more business with Julie. My long term goal will be to buy a house on my own and do 80-100% of the rehab myself (Scared of heights so there are a few things I can’t do).
Just like with Android apps, I’m not an expert. But if you have questions or suggestions, let me know in the comments.